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Popular tool in estate planning may be on the block

By Amy Joyce, CPA, JD, Senior Manager, Margolin, Winer & Evens LLP

A popular tool in estate planning may be on the chopping block, and prompt action could be necessary.

The use of valuation discounts is an important component of estate planning.  In a nutshell, regardless of the presumed value of an asset, through the use of valuation discounts, such assets may be treated as having a substantially discounted value for gift and estate tax purposes – the exact amount of the discount depending on the particular asset being valued.

However, it is not unusual that through the use of valuation discounts, the value of certain interests in closely-held family businesses and real estate entities can be discounted by approximately 30 to 35 percent.

In addition, interests in other types of assets (e.g., stocks, bond and other securities) have also generated valuation discounts, although to a lesser extent.

Many people view the use of valuation discounts to be a “loophole.”

For years, a number of unsuccessful attempts have been made to enact legislation to eliminate or substantially reduce the availability of these discounts.

In light of the many legislative failures, proponents have recently turned their efforts to pushing these changes through the much simpler and expedient process of having the Treasury Department issue regulations regarding valuation discounts.

In an effort to further this, in February 2015, Vermont Senator and current presidential candidate Bernard Sanders sent a letter to President Obama asking him to bypass Congress and issue executive orders to make sweeping changes in tax policy including, but not limited to, changes to the availability of valuation discounts.

In addition, in a recently published Trusts and Estates article, the influential authors state that if such regulations were to be issued, “it’s questionable whether any such regulation would be struck down as invalid.”  The authors also state that while the regulations may, in general, eliminate or substantially curtail the availability of valuation discounts, they believe that an exception may be carved out for transfers of interests in actual operating companies.

Various sources have reported that there is a significant chance that such regulations may be issued in the next several weeks or possibly sometime this summer.

In theory, the effective date might be the date that the regulations are first issued in proposed form (which may be sooner rather than later).  Alternatively, the effective date might be the date that the final regulations are formally adopted (which would be sometime later).

While it is impossible to predict either the issuance of these regulations or their effective date, it would be prudent for anyone desiring to take advantage of these valuation discounts to have their estate plans reviewed now with their advisors.

In summary, Treasury apparently is working on regulations that are intended to eliminate or substantially reduce the availability of valuation discounts and uncertainty exists over what exceptions, if any, will be contained in the regulations and, as well, over the effective date of such regulations.

In light of the above, prompt action may be required to ensure the continuing availability of valuation discounts in estate planning transactions.

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