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Change in Estate Planning and Tax Law


A recent change in estate and tax law could affect business owners as described in the following article by Maryland attorney Jane Sims. As we meet with business owner clients this year, we will be evaluating whether to take advantage of this valuation discount tool before it disappears. In the meantime, if you have any questions about this or any other concerns, please don't hesitate to contact us.

Bill

 

The IRS has issued new proposed regulations that all but eliminate a very valuable estate planning tool, but there is still time to act before the regulations go into effect (which will be sometime on or after December 1).

This tool is called the valuation discount for lack of control, and here is how it works. When an individual dies owning an interest in a closely-held entity (such as a corporation, partnership or LLC that is not publicly traded), the question arises how to value that interest for estate tax purposes. The same question arises for gift tax purposes if the individual gives away the interest during lifetime.

Imagine that the entity is an LLC that holds $100 of cash, and imagine that you have just given 50% of the LLC membership interests to your child. Would the value of that 50% interest be $50? Until now, the answer was no, because the child lacks the majority control necessary to turn that 50% interest into $50 cash upon demand. An appraiser would therefore discount the value of the 50% interest due to the lack of control. For example, if the appraiser decided that a 40% discount was appropriate under the circumstances, the 50% interest in the LLC would have a value of $30 for gift tax purposes.

The IRS has never liked allowing discounts for lack of control in the context of transfers within the same family, and now in the new proposed regulations, the IRS has finally done something about it. These regulations would essentially eliminate any lack-of-control discounts with respect to any entity that is controlled by a single family. It would not matter whether the entity held only $100 cash or held an entire operating business.

The new regulations affect anyone who owns any part of a closely-held corporation, partnership or LLC and who may be subject to estate tax. For Marylanders, this means anyone with overall assets of $2 million or more, or $4 million for married clients. For those living in a state with no state estate tax, this means anyone with assets of $5.45 million or more, or $10.9 million for married clients. You should consider whether it may be more tax efficient to transfer some or all of those interests to a multi-generational trust before the new regulations take effect, rather than hold on to those interests until death.

 


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