IRS threatens to eliminate discounts on transfers of family business interests

Family business interests

Proposed regulations have many families rushing to do advanced estate planning

On Aug. 2, 2016, the IRS released proposed regulations under Section 2704 of the Internal Revenue Code. If adopted, the proposed regulations will significantly reduce the availability of valuation discounts in transferring interests in family entities, including limited partnerships and limited liability companies.

Following their publication, a public comment period began, continuing through Nov. 2, 2016. Thereafter, the IRS held a public hearing on Dec. 1, 2016. During the public hearing, Catherine Hughes, of the Treasury’s Office of Tax Policy, made several oral remarks. Specifically, Hughes noted that contrary to the plain language of the proposed regulations, the IRS does not intend to eliminate traditional discounts currently available for family-owned entities. However, if the proposed regulations are enacted as currently drafted, such discounts would be eliminated. Hughes did not provide any indication that the IRS plans to modify the proposed regulations to align with her comments. Accordingly, her remarks cannot be relied upon to mean that the final rules will not significantly reduce the availability of valuation discounts.

Unfortunately, following the hearing, it is still not clear which of the proposed regulations will be published as final rules. Over 9,000 comments were submitted to the IRS, which are expected to take some time to review. While the IRS failed to provide any insight as to the timing of the issuance of the final rules, it is still possible that final rules may be issued prior to Trump’s inauguration on Jan. 20, 2017. At a minimum, the final rules are expected to become effective 30 days after formal publication in the Federal Register.

Under current law, the IRS allows valuation discounts for intra-family transfers of interests in family-owned businesses to account for lack of control or lack of marketability. Such valuation discounts allow taxpayers to gift or transfer minority interests in family entities to family members at a discounted gift or transfer tax cost, which in turn allows clients to maximize wealth transfer between generations and reduce estate tax consequences.

For example, if mom owns a 10 percent limited partnership interest in a family limited partnership with assets valued at $30 million, the fair market value of 10 percent of the underlying assets of the partnership is $3 million. However, taking into consideration conservative discounts for lack of control and lack of marketability of 25 percent, the discounted value of mom’s limited partnership interest is only $2.25 million. If mom elects to gift her limited partnership interest to a trust for the benefit of her daughter, mom will utilize only $2.25 million of her lifetime gift tax exemption of $5.45 million. In this way, mom has effectively transferred $3 million outside of her taxable gross estate, including any future appreciation of the interest.

While it is unclear which of the proposed regulations will pass, it is possible that valuation discounts for transfers of minority interests in family-owned entities may be eliminated. Accordingly, in light of the IRS’ reluctance to provide any immediate guidance with respect to the proposed regulations, clients with taxable gross estates (in excess of $5.45 million for a single person or $10.9 million for a married couple with a properly structured estate plan) should consider business succession planning and effectuate gifting of minority interests in family-owned entities as soon as possible to take advantage of the current tax law and maximize wealth transfer.

A special thank you to Chuhak & Tecson, P.C. Associate, Kathryn Kaler, for her collaboration on this article.


Benefits of gifting assets “In Trust”

With the federal estate tax at 40 percent, generous clients with taxable gross estates often look to make gifts to family members as a means to transfer wealth. The federal government allows for unlimited gifts to be made between spouses. However, for all others (family and friends), the government imposes limitations.

The annual gift exclusion in 2015 is $14,000 per person (or $28,000 for a married couple) and may continue to be adjusted for inflation. In addition, the American Taxpayer Relief Act legislation of 2013 increased the lifetime gift exemption to the estate exemption of $5.43 million in 2015, increasing to $5.43 million in 2016. When clients make gifts in excess of the annual gift exclusion, no gift tax is owed but a federal gift tax return must be filed to notify the IRS that you have utilized a portion of your lifetime gift exemption. Upon death, the lifetime gift exemption then decreases proportionately. For example,Read the rest of this entry

Funding the Future

Grandparents Have Many Ways to Help Loved Ones

My family has had the pleasure of welcoming the next generation of Markuses.  My almost 3-year-old niece, Lex has enough personality and style to be nicknamed “Manhattan.” And my nephew, Nathan, followed. While his personality is still developing, I’m thinking “Mr. Giggles” may be appropriate for this very happy three-month-old.

The joy they bring to the family is immeasurable. And my generous parents, like countless other clients say, “I want to see my children and grandchildren enjoy the fruits of our labors. What should we do?” The key is to gift strategically.Read the rest of this entry

Peace of Mind: Buddhism and Estate Plans

Originally published in Chicago Daily Law Bulletin, July 31, 2014

Death comes to all of us, but the time of death is uncertain.

This chant, which is contemplated by Tibetan Buddhists throughout the world, teaches that we should make reasoned, logical, clear decisions that leave us and our families and friends in as peaceful a place as possible – now, upon our death, and even after our passing.

