Tax Insights

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Will this Estate Planning Loophole be Closed?

On August 2, 2016 the U.S government proposed making it harder for wealthy business owners to transfer assets to heirs without paying estate and gift taxes. The Treasury Department’s plan would place new limits on a common tactic used to transfer interests in illiquid businesses.

“By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes,” Mark Mazur, the assistant secretary for tax policy, said in a written statement. “Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques.”

Estate and gift taxes, or transfer taxes, are taxes on the transfer of assets from one person to another either by gift during their lifetime or by inheritance at death. Only transfers by an individual or their estate in excess of $5.45 million are subject to tax. For married couples, no tax is collected on the first $10.9 million transferred. This generous exemption amount means that fewer than 10,000 of the largest estates are subject to any transfer tax at all in a year.

The proposed regulations are a response to the practice of discounting the value of fractional interests in closely held businesses or land, allowing wealthy families to pack assets inside the $10.9 million lifetime exclusion from estate and gift taxes. The Treasury is intent on making it harder for taxpayers to claim valuation discounts by changing how the IRS considers restrictions of an individual’s right to liquidate interests in a business.

The government has signaled for months that the regulations are imminent. Estate planners have urged clients to complete transfers before the government acted. Such efforts may accelerate in the coming months, because the proposed regulations are subject to a 90-day public comment period. The regulations themselves will not go into effect until the comments are carefully considered and then 30 days after the regulations are finalized.

Pamela Wheeler, EA