Valuation Discounting

Year-End 2019 Tax and Estate Planning: Limited Time to Use Current Law to Avoid Estate Tax and Get Assets to Your Heirs Rather than the IRS

December 24, 2019 By Asher Rubinstein, Esq.

As a result of the changes to the tax law implemented at the end of 2017, the exemption from the federal estate tax has never been higher. Currently, the estate tax does not apply to estates valued less than $11.4 million per person. However, this exemption will expire in 2025 (or perhaps following House, Senate and White House elections in 2020), which means that now is the time to take advantage of the high exemption amount, before it is lowered (a figure of $3.5 million per person and an estate tax rate of 77% have been suggested by current presidential candidates). As a further indication that the current favorable climate for tax planning may not last long, in October 2019, legislation was introduced in the House of Representatives to lower the exemption amount, known as the “For the 99.8% Act” (identical to the legislation introduced by Senator Bernie Sanders).

An additional benefit to acting now: the IRS has announced that proper tax planning undertaken currently will not be challenged once the law changes in 2025 (or earlier). “Individuals planning to make large gifts between 2018 and 2025 can do so without concern that they will lose the tax benefit of the higher exclusion level once it decreases after 2025,” the IRS stated in a press release. This gives an opportune cover. Contact us now to explore estate tax planning while the opportunity exists and has been blessed by the IRS.

Leveraged Gifting to Get Even More to Your Heirs

This method to reduce estate taxes utilizes discounted transfers of interests in closely held entities (FLPs, LLCs, family corporations) to family members. Such “leveraged gifting” has been an extremely important, effective and common method used to reduce or eliminate estate taxes.

People who own Family Limited Partnerships (FLPs) or LLCs should consider gifting limited partnership interests (or LLC membership interests) in order to decrease the value of their estate for tax purposes. As long as you retain your General Partner (GP) interests, you 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 $11,400,000 ($22,800,000[1] 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. In some cases, as much as $44,000,000 worth of FLP interests can be conveyed to your heirs and escape the estate tax.

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 $15,000 ($30,000 for a married couple) by the end of 2019 to as many people as you choose.

We can advise you as to appropriate FLP discounts, prepare the appropriate documents, 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] In 2020, the exclusions go up: $11,580,000 for individuals and $23,160,000 for married couples.

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

August 17, 2016 By Asher Rubinstein, Esq.

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 contact us with any questions.

It’s 2016: What to Do Now About Higher Income Taxes

January 4, 2016 By Asher Rubinstein, Esq.

Higher income, capital gains and estate taxes are now a fact. The following tax changes were all implemented over the past few years:

Expiration of top 35% income tax rate and reset to 39.6%;
Increase in long-term capital gains rate from 15% to 20%, plus the 3.8% investment tax under the Affordable Care Act (“Obamacare”), for a top long-term capital gains tax rate of 23.8%. (In many cases an additional 0.9% surtax also applies, making the total capital gains tax 24.7%);
Short-term capital gains are now taxed at 39.6%, plus the Obamacare additional tax of 3.8%, for an effective short-term capital gains rate of 43.4% (again, often, plus 0.9% making the total 44.3%);
Expiration of top 15% rate on qualified dividends and jump to 20%, plus the 3.8% investment tax under the Affordable Care Act, for a top dividend tax rate of 23.8%; ordinary dividends are now taxed at 39.6%;
The gift and estate tax rate increased to 40%.

The 3.8% tax on net investment income is now imposed on joint filers with an AGI greater than $250,000 ($200,000 for single filers) pursuant to the Affordable Care Act. This additional 3.8% tax is in addition to the already heightened rate that will apply and will be assessed on taxable interest, dividends, rents, some annuities and capital gains including on the sale of real estate.

Congress may also amend other tax laws to eliminate some favorable tax planning strategies. Clients are therefore advised to engage in tax planning now, in order to have the benefit of “grandfathering” current beneficial tax strategies before additional changes to the tax law. We can help explain tax changes, how they may effect your specific situation, and how to legally minimize your taxes.

There are various steps that taxpayers should consider now for effective tax minimization:

1. Avoid capital gains tax via a Charitable Remainder Trust or via international tax planning strategies (e.g., tax advantaged foreign annuities and foreign private placement life insurance).

2. Convert IRAs, 401(k)s and other retirement plans to Charitable Remainder Unitrust IRAs before the government taxes them.

3. Engage in income tax planning via tax-compliant strategies that take advantage of favorable reciprocal tax treaties.

4. Consider a Dynasty Trust. Such a trust allows the preservation of assets for one’s immediate and remote descendants, along with offering asset protection from creditors, as well as delay of the estate tax bite for many generations. The trust can distribute income to beneficiaries (who will pay income tax on these distributions of income), but principal is preserved, asset-protected and grows tax-free.

