Gifters Should Act Now: The I.R.S. Signals That It May Stop A Popular Gifting Technique By Eliminating Discounts


by Jon Grob and Matt Ottemann

Grob, Jonathan
jgrob@mcgrathnorth.com

Ottemann, Matthew
mottemann@mcgrathnorth.com

(402) 341-3070

Longtime football fans may remember Don Meredith’s work as a commentator on Monday Night Football. When a game was effectively over, he was known for singing “Turn out the lights, the party’s over.” Unfortunately for many high net worth individuals, Don may be warming up his vocal cords for a very popular wealth transfer planning technique known as valuation discounts. People who want to take advantage of this technique may need to act very quickly to do so.

As many of our clients are aware, each person now has the opportunity to make $5.43 million in lifetime gifts or bequests (not counting the $14,000 gifts which can annually be made tax-free) before federal gift or estate tax is due on the transfers. For some high net worth individuals, this $5.43 million “coupon” will not be enough to cover all of their assets. For these individuals, a common and legally accepted technique is to structure those gifts using family entities (such as family limited partnerships or LLCs), so that the gifts will be eligible for valuation discounts. These valuation discounts may allow the transferred assets to be counted, for gift and estate tax purposes, at some value below their full market value.

An IRS spokesperson recently appeared at the annual Tax Section meeting of the American Bar Association and warned that the IRS may issue proposed Treasury Regulations this year that would substantially reduce or, in some instances, eliminate valuation discounts in wealth transfer planning. Drafts of these regulations have not been publicly circulated, so it is impossible to know exactly what they will say.

If issued, the Regulations could be effective for all gifts of interests in family entities (such as family limited partnerships or family limited liability companies) made on and after the effective date of the Regulations. The spokesperson indicated that the effective date of these Regulations could be as early as September, but gave no assurances that the effective date may not be even earlier.

Close observers of Washington may recall that the Obama administration had, in prior versions of the federal budget, proposed new legislation to eliminate valuation discounts for family entities. Recent budgets (since 2014) have not contained these legislative proposals. Therefore, it is possible that the IRS now believes that it can accomplish this reform directly through its regulatory powers without needing additional legislation.

Although it is possible that these proposed Regulations may never be completed, we are taking this risk seriously based upon the current environment in Washington. We want our clients and friends to be aware of this potential change. If implemented, discounts (such as discounts for lack of marketability and lack of control that, in some instances, may range between 30% and 40%) would no longer be available, dramatically impacting the ability to utilize family entities to reduce federal gift or estate taxes on sizable wealth transfers.

For those clients who have or would like to consider wealth transfer planning that incorporates these valuation discounts, time may be running out to finalize those plans. Please contact a member of the McGrath North Tax Group if you would like to discuss this further.

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