Private Business Counsel

While the federal estate and gift tax used to be assessed at a maximum rate of the confiscatory fifty-five percent (55%) (and for a few years and for very large estates, an astounding sixty-five percent (65%)) it is now at the historically low figure of forty percent (40%).  The good news is that the exemptions from the federal estate and gift tax (which are applied cumulatively to lifetime gifts and at death) are generous — $5,340,000 per individual in 2015 and an inflation-adjusted $5,450,000 in 2016.  With some basic estate planning, a married couple with less than twice that amount can avoid paying any federal estate tax (although many states, including Pennsylvania, New Jersey and New York, impose their own estate or inheritance tax).

But if your estate exceeds the amount of the federal estate tax exemption, forty percent (40%) is an awful lot to pay for the privilege of dying.

There are a variety of ways to reduce or eliminate federal estate tax liability and most involve the making of gifts to or in trust for children and others.  Gifts remove from the estate the appreciation on the gifted asset.  As applied to interests in closely-held businesses, valuation discounts (minority interest, lack of control and lack of marketability discounts) can reduce significantly the value of gifts made during life and the value of the business interests at death.  This reduces the tax.  Business appraisers not only determine the “fair market value” of a business, but identify and quantify the valuation discounts and prepare reports which accompany estate and gift tax returns.

It will come as no surprise that the IRS does not like valuation discounts.  And that is why the IRS has been battling with taxpayers over discounts for many years.  While the IRS has had more than a few victories, valuation discounts remain part of estate and gift tax law and a powerful tool to estate planners in reducing a client’s estate and gift tax liability.

Which is why the IRS has signaled that it is planning to issue regulations which most observers believe will limit or even eliminate the use and application of valuation discounts to gifts, during life and at death, of closely-held business interests.  Most regulations are effective when they are first made public – not the date they are approved or the date they become final.  The regulations the IRS is threatening to issue on valuation discounts could be made public any day now and once that happens the discounts could fade or disappear.

If you (or even better … someone who loves you) is thinking of making a gift of a business interest for the purpose of reducing that individual’s federal estate or gift tax liability, s/he should rush to see his/her estate planning lawyer before the opportunity to take advantage of valuation discounts is confiscated by the IRS.