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Estates & Trusts

Do you own an interest in a Limited Partnership? If so, proposed tax regulations could have a significant impact on your estate and gift taxes.

By November 22, 2016No Comments

These family controlled partnerships are often used in order to transfer assets to future generations during life or at death. Under current regulations, individuals transferring their interests are allowed to take valuation discounts if they meet certain criteria such as lack of control or lack of marketability. These discounts have provided an effective way for families to minimize the estate and gift taxes associated with these transfers. However, proposed regulations, if passed, will dramatically decrease or eliminate these valuation discounts. Click on the link below to learn more about these new regulations and how they will affect transfers involving family businesses.

Key Changes

Individuals owning closely-held limited partnerships have been using valuation discounts for over 30 years. This means that the value of their ownership of the business for federal and estate gift tax purposes is reduced for issues such as lack of marketability or lack of control. These discounts have been aggressively used by estate tax attorneys to decrease the value of their client’s estate when gifting assets to their heirs, thus reducing the estate and gift taxes. The proposed regulations would significantly limit the use of valuation discounts for any type of family limited partnership or other family business transfer, where the family retains control before and after the gift or bequest occurs.

The proposed regulations would expand the family attribution rules to include siblings as part of the definition of family. If a family, as a whole, controls an entity, their interest must be treated as a controlling interest with the ability to liquidate the entity, regardless of the size of each individual interest. Therefore, any minority interest transfer of a family controlled entity would be seen as having control under the expanded definition and as such, would not qualify for any discounts for lack of control.

The proposed regulations would also disregard certain restrictions placed on the redemption or liquidation of family controlled interests. This means that certain restrictions would be ignored in valuing these interests for gift or estate tax purposes when they are transferred to a family member. This would reduce or eliminate any minority or marketability discounts that would have otherwise been applied.

The proposed regulations could become final any time after December 1, 2016 and would only apply to transfers after the effective date. If you are considering any transfers of interest in a family owned business or have any questions regarding these proposed regulations, please contact your L&B Professional.

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