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.

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

 

2013 Year End Notes, Part 1: Year End Tax Planning / Historic Opportunity to Avoid Estate Tax on $10.5 Million of Assets

As the year comes to a close, we take this opportunity to remind our clients, colleagues and interested parties of several important issues that might impact upon their tax, estate and asset protection planning, to reflect upon a few significant developments in 2013, and to offer suggestions for effective year-end tax planning. Continue reading

The Care and Feeding of Family Limited Partnerships (FLP)

FLPs are complicated structures, and we want you to implement your FLPs properly.  Carelessness and failure to abide by formalities may lead to a creditor undoing, or the IRS challenging, many of the benefits of an FLP.  Thus, we present this reminder to clients who have established FLPs.

Keep accurate records of transactions, investments, sales of property, etc.  Keep these records separately from your personal records.  Keep records of distributions from the FLP to the partners.  The simplest repository of a partnership’s financial records is the partnership’s bank account check register.  It is often most convenient to keep all records in the FLP binder. Continue reading

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