Houston Families Should Take Note of Pending IRS Changes

Professor at chalk boardThe word is out in the estate planning bar that the IRS is looking at making an announcement this September about a favorite tax benefit gained from the use of family partnerships and LLCs.  New regulations would effectively raise the taxable value of assets transferred into these entities, which currently enjoy a generous discount. Wealthy clients are being advised to set up partnerships now to capture what remains of these discounts before the new rules take effect.

According an article in Barron’s titled “IRS Considers New Tax on Wealthy Families,” any changes to tax benefits affection family partnerships and LLCs could have significant consequences.

The article explains that partnerships and LLCs currently let families pass on a minority stake in the family business or in a pool of privately-held investments to their children with little or no tax consequences. This is because minority shares in a private business are illiquid, or unable to be easily sold or exchanged for cash without a substantial loss in value. They are worth less, from a tax perspective, than their stated market value. This is a big help to families who want to lower the taxable value of their assets, and in some cases below the $5.43 million gift-tax exemption. It also works even if the underlying investments getting passed on are liquid. The discount could be as much as 20% to 25%.

The article gives this illustration: the family business is worth $25 million and is entirely private owned by the family. You decide to pass on a 25% minority holding in it to your daughter via a partnership or LLC. The current IRS rules let you discount the shares up to 35%, because they are illiquid. This works to your benefit, as the IRS discount means that instead of passing on $6.25 million in shares—and paying taxes—you’re only passing on shares valued by the IRS at $4.1 million. That amount makes the transfer tax free because it’s under the $5.43 million gift-tax exemption.

The Treasury Department has put the estate planning community on notice that this may change and has hinted that new rules on family partnerships could be released before the fall. The rules would restrict definitions and possibly decreasing narrowing discounts for certain assets.

The article suggests that you speak with an attorney if you are thinking about forming or making changes in the organization of a family entity. With all of these changes in the wind, this may be a great time to get going with these discussions, as any stricter rules that are created could be made effective immediately, with the fine details sorted out later.

For additional information on business succession planning and estate planning in Houston, please click here to visit my website.

Reference: Barron’s (June 30, 2015) “IRS Considers New Tax on Wealthy Families”


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