If you have or think you might eventually have a total net estate worth more than $5,450,000 for an individual or $10,900,000 for a married couple, your taxes are going to increase if you transfer business interests or other assets to family members.
The Santa Barbara Independent says in “New IRS Regulations” that people in the past usually transferred certain assets into partnerships or limited liability companies (LLC). After the transfer, rather than owning the assets in their own name, the assets were now owned through an interest in a partnership or in a limited liability company (LLC). When the transfers of those entity interests (assets) were made to family members, it meant a reduction of the value of the transferred portion by as much as 25% to 45%. This estate planning strategy—known as “valuation discount planning”—usually decreased wealth transfer taxes at the time of death or when “gifting” assets to heirs ahead of death.
For instance, placing $10 million worth of assets inside a closely-held LLC or partnership might decrease the value of those assets in the estate by $2.5 million to $4.5 million. With the current 40% estate tax rate, this could reduce the estate (or gift) tax by $1 million to $1.8 million.
However, the U.S. Treasury Department recently announced proposed regulations for Internal Revenue Code Section 2704 that, when finalized, would eliminate this valuation discount planning approach. The Treasury Department won’t finalize the regulations until after its December 1, 2016 hearing at the earliest, so you can still plan and take action if this kind of strategy is important for your family.
You can still make gifts or sales to your family and take full advantage of the current law. There are many complexities involved in large estates, so talk to an experienced estate planning attorney to structure the valuation discounts/adjustments properly before you move forward.
Reference: Santa Barbara Independent (September 8, 2016) “New IRS Regulations”
One of the main goals of our law practice is to help families like yours plan for the safe, successful transfer of wealth to the next generation. Call our office today to schedule a time for us to sit down and talk about your estate plan, where we can identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.