To: Clients and Colleagues
Date: 26 January 2009
Subject: Your Ability to Discount the Value of FLP Gifts May Be Eliminated Soon
On January 9, 2009, Rep. Earl Pomeroy (D-ND) introduced a Bill (HR 436) in Congress which, if passed, would eliminate your ability to discount the value of family limited partnership interests (or interests in any entity – corporation, LLC, etc.) that are transferred. The Bill explicitly prohibits discounts for minority interest or lack of control where the receiver of the limited partnership interest (or other entity interest) and his/her other family members together have control of the partnership (or entity). This provision of the Bill would become effective as of the date of its enactment. The Bill has been referred to the House Ways and Means Committee. We believe there is a significant likelihood that this Bill will be passed by Congress and signed by President Obama in the near future.
Each of you currently has the right to give $1,000,000 free of gift tax. A gift of $1,000,000 worth of limited partnership interests may, under current law, benefit from discounts in the value of those limited partnership (LP) interests because they are minority interests and do not give the recipient control of the partnership. Such discounts may reduce the value of the LP interests by as much as 50%, thereby enabling you to give away twice as many LP interests with the same $1,000,000 gift. For example, if the partnership assets are worth $2,000,000, a gift of $1,000,000 of LP interests would get 50% of the partnership out of your estate (although you continue to control the partnership and all of its assets as general partner). With a 50% discount in the value of the LP interests, the same $1,000,000 gift of LP interests removes 100% of the partnership from your estate (although you still maintain control as general partner). Thus, for a married couple, gifting of LP interests at discounted values has been an easy and effectively way of decreasing their taxable estate by up to $4,000,000, while still maintaining control of the assets in their partnership. HR 436 will soon eliminate this valuable estate planning tool.
Many of you have either not made any gifts of LP interests at all or have only made $12,000 gifts. These $12,000 gifts have no relation to the $1,000,000 gift discussed above. We encourage you to consider making a $1,000,000 gift of LP interests ($2,000,000 for a married couple) at discounted valuations now, before this valuable estate planning tool is eliminated. Gifting at this time would also take advantage of current depressed asset values, allowing for even greater partnership percentages to be removed from your estate.
Gifting LP interests will require:
Determination and documentation of the current value of partnership assets;
Preparation of Memorandum of Gift;
Calculation of valuation discounts and percentage of partnership transferred via gift;
Preparation of calculation letter;
Preparation of IRS Form 706 (Gift Tax Return – There will be no gift tax, but the return is necessary in order to claim exemption from gift tax).
HR 436 also eliminates the unlimited federal estate tax exemption that was supposed to become effective January 1, 2010 and instead establishes a permanent $3,500,000 estate exemption. It also establishes a permanent federal estate tax of 45% on estates up to $10,000,000 and 50% on estates greater than $10,000,000. The above would be in addition to any applicable state inheritance tax.
Please note that HR 436 has no impact whatsoever on the asset protection aspects of family limited partnerships.
To discuss utilizing your discounted gifting opportunities before they are lost, please call us at 212.888.6600 or e-mail us at email@example.com.