In mid-May, 2015, a senior Treasury Department Estate and Gift Tax attorney announced that the government will soon issue regulations that will limit, or even eliminate, the ability to use “discounts” to save estate taxes for your family. She projected that the IRS would adopt (or propose) these new regulations before the end of September, 2015. Experts believe the effective date will probably be the date the rules are announced, or shortly thereafter.
If these regulations are adopted in the form we now anticipate, it would be a major blow to the ability of apartment owners to save their families from estate taxes. So, for those of you who have worked hard for decades building wealth that exceeds your estate tax exclusion, NOW is the time for some serious planning to see if discount strategies make sense for your family!
Discounting is not the only way to save Estate and Gift Taxes, but it can “turbocharge” other strategies. The best strategies often combine Estate Freezes (largely through gifting), Discounting, “Squeezing” and the Time Value of Money.
Unfortunately, if you do not act soon, you may never again have the opportunity to choose a discounting strategy to save $$ millions in Estate Taxesfor your family.
Will Your Family Face Estate Tax Problems?
Every U.S. resident gets a lifetime exclusion amount that he or she can pass free of Estate and Gift Taxes). That exclusion has grown to $5.43 million in 2015 ($10.86 million for a married couple). But, many apartment owners, through good investments, sacrifices and inflation, have seen values rise so fast that the exclusion will not fully protect them. And, the most successful owners expect their wealth to continue to grow at a faster rate than the Estate Tax Exclusion.
At just 5% per annum of appreciation and retained cash flow, your estate will double in about 14 years. That means that many apartment owners with estates under the exclusion amount will probably leave their heirs to face significant Estate Tax exposure before they die.
MAIN POINT: If your assets or net of liabilities, exceeds the Estate and Gift Tax Exclusion, or you think it will increase in value to exceed the Exclusion, you need to evaluate advanced planning strategies to protect your family from unnecessary Estate Tax exposure BEFORE the IRS alters its discount rules.
Imminent IRS Attack on Discounting
Most gifting strategies work best for Estate and Gift Tax purposes when property is first contributed to a Family Limited Liability Company (“LLC”). Then, instead of transferring the property directly to heirs or a trust for them, you transfer the non-managing LLC or FLP interests to the FST. This lets you keep management control as Manager of the entity (or by designating the manager), while it can also enhance protections from creditors and should, under current rules (until the IRS changes them), reduce the value used to calculate the gift and sale portions.
The structures of a well-crafted LLC or FLP results in discounting the “fair market value” (FMV) used to measure a transfer for Estate and Gift Tax purposes. “Discounting” adjusts such FMV downward (often by 30-50%) for Estate and Gift Tax purposes from the liquidation value of the property in the entity due to lack of control, minority interests and lack of marketability. Numerous court cases and other legal precedent support both the reality of these discounts and the ability of families to use them to save Estate and Gift Taxes by reducing valuations for the purposes of these taxes.
However, the IRS has long expressed the view that the discounts, while reflecting reality for a non-family buyer, often do not really reduce the real value to family members. As a result, President Obama proposed, early in his first term, that Congress limit the use of such discounts. His legislative initiative on this went nowhere.
Since he cannot get Congress to change the law, the Treasury Department made it clear recently that it expects to imminently announce regulations to limit the use of discounts in family estate planning transactions. Fortunately, the apartment owners who complete transfers of “discounted” assets before the effective date of the regulations can still reap the advantages of discounting. But, if you wait too long, your heirs may lose the ability to lock-in the benefits of discounting forever.
What About a Step-Up in Basis?
Any strategy which takes property out of your estate will usually have one major cost: It will preclude your family from getting a step-up in basis when you die.
However, we canusually structure and operate a strategy combining gifts and sales to grantor trusts in a way that can produce both substantial Estate Tax savings, and allow your family to get a step-up in basis when you pass away. When you get both these effects, you have found the holy grail of estate planning. Experienced lawyers who work with grantor trust strategies like the FST can explain how this can be done, while showing you how these strategies should work for your specific estate.
I plan to cover the principles behind this “two-for-one” benefit in upcoming FREE AOA “Estate Planning for Apartment Owners” seminars in Orange County on July 21, in Van Nuys on July 23, and in Torrance on September 1, 2015. If you do not want to wait for a seminar to see whether or not you should implement a Family Security Trust SuperFreeze or other discounting strategy, you should consult with counsel as soon as practical. Remember: This is a sophisticated strategy, and it takes time to implement properly.
IMMINENT CHANGES TO THE DISCOUNTING RULES MEAN APARTMENT OWNERS WITH LARGE ESTATES NEED TO PLAN WELL NOW!
Changes to the IRS rules that may reduce, or eliminate, discounts in estate planning look imminent. As a result, you need to learn right now whether or not locking in discounts would be important for your family’s wealth. Families that plan well before the IRS changes the rules may save millions of dollars more than families who delay their planning.
If you already have a large enough estate that your heirs will face estate taxes, or expect you will build that large an estate during your life, I urge you to consult with an attorney experienced in advanced estate planning strategies as soon as you can, before the IRS limits the ability to use discount planning.
This article is intended to assist readers to get a general understanding of some estate planning concepts which are relevant for income property owners. To keep it concise, it does not discuss all of the exceptions, qualifications and other concepts that might affect their utility in your situation. You need to obtain careful planning from expert counsel to determine the extent to which these concepts may be appropriate for you. You can only rely on counsel you specifically retain, and not on these materials, in connection with your planning.
Kenneth Ziskin is a Los Angeles (Sherman Oaks) estate planning attorney who concentrates his practice on integrated estate planning for income property owners throughout California, from San Diego to the Bay Area. Ken is a member of AOA, and lectures regularly to its members. He focuses on integrated planning to save income, property, gift and estate taxes. He holds the coveted AV Preeminent peer reviewed rating for Ethical Standards and Legal Ability from Martindale-Hubbell, and a perfect 10 out of 10 rating on legal website AVVO, which also presented him its Client Choice Award in 2014.
FREE Seminars – Kenneth Ziskin will present upcoming seminars in conjunction with the AOA on “Estate Planning for Apartment Owners” in Orange County (with Michael J. Wittick) on July 21; in Van Nuys on July 23; and in Torrance on September 1, 2015. For seminar reservations click here
Ken’s recent seminars were filled up fast, so please reserve early. For seminar reservations click here or call AOA at 800-827-4262. For further information or to book a consultation with Ken, call (818) 988-0949, or email KenZiskin@GMail.com.