Tax and Estate Planning
November 30, 2016 | BY Shulem Rosenbaum, CPA
In a recent article, the New York Times declared: “If a family is considering doing some tax planning and they’re putting it off to next year, they can’t go back in time and take advantage of the discounts.” The reason for this dramatic declaration is the fact that proposed IRS regulations aim to eliminate valuation discounts and severely limit the ability to shift wealth. These proposed regulations may significantly impact our ability to provide the ideal estate tax planning to you and our high net-worth clients.
The recent elections illustrate the importance of proper tax planning. President-elect Donald Trump has vowed to repeal the estate tax and replace the “death tax” with a capital gain tax on assets upon the owner’s death. Democrats vow to block any such efforts and plan to reduce the gift tax exception to $1 million. This volatility means that the perfect time for estate planning is now, before any extreme changes are made that limit planning tools that are currently available.
Estate tax is a 40% tax that is applied to the fair market value of a decedent’s estate or transfers in the form of gifts during his or her lifetime. In order to limit the double taxation effect of the estate taxes, Congress allowed for a tax credit to allow for a small estate, or an estate with assets of less than $5.45 million, to be exempt. This credit allows for a lifetime exclusion, per person, to transfer up to $5.45 million without being subject to tax.
An extremely popular tax planning technique to minimize estate taxes is by transferring assets that are held in privately-owned businesses at a reduced fair market value. The fair value of a privately-held business is different from the market value of a publicly-traded stock because of the lack of marketability. Likewise, shares with significant influence or control of a business are more valuable than debt or equity with no voting rights. These concepts provide for a discount that can shrink the appraised value of a business asset by up to 40% and can be used to minimize any estate or gift taxes.
The Treasury Department stated its desire to eliminate these valuation techniques by 2017. This will increase the value of businesses for estate or inheritance tax purposes, including capital gain taxes as proposed by the incoming administration.
Estate planning involves more than just Federal taxes. Most states levy inheritance taxes and may have restrictions on any Federal tax planning. In addition, basic estate planning documents and trusts can be used to protect assets from creditors, predators or divorce. Finally, business planning and succession may be necessary to specify business continuity while providing for family members who are not involved in the business.