There are traditionally three phases of estate planning. I refer to these phases as Core, Legacy and Stewardship.
Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) have long been used for a variety of purposes, including centralized asset management, creditor protection, efficient legacy planning, and implementing legitimate discounting and freezing techniques for estate planning purposes. Our estate and gift tax system relies on accurately determining the fair market value of the property being transferred. Fair market value is to be determined objectively considering hypothetical buyers and sellers. Appraisers must take into account valuation discounts for lack of control and lack of marketability. When property is transferred to descendants or trusts, the value of the particular property being transferred is what is reported for gift tax purposes, and then the property with all future appreciation is excluded from the grantor’s estate.
The IRS began a campaign of attacking FLPs back in 1997. Court decisions have generally rebuffed various tactics and positions taken by the IRS in the family limited partnership area.
The IRS publishes its priority guidance plan each year to emphasize areas of the tax law that the IRS may issue additional regulations. Additional regulations affecting valuations in an intra-family transfer context has been on the IRS’ priority guidance plan for the last 11 years. Now, it has been elevated to a proposal set forth in President Obama’s Administration’s 2013 Green Book. The IRS recently announced that it could issue proposed regulations as early as September, which would severely restrict valuation discounts for interests in FLPs and other family entities.
Articles are now appearing which are encouraging estate planners and clients to get ahead of these likely new rules. It is likely that the IRS position will be that any new rules will be effective upon the publication of the proposed regulations, even though they will not become “final” regulations until a much later date.
Earlier this summer, we sent messages to clients who are in the midst of their estate planning that they may want to expedite the process, before the IRS can issue proposed regulations which greatly curtail the legitimate discounting and freezing techniques that we’ve implemented with countless clients. One would think that only Congress can change the law with respect to re-defining the value of property for gift and estate tax purposes, but the Obama Administration has an historical edict of affecting change by more government regulation. The IRS, no doubt, is feeling very confident in their power to limit valuation discounts by way of their regulatory authority.
If you have put off further estate planning, time may be of the essence. If your planning should include the many benefits of FLPs and FLLCs, or if you have an FLP or FLLC and gifting may be appropriate, you may want to get with your advisor sooner, rather than later. If we can help, give us a call.
H&A has again successfully settled an estate tax audit. In this case, the IRS confronted the Estate with an additional assessment of nearly $2.4 million dollars in estate taxes. The IRS assessment was based largely on three issues. First, the IRS argued that an LLC created prior to death should be included in the estate under IRC Section 2036. Second, the IRS argued that a vacation home previously owned by a QPRT and rented back to the decedent should be included in the decedent’s taxable estate under IRC Section 2036. Finally, the IRS disallowed an estate tax deduction for interest on a Graegin loan taken from the recently created LLC to pay estate taxes.
H&A was able to successfully defend the Estate on each and every issue on which the IRS based its assessment. Through proper planning, creative thinking, and hard work by H&A, the Estate recently received from the IRS a no-change closing letter. This was a collaborative effort across all firm departments, and is a testament to the wide ranging skills and knowledge offered to our clients. I’d like to thank everyone involved for their efforts in bringing this matter to a successful conclusion.
We cannot guaranty similar results, as success or failure of any audit defense depends on the facts and circumstances of the individual case. If you need help dealing with the IRS, please do not hesitate to contact us at (404) 255-7400.