[IMGCAP(1)]If you have discussed the idea of setting up a family limited partnership with any of your clients in the past, now might be a good time to revisit the subject.
The Treasury is currently working on regulations that would limit the ability to use family limited partnerships and possibly other family-owned entities as wealth transfer vehicles, according to Clay Stevens, director of strategic planning at the wealth management firm Aspiriant.
“These regulations will likely finalize in September,” he predicts.
“For 20 years or so estate planners have been using entities such as FLPs or LLCs as a wrapper to hold marketable assets, and then have been transferring those through gift planning strategies to trust to their kids and taking discounts based on their lack of marketability,” Stevens said. “It’s a way to reduce the values of what’s being gifted, so if you have $10 million of marketable securities, you put them in an FLP and transfer it to your heirs. As a result you’re able to effectively discount the value of what’s being gifted.”
Usually, the discount is from 25 to 40 percent, according to Stevens. “It depends on what assets are inside, and how liquid the assets are within the entity,” he said. “For example, there would be a greater discount for hedge funds.”
These have been available for estate planners for the last two decades, observed Stevens. “The IRS has challenged them on numerous occasions, but has lost most of those challenges. At this point, they have conceded that there is some discount applicable to the transfer to the entity if it’s set up properly. Most of the cases now revolve around the size of the discount.”
Government proposals over the past decade have been intended to stop what is viewed as abusive practices, Steven noted. “There’s just never been enough support to get that changed legislatively.” As a result, he indicated, “There have been suggestions at industry conferences by industry executives that they will come out with new regulations under Code section 2704 that will attempt to prevent this type of discount on entities that are family-controlled.”
“We don’t know at this point what they will look like or how broadly they will cover various situations,” said Stevens. “While the indication is that they will come out in mid-September, we don’t know what the effective date will be. Most of us do not believe that they will be retroactive.”
Stevens believes there will be challenges to the regulations. “They clearly have the right to issue the regs, but if they are too broad, they could be overturned in the courts,” he said. “The question is whether section 2704 covers this situation or if the regs are too broad. If they do bar the ability to take discounts on any family-controlled entities, there will likely be many challenges to that, especially if they are made retroactive.”
So the handwriting is on the wall—those who would benefit from the discounts inherent in FLPs as they are today should consider setting one up, before the new regs become effective.
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