February 2, 2023
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Proposed rules have consequences for wealth transfers


John Ambrecht

John Ambrecht

By John Ambrecht

The IRS is changing estate and gift tax rules, possibly as soon as this month. If you currently have or think you will eventually have a total net estate worth more than $5.5 million for an individual or $10.9 million for a married couple, your taxes to transfer any business interests or other assets to family members are about to go up.

In the past, people commonly transferred certain assets into a partnership or limited liability company. After the transfer, instead of owning the assets in their own name, they instead owned an interest in a partnership or in an LLC.  Then when they made transfers of those entity interests (assets) to family members, they were able to reduce the value of the transferred portion by as much as 25 percent to 45 percent. This estate planning strategy, oftentimes referred to as “valuation discount planning,” typically lowered wealth transfer taxes at the time of death or when “gifting” assets to heirs ahead of death.

For example, placing $10 million worth of assets inside a closely held LLC or partnership might reduce the value of those assets in the estate by $2.5 million to $4.5 million. At the current 40 percent estate tax rate, this strategy could reduce one’s estate (or gift) tax by $1 million to $1.8 million, a sizeable savings for a family.

On Aug. 4, however, the U.S. Treasury Department issued proposed regulations under Internal Revenue Code Section 2704 that, when finalized, will eliminate this valuation discount planning approach. The Treasury Department, for procedural reasons, cannot finalize the regulations until after their Dec. 1 hearing at the earliest, which means there’s still a small window of time to plan and take action if this kind of strategy is important for the family.

How? You can still make gifts or sales to your family taking full advantage of the current law. Because of the complexities involved in most large estates, it is wise to check with your tax adviser to structure the valuation discounts/adjustments properly before you take this step. But don’t wait, because the window is short and advisers can get extremely busy toward the end of the year.

• John Ambrecht is principal of Ambrecht & Associates, an estate planning, trust, tax and tax litigation law firm in Montecito.