“Thought for the Day” #797 – by Stephen R. Elville, J.D., LL.M.

September 6, 2016

The U.S. Treasury Department has proposed new regulations designed to prevent wealthy families from taking advantage of a long-utilized estate tax loophole.  The regulations affect families that are passing on family businesses.  In order to avoid paying estate tax – which applies only to estates valued at (in 2016) more than $5.45 million per individual or $10.9 million for a married couple – some wealthy families put their assets in a limited liability corporation (LLC).  Under current law, if the decedent has gifted minority partnership interests in the business entity to his or her heirs, the value of the decedent’s share can be discounted upon transfer to the estate.  This can bring the decedent’s combined assets to below federal estate tax thresholds.  The proposed regulations are meant to prevent these valuation discounts by changing the treatment of certain lapsing rights and of restrictions on liquidation.  In a blog post, the Assistant Secretary for Tax Policy at the U.S. Treasury, Mark Mazur, stated that wealthy taxpayers have been using aggressive tax planning tactics to artificially lower the value of their assets.  Mazur asserted that the “Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques solely for the purpose of lowering their estate and gift taxes.”  The Treasury Department is soliciting comments on the new regulations for 90 days.  A hearing on the regulations is scheduled for December 1, 2016, and the rules may be finalized by the end of the year.