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.
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 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.
 In 2020, the exclusions go up: $11,580,000 for individuals and $23,160,000 for married couples.