The firestorm broke just one year ago. In the final months of the outgoing Obama Administration, Treasury Department officials proposed new rules that would have drastically affected the process of transferring a family business to heirs on the death of the business owner. The proposed rules would have significantly increased the estate tax burden on children inheriting a family business and, say opponents, could have made it difficult if not impossible for some small businesses to remain in the family.
Within a few months after the rules were announced, the controversy generated what this article that appeared last December in Forbes magazine called “the biggest crowds ever to a Treasury public hearing.” The response (including nearly 10,000 public comments) was so emotional because of what many perceived as the unintended consequences of the proposed valuation rules. Outgoing administration officials had laid out the new stipulations to “close a tax loophole used by the wealthy,” in the words of Forbes. But those opposed to the changes in the law argued that they would “wreak havoc” on the ability of owners of small family businesses to pass along those businesses as a legacy to their legitimate heirs. Among those testifying against the law at the emotionally charged hearing last December were an 83 year old owner of a hotel in Jackson Hole, Wyoming, a fifth-generation cattle rancher from California, and the owner of the White Castle hamburger chain, along with many others.
Even at the time, the Forbes article speculated that, considering President-elect Donald Trump’s stated opposition to the estate tax, the new regulations governing transfer of family businesses would probably never see the light of day. Sure enough, just this week we found this article on the Wealth Advisor website titled “Hated Estate Tax Valuation Rules on Trump’s Hit List.” After President Trump ordered government agencies to find ways to reduce tax regulatory burdens, U.S. Treasury officials identified the year-old valuation proposal as “ripe for review.” The public comment period, reports Wealth Advisor, just closed last week.
According to the Wealth Advisor article, valuation discounts allow a business owner to put a lower-than-market value on the asset – in this case, a family business – that he or she plans to give to their heirs. This allows the heirs to escape or reduce gift taxes and estate taxes. “Estate planners and their clients cried foul when the rules were proposed last August,” says Wealth Advisor, “and in Treasury hearings in December. They say there are legitimate reasons for the use of discounts.” They also argue that actual businesses being operated by families should be exempt, as opposed to what are called family limited partnerships which do little more than hold securities. These so-called businesses, financial analysts argue, are more open to financial manipulation at inheritance time.
For those of us in the legal profession trying to advise our clients on the status of the proposed Obama-era rules, there’s a high degree of uncertainty. Based on the commitment of the current administration to reduce the U.S. tax burden, some financial experts doubt whether the controversial changes to the valuation laws will ever be adopted, says Wealth Advisor. What’s more, some argue, if President Trump is successful in doing away with the estate tax altogether, something he has said he wants to do, the question is moot. But until that happens, or until the proposed rules are codified, modified or thrown out, the prevailing advice seems to be to stick with the current rules and to be conservative. “Most people are taking valuations based on principles of current law,” says Wealth Advisor, “regardless of the proposed regulations.”
Our further advice at AgingOptions is that this is one area where you definitely need expert professional counsel. The Wealth Advisor article notes the danger in being “too aggressive” in transferring assets, risking an unnecessary and unwelcome IRS audit. You may also find yourself owing gift taxes retroactively if you fail to provide the IRS with proper forms and adequate disclosure. If you have a family business you want to pass along to your heirs, careful planning and awareness of the rules – even amidst proposed changes – is vital. Please contact us and allow us to assist you in evaluating your particular situation.
For the rest of us, we would make a similar recommendation when it comes to planning for retirement: you need careful planning and an awareness of the principles that can ensure a brighter and more secure future as you age. This planning goes far beyond finances! You also need to have someone guide you through the maze of medical decisions (both short term and long term) and the significance of appropriate housing choices. There are legal preparations to consider in order to make certain that you and your estate are protected. Finally, you’ll want to plan a family conference so those closest to you will understand and support your wishes. Is it possible to protect your assets in retirement and avoid becoming a burden to your family? Can you live how and where you want without being forced against your will into a nursing home? The answer is yes – if you have prepared an AgingOptions LifePlan.
There’s an easy, no-obligation way to learn more about the power of a LifePlan. Plan now to attend a free LifePlanning Seminar, held frequently at locations throughout the region. Bring all your questions and come to a seminar near you. Simply click here for details and online registration, or contact us during the week. Whatever your circumstances, we can help you face the future with confidence. All it takes is a LifePlan from AgingOptions.
(originally reported at www.forbes.com and www.thewealthadvisor.com)
