Recently, I sent out an alert that the IRS was on the verge of issuing regulations that would have a significant and drastic impact on family limited partnerships. What is at stake is taxes – gift taxes, estate taxes and generation-skipping taxes.
All of those sorts of taxes – gift taxes, estate taxes and generation-skipping taxes – are generally known as “transfer taxes.” Each of them impose a tax based on the value of an asset that is moving from one place to another, such as from a trust to an individual or from a decedent to an heir.
Simply put – the lower the value, the lower the tax. And that is where family limited partnerships come in. When a person puts an asset into a partnership, the person doesn’t own the asset any longer. Instead, the person owns interests in the partnership. If the person dies or gives away partnership interests, or puts them into a trust, it’s the value of the partnership interest that is important. Properly structured, those partnership interests can have a value that is significantly lower than the value of the assets put into the partnership. We call that “discounting.”
The IRS, through regulations, will try to reach (many believe unfairly) a conclusion based on the statute in the Internal Revenue Code that was designed to deny certain valuation “discounts” under certain circumstances. For years, the IRS tried to get Congress to amend the statute to give the IRS the clear ability to eliminate more – even all – valuation discounts, but Congress refused. Having failed at that, the IRS now proposes to act to issue regulations attempting to get the results the IRS tried to get through Congress. And until some unlucky taxpayer is willing to spend the hundreds of thousands of dollars to fight those regulations through the courts and, hopefully, win, the use of valuation discounts will be in limbo, creating a chilling effect on planning efforts by taxpayers and their tax advisors alike.
The exact text of the regulations is, as yet, unknown, but everyone who deals in this area knows exactly what the IRS is up to. How they intend to go about it is something they are not telling – at least not yet.
The message is clear, however, and that is valuation discounts in family limited partnerships are at risk and may be under substantial attack or even eliminated. The best way to avoid the problem is to act BEFORE the regulations are issued, or even proposed.
Protect Your Assets
“Too late!” Unfortunately, that is when people start to think about how to protect their assets. There’s an accident and someone gets hurt. A problem comes up in your business. Any number of things can happen, and when they happen, it’s too late – too late to start protecting the assets you’ve been able to accumulate.
Every state, as well as federal law, makes it illegal to move your assets when you might face a claim against you. That’s right – when you “might face a claim.” Once something has happened, and you might be involved, you’re stuck. Even if you think you can argue your way out of any responsibility, you’re still stuck.
There are perfectly legitimate, legal and acceptable ways to protect your assets, but you have to START before you might face a claim. So, what do you do?
The way to start is to get smart. The way to get smart is to get educated. Google is NOT the answer. Too much of what is on the Internet is misleading, or useless, or even harmful! Here is one answer – traditional estate planning vehicles and business structures – pieced together in exactly the right way – can do wonders.