The Sky is Falling!

Dear Clients, Colleagues, and Friends,

Client Alert was created to educate and inform. The importance of acting now cannot be overstated. Failing to do so is at your peril…

One of the greatest estate tax reduction strategies used by estate planners is about to go away – forever. Act Now!

Ok, while Client Alert’s Chicken Little act is over, it can say with a high degree of certainty that the sky really is falling.

What is the single most important goal of effective estate planning?

Maximizing wealth transfer, as your heirs should be better stewards of your wealth than some bureaucrat back in Washington, D.C

New government regulations, of course!

Here’s what’s happening:

Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) have long been a fixture in effective gift and estate planning for affluent families and successful business owners for years.

Why? FLPs and FLLCs provide for the flexible transfer of the value of your wealth to your heirs while allowing you to continue control. The FLP and FLLC also provide the tax benefit of significant valuation discounts. These discounts, which can be as high as 25-45% or more, depending upon the types of assets and the terms of the operating agreement, can potentially be taken when a member gifts interest to another member and upon the death of a member for their remaining interest.

Thus, using FLPs and FLLCs creates “discounts in value” such that the “sum of the parts will be worth less than the whole.” The effect of using the FLP or FLLC is to shift more wealth to your heirs free of the 40% transfer tax.

Without this type of estate planning tool, more of your hard-earned accumulated assets may go to pay federal estate and gift taxes. In fact, this estate planning tool represents one of the most effective means to lower estate taxes.

For many years, the IRS has challenged valuation discounting strategies with limited success in court. Moreover, the IRS wants to eliminate sales to grantor trusts, limit dynasty trust periods for estate tax deferral to 90 years, and trigger the capital gains tax on gifts of appreciated property to donees before the asset is sold, i.e., tax you sooner.

Recently, the IRS Estate and Gift Tax Office of Tax Policy turned to the Obama Administration’s 2016 proposed budget for help and announced their intent to release new proposed regulations by mid-September that would likely include “disregarded restrictions” built into family entity strategies. This would, in turn, reduce or eliminate the use of valuation discounts in family business entities like FLPs or FLLCs.

What does this mean?

For affluent families and family businesses, this means that transactions completed after the effective date of the legislation will not be able to qualify for previously available discounting strategies. Therefore, the window of opportunity to take advantage of these effective wealth transfer strategies is rapidly closing.

This may be your final chance to implement these techniques. For those wishing to shift significant value out of their estates and into the hands of their family for generations to come, the time to complete estate planning and transfers is here. For clients who have already performed such planning, now is the time to review the benefits of accelerating gifts or sale planning. It is important to take advantage of current regulations now because they might be gone forever in a very short window of time.

So, the sky really is falling…

…And so is your window to take advantage of important estate planning tools like FLPs and FLLCs. You may kick yourself if you miss this opportunity because these advantageous estate planning strategies may be gone by the end of 2015. Act now, and call to discuss whether this strategy is appropriate for your circumstances.

Client Alert will next discuss the HYCET (Have Your Cake and Eat It Too) Trust, wherein you can take advantage of the FLP/LLC strategy for discounting, yet later reclaim all or part of the gift if you need or want it.

Posted in Client Alert, Estate Planning.