Category Archives: Estate Tax

Welcome the New Year With Our Updated Tax Reform Review

On December 22, 2017, President Trump signed into law the most important rewrite of the US tax code in decades. The federal law, which is entitled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution of the budget for the fiscal year 2018” (the Act), has no other name, as its short title, the Tax Cuts and Jobs Act, was stricken from the bill shortly before being signed.

We have prepared a summary of the Act as a non-exhaustive discussion of key changes to the tax code. We will continue to analyze the Act and will post updates and recommend planning strategies on this blog.

For more information regarding the Act, please see our previous related blog posts linked below:

On behalf of everyone at Williams Parker, we hope you and your family have a healthy and happy 2018.

Please note this post was co-authored by Elizabeth Diaz, Colton Castro, and Nicholas Gard. 

Elizabeth P. Diaz
ediaz@williamsparker.com
941-329-6631

Colton F. Castro
ccastro@williamsparker.com
(941) 329-6608

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563

Planning to Live Beyond 2025? How You Can Still Enjoy Estate Tax Reform’s Sunset Special

The just-enacted Tax Cuts and Jobs Act doubles the federal estate, gift, and generation-skipping transfer lifetime tax exemptions through 2025. The exemptions revert to their pre-Act levels on January 1, 2026. Ignoring inflation adjustments, the combined exemptions for a married couple will then fall from over $22 million to $11 million. At the 40% Federal transfer tax rate, a 2026 sunset will increase a married couple’s estate tax by $4.4 million.

Do you want to avoid $4.4 million of estate tax, even if you plan to celebrate the 2026 New Year amongst the living?

A married couple can permanently harvest the increased exemptions by gifting assets with value up to the full $22 million exemption amount before 2026. If you gift into a generation-skipping trust, the exempted assets can pass through many generations free of transfer tax. With valuation discounts for lack of control and lack of marketability still fully available, family business assets are particularly attractive for gifting.

A taxpayer can not use the increased exemption until he or she first make gifts exhausting his or her pre-Act exemption. An individual does not create an additional tax benefit until he or she first gifts about $5.5 million worth of property. A couple does not capture the full additional benefit until they give away property worth over $22 million.

These ordering rules create an obstacle for many, who can not afford to give away that much property. Married taxpayers in that situation may consider funding “Spousal Lifetime Access Trusts.” Each spouse gifts assets to a trust for the other spouse, leaving the gifted assets available to the beneficiary spouse for his or her lifetime. When the beneficiary spouse dies, the remaining trust assets pass to children or other beneficiaries free of estate tax. Persons who created such trusts shortly before 2013, when another legislative sunset almost reduced the lifetime exemptions, can fund their existing trusts with additional gifts.

Many families will wait until 2026 is closer before taking action. Families with sufficient wealth to afford substantial gifting, who also expect estate tax liability even with the increased exemptions, should consider gifting sooner, to remove appreciation in the gifted assets before 2026 from their future taxable estates.

For more information regarding the Tax Cuts and Jobs Act, follow these links:

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

IRS Sees the Light and Withdraws §2704 Proposed Regulations

The Treasury Department’s issuance of proposed regulations under Code Section 2704 were met with significant criticism and confusion. The §2704 proposed regulations were intended to provide the IRS with an additional sword to reduce and in some cases eliminate valuation discounts on family-controlled business entities.

After thousands of comments were received and a public hearing was held where numerous taxpayer advocacy groups, business advisors, and valuation experts provided their concerns, the IRS finally blinked. On October 20, 2017, the IRS published a withdrawal notice of proposed rulemaking, which removes the potential for these proposed regulations to be finalized. The elimination of the proposed regulations is fantastic news for all family-controlled business owners that would be subject to estate and gift taxes. More information regarding the withdrawal is available at federalregister.gov.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
(941) 536-2042

2704 Regulations Explained: Proposed Rules Are Set to Further Expand Value Differences between Family-Controlled Entities and Other Companies

The IRS is focused on reducing valuation discounts associated with transfers of interests in family-controlled businesses, but this focus will result in family members being deemed to receive a different value than non-family members.  This also means that an appraiser will be required to establish two different values based on ignoring certain restrictions for family members, while taking those same restrictions into consideration for non-family members.

Consider, for example, a trust that provides that 50 percent of a decedent’s family-controlled business interest will go to charity and the remaining 50 percent will go to family members.  The IRS will be expecting that the interest being conveyed to the family members to result in a higher value when compared to the same percentage interest being conveyed to charity.  This ultimately means that the interest conveyed to family will result in higher estate taxes and the interest conveyed to charity will result in a smaller charitable deduction for estate tax purposes.  The end result is the IRS receives more estate tax from the estate even though the same restrictions apply to all members (both the family members and charity).

This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.

