Year-End 2016 Tax Planning, Year-End Gifting & 2017 Tax Changes

Year-end gifting may be changing soon. Each year, we begin our end-of-year suggestions with a reminder to clients who own FLPs, LLCs and family business ventures, that they should take advantage of year-end gifting to lower estate taxes.  This year the message is even more crucial, because discounted gifting of family enterprises is about to go away entirely.  The recent election results will not alter (at least for now) this change in tax law.

Take Advantage of Year-End Gifting to Lower Estate Tax – Before the Law Changes: New IRS Regulations Eliminate the Ability to Discount the Value of FLP and LLC Gifts to Family Members

In August 2016, the IRS finally issued proposed regulations that will eliminate (or severely limit) the ability to discount the value of transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members.  Such “leveraged gifting” has been an extremely important and common method used by estate planners to eliminate estate taxes.

The proposed regulations will undergo a ninety day comment period and a public hearing on December 1, 2016.  Shortly after that, the IRS will publish final regulations which will take effect within thirty days after publication[1].  These proposed regulations were expected and we have previously written about them here.

Readers are strongly urged to contact us to implement gifts of FLP and LLC interests to their heirs before the changes take effect.  Clients with FLPs should consider gifting limited partnership interests in order to decrease the value of their estate.  As long as clients retain their General Partner (GP) interests, clients will continue to control all assets within their partnership.  Yes, you can escape the estate tax and still control the assets.

In summary:

– You can lower the value of your taxable estate, and pass up to $5,450,000 ($10,900,000[2] for a married couple) to your heirs, tax free.

– If you own an FLP, you can gift Limited Partnership (LP) interests to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free (up to $21,800,000 in 2016).

– You can keep your General Partner (GP) interests and still control the FLP and its assets, even if you gift all of the Limited Partnership (LP) interests.

Also, don’t forget about the annual gift exclusion, which allows you to gift up to $14,000 ($28,000 for a married couple) in 2016 to as many people as you choose.

We realize that gifting and discounting are not simple concepts, and we welcome your questions.  We can advise you as to appropriate FLP discounts, prepare memoranda of gift for you[3], as well as the partnership valuation and gift valuation calculation letters (necessary for the IRS).  Please contact us with any questions regarding your year-end tax planning.

[1]This fall, two bills were introduced in the U.S. House of Representatives and Senate to derail the proposed IRS regulations, further illustrating the uncertain nature of our tax law.

[2] Under current law, in 2017, the exclusions go up: $5,490,000 for individuals and $10,980,000 for married couples.

[3]  A recent tax court case has made it imperative that the documents transferring the LP interests be worded very carefully.  These documents be prepared by qualified tax counsel.

New IRS Regulations Eliminate the Ability to Discount the Value of FLP and LLC Gifts to Family Members

This month, the IRS finally issued proposed regulations that will eliminate (or severely limit) the ability to discount the value of transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members.

Such “leveraged gifting” has been an extremely important and common method used by estate planners to eliminate estate taxes.

The proposed regulations will undergo a ninety day comment period and a public hearing on December 1, 2016. Shortly after that the IRS will publish final regulations which will take effect within thirty days after publication.

These proposed regulations were expected.  We have previously written about them here and here.

While we do not venture into political discussion, we point out that Hillary Clinton has stated that she will reduce the estate tax exclusion from $5,450,000 per person ($10,900,000 for a married couple) currently in effect, to $3,500,000 per person ($7,000,000 for a married couple) and reduce the gift tax exemption from $5,450,000 per person to $1,000,000 per person.  She will also increase the gift/estate tax to 45%.  (Donald Trump has proposed to eliminate the gift/estate tax entirely.)

Readers who have not yet completed their estate planning are strongly urged to contact us to implement gifts of FLP and LLC interests to their heirs before the changes take effect.

Please see our related articles:

Family Limited Partnerships & Discounting

Historic Opportunity to Avoid Tax on Over $10 Million+ of Assets

Year-End 2015 Tax Planning: Take Advantage of Gifting to Lower Estate Tax – Before the Law Changes

LLC/FLP Discounting and Leveraged Gifting to Lower Estate Tax May Soon Be Limited

Please contact us with any questions.

Year-End 2015 Tax Planning: Proposed Income Tax Revisions Mandate Timely Tax Planning

There have been many recent proposed changes to tax laws and regulations.  Planning ahead of these changes is crucial.  President Obama’s proposed 2016 budget includes changes that would eliminate many strategies that could save significant taxes.  These changes include:

  • Elimination of favorable tax treatment for Grantor Retained Annuity Trusts (GRATs) which are used to transfer family assets with minimized tax consequences;
  • Elimination of discounted gifting of interests in family corporations, family limited partnerships (FLPs) and limited liability companies (LLCs);
  • Limitation on annual gifts excluded from the gift tax;
  • Reverting to a prior smaller exemption from estate tax (specifically, to 2009 when the estate tax exception was only $3.5 million per person and lifetime gift exemptions were $1 million per person) and a return to the top estate tax rate of 45%;
  • Eliminating the “step up” in basis for appreciated assets at death;
  • Capital gains tax rate increase from 23.8% to 28%;
  • Eliminating the home mortgage interest deduction.

While certain of the above proposals are unlikely to be approved by Congress, note that Congress frequently changes the rules.  Recall, for example, the rush to estate planning at the end of 2012, when the exemption from estate tax was set to expire.  In addition, Congress in recent years approved increases in capital gains tax rates, dividend tax rates and also implemented the 3.8% investment tax.

