Issue link: http://viewer.e-digitaledition.com/i/727041
INDI V ID UA L TA X PAY ER S SH O U L D examine their estate now before changes are made that a…ect gift and estate taxes. W h i le most t a x payers a re spend- ing the summer focused on economic de ve lopment s a s s o ci a t e d w it h t he market, foreign a…airs, or election year developments closer to home, high net- wor th ta xpayers have other negative developments to be concerned about. The estate a nd g if t ta x r u les, which beca me per ma nent a f ter 2012 , may ex per ience dra matic cha nges ba sed on new proposa ls by one Presidentia l candidate and the current administra- tion. Current Federa l law provides for a n est at e a nd g i f t t a x exempt ion of $5,450,000 ($10.9 million for a ma r- ried couple). This exemption is indexed for inflation a nd increases each yea r. One Presidentia l ca ndidate proposes to reduce the estate ta x exemption to $3.5 million ($7 million for a married couple), reduce the gift ta x exemption to $1 million ($2 million for a married couple) and repeal the inflation indexing. This will significantly increase estate a nd g if t ta x for ta x payers whose net wor th is equa l to or g reater tha n the existing exemptions. The use of va luation discount s to reduce t he est ate a nd g i f t t a x va lu- ation of fa mi ly-ow ned businesses is a n i mpor t a nt es t at e pla n n i n g t ool . Discounts are commonly claimed for lack of control (minority interest discount) a nd lack of ma rket abi lit y. Apply i ng such discounts in the context of family controlled entities has long been a point of contention for the IRS. Unsuccessful in attempts to restrict the use of va lu- at ion d i scou nt s t h rou g h leg i slat ive changes, the Treasury Department has proposed regulations under Section 2704 to accomplish this goa l and eliminate discounts on family controlled entities. Va lu a t i on d i s c ou nt s , c om m on l y used for fa mily limited pa r tnerships (FLPs) and limited liability companies (LLCs), a llowed for more wea lth to be tra nsferred free from estate, gif t a nd generation sk ippi n g t ra nsfer (GST) ta xes. If a 25 percent discount is appro- priate, then a $1 million pa r tnership interest can be transferred as a $750,000 gift. This would save $250,000 of the gift or estate exemption. The Obama Administration proposed, w it hout s uc c e s s , ch a n g i n g t he l aw over severa l a n nua l bud get propos- a ls i n order t o rest r ict or el i m i nat e va luat ion d i scou nt s on t ra n sfers of interests in fa mily controlled entities. Now the IRS is exploring other mea ns to reach the sa me end — specif ica l ly new ta x reg u lations. W het her t hese new restrictions will withstand a court cha llenge rema ins to be seen. The I R S ha s been f r ustrated t hat Congress has not acted to cha nge the law restricting valuation discounts, and these proposed regulations are expected by many to be made e…ective by January 2017 or ea rlier. This mea ns that it is likely that any transfers of interests in fa mily entities that took place before the reg ulations are e…ective would be "g ra ndfat hered," i.e., t he IR S wou ld respect the ability to use the discounts. If you are in the process of planning your estate and are considering forming a FLP or a LLC, you should be aware of this development. The family valuation discounts to which we have become accustomed over the past 20 years may not continue to be available. If you have an existing family entity, you may want to revisit your estate plan to see if you would like to make additional transfers before the rules change. Many taxpay- ers have remaining lifetime transfer tax exemption (gift, estate and GST) to utilize in a current transfer. Please contact your CPA or your estate tax attorney for additional information. Naomi Ganoe is a Director of CBIZ MHM, LLC & Mayer Ho°man McCann P C , a n i n d e p e n d e n t C PA f i r m i n Akron, Ohio. ■ to Impact Estate and Gift Tax Planning BY NAOMI GANOE, CPA, MT, CFP Dramatic Proposed Changes 2 8 2 8B U S I N E S S S E C T I O N