View previous posts:

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042

What Do Estate Tax Laws in Other Countries Tell Us About the Presidential Candidates’ Proposals?

Under current law, the federal government imposes a 40% estate tax to the extent an individual’s estate exceeds a $5.45 million exemption. Republican presidential nominee Donald Trump advocates eliminating the tax. Democratic presidential nominee Hillary Clinton previously previously proposed reducing the exemption to $3.5 million and increasing the tax rate to 45%. Last week, she further proposed increasing the tax rate to 50% to the extent an estate exceeds $10 million, 55% to the extent an estate exceeds $50 million, and 65% to the extent an estate exceeds $500 million.

According to a 2015 Tax Foundation study, the current top 40% federal estate tax rate was the fourth highest amongst the 34 countries in the Organization for Economic Cooperation and Development (OECD) at that time. Japan had the highest top rate, 55%. Spain had the next highest rate behind the U.S., 34%. Chile rounded out the top 10, at 25%. 15 countries imposed no estate tax.

Adopting the Clinton proposal would make the U.S. top estate tax rate 10% higher than any other OECD country’s top rate. Even if we ignore the 65% rate applicable only to estates over $500 million, a 55% top rate would tie the U.S. with Japan for the highest rate. Even a 50% top rate would tie the U.S. with South Korea for the second-highest rate.

What does this tell us? The candidates’ proposals are at the opposite extremes of worldwide estate tax policies. While neither proposal seems likely to pass into law, the divergence underscores the tax policy polarization between the candidates.  Rather than “fitting in,” each pushes our nation’s tax policy to an extreme.

There is also a question whether adoption of either policy would serve the proposing candidate well as President.  How would Mr. Trump’s disgruntled blue collar supporters react to estate tax repeal?  One also can wonder whether Ms. Clinton’s proposal would motivate more of the wealthiest Americans to surrender their citizenship and move capital out of the U.S., not a result she relishes.

Here is a link to the Tax Foundation estate tax study: http://taxfoundation.org/article/estate-and-inheritance-taxes-around-world

Here are links to recent media coverage regarding the candidates’ estate tax proposals: http://www.wsj.com/articles/hillary-clinton-proposes-65-tax-on-largest-estates-1474559914

http://www.latimes.com/nation/politics/trailguide/la-na-trailguide-updates-1474577545-htmlstory.html

http://www.forbes.com/sites/robertwood/2016/09/23/hillary-clintons-65-estate-tax-or-donald-trumps-repeal/#450664385bf7

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

2704 Regulations Explained: Proposed Rules Negating Gift and Estate Tax Valuation Discounts May Ensnare Your Vacation Home Too

As mentioned in several recent posts, the proposed regulations under Code Section 2704 are aimed at reducing valuation discounts associated with transfers of interests in family-controlled businesses.  So that the proposed regulations capture certain entities that may be disregarded for federal income tax purposes, such as single-member limited liability companies, the definition of a family controlled entity under the regulations casts a wide net.  In fact, this net is so expansive that it has the ability to reach certain business arrangements that are significantly different from the typical family business.

Consider, for example, three siblings who own a vacation home as tenants-in-common.  Assume that the siblings have executed a co-tenancy agreement that restricts each tenant’s ability to partition and sell their interest (as many of these agreements do).  If this arrangement constitutes a controlled entity under the proposed regulations, then the regulations would apply to this co-tenancy arrangement in generally the same manner that they would apply to an active trade or business.  Should the proposed regulations apply, if a co-tenant transfers his or her interest in the vacation home (either during life or at death), the value of this interest for transfer tax purposes may be computed without regard to the restriction on partition in the co-tenancy agreement and, in turn, any valuation discounts that this restriction may warrant.  In this event, the application of the proposed regulations may result in a higher gift or estate tax value associated with this transfer.

This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.

View previous posts:

Douglas J. Elmore
delmore@williamsparker.com
(941) 329-6637

2704 Regulations Explained: Winners and Losers of Proposed §2704 Regulations, Is the IRS a Loser?

The recently issued proposed regulations under Code Section 2704 are specifically targeted at substantially reducing valuation discounts associated with family-controlled businesses.  The clear losers are the families that have taxable estates. These families will likely pay additional estate and gift tax once the §2704 regulations are finalized. In order to reduce the impact that will occur when the regulations are finalized, families that have taxable estates should review their existing plans to determine whether planning now could save them substantially later.

The IRS is likely to win in the long run, but the increased estate and gift tax revenue will be offset to an extent by a reduction in income tax.  In addition, courts have been reluctant to go along with the IRS’s past attempts to substantially change the value of a family-controlled business. Accordingly, if the IRS finalizes the regulations without substantial changes, we can expect multiple challenges to be forthcoming from taxpayers, which could further reduce what the IRS likely perceives as a significant revenue booster.

