The Treasury Department has issued new proposed regulations that, if adopted as proposed, will effectively eliminate a common estate planning tool used to transfer wealth among family members. That tax planning tool is the Family Limited Partnership (“FLP”) or Family Limited Liability Company.
Let’s start with the basics. A family creates a FLP which provides a centralized vehicle through which the family can not only manage a portion of its wealth, but also provide a governance structure through which the younger generation can learn the art of running a family business (if the FLP holds the family business) from the senior generation. The older generation receives both general and limited partnership interests for the assets transferred to the FLP. At some point in the future, the senior generation gifts limited partnership interests to their children or grandchildren. The senior generation serves as general partners. The children, because of their limited partner interests, do not participate in the management of the FLP.
The current estate planning technique that the IRS is addressing is that the gift to the children is valued at less than fair market value (FMV). Taxpayers would have a FMV study of their FLP (family business) done by a valuation expert. The expert would then consider the fact that the gifted limited partnership interests have no voice in the management of the FLP, have no control of the FLP, and are restricted as to whom the interests can be transferred, resulting in a finding that the minority interests needed to be discounted in value to reflect these negative attributes. These discounts were often in the 20% to 30% range resulting in potential significant tax savings.
The new proposed regulations would no longer allow discounting when making family transfers.
The new regulations will not take effect until 30 days after the publication of the Final Regulations. The IRS has scheduled a public hearing on these regulations for December 1, 2016, so it is likely that the new regulations will not become final until early in 2017.
Planning opportunities still remain for closely held business owners but the time to act is now.
If you want to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.