WHY IT MATTERS FOR ESTATE PLANNING
Every year the Federal Department of Treasury publishes the greenbook which outlines the then current presidential administration’s revenue proposals, tax policies, job creation issues that relate to the Department of Treasury and other related fiscal and policy issues. The greenbook is scrutinized by tax pundits, politicians and others for what it contains, but what it does not contain is also important. Within the 2013 greenbook, there was an obvious lack of discussion of 26 U.S.C. § 2704, which mandates how the law measures the value of certain family controlled entities for estate and gift tax purposes. Some observers took that to indicate that the IRS plans on amending the regulations pursuant to this statute. This suspicion was validated when an official from the Department of Treasury spoke at an American Bar Association, tax section meeting in May, 2015. She indicated that a proposed regulation may be released as early as September, 2015. As of mid-November 2015 such regulations have yet to be published. This issue is of substantial import for estate planning throughout the nation. If and when a family business is transferred via an estate or even to a trust created by an owner of the business, it is likely be a taxable event, depending on the specifics of the transaction.
PASSING A FAMILY BUSINESS ON TO NEXT GENERATION
Certainly a person can leave a number of shares of voting stock (or any other class of stock for that matter) in a will or trust, but in some circumstances that will not accomplish what is intended to be accomplished. Perhaps the business is a partnership, which is a favored business form for many family owned business entities, due to favorable tax treatment under state law. In addition, there is a discount applied to the valuation of the entity, compared to the value of the assets of the business under regulations heretofore promulgated and enforced by the IRS. Creation of a family limited partnership may be a vehicle to avoid taxation. For example, a parent can create a family limited partnership, fund the entity and then pass it on to his estate, heirs or whomsoever he/she chooses, thereby effectively discounting estate and gift tax liability. There are many perils for the careless donor that may incur further tax liability or penalties if such an arrangement appears as an attempt to reduce tax liability and not a transfer of a legitimate business entity.
NEW REGULATIONS WILL BENEFIT SOMEONE
Whatever final form the regulations take it will inevitably help some. For example, if the IRS decides to tighten up the circumstances that allow for a valuation discount, reduce the amount of a discount or even outright eliminate a discount, that would benefit some heirs that inherit under the federal and/or state tax threshold amounts by increasing the basis that they obtain upon inheritance. That means when they sell their share of the asset there is less capital gains tax liability. If the IRS decides to only do some, none or any of these, there will be winners and losers.
Estate planning is a dynamic endeavor, with cases even in another state affecting practice here in New York. The only way to insure the best, most up to minute advice is to consult with an experienced estate planning attorney.