An effective and common estate tax planning tool could soon be up for elimination by the Internal Revenue Service. The IRS is considering a change in its rules regarding the use of Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs).
There are many reasons a family business owner would choose to set up a FLP or FLLC but one of the more popular motivations for doing so is the benefit associated with valuation discounts used for gift or estate tax purposes. Currently, families who own closely-held businesses can set up a FLP or FLLC for the purpose of transferring (either via gift or sale) interests in the business to children or other family members. The value of the interest is typically discounted for valuation and tax purposes, often as high as 20 to 50 percent.
These valuation discounts allow senior business owners to transfer assets out of their estate at values lower than the actual value of the underlying assets. The discounts can also lower the eventual estate tax bill for heirs, and can potentially decrease future transfer taxes.
The IRS has signaled its intent to release, as early as this month, new regulations under IRC Section 2704(b)(4) that would curtail or eliminate the use of valuation discounts in FLPs and FLLCs. It appears that the changes would be prospective instead of retroactive, so any transfers made via these structures before the new rules take effect would still be able to use valuation discounts. Any transfers made after the date of change would not.
The gift and estate tax benefits of these valuation discounts can be significant. However, as with any wealth transfer vehicle, it is critical to review your particular set of circumstances, and find the right fit for you. The federal income tax and estate tax rules are constantly subject to change so it is also important to periodically reevaluate your overall estate plan and wealth transfer objectives.
RKL’s Business Consulting team is tracking the progress of IRS moves on this topic. If you have questions about this particular issue, or how this will impact your family business ownership transfer or succession plans, contact one of RKL’s valuation professionals today. Our team is ready to help you find the wealth transfer strategy that best suits your unique business circumstance.
Contributed by John S. Stoner, CPA, CVA, partner and leader of RKL’s Business Consulting Services Group in the Lancaster office. John provides a wide range of business consulting services, including business valuation, financial analysis, litigation support, merger/acquisition assistance and business succession planning to business clients.