What Will The Proposed New IRS Estate-Planning Rules Mean To You?

Transferring a family business

Team Silver Rock uncovered a reveling article that just posted in the Wall Street Journal a few days ago. The article brings to light several intriguing topics as related to estate planning and succession planning and how these concepts are being targeted by the IRS for future codified actions. More specifically the article looks at the use of corporate identity and even partnerships to transfer the assets of the wealthy. Transferring a family business or even securities to heirs, a spouse or children in a more tax efficient way is typically the objective here.

Know And Proven Strategy

The article does a good job of pointing out that the IRS is increasingly placing wealthy families under the “tax microscope” simply because they are choosing to value certain assets in a specific manner. This should catch the attention of affluent and high-net-worth members of society as it may profoundly change the way estate planning is implemented going forward. As a known and proven strategy in NY estate plan structuring the idea is to effectively manage estate taxes and gift taxes by creating a corporation to encompass a family business. In short, it is a concept that has a proven track record in years past.

Increase In Value

According to the WSJ piece, the IRS is intent on ending this accepted practice. The technique is also a key strategy commonly used for transferring portfolios at a discount in relation to publicly traded securities. In most instances, a family LLC or limited partnership is established by a husband and a wife as a way to more efficiently own a business. Especially if the business is forecast to increase in value over a given period of time.

Course Of Action

The idea is that a couple will operate as partners whereby they can then “gift” assets to children while enjoying tax breaks and improved tax efficiency. An estate attorney or estate plan adviser is best able to assist those wishing to take this course of action. Other planning strategies such as the use of a life insurance policy to create tax efficiency offer added advantages as well. Life insurance for foreign nationals is also often used in the same way with a very similar outcome.

Federal Tax Efficiency

The essence of the partnership planning discussed earlier here is to allow for a gift to children in order to displace assets from the couple’s primary estate while still maintaining control of those assets. This is a crucial federal tax efficiency move in that it can protect assets in a proven way. The net result is a lower estate tax bill or greater estate tax credit depending on how it is viewed. This is due largely in part to the fact that combined assets in a partnership are less marketable and perceived as lower in value than would otherwise be the case.

Legitimate Business Interest

The WSJ article quotes one Northeastern US management-planning expert as saying that by the IRS removing this discount it will have a big impact on “balance sheets that are dominated mostly by highly liquid assets.” Current IRS code states that a partnership must serve a legitimate business interest. As it stands this definition is broad enough to include families routinely involved in making investment decisions related to a family business or a securities portfolio. The WSJ write-up goes on to say that it is likely that the IRS will soon limit these types of discount strategies. Affluent and high-net-worth individuals should take notice in this regard.

More Innovative Strategies

These types of rule changes could have a definite “freezing” effect or existing “income tax efficiency” as it is related to estate type planning. This is especially true with reference to wealthy families and individuals who have already taken full advantage of exemptions available to them for giving financial gifts during their lifetime. Currently that amount is slightly in excess of $5 million for an individual and close to $11 million for a couple. Those with assets and wealth that go above and beyond these amounts may require more innovative strategies to better address any impending IRS rule changes.

Comments And Questions

Write to Mike@silverrockpartners.com for amplification and to make comments about this informative post. Silver Rock Partners is comprised of a dedicated team of estate planning experts specializing in assisting high-net-worth and affluent families. Contact Team Silver Rock today for foreign national estate plans and life insurance for those who have already been deemed uninsurable. Team Silver Rock advisers implement succession planning best practices as well as addressing estate planning tax issues. The company serves wealthy clients in New York, California and Florida.