Proposed Rules Could Limit Techniques Used to Lower Estate and Gift Taxes

Laura Saunders reported in Saturday’s Wall Street Journal that, “New rules are coming that will likely limit techniques used by the wealthy to lower their estate and gift taxes.

The proposed regulations, issued by the Treasury Department and Internal Revenue Service in early August, apply to moves known as ‘valuation discounts.’ They allow people with assets greater than the current exemption of $5.45 million per person ($10.9 million for a couple) to lower the value of their assets that are subject to gift and estate taxes. The top tax rate on amounts above the exemption is currently 40%, so the savings can be substantial.

To get the lower valuations, the owner of assets typically puts them into a holding company or other entity that isn’t traded and gives pieces of the company to family members and perhaps a charity. As a result, the assets’ value drops because control of the entity is dispersed and the assets would be harder to sell. The combined discounts generally range from 30% to 50% of the assets’ value, and can be even higher.”

The Journal article explained that, “These moves are controversial because the courts have allowed taxpayers to use them to get sizable tax breaks on traded securities and even cash. Thus a wealthy taxpayer could reduce the taxable value of $10 million of blue-chip stocks to $6 million and cut his estate tax by $1.6 million.”

Saturday’s article noted that, “The proposed changes in the rules would allow the IRS to ignore many discounts in entities where they currently apply and collect far more estate or gift tax. In addition, the IRS could disallow even more discounts if a taxpayer dies within three years after making certain gifts.”

Ms. Saunders added that, “Experts say it is unclear whether revisions are likely, or what they might be. The Treasury and the IRS are accepting comments on the proposals, and a hearing is scheduled for Dec. 1. Some think the administration will push to finish them before a new president takes office.

“There is a window of opportunity for people who have or want to have entities with valuation discounts, because the most important changes won’t take effect until 30 days after the rules are made final.”

The New York Times also discussed this issue in Saturday’s paper, Paul Sullivan reported that, “The Treasury Department has moved a step closer to tightening the way family limited partnerships are valued for tax purposes. And the prospect that the tax code could be changed by the end of this year has tax planners pushing their clients to consider stepping up estate and business planning, or risk paying more taxes.

“Earlier this month, the Treasury Department issued ‘proposed final regulations’ to eliminate a provision in the tax code that effectively allows wealthy people to greatly discount the value of shares in a family limited partnership given to family members. These partnerships are able to own assets like family business, real estate and securities.”

The Times article indicated that, “Tax experts do not rule out that these new regulations, although labeled final, could be changed in the comment period. Their enactment, which is set for 30 days after they become final, could also be delayed. At the earliest they would take effect on Dec. 31.

“Still, predicting when the regulations will take effect is beyond people’s control and could be risky for those who would benefit from a family partnership.”

This entry was posted in General Interest. Bookmark the permalink. Both comments and trackbacks are currently closed.