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IRS and U.S. Treasury are at it again! Rules are changing for gift and estate planning tools

August 25, 2015
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By way of background, transfers of wealth whether during lifetime (i.e. gift) or upon death (via one’s estate) are subject to tax currently at a rate of 40%, to the extent the transfer exceeds the transferor’s lifetime exemption (currently $5.43M).

Savvy gift and estate planning has utilized various techniques to transfer assets that are not readily convertible to cash quickly (illiquid) such as a privately owned business, real estate, interests in non-publicly traded securities or partnership interests, etc.  Taxpayers and their practitioners have consistently contended that these assets, and in particular minority interests in these assets, are worth less than full value due to illiquidity, lack of marketability, lack of control, and other factors. Although this sticks in the craw of the IRS, it is well settled law that these assets are able to be valued at a discount from “full value.” These discounts result in more assets being able to be transferred before a tax is due, or at a lower overall tax cost than if no discount were available.

An official of the U.S. Treasury Department (the organization in charge of the IRS), Catherine Hughes, Estate and Gift Tax Attorney - Advisor in the Office of Tax Policy recently indicated that the Treasury Department is planning to change the rules for valuing property for gift and estate tax purposes by eliminating the availability of valuation discounts for transfers between and among family members.  If Treasury does so, and the Courts permit those new rules to stand, a significant gift and estate planning opportunity will be lost.

How long will this window of opportunity remain open? That is hard to say. However, the Treasury official who spoke on this point hinted that the new rules could go into effect as soon as mid-September.

If you have contemplated making gifts (other than cash or readily tradable marketable securities), the time to do so may be now.  Procrastination may prove to be expensive in the end.

If you would like to discuss this, please contact James A.J. Revels, CPA, MST, Co-Chair of the Trust and Estate Practice Group or your Citrin Cooperman & Company representative.