(Is This) The End of Discounted Gifts?

September 12, 2016 | Trusts & Estates

The Internal Revenue Service has proposed new regulations that could dramatically impact wealthy individuals’ ability to minimize their future estate tax. The proposed regulations call for an elimination of valuation discounts. Valuation discounts have been a valuable tool for shielding assets from lawsuits and protecting family businesses from the effects of a potential divorce.

The proposed regulations are expected to take effect as early as year-end, and they will substantially curtail tax- and asset-planning flexibility.

What Are Discounts Anyway? Here’s a Simple Illustration:

Tom has a $20 million estate which includes a $10 million family business. He gifts 40%
($4 million) of the business to a trust to grow the asset outside of his estate. Since a minority 40% trust/shareholder cannot force a sale or redemption of its interest, the non-controlling interest in the business transferred to the trust is worth less and should be valued accordingly.  As an example, the value of the 40% business interest transferred to the trust might be appraised, net of discounts, at $2.4 million. The discount has reduced the estate by $1.6 million from this one simple transaction.

Not a 2012 Boy Who Cried Wolf:

Many of you might remember the mad rush to plan in late 2012 on the fear that the gift, estate and generation skipping transfer tax exemption might be reduced from $5 million to $1 million in 2013. After many incurred significant costs and hassles in implementing planning quickly, that change never occurred. For those who might be affected by valuation discounts, the situation in 2016 seems vastly different. Although the proposed regulations could be changed and theoretically even derailed before they become effective, the more likely scenario is that they will be finalized after public hearings and the ability to claim valuation discounts will be severely curtailed. If you do undertake planning, be cognizant of an important lesson from much of the poor planning that was done in 2012, when many people transferred assets out of their own reach. Consider using planning techniques that assure you (or if you are married, your spouse) access to funds transferred in the discount planning.

What You Should Do:

Contact your attorney, CPA and wealth advisor to review strategic wealth transfer options that will maximize your benefit from valuation discounts while still meeting other planning objectives. Projections completed by your financial planner could be essential to confirming how much planning should be done and how. Your CPA will have vital input on wealth transfer options, federal and state income tax implications, and more. Your insurance consultant can show you how to use life insurance to backstop some of the planning strategies, in coordination with the financial forecasting done by your financial planner, to maximize both the tax benefits and your financial security.

Thanks to: LISI Estate Planning Newsletter #2448 (Agust 22, 2016) at http://www.leimbergservices.com
Copyright © 2016 Martin M. Shenkman, Jonathan Blattmachr, Ira S. Herman and Joy Matak.

Related News


Legal updates and news delivered to your inbox