Internal Revenue Service and the Department of Treasury Withdraw Estate Valuation Regulations

by Monte L. Schatz

Historically, valuation discounts have been used as an estate planning tool to minimize estate, gift and generation-skipping taxation.  The ability to minimize taxation of ownership interests in closely held corporations, limited liability companies and partnerships has been critical in helping to assure the preservation and continuity of those businesses by legally avoiding tax obligations that would adversely affect the liquidity and cash flow of operating businesses.  The use of valuation discounts has been in a state of uncertainty for the past several months. Proposed regulations published by the Internal Revenue Service would have restricted valuation of discounts previously recognized under Internal Revenue Code § 2704.

The 2704 valuation discount provisions allow for statutorily recognized reductions in value resulting from the restrictions, illiquidity and reduced marketability of closely held business interests.  The 2704 discounts were particularly helpful for entities that were family owned businesses.  The proposed regulations published on August 4, 2016 would have provided for disregarding restrictions placed upon shareholders, partners or members for sale of their interest.  The practical result of disregarding those business entity restrictions would be elimination of any discount from the fair market value for those interests.  The entity would be taxed at fair market value thereby potentially increasing estate, gift or generation-skipping taxes for holders of those interests.

On April 21st, 2017 the President issued Executive Order 13789 instructing the Secretary of Treasury to review all significant tax regulations that:

i. impose an undue financial burden on U.S. taxpayers;

ii. add undue complexity to the Federal tax laws; or

iii. exceed the statutory authority of the IRS.

The Secretary of Treasury submitted a final report to the President on September 18, 2017 recommending a complete withdrawal of the proposed regulations that would have eliminated certain valuation discounts for closely held businesses.  The report has been filed as of October 17th and is set for Publication on October 20, 2017.

§ 2704 Valuation discounts have been preserved for taxpayers who own closely held businesses.   The continued recognition and reaffirmation by the Treasury Department and Internal Revenue Service of valuation discounts preserves a critical estate planning tool for legal professionals to assist minimizing taxation of their client’s estates and helping to preserve the continuity and preservation of taxpayer’s ownership interests.

SOURCES:  https://www.gpo.gov/fdsys/pkg/FR-2016-08-04/pdf/2016-18370.pdf
https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-22776.pdf

© 2017 Vandenack Weaver LLC
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Proposed Basis Consistency Regulations

The Internal Revenue Service released proposed and temporary regulations to further consistency in the reporting of the tax basis of certain property received by a beneficiary of an estate or trust. These regulations provide guidance regarding the basis consistency requirements under IRC 1014(f) and reporting requirements under IRC 6035.

For estates with tax due after July 31, 2015, the executor or trustee is required to file Form 8971 indicating information about the beneficiaries, the property to be acquired by the beneficiaries, and the estate tax value of the property. The initial basis of the beneficiary may not exceed the basis reported to the IRS on such form. The executor is also required to furnish a statement (Schedule A of Form 8971) to each beneficiary who will acquire property from the estate including the value of the property. Estates filing tax returns to elect portability for a surviving spouse are not required to file the basis consistency reports. The regulations also establish penalties for inaccurate basis reporting and failures to furnish correct statements.

 Generally, Form 8971 must be filed with the IRS no later than 30 days after the estate tax return is due or filed and is required to be filed separately from the estate tax return. Effective March 23, 2016, the IRS announced that additional time will be granted to estates currently required to file Form 8971 and delayed the time to file and furnish the statement to beneficiaries until June 30, 2016.

© 2016 Vandenack Williams LLC
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Are There Any Lifetime Planning Options Available to Me to Reduce My Exposure to Estate Taxes?

A Video FAQ with Mary E. Vandenack.

There are a variety of techniques that can be used to reduce your exposure to estate tax. A really simple one is an annual exclusion. Every year you can make a gift to any individual for up to a certain amount–that amount changes from year to year. You can also make lifetime gifts to your heirs/beneficiaries that are going to add up to the maximum amount you can pass during your lifetime. Next you want to go ahead and set up a trust or consider other lifetime planning strategies. There are a variety of trust techniques that will allow you to reduce your exposure to estate taxes. There are also some newer techniques that just using portability in your estate plan that can minimize your exposure to estate taxes.

