IRS may limit an estate tax planning option

On behalf of Kaplin Stewart Meloff Reiter & Stein, P.C. posted in Estate Tax on Jul 1, 2015.

Many Pennsylvania families are aware of the benefits of creating a family-owned limited liability corporation or family limited partnership. These business structures allow one generation to pass wealth down to another without incurring a heavy tax burden. This strategy, however, may soon be limited or eliminated by the Internal Revenue Service, leaving many families waiting to see where their next estate tax planning moves should fall.

The benefits of a family limited partnership lie in the tax discounts given for assets held within this type of business structure. Assets are placed into a family-owned business, which removes that wealth from the primary owner’s estate. Then, children or grandchildren are gifted limited partnerships in the business, but are not given control over the assets held within. Because of this limited connection, and the presumed decrease in marketability, the assets are valued at a lower rate than they would be under a different business structure. This means a reduced tax bill, and savings for all of the owners and partners.

Recent comments from IRS officials, including statements made by an IRS tax attorney at a meeting of the American Bar Association, suggest that change may be on the horizon. The IRS has long sought to limit or even prevent tax discounts on limited-partnership business ventures. The ability to impose such changes is already present within the U.S. Tax Code.

Should such changes take place, families in Pennsylvania and across the nation could find that their business assets are taxed at a value that is between 30 and 38 percent higher than the current rules allow. This could mean a significantly higher tax bill, and could lead many business owners to search for alternative estate tax and wealth preservation options. For now, families who make use of these tax discounts will continue to watch for changes, while also evaluating other estate planning methods.

Source: The Wall Street Journal, “IRS Takes Aim at an Estate-Planning Strategy“, Liz Moyer, June 26, 2015