An IRS attorney from the Estate and Gift Tax Office of Tax Policy created quite a stir at the American Bar Association’s Section of Taxation meeting in May. The IRS attorney noted the Service’s intent to release new proposed regulations by mid-September that would likely include new “disregarded restrictions” built into family entity strategies that would, in turn, reduce or eliminate the use of valuation discounts in family business entities like family limited partnerships (FLPs) or family limited liability companies (FLLCs).

Presently, when we use such entities in advanced estate and wealth preservation planning, it allows successful families to leverage gifts or sales of equity interests in family entities which equates into shifting more wealth to the “other side of the tax wall” for the benefit of generations of family members.  The bottom line is the IRS wants to take the planning technique away for successful families.

The IRS has often challenged valuation discounting strategies in court but with limited success.  Without much help from the judiciary, the IRS turned to the President’s budget proposals for help. From 2010 through 2013 the Obama federal budget Green Book included proposals to eliminate valuation discounting on family entities as well as limit other favorable planning techniques for successful families.

If past budget proposals are prologue to proposed regulations, we might expect to see the addition of “disregarded restrictions” which would dramatically reduce the impact of valuation discounts, especially in family entities that do not have actual business operations.   For example FLPs or FLLCs that hold cash and marketable securities only.

There is further speculation that existing family entities would not be “grandfathered” under the proposed regulations, so only gift or sale transactions that are completed before the effective date of the proposed regulations would be grandfathered.

The window of opportunity may be closing fast for successful families to take advantage of valuation discounting in family entities (ex. family limited partnerships (FLPs) or family limited liability companies (FLLCs).

For clients who wish to shift significant value out of their estates and into the hands of their family for generations to come, the time to complete their planning and transfers is here.

For clients who already have family entities in place, they should strongly consider accelerating their gift or sale planning before the opportunity to leverage those transactions through discounting is gone forever!

In any case, we can help!  Call Randall H. Borkus, Esq. (Rhb@borkuslaw.com / 630-568-3480)