Taxable Estates Must Act By End Of 2016 To Avert A Possibly Costly IRS Surprise

Individuals with a taxable estate must act by the end of 2016 to avert the possibility of a nasty hike in what will be owed upon death to the IRS.

Not to be maudlin or insensitive but no one is getting out of here alive, in the broadest sense.

If you don't take care of the possibility of a proposed change to regulations for enforcing Section 2704 of the IRS Code, your heirs could be forced to pay a very high price.

The IRS has always allowed individuals to lower the tax on their estate using liquidity discounts.

Say you have three children and own a business worth $15 million, you could transfer equal interests to each child over a specified period of time.

Divvying up the tax among three children suddenly means no one person controls the company and, therefore, each child's interest in the company is less valuable.

Each child could discount the value of their interest in the company by as much as 30% for estate tax purposes.

In the case of Tom, Dick and Harriet, they could take as much as 30% off the value of their interests, and would owe estate taxes on an estate valued at $3.5 million instead of $5 million.

For years, the IRS permitted taxpayers to take haircuts on the value of their interests in family limited partnerships.

Of course, that's led to some abuse, like taxpayers placing marketable securities — stocks and bonds — that are placed in a partnership.

Tax policy wonks expected the IRS staff would recommend ending the discounts on partnership abuses, like creating partnerships to hold marketable securities and calling that an active business. No one expected haircuts on valuations of active business or real estate rental and development would be affected by the IRS proposed rules on Section 2704.

And that's where the surprise came in. The IRS proposed limiting valuations on active businesses as well as borderline schemes taking advantage of the rules.

If you own assets worth millions or have been gradually transferring your interest in a business as part of an estate plan, the new regulations are widely expected to be adopted. In fact, it could happen as early as the end of the year. After that, it could be too late to minimize the tax your heirs owe at your death under the changes to the rules implementing IRS Code Section 2704.

This is not the kind of surprise you want to leave your heirs open to. So please give us a call if you have any questions or consult with a tax advisor.

This article was written by a professional financial journalist for Mulligan Capital and is not intended as legal or investment advice.

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