In The News: August 25, 2016

New Federal Tax Regulation That Can Significantly Increase Estate Tax On Participants In Family-Owned Businesses and Farms

Many of our clients and colleagues participate in family businesses. And even those who don’t — know people who do. The material described in this memorandum will be relevant to any family business or farm participants who are at all concerned about estate taxes. Feel free to share this information with others if you think it might be useful.
Background. On August 4, 2016, the U.S. Treasury Department issued proposed regulations under Internal Revenue Code Section 2704 that, when finalized, may substantially increase your wealth transfer taxes by blocking a common estate planning strategy. Essentially, it means that for people with an interest in a family farm or business, the ability to reduce estate tax valuation of the business interests will be significantly impaired. This means more families will pay more estate taxes.
Historically, taxpayers could reduce the value of their taxable estates by placing assets in partnerships, Limited Liability Companies or closely held corporations and claiming lack of marketability and/or lack of control discounts. These discounts typically reduced the value of the ownership interests, for tax purposes, by 15% to 45%.
For example, placing $10 million worth of assets inside a closely-held entity (such as a corporation or LLC) might reduce the value of the estate by $2.5 million to $4.5 million and, given the current 40% estate tax rate, reduce the estate tax payable by as much as $1.8 million.
The IRS has been working on these rules for years. Every informed commentator we’ve heard from says that something close to these proposals will be put in place, as early as December 1, 2016, and in any event, not much after that date. Congressional action is not likely and court challenges will take years to unravel. SO WE BELIEVE THIS IS A REAL ISSUE for many of our clients.
During the election season, tax proposals can be found everywhere. But one proposal that is likely to get serious attention “rolls back” the Federal Tax exclusion from $5.45 Million to $3.5 Million. For Illinois residents, this means the current state threshold of $4 Million would also be reduced. This would dramatically increase the impact of these new regulations.
What Can Be Done About It? Fortunately, families that may be affected have a short window of opportunity to take action before the Section 2704 regulations go into effect. The Treasury Department, for procedural reasons, cannot finalize the regulations until December 2016 at the earliest. In the meantime, we believe you can make gifts or sales to your family taking full advantage of the current law, which allows valuation adjustments.
If you are in our Annual Family Heritage Protection (Maintenance) Plan and believe your family farm or business could be affected: We believe your situation calls for attention. For general information, consider signing up for one of our free SEMINARS on the subject. A schedule of times and locations will shortly be posted here. As a member of our Family Heritage Protection (Maintenance) Plan, you can also call our office to schedule a free personal consultation. Having a recent financial statement or asset spreadsheet available will be helpful.
If you are not in our Annual Family Heritage Protection (Maintenance) Plan and you believe you and your family might be impacted by these changes, consider signing up for one of our free SEMINARS on the subject. A schedule of times and locations will shortly be posted here. We can arrange for a preliminary assessment of your situation in a private appointment, for which there will be a fee.
Frankly, because we only have until early December to develop and complete these complex plans, time is at a premium. While we will do all we can to help our friends and clients, it will be a “first to the table” situation.
We will also post, as time allows, other information on this subject here, on our website.
Family Business planning will remain important and feasible. Planning for succession in control and economic interest is a good idea regardless. It is only the estate tax implications that are changing. But these may change plans.
Again, please feel free to share this information.
David M. Frisse, Rick A. Brewster and L. Kaye DeSelms Dent

This letter is offered for educational and informational purposes only. It is not intended as directed legal advice to any person receiving it.

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