What does estate planning have to do with meditation? Quite a lot, actually. As a student of meditation, I was quite moved by the similarities between the Buddhist philosophy and my personal work mantra and website tag line – Plan Today, Strengthen Tomorrow.Read the rest of this entry

Save Millions with Estate Tax Return

On Jan. 27 of this year, the IRS announced in Revenue Procedure 2014-18 an automatic extension of time for certain estates to elect portability of a decedent’s unused exclusion amount for the benefit of the decedent’s surviving spouse. However, there are exclusions.

In this article, Lindsey Markus identifies how filing an estate tax return can translate into millions of dollars of tax savings.

To learn more, download “Save Millions with Estate Tax Return,” published in the April edition of the Chicago Daily Law Bulletin.


A Lurking Federal Tax Law Minefield

The American Taxpayer Relief Act of 2012 (ATRA) was signed into law on Jan. 2, 2013, making several of the Bush-era tax cuts permanent. At first glance, ATRA was considered taxpayer friendly. But upon closer examination, a minefield lurks — not because of potential estate tax but, rather, income tax.

Lindsey’s latest article examines how increased estate tax exemptions and increased income taxes have dramatically changed the focus of estate planning from estate tax minimization to income tax minimization. And, how estate planning documents should be updated to help minimize potential income tax consequences.

To learn more, download “A Lurking Federal Tax Law Minefield,” published in the May issue of the Chicago Daily Law Bulletin.


A Lurking Federal Tax Law Minefield

Assisted Reproductive Technology Poses New Estate-Planning Questions

Due to the deferral of pregnancy, environmental issues and a host of medical factors, infertility rates are on the rise.

Lindsey’s latest article addresses the estate planning implications associated with assisted reproductive technology (ART). Specifically, what happens to genetic material upon death? And, who stands to inherit?

To learn more, download “Assisted Reproductive Technology Poses New Estate-Planning Questions,” published in the February issue of the Chicago Daily Law Bulletin.


Assisted Reproductive Technology Poses New Estate-Planning Questionscdlb-assisted-reproductive-tech-feb-2014_page_2

Death, Taxes and Divorce – Why Every Ex-Spouse Needs a New Estate Plan

No one can escape the inevitable – death and taxes. And unfortunately, according to the U.S. Census Bureau nearly 50 percent of all marriages will end in divorce.

The divorce process is incredibly stressful. Clients are often so overwhelmed with emotional, financial and legal complexities, they fail to consider the estate planning implications of their separation and divorce. However, proactive planning can help ensure assets do not pass to a soon-to-be-ex or a former spouse.

Lindsey’s latest article explains why everyone who survives a divorce needs a new estate plan to avoid probate, provide asset protection for beneficiaries, and to make sure the money doesn’t inadvertently flow back to your former spouse!  She also addresses which estate planning tools that can be implemented during the pending divorce.

To learn how to protect yourself and your estate, download Lindsey’s latest article, “Death, Taxes and Divorce – Why Every Ex-Spouse Needs a New Estate Plan,” published in the November issue of the Chicago Daily Law Bulletin.


Death, Taxes and Divorce – Why Every Ex-Spouse Needs a New Estate Plan

Policy Frees Up Snowbirds To Give Charitably

Like Florida, New York, Massachusetts, and Connecticut, the Illinois Department of Revenue has adopted new regulations which ensure that out of state donors will not be penalized for continuing to donate to their favorite local charities.

Lindsey’s latest article explains that the department will no longer consider a taxpayer’s charitable contribution to a not-for-profit 501(c)(3) organization in determining residency. To learn more, download “Policy Frees up Snowbirds to Give Charitably,” published in the September edition of the Chicago Daily Law Bulletin.


Policy Frees up Snowbirds to Give Charitably

Life Insurance Lessons From A ‘Sopranos’ Star

James Gandolfini has been gracing the headlines over the past few months. Surprisingly, the publicity surrounding the late television star’s death is not focused on his award-winning performance in “The Sopranos” or a Hollywood scandal – but rather his estate planning.

Tony Soprano certainly missed some extraordinary estate planning opportunities.

Lindsey’s latest article examines lessons learned from James Gandolfini’s estate on life insurance.  Effective August, 2012, Illinois now provides increased creditor protection for life insurance policies where the beneficiary is trust for the benefit of a child, spouse, or dependent.  Beneficiary designations on life insurance policies are critical to providing asset protection for beneficiaries and ensuring maximum estate tax planning.

To learn how you might benefit from similar planning download “Life Insurance Lessons From A ‘Sopranos’ Star,” published in the August edition of the Chicago Daily Law Bulletin.


Life Insurance Lessons From A 'Sopranos' Star