Aug 06, 2015

Discount gifting of FLP interests may be on the way out

The Internal Revenue Service (“IRS”) is expected to issue new proposed regulations that may significantly reduce the availability of valuation discounts in transferring interests in family entities, including limited partnerships and limited liability companies by gift or upon death.

Under current law, the IRS allows valuation discounts in the transfer of such interests by gift or upon death in family-owned businesses to account for lack of control or lack of marketability. Such valuation discounts allow taxpayers to gift or transfer minority interests in family entities to family members at a discounted gift or transfer tax cost, which in turn allows clients to maximize wealth transfer between generations and reduce estate tax consequences. For example, if mom owns a 10 percent limited partnership interest in a family limited partnership with assets valued at $20 million, the fair market value of 10 percent of the underlying assets of the partnership is $2 million. However, taking into consideration conservative discounts for lack of control and lack of marketability of 25 percent, the discounted value of mom's limited partnership interest is only $1.5 million. If mom elects to gift her limited partnership interest to a trust for the benefit of her daughter, mom will utilize only $1.5 million of her lifetime gift tax exemption of $5.43 million. In this way, mom has effectively transferred $2 million outside of her taxable gross estate, including any future appreciation of the interest. 

When issued, the proposed regulations may eliminate minority interest and lack of marketability discounts for certain family-owned entities where the transfer does not ultimately reduce the value of the interest to the transferee. The IRS has indicated that it anticipates that these new regulations may be issued as early as September of this year. The effective date of the proposed regulations is unknown, however transactions which occur prior to the effective date of the proposed regulations may be allowed the valuation discounts. Therefore, clients are encouraged to effectuate gifting of minority interests in family-owned entities as soon as possible to take advantage of the current tax law and maximize wealth transfer before such discounts are potentially eliminated. 
This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client Alert authored by: Kathryn L. Kaler and Lindsey Paige Markus