5. Consider a Charitable Remainder Trust. Contributing appreciated assets, such as stock, family businesses and real estate to a Charitable Remainder Trust is a good way to avoid the increased capital gains tax. You and your beneficiaries can enjoy distributions from the trust at very low tax-favored rates, and at the end of the trust term, a remainder equal to ten percent of the original contribution to the trust will go to a qualified charity. You will receive an additional tax benefit: a deduction equal to the present value of the remainder that will be left to charity. The benefits: a low-tax income stream for you and your beneficiaries, philanthropy of your choice, a charitable deduction and significant capital gains tax minimization.

6. It is also possible to minimize the tax on appreciated assets by exchanging such assets in return for a foreign annuity policy. Capital gains within the annuity policy would not be taxable. Annuity payments can be deferred until retirement or advanced age, at which point tax would be due on the income component of the annuity payments. Moreover, the annuity policy and the assets within the policy would be completely asset-protected from future creditors. For complete tax elimination, a foreign life insurance policy can be incorporated, which would allow one to borrow against the cash value of the policy, completely free of taxation (the amounts borrowed, rather than having to be repaid, would be deducted from the ultimate death benefit). Such tax strategies involving foreign annuities and foreign life insurance offer the most advanced asset protection from civil creditors, as well as significant tax minimization or even tax elimination.

7. With respect to the self-employment tax (the equivalent of social security tax for taxpayers who receive income from self-employment or investments instead of wages) which increased from 4.2% to 6.2%, and the 3.8% surtax imposed on investment income (dividends, capital gains and passive rental income), tax compliant strategies exist which enable taxpayers to actively avoid both the self-employment tax and the investment income surtax. Section 1402 of the Internal Revenue Code and the regulations provide an exemption for distributions of partnership income to limited partners, provided such distributions are not guaranteed payments and provided the limited partners meet certain conditions. Through the use of multiple layers of limited partnerships, taxpayers may achieve complete exemption from the self-employment tax and the investment income surtax, thereby increasing their net income by as much as ten percent. In many cases, clients may achieve tax exempt status by simply restructuring their existing family limited partnerships.

8. Of course, leveraged gifting is a very advantageous ways of lowering one’s tax base. In addition, consider gifting appreciated investment assets to charity. If you’ve owned the appreciated investment for longer than one year, you may be able to deduct the full market value and avoid tax on the appreciation.

It should be noted that tax strategies such as those above were utilized to save significant amounts of taxes in several recent highly publicized transactions, including the initial public offering (IPO) of Twitter, the IPO of Facebook, and the sale of Lucasfilm to Disney. The strategies discussed herein are available to everyone with appreciated assets and estates of all values. Contact us to discuss your facts and tax minimization techniques.

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

December 22, 2015 By Asher Rubinstein, Esq.

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.

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

December 21, 2015 By Asher Rubinstein, Esq.

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.

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

October 13, 2015 By Asher Rubinstein, Esq.

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.

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

September 23, 2015 By Asher Rubinstein, Esq.

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

The FBAR, Report of Foreign Bank and Financial Accounts, is due by June 30, 2015 for Offshore Accounts

May 18, 2015 By Asher Rubinstein, Esq.

It’s FBAR season again. The FBAR, the Report of Foreign Bank and Financial Accounts, previously known as Treasury Department Form TD F 90-22.1 and now known as FinCEN Form 114, is due by June 30, 2015, for foreign financial accounts that existed during 2014, including offshore accounts. Even if you are on extension to file your 2014 U.S. income tax return, there is no extension for the FBAR filing. The FBAR must be filed electronically.

We’ve written extensively about the FBAR and the foreign accounts and assets that are required to be reported. We advise U.S. taxpayers on whether their foreign assets are subject to the FBAR. We also advise on how to correct past FBAR non-filings. In some cases, FBAR non-compliance can be remedied without penalties. In other cases, such as when a taxpayer did not file an FBAR and also did not report foreign income to the IRS, then it may be possible to come into compliance via a Voluntary Disclosure to the IRS. However, if the IRS already has information about the foreign account, or if the taxpayer is already under investigation or audit, then it may be too late for corrective filings. Thus, proper timing is crucial. We can assist you with such issues, and with offshore reporting and IRS compliance for foreign assets.

2013 Year End Notes, Part 3: Offshore Considerations

December 13, 2013 By Asher Rubinstein, Esq.

During 2013, the IRS and U.S. Department of Justice (DOJ) continued to successfully attack offshore banking “secrecy”. The IRS’ success against UBS and other banks eroded Swiss banking secrecy, effectively ending “going offshore” to hide money from the IRS. Going offshore for asset protection from civil creditors, however, is still viable and effective, but must be tax-compliant.Continue Reading