There are strategies that can be implemented before these proposed changes are promulgated by the government.  We can assist you in best anticipating the proposed changes and developing strategies to overcome the tax increases.

For additional information on tax planning, please see our various articles here.

Contact us for a confidential consultation regarding tax planning.

 

Year-End 2015 Tax Planning: Take Advantage of Gifting to Lower Estate Tax – Before the Law Changes

Each year end, we remind our clients about year-end gifting of Family Limited Partnerships and Limited Liability Company (LLC) interests in order to achieve tax minimization.  This year, however, the need for leveraged gifting is even more crucial, because soon the U.S. Treasury Department will release proposed regulations that will eliminate the ability to discount the value of interests in private entities, including family corporations, FLPs and LLCs, to family members for gifting.

For estate planning purposes, the IRS currently allows a person to gift minority interest in one’s family owned business (FLPs and LLCs) to one’s heir(s) at a discounted rate.  The IRS permits the discounted rate because these interests are not marketable, i.e., they are not attractive to anyone outside the family and therefore they are worth less than their fair market value.  In addition, these interests are usually minority or non-voting interests, which is a second reason for a discount in value.

The tax code is ambiguous as to the discount rate acceptable for certain assets.  Some taxpayers (including some of our clients) have taken up to a 50% discount on gifts of FLP interests.  This ambiguity in the tax code has led to disputes between the IRS and taxpayers, some of which have been adjudicated before the U.S. Tax Court.  The tax code allows the IRS to add restrictions to laws.  The proposed regulations will eliminate any ambiguity by adding restrictions on discounts for closely held interests.  Tax professionals have speculated that the proposed regulations may extinguish such discounting altogether.

Details about the proposed regulations are limited and speculative, but the proposed regulations could become effective retroactively.  In light of the uncertainty surrounding the proposed regulations, it is imperative that individuals accelerate their estate planning by the end of the year to take advantage of current tax savings.

Clients with FLPs should consider gifting limited partnership interests, in order to decrease the value of their estate.  As long as clients retain their General Partner (GP) interests, clients will continue to control all assets within their partnership. Yes, you can escape the estate tax and still control the assets.

Clients should also keep in mind that on the state level, the exclusions from state estate taxes can be much lower.  In New York, the current estate tax exemption is $3,125,000.00 and rises to $4,187,500.00 on April 1, 2016.  New York estates valued at 105% (or greater) of the exemption lose the exemption entirely.  New Jersey imposes an inheritance tax on estates over $675,000.  In Connecticut, the exemption is now $2 million and the estate tax ranges from 7% to 12%, depending on the amount above the Connecticut estate tax exemption. (Connecticut, along with Minnesota, are the only two states in America which also impose a gift tax.)

In summary:

– You can lower the value of your taxable estate, and pass $5,430,000 ($10,860,000 for a married couple) to your heirs, tax free.

– If you own an FLP, you can gift Limited Partnership (LP) interests to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free (up to $21,720,000 in 2015).

–  You can keep your General Partner (GP) interests and still control the FLP and its assets, even if you gift all of the Limited Partnership (LP) interests.

Also, don’t forget about the annual gift exclusion, which allows you to gift up to $14,000 ($28,000 for a married couple) in 2015 to as many people as you choose.

We realize that gifting and discounting are not simple concepts, and we welcome your questions.  We can advise you as to appropriate FLP discounts, prepare memoranda of gift for you, as well as the partnership valuation and gift valuation calculation letters (necessary for the IRS).  Please contact us with any questions regarding your year-end tax planning.

Please also see the following additional articles:

LLC/FLP Discounting and Leveraged Gifting to Lower Estate Tax May Soon Be Limited

Family Limited Partnerships & Tax Savings

Family Limited Partnerships & Discounting

Gifting Family Limited Partnership Interests: How NOT To Do It

Efficacy of Family Limited Partnerships: A Case Study

Elimination of FLP Gift Discounts

 

Federal Estate Tax Changes: New Estate Reporting Requirements, and Beneficiaries Must Use Estate Tax Value as Basis

There are significant new procedural changes that were implemented into law this summer as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.  Among the changes:

  • If an Estate is required to file an Estate Tax Return (IRS Form 706), the Estate must – – separately and in addition to the Estate Tax Return – – report to the IRS and to each estate beneficiary, the estate tax value of property to be received by the beneficiary.
  • In addition, for inherited property, estate beneficiaries must use the same value as reported on the Estate Tax Return as the basis in the property.  If not, beneficiaries face a 20% accuracy penalty.  This new provision seeks to fix a tax loophole whereby estates reported values using a valuation discount (e.g., for lack of marketability of family businesses), and then beneficiaries later sell the same assets reporting a higher book value as basis.

These changes follow other changes passed by Congress in recent years, such as “portability” of any unused exemption from the estate tax (currently $5,430,000 per person).  The tax law now allows for the portability or transfer of any unused estate tax exemption left behind at the death of the first spouse, so that the surviving spouse may add the unused amount to his/her own exemption.  However, certain formalities and paper work must be followed.  Portability is not automatic.

You should be aware of these new changes if you are an executor of an estate, if you have inherited property, or a deceased spouse has left behind an unused portion of his or her exemption from estate tax.  In general, we recommend re-examining estate planning and tax planning every few years, and certainly at each major life event (birth, death, divorce, selling valuable assets, inheritance, etc.).  Contact us for additional information.

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