Limitations on Using Discounts for Certain Taxable Gifts May Be Imminent
Generally, estate planners employ certain discounting techniques to maximize the benefits of clients’ gifting plans by utilizing popular estate planning devices such as family limited partnerships and family LLCs (“LLC”). For example, if income-producing property is placed in a limited partnership or an LLC and then non-controlling interests in those partnerships or LLCs are given away, the gifted interests may be subject to valuation discounts (e.g., for lack of control and/or lack of marketability, etc.) for gift tax purposes. These valuation discounts may be as high as 30-40%. Such discounts can significantly reduce the tax cost of passing the property to one’s intended beneficiaries – without sacrificing present control of the partnership or LLC itself. Due to these available valuation discounts, estate planning techniques using limited partnerships and LLCs have become popular and, as a result, the IRS has been scrutinizing the use of such discounts for some time.
Based on remarks by an IRS official at a recent industry meeting, it appears that the IRS may soon issue regulations significantly curtailing or even eliminating the ability of taxpayers to claim such discounts. These regulations could be issued and take effect before the fall.
If you are interested in transferring interests in limited partnerships and/or LLCs in order to take advantage of valuation discounts while they are still available, we recommend that you contact one of the members of our Tax and Trusts & Estate Department as soon as possible.