Type: Law Bulletins
Date: 08/10/2015

Potential Change in IRS Rules Regarding Valuation Discounts

The IRS appears ready to eliminate or sharply curtail a tax strategy widely used by high net-worth individuals and families who own closely-held businesses. The prevailing sentiment is that as early as mid-September of this year the U.S. Treasury Department will establish new rules that will eliminate the ability to discount or establish a reduced value of certain assets transferred to heirs through the use of Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs). This action will put an end to an extremely effective estate tax reduction tool that is used as part of estate and business succession planning.

FLPs and FLLCs have been used for years to transfer portfolio assets, real estate and family-owned business assets to the next generation at a significantly reduced gift and/or estate tax cost. Discounts can range from 15%-35% depending on the type of asset owned by the FLP or FLLC. Such discounts, especially when combined with other estate tax planning strategies, result in significant income and estate tax savings for individuals and their heirs.

Following is a simple example: Individual A has $16 million of real estate and securities that he/she transfers to an FLP or FLLC. Individual A has $4 million in lifetime exclusion remaining that he/she wants to utilize to make a gift to an heir. Under current IRS rules and case law, Individual A is allowed to discount the value of the shares by up to 35% because the shares are illiquid and have other restrictions. Instead of transferring $4 million in underlying value, with a discount of 35%, Individual A would remove $6.15 million in underlying value from his/her estate.

The anticipated rule change will likely have no grandfathering period. Anyone in the position to take advantage of this type of estate planning needs to act now. The clock is ticking — roughly one month may remain to implement this planning.

If you have any questions or would like to discuss this topic further, please contact one of the attorneys listed on this law update.

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