UHY Reports: Current IRS Proposal Could Potentially End Valuation Discounts in Estate Planning

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A current proposal by the IRS could impact your ability to maximize the transfer of family wealth in the future.

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The IRS is again attempting to curtail or even eliminate completely the use of valuation discounts in estate and gift tax planning. When valuing minority interests, consideration is often given as to whether or not a discount for “lack of control” and/or a discount for “lack of marketability” is warranted. This is handled on a case by case basis and is frequently seen when valuing interests in family limited partnerships (FLPs) and limited liability companies (LLC). These discounts reflect the fact that the minority interest holder cannot influence control over the entity (i.e. liquidate assets or set compensation levels) nor is there an easy mechanism to convert their investment into cash (There is no public exchange for closely held businesses). When the facts and circumstances support their use, these discounts help quantify the fair market value of the minority investment and often reflect significantly less value than a simple pro-rata allocation of the control value. When done properly, this provides a supportable way of maximizing the transfer of wealth utilizing the available unified credit or annual exclusions and/or minimizing the tax to the estate on any remaining taxable portion.

Over the years, the IRS has continually fought these tax planning strategies, particularly when the underlying assets are highly liquid investments and to date has not had much success in wide spread regulation to eliminate or restrict the use of such discounts. Nonetheless, the current proposal could substantially impact your ability to maximize the transfer of family wealth in the future. It is important to review your estate plan now and determine the impact that proper application of these discounts could have on your estate before it’s too late.

To discuss this topic further and determine your eligibility for these valuation discounts while they are still in effect, please contact your professional at UHY Advisors in Detroit 313 964 1040, Farmington Hills 248 355 0280 or Sterling Heights 586 254 8141, or visit us on the web at http://www.uhy-us.com.

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Chris Clark
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