IRS Threatens Discounts on Certain Family-Owned Business Entities

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For years, proactive taxpayers have used family limited partnerships (FLPs) and other family-owned business entities in estate planning. If properly structured and administered, these estate-planning tools allow high net worth individuals to transfer their wealth to family members and charities at a substantial discount from the value of entities’ underlying assets. Examples of assets that may be contributed to as an FLP include marketable securities, real estate, and private business interests. Important Note: The FLP must be set up for a legitimate purpose to preserve valuation discounts.
The IRS has targeted FLPs and other family-owned businesses in various Tax Court cases. To strengthen its position in court, the IRS issued a proposal in August that could significantly reduce (or possibly eliminate) valuation discounts for certain family-owned business entities. Among other changes, the proposal would add a new category of restrictions for valuation transfers of family-owned business interests. Mostly, the cases focus on valuation discounts on FLPs relating to lack of control and marketability associated with owning a limited partner interest. Typically, these interests are subject to various restrictions under the partnership agreement and state law.
If finalized, the proposed changes will not go into effect until 2017 (at the earliest). There is still time to use these estate-planning tools and be grandfathered in under the existing tax rules. This may be the best time for setting up a FLP or transferring additional interests in an existing one.

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