Vicki Beckey, CPA, CFF, CSEP and head of TD&T’s estate department, provides some thoughts on understanding estate and gift taxes.
The Internal Revenue Service is proposing regulations to limit the use of discounts when valuing gifts. Currently there is a unified credit from federal estate tax that allows a lifetime or death-time transfer of $5,450,000 for an individual and $10,900,000 for married couples, tax free. Any transfers above these limits have a federal estate tax rate of 40%.
When valuing gifts, historically, taxpayers have used discounts when the donor has a non-controlling interest. Taxpayers have used these minority interests and lack of marketability discounts of 20-40% through entities such as family limited partnerships.
Because they have been unsuccessful in fighting the discounts in the past, the IRS is now proposing regulations to eliminate the discounts. Although the regulation may become final by the end of 2016, the impact and litigation will not be known for some time.
Regulations set the unified credits at $5,450,000 for individuals and $10,900,000 for married couples. Taxpayers below these levels usually do not benefit from the discounts and therefore do not often use them. Without using the discounts, the beneficiary of an asset acquired at death would receive a higher basis. However, if an individual or couple exceeded the thresholds of $5,450,000 and $10,900,000 respectively, the discounts would save tax of 40% at the cost of basis reduction for a beneficiary who would most likely be in a lower tax bracket than 40%.
If you are considering gifting that would benefit from discounts, you will want to be aware of the implementation date for the final regulation. It’s probably too late to do anything about the 2016 tax year. However, if the new regulation becomes effective in 2017, it may be worth considering the timing of any potential gift to occur prior to the date of the final regulation.
Please contact your CPA at TD&T for assistance or questions about gifting.