by Margot S. Edwards and Anne A. Zeckser
Due to recently proposed regulations to Section 2704 by the U.S. Treasury Department, high net-worth taxpayers and their advisors need to act now to evaluate the best course forward. The proposed regulations threaten to significantly curtail the application of discounts to intra-family transfers of entity interests, which impact key gift and estate tax planning techniques used for high net-worth individuals. For wealthy families and their advisors, these proposed regulations call to mind the flurry of wealth transfer planning activity that took place in late 2012. Advisors are anticipating a very busy fourth quarter working with clients to address the impact of the proposed regulations.
Who Should Act Now
In consultation with their advisors, the following taxpayers should look carefully at their assets to determine whether there are any opportunities to shift substantial value out of the taxpayer’s taxable estate before discounts effectively disappear:
- Taxpayers whose estates are subject to the imposition of estate tax
- Taxpayers who have historically made annual gifts of discounted business interests to family members or trusts
- Taxpayers who have been considering establishing a long term trust for family members to hold business interests
- Taxpayers who have an existing trust in place for family members
- Taxpayers who have a need for business succession planning
Next Steps – What to Do and When
The proposed regulations could become final and effective as early as late December 2016 (although a later effective date is more likely) and a hearing on these regulations is scheduled for December 1st. As a result, all family business owners and wealthy taxpayers should take this opportunity to meet with their team of advisors to review their wealth transfer plans and, if additional transfers are warranted, initiate that process as soon as possible.
The affected taxpayers should consider gifts or sales of discounted business interests to family members or trusts by the end of this year. However, it is important to note that there will likely be a 3-year-look-back on transfers. These taxpayers should also consider the transfer of discounted entity interests to a trust in exchange for a note or an annuity interest to preserve future planning opportunities. While it is unclear whether the IRS will require some sort of consistency of valuation for payment of promissory notes and annuity interests, there is the potential that payments could be made with undiscounted interests later, further enhancing the tax savings. Read more