New estate rule would affect tax strategies of ultra-wealthy

A proposed Treasury Department regulation would change the way some wealthy clients transfer businesses to their children and other heirs.
The agency proposed a rule Tuesday that would curb tax-planning strategies that lower the valuation of stakes in corporations or partnerships.
“By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes,” Mark Mazur, assistant Treasury secretary for tax policy, wrote in an Aug. 2 blog post.
Under the Treasury proposal, the valuation discount — sometimes up to 40% — that is given for the transfer of assets that have limited liquidation rights would not apply for “deathbed” transactions, only to transfers that occur more than three years before the death.
“For many high-net-worth individuals with illiquid assets, this has been a popular technique,” said Tim Steffen, director of financial planning at Robert W. Baird.
The proposal was anticipated because it has been previewed in President Barack Obama’s budget proposals. But now there is added urgency.
“The transactions aren’t dead today, but they’re on life support,” Mr. Steffen said. “The clock is ticking, no doubt.”
The Treasury Department will conduct a 90-day comment period on the proposal, which starts when it is published in the Federal Register. The agency also has scheduled a hearing for Dec. 1.
The 40% estate and gift tax applies to wealth transfers of more than $5.45 million from individuals and $10.9 million from couples in 2016. In 2014, when the tax was slightly lower, it was applied to about 5,150 tax returns.
The changes being proposed will affect even fewer people, according to Richard Behrendt, director of estate planning at Annex Wealth Management.
“You need to be more than a millionaire,” Mr. Behrendt said. “It’s the one-tenth of 1% that’s affected by the estate tax. You’re going to [make the discounted transfers] if you’re Donald Trump or Warren Buffett.”
Charles Douglas, a board member of the National Association of Estate Planners and Councils, said the restriction on the valuation approach could apply to the inheritance of most family businesses.
“It could have a significant impact on the wealthy who are looking at transferring intergenerational wealth and taking advantage of this significant discount,” said Mr. Douglas, a wealth planner.
But Mr. Behrendt said the regulation is a “targeted change,” focused on abuses of the discount such as wrapping a securities portfolio into a limited liability corporation and then taking the valuation rake off.
“It’s very precise,” said Mr. Behrendt, a former Internal Revenue Service attorney. “They’re not proposing a broad rule.”
The question is whether the proposal will go into effect if the Obama administration doesn’t finalize it until just before it leaves office.
“It may just fall into the dust bin if it’s not implemented by the time the new administration comes in,” said Peter Chepucavage, an independent regulatory consultant.

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