New York Estate Planning & Elder Law Blog
Newly proposed IRS regulations meant to curb common estate and gift tax planning tactics is being met with a firestorm of resistance from financial advisers and estate planners across the country. The proposed regulations (REG-163113-02) place limitations on the use of current valuation discounts that reduce the overall value of assets in family-owned businesses, thus lowering a decedent’s estate and gift tax liability at the time of death. The IRS hope to achieve this end by disregarding restrictions that enabled taxpayers to use these discounts in the past.
Wealth Preservation In Closely Held Businesses
Currently, interests in closely held businesses are not taxed the same as other property interests due to their illiquid nature. Many tax and estate planners put a family’s assets in a closely held business to reduce their estate and gift tax liability. While this is a boon for many families seeking to preserve their wealth, others argue that what started out as a helpful tax break for legitimate family businesses is being abused and exploited by those who have no legitimate use of it.
The proposed regulations would in general value an entity owned by family members or closely held business in its entirety by disregarding current discounts. An individual owner’s interest would then be valued as a pro-rata share of the fair market value of the business. The proposed regulations would also treat certain transfers made within three years of the transferor’s death as a date of death transfer. This would result in an increase of the transferor’s estate for death tax purposes.
IRS Overstepping Their Authority
Despite the question of the legitimacy of this tactic, the question of whether or not the IRS even has the authority to propose new rules to eliminate it has been brought up by many. This estate and gift planning tactic has been in use since Congress first passed it in 1990. Experts in the area state that the statutory authority that the Secretary of the Treasury relies on may not actually grant the necessary power to close this supposed loophole. If the regulations are eventually passed, the ultimate decision of whether or not the IRS can pass these regulations may come down to a U.S. Tax Court ruling.
No Effect Until At Least 2017
No one can say for certain whether or not these proposed changes will even go through in their current for or even at all. The earliest that these proposed regulations could go into effect is the year 2017. Even then, there may be lengthy court battles by those who wish to continue this practice.
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