Impact to Tool Reducing Federal Estate Tax Liability

Have you heard about the estate planning shake-up that occurred recently with the Treasury introducing the proposed regulations impacting high and ultra-net worth individuals? 

Identified as REG-163113-02, the regulations govern section 2704 of the Tax Code.  As they are now written, the regulations completely dismantle the most established and relied upon tool for reducing a person’s federal estate tax liability: discount planning through closely-held businesses.  Often called family limited partnership planning, the technique involves using an LP or LLC to hold assets such as businesses, farmland, or investments.  Non-controlling interests are then transferred to other members of one’s family, often descendants.  This division of ownership in conjunction with the governing document allow us to take substantial discounts in valuing the business—often 30% to 40%—for purposes of reducing a family’s federal estate tax liability.

The proposed regs have been the boogeyman for the past year in the estate planning community.  There was talk that they were being worked on, but no one knew when they were going to drop and what they were going to say.   They were originally expected last September.  Now that they have been released, general consensus is they are much worse than imagined.  Instead of affecting the planning technique or reducing its effectiveness, the regulations have likely done away with our ability to obtain valuation discounts altogether through the use of closely-held businesses.

Discount planning is a strategy our firm has used for every one of our clients above the federal exemption limit that wanted to reduce their estate tax burden.  Notice and comment period for the rules begin December 1, 2016.  This means the soonest that the regulations can take effect is the start of the new year.  Changes could of course be made in the interim and many anticipate that we will see litigation with the IRS over this in the near future.  As it stands, however, we may be facing the loss of the single most powerful tax-savings tool for clients.   The most we can say is that it is guaranteed to be around for the rest of this year.

We would encourage anyone currently above the federal tax exemption amount ($5.45 Million single or $10.9 Million married) to quickly move forward with their tax planning and to conclude it by the end of the year.  Due to inflation, those also near the federal tax exemption amount may also want to consult with an experienced CPA and estate planning attorney in the short-term to determine if they should take advantage of this possible short-lived planning strategy. (Our recommendation is a current net worth of $4 Million single or $8 Million married).  

If you want to talk about the regulations further or would like to schedule a complimentary estate planning consultation, feel free to contact our law firm. We would be happy to help.