U.S Treasury Department Crack Down on Tactics to Avoid Estate and Gift Taxes

Recently, the U.S. Treasury Department and IRS have proposed new limits in place to regulate the taxes on the transfer of assets from wealthy business owners to their heirs. Under the current regulation, owners of closely held businesses and land, have the option to discount the value of ownership stakes to be less than $10.9 million lifetime exclusion for married couples which would allow them to significantly reduce or avoid paying estate and gift taxes.

For example, under the current federal tax law, certain gifts of up to $14,000 can be excluded per recipient each year without depleting any of your lifetime gift and estate tax exemption. If discounts total 30% in 2016, you can gift an FLP interest that’s worth as much as $20,000 before discounts (based on the net asset value of the partnership’s assets) tax-free because the discounted fair market value doesn’t exceed the $14,000 gift tax annual exclusion.

An FLP must be established for a legitimate business purpose, such as efficient asset management and protection from creditors, to qualify for valuation discounts. Partnerships set up exclusively to minimize gift and estate taxes won’t pass IRS muster.

According to a report by the Wall Street Journal, this crack down by the Treasury Department will address the use of discounting the value of ownership stakes in closely held businesses or land. The government has made it clear that these planned regulations are impending. The proposal must first go through a 90-day public-comment period and won’t go into effect until 30 days after the government issues the final version upon passing the ruling.