New estate rule
would affect tax
strategies of
ultra-wealthy
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Treasury Department's proposed regulation aims to curb taxplanning approaches that lower the valuation of stakes in
corporations or partnerships
By Mark Schoeff Jr. | August 3, 2016 ­ 1:54 pm EST
A proposed Treasury Department regulation would change the way some wealthy
clients transfer businesses to their children and other heirs.
The agency proposed a rule Tuesday that would curb tax-planning strategies that
lower the valuation of stakes in corporations or partnerships.
“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, assistant Treasury secretary for tax policy, wrote in
an Aug. 2 blog post.
Under the Treasury proposal, the valuation discount — sometimes up to 40% — that is
given for the transfer of assets that have limited liquidation rights would not apply for
“deathbed” transactions, only to transfers that occur more than three years before the
death.
“For many high-net-worth individuals with illiquid assets, this has been a popular
technique,” said Tim Steffen, director of ἀ渄nancial planning at Robert W. Baird.
The proposal was anticipated because it has been previewed in President Barack
Obama's budget proposals. But now there is added urgency.
“The transactions aren't dead today, but they're on life support,” Mr. Steffen said. “The
clock is ticking, no doubt.”
The Treasury Department will conduct a 90-day comment period on the proposal,
which starts when it is published in the Federal Register. The agency also has
scheduled a hearing for Dec. 1.
The 40% estate and gift tax applies to wealth transfers of more than $5.45 million
from individuals and $10.9 million from couples in 2016. In 2014, when the tax was
slightly lower, it was applied to about 5,150 tax returns.
The changes being proposed will affect even fewer people, according to Richard
Behrendt, director of estate planning at Annex Wealth Management.
“You need to be more than a millionaire,” Mr. Behrendt said. “It's the one-tenth of 1%
that's affected by the estate tax. You're going to [make the discounted transfers] if
you're Donald Trump or Warren Buffett.”
Charles Douglas, a board member of the National Association of Estate Planners and
Councils, said the restriction on the valuation approach could apply to the inheritance
of most family businesses.
“It could have a signiἀ渄cant impact on the wealthy who are looking at transferring
intergenerational wealth and taking advantage of this signiἀ渄cant discount,” said Mr.
Douglas, a wealth planner.
But Mr. Behrendt said the regulation is a “targeted change,” focused on abuses of the
discount such as wrapping a securities portfolio into a limited liability corporation
and then taking the valuation rake off.
“It's very precise,” said Mr. Behrendt, a former Internal Revenue Service attorney.
“They're not proposing a broad rule.”
The question is whether the proposal will go into effect if the Obama administration
doesn't ἀ渄nalize it until just before it leaves ofἀ渄ce.
“It may just fall into the dust bin if it's not implemented by the time the new
administration comes in,” said Peter Chepucavage, an independent regulatory
consultant.
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