Treasury Proposes to End Strategy for Estate and Gift Taxes

The Treasury Department and the Internal Revenue Service have issued proposed regulations that would eliminate a tax-planning strategy for minimizing estate and gift taxes.

The proposed regulations concern the valuation of interests in corporations and partnerships for estate, gift, and generation-skipping transfer tax purposes. They involve the treatment of certain lapsing rights and restrictions on liquidation in determining the value of the transferred interests. The proposed rules would affect certain transferors of interests in corporations and partnerships and aim to prevent the undervaluation of the transferred interests.

Mark Mazur, Assistant Secretary for Tax Policy at the Treasury Department, released a blog post Tuesday claiming the regulatory proposal would close a “tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposes.”

He pointed out that only transfers by an individual or their estate above the $5.45 million exemption amount are subject to tax. For married couples, there is no tax on the first $10.9 million transferred, so fewer than 10,000 of the biggest estates are subject to any transfer tax at all each year.

Mazur claimed the tax strategy targeted by the proposed regulations was aggressive. “It is common for wealthy taxpayers and their advisors to use certain aggressive tax planning tactics to artificially lower the taxable value of their transferred assets,” he said. “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. Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques solely for the purpose of lowering their estate and gift taxes.”

The proposed regulations are subject to a 90-day public comment period and will not take effect until the Treasury considers all the comments it receives, and then it will take 30 days after the regulations are finalized for them to take effect, he noted.

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