The clear winners are the family business owners that do not have taxable estates ($5.45MM on an individual basis and $10.9MM for a married couple) because the proposed regulations should allow their family to receive a larger step up in the income tax basis of the business, and in some cases the business’ assets, when they pass away.

This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.

View previous posts:

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042

2704 Regulations Explained: Why is the IRS Targeting Valuation Discounts on Family Controlled Entities?

The simple answer is that the IRS believes that valuation discounts taken on family controlled entities are falsely high, which results in lower transfer tax revenue to the Treasury.  With the foregoing in mind, it is important to understand how the IRS, courts, and taxpayers value a business interest under current law for estate and gift tax purposes.  The general rule for a valuation is to determine the price at which property would change hands between a willing buyer and a willing seller, both of whom have reasonable knowledge of the facts and neither of whom is compelled to complete the transaction.

The courts and the IRS have recognized that discounts should be allowed where the property transferred is a minority interest in an entity that cannot force or compel the entity to act (“lack of control”) and where there is a limited market for the property (“lack of marketability”).  Taxpayers and their planners began to take advantage of this knowledge by adjusting their entity’s governing documents to increase the discounts available when transferring interests to family members.  In 1990, Congress enacted Code Sections 2701 through 2704, known as Chapter 14, to quell what was seen by some as aggressive, and in some cases abusive, uses of these discounts to reduce transfer tax values especially when many of the restrictions imposed had limited or no significant substantive effect because the family had the ability to fully control the entity and eliminate the restrictions at its will.  Since Chapter 14 became effective, the IRS has slowly seen Chapter 14’s impact dwindle due to court decisions and changes in state law.  As a result, the Treasury began seeking legislative changes to Chapter 14; however, these changes were not getting traction in Congress after several years.  The proposed regulations are Treasury’s response to the inaction of Congress and an attempt to substantially reduce discounts that the Treasury believes to be an estate and gift tax planning fiction.

Over the next several weeks we will be providing a series of blog posts addressing the proposed regulations and a synopsis of the parties that should be reviewing their plans as a result of the regulations.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042

IRS Targets Valuation Discounts on Family Controlled Entities

The Treasury has followed through on its promise to issue proposed regulations that are intended to significantly reduce the lack of control and lack of marketability discounts applied by appraisers when valuing family-controlled entities.  The proposed regulations follow closely with guidance provided in the Treasury Department’s “Greenbook” as discussed in our prior post (click here to view prior post). The good news is that the proposed regulations have provided everyone with a window of opportunity to complete their planning before the regulations become final. We will provide a more detailed analysis of the proposed regulations soon.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042

IRS Rattles Its Saber to Restrict Family Partnership Planning. What Should You Do?

If you are, or someone that you know is, considering transferring an ownership interest in a family controlled entity the best time may be now.  Speculation abounds over the impact that potential new regulations may have on the valuation of a closely held business interest.  For several years, the Treasury Department’s “Greenbook” contained a Revenue Proposal entitled, “Modify Rules on Valuation Discounts.”  Based on recent comments made by IRS and Treasury officials, it is possible that new proposed regulations will be issued by the middle of next month.  In some cases the Treasury has made proposed regulations effective as soon as they are issued, which could occur in this case as long as the regulations are not otherwise modified when they are finalized.  When issued, many practitioners believe that the proposed regulations will reduce the amount of the lack of control and lack of marketability discounts that appraisers apply when valuing family-controlled entities.

With the lack of clear guidance available, it is impossible to know how significant an impact the potential new regulations may have.  The best guidance likely comes from last time the proposal was contained in the Greenbook, which read as follows:

This proposal would create an additional category of restrictions (“disregarded restrictions”) that would be ignored in valuing an interest in a family-controlled entity transferred to a member of the family if, after the transfer, the restriction will lapse or may be removed by the transferor and/or the transferor’s family. Specifically, the transferred interest would be valued by substituting for the disregarded restrictions certain assumptions to be specified in regulations. Disregarded restrictions would include limitations on a holder’s right to liquidate that holder’s interest that are more restrictive than a standard to be identified in regulations. A disregarded restriction also would include any limitation on a transferee’s ability to be admitted as a full partner or to hold an equity interest in the entity. For purposes of determining whether a restriction may be removed by member(s) of the family after the transfer, certain interests (to be identified in regulations) held by charities or others who are not family members of the transferor would be deemed to be held by the family. Regulatory authority would be granted, including the ability to create safe harbors to permit taxpayers to draft the governing documents of a family-controlled entity so as to avoid the application of section 2704 if certain standards are met. This proposal would make conforming clarifications with regard to the interaction of this proposal with the transfer tax marital and charitable deductions.

When additional guidance is provided, or the proposed regulations are released, we will provide an update discussing the potential impacts of the regulations.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042