Tax Planning

Estate Tax: “Valuation Discounts” Under Attack

Several proposals now circulating in Congress would crack down on popular estate-planning techniques.  The one the IRS—and tax-loving congressional representatives—dislike the most are “valuation discounts” associated with family limited partnerships and related entities.  The IRS has fought valuation discounts tooth and nail, but the courts have, with some exceptions, generally upheld them as reflecting market reality.

Typically, this type of planning involves making periodic gifts of minority interests in a family limited partnership (FLP) to your heirs.  Under current law, you can often discount the value of such gifts for gift and estate tax purposes.   Discounts vary from 10% to 50% or more, although 25% is a typical adjustment.  The discount exists because it's often not possible to sell partnership interests—particularly minority interests—for the full value of the assets they contain.  That’s because these minority interests aren’t readily marketable, and the recipient has no real control over them.

One proposal would eliminate these discounts to the extent that they are claimed for passive assets such as securities, cash, or life insurance policies.  Discounts would still exist for assets used in the active conduct of a trade or business.

Many estate planning attorneys—and their clients—complain that these provisions are overly harsh.  Perhaps they are, but Congress is desperate to raise revenue, and valuation discounts are a handy target.

No one knows whether if valuation discounts for passive assets will survive estate tax reform.  If they don’t, it’s possible discounts could be invalidated retroactively. Consult with your tax advisors to consider the potential impact of this legislation on your estate plan.

Copyright © 2011 by Mark Nestmann

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