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. 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.
– You can lower the value of your taxable estate, and pass up to $5,450,000 ($10,900,000 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 $21,800,000 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, 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.
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.
 Under current law, in 2017, the exclusions go up: $5,490,000 for individuals and $10,980,000 for married couples.
 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.