Big Changes Coming To Estate Tax Planning

By |2019-03-05T19:35:50+00:00August 5th, 2016|Estate Planning|

 Reducing estate tax liability is getting more complicated

A very significant thing has recently happened regarding estate taxes. The significance of this chance is far-reaching, the agent that grasps this will be far ahead of the competition. Not only will this rule change make a huge difference is how estates are handled in regards to estate tax liability, but it also opens the door for agents who specialize in annuity concepts.

First, let me explain. This is a problematic issue to understand fully, so let me start with the general concept.

If you have an asset held privately (such as a farm), the value of the farm as a whole would be more than the farm valued in unseparated shares. In simpler terms, a privately held asset does not have the same value in entirety when broken down into shares and the entire asset as a whole.
That concept was the basis for devaluing an asset when determining the overall value and the ultimate estate tax liability. Normal estate tax liability planning would use a 40% devaluation in the asset. This devaluation was widely used and accepted by the estate planning community.

Often the actual tool used to place the shares of the asset was known as a Family Limited Partners (FLP). This process was taught to CPAs, estate planning attorneys and in law schools.

Here is an example of how it was done. Assume a family held asset (business, real estate, farm, etc.) had a value of $100,000,000. If the owner of the asset died, tax liability would be about $40,000,000 (estimate). A FLP allowed for the asset to be placed in the partnership still owned by the original owner (let’s pretend it is mom and dad). As sole owners, they name themselves the general partner of the FLP, and the general partner is the boss regardless of what percentage is owned. The FLP then devalues the asset to (40-50%) and gifts shares of the partnership to their children using their lifetime and annual gifting. ($11.15 million lifetime each and $15,000 annually per gift per owner). Over time, 99% of the non-general partnership assets have been legally and without tax liability have been transferred to the children.

Mom and dad are still 100% in control since they are the general partner; now they die. Their valuation has dropped from $100,000,000 to 50% of 1%. Their estate tax liability is nil. After their death, the children can end the partnership or continue it, up to them. They simply vote on a new general partner.

That is how it has always been done. The IRS has allowed this an accepted practice.

Two days ago, the IRS announced it was closing this discounting process and the lowered gifting valuation as a loophole. Remember, the IRS does not need congressional approval to make this change, and it can be done as a regulatory action. To counteract the process, a lawsuit would be initiated by an individual via an estate planning partner and the whole issue goes to tax court. The simple fact the IRS is closing the loophole as regulatory action should signal the demise of this long time and accepted practice.
Here is their announcement: The U.S. Treasury Department has issued a new regulatory proposal that would “close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposes,” according to Mark Mazur, the Treasury’s assistant secretary for tax policy.

“It is common for wealthy taxpayers and their advisors to use certain aggressive tax planning tactics to ower the taxable value of their transferred assets artificially. By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes.”

Traditionally, ownership restrictions, such as on liquidation, voting rights or control can provide the ability to take a minority interest discount to reduce the value of the property for estate tax purposes when the ownership interest is being transferred.

The proposed regulations aim to curtail this loophole. The next step is a 90day comment period, evaluation of those comments then implementation.

 

About the Author:

Bill Broich
Bill Broich is a well-known annuity expert with over 30 years of experience. He has written hundreds of articles on annuities and other financial topics, and has been a featured commentator on TV, Radio and the Internet. To follow Bill's profile, click here.