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Estate Planning: Take Advantage of Potential Valuation Discounts

Estate Planning Tools

  • Family limited partnerships (FLPs) and limited liability companies (LLCs) are often created by parents who are looking to:
  • Accumulate their wealth for the benefit of their family
  • Consolidate assets
  • Provide asset protection to younger generations
  • Provide the younger generations with hands on-education in investment and income tax planning while still keeping overall control of the assets
  • Transfer wealth from one generation to another at a discounted value

Parents establish a FLP or LLC by transferring their own assets to the entity. The parents retain the controlling interests in the family entity and gift the non-controlling interests to their children, or trusts for the benefit of their children, via annual or lump-sum gifting. If structured correctly, these gifts can qualify for the annual exclusion, which currently allows you to give $14,000 to as many individuals as you wish during the calendar year.

Current Discounts

Two discounts are generally available when determining the value of the closely held family entity interests: a lack of marketability discount and a minority discount:

  1. A “Lack of Control” or “Minority Interest” Discount reflects the limited partners’ (or non-controlling member in the case of the LLC) inability to make key business and management decisions with regards to the family entity.
  2. A Lack of Marketability Discount reflects the fact that the sale or transfer of the closely held family interests is so restricted that a ready market for those interests often times doesn’t exist as it would with publicly traded assets.

Upcoming IRS Regulations Could Limit Discounts

As previously mentioned, the IRS is rumored to be issuing proposed regulations late summer/early fall that may significantly limit these discounts when valuing a closely held family entity. Actual operating companies may be exempted from the new rules; however entities that predominately hold portfolio type investments will likely be subject to these changes.

 

DHJJ Financial Advisors Can Help

If you are considering making a gift of any type of closely-held family entity as part of your overall estate or succession plan, please contact your DHJJ tax advisor today to discuss next steps.

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