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.

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

This summer, an IRS executive publicly commented that the IRS will soon be introducing new regulations that will seriously limit discounting of interests in Limited Liability Companies (LLCs) and Family Limited Partnerships (FLPs).  Until now, discounting and gifting of membership and partnership interests was a very effective way of keeping assets within the family as well as lowering estate tax liability.  We have historically been successful in taking discounts of 30-50% on certain assets, thereby achieving substantially lower estate tax liability for many of our clients.

The IRS is expected to issue proposed rules on this issue this fall.  Interestingly, for the last few years, the idea of limiting discounted interests has appeared in the President’s proposed budget, but was not acted upon.  Now, the limitations on discounting are expected to be issued by the IRS itself, pursuant to the theory that the IRS has the authority to promulgate such revisions in law, rather than the President submitting the change to Congress.

Many families would benefit from discounted gifting of assets.  Please contact us for additional information.  We can assist you, including the discounting calculations and preparation of Memoranda of Gift and valuation calculation letters that the IRS will require for effective discounting and gifting.  Time is of the essence, as there is talk within the practitioner community that there will be no “grandfather” period.

For additional information of FLPs, discounts and gifting, please see:

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

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

Elimination of FLP Gift Discounts

 

2013 Year End Notes, Part 5: Reminder to Properly Maintain FLPs

Reminder to Properly Maintain Family Limited Partnerships (FLPs)

The U.S. Tax Court in 2011 issued its opinion in Estate of Paul H. Liljestrand v. Commissioner.  In that case, the Tax Court determined that assets held by a Family Limited Partnership were included in the estate of a wealthy deceased taxpayer and were subject to estate tax.  The basis for this negative decision was that the deceased taxpayer did not properly follow FLP procedures and co-mingled personal and FLP assets. Continue reading

2013 Year End Notes, Part 4: Asset Protection Considerations

Asset Protection for Financial Professionals, Hedge Fund Managers and Investment Advisors

During 2013, we have seen the growth of a new group of clients interested in asset protection: investment advisors, hedge fund managers and other financial professionals.  This group is faced with an increase in lawsuits brought by litigious investors against their financial advisors and those charged with making investment decisions.  As investors seek to blame others for investment losses, they are now suing fund managers and investment advisors personally, in addition to the fund itself or the advisor’s employer.  In the past, it was routine to sue the fund or financial institution; naming the fund manager or investment advisor personally is relatively new, but a phenomenon that we are seeing in increasing numbers. Continue reading

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