© 2014 Parsonage Vandenack Williams LLC

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Are There Any Exemptions to the Estate Tax?

There are exemptions to the estate tax. The federal estate tax exemption for 2014 is $5,340,000 and that pertains to each American citizen; therefore, between yourself and your spouse you have over $10,000,000 in exemption. In addition to that, there is a skip generation benefit equal in value which means that you can not only pass down to your spouse and to children, but also down to future generations by use of the skip generation with it.

© 2014 Parsonage Vandenack Williams LLC

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IRS Allows Extension of Time to File Estate Tax Returns

The IRS has issued Rev. Proc. 2014-18 to provide relief to certain estates that failed to file a federal estate tax return in order to elect portability of a decedent’s unused exclusion amount for the benefit of the decedent’s surviving spouse.

The Revenue Procedure limits the relief provided to estates of decedents that died during 2011, 2012 or 2013 that failed to file a return within the time required by law to elect portability of unused exclusion amount to the decedent’s spouse. The relief is only available if the estate is not otherwise required to file an estate tax return.

Estates that are not eligible for relief under Rev. Proc. 2014-18 may request an extension of time to make the portability election by requesting a private letter ruling pursuant to the procedures set forth in Rev. Proc. 2014-1.

 The full text of Rev. Proc. 2014-18 is available at: http://www.irs.gov/pub/irs-drop/rp-14-18.pdf.

© 2014 Parsonage Vandenack Williams LLC

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Expiration of Bush Tax Cuts Likely Will Raise Income Taxes for Everyone

If The President and Congress do not act before the end of the year, many significant tax cuts from the Bush era will expire. One of the significant tax increases will be in the area of estate taxes.  If action is not taken these tax laws will revert back to what they were in 2001, and the exemption for bequests at death will drop to $1,000,000.

Additional taxes that will increase, if action is not taken, include income taxes (by removal of the 10% bracket and increases in the 25% or higher brackets) and long-term capital gains (which will be increased to 20%).  Many favorable tax breaks, such as bonus depreciation, will no longer be available.

Tax planning strategies are extremely important to ease the transition into 2013. A good year-end tax plan could make a huge impact on taxes paid after the first of the year. With a successful strategy, the ill-effects of the Bush Tax Cuts expiration will be lessened.

© 2012 Parsonage Vandenack Williams LLC

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Estate and Income Tax Increases Likely in 2013

Unless Congress acts prior to year end, a variety of taxes will increase automatically on January 1, 2013.  Income tax rates and capital gain rates will increase on January 1.

A new 3.8% Medicare tax comes into effect on January 1, 2013.  The new Medicare tax is imposed on is imposed on investment income in excess of certain thresholds (adjusted gross income of $200,000 single/$250,000 married).  Investment income includes income received from rents, stocks, bonds, mutual funds and other investments.  Income that is derived in the ordinary course of a trade or business is not included.  Taxpayers should review investment portfolios, asset structure, and business structure to minimize the impact of the new tax.

The estate tax exemptions for gifts during life or at death and the generation skipping transfer exemption will decrease from $5.12 million to $1.0 million, $1.0 million and $1.4 million respectively.  Those with assets in excess of $1.0 m should at least review and consider planning options prior to December 31, 2012.

© 2012 Parsonage Vandenack Williams LLC

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TAX COURT RULES GIFTS OF NEBRASKA LLP NOT A GIFT OF A PRESENT INTEREST

The United States Tax Court recently published a tax court memorandum opinion, T.C. Memo 2010-2 entitled Walter Price v. Commissioner. In Price the Tax Court held that a couple’s gifts of interest in a Nebraska limited partnership to their children did not qualify for the gift tax present interest annual exclusion under I.R.C. § 2503(b), determining that despite distributions of nearly $530,000 in the six years following the initial gift because the Price’s failed to show that the gifts had an unrestricted and noncontingent right to immediate use. For a link to the full Price v. Commissioner opinion, see our website at www.pvwlaw.com.

Link for website: http://www.ustaxcourt.gov/InOpHistoric/PRICE3.TCM.WPD.pdf

© 2010 Parsonage Vandenack Williams LLC

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