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Valuation discounts may be ending if the IRS has its way

There may be more than six months to go before tax returns must be filed in April 2017, but it appears that battle lines are being drawn on how some wealthy, family business owners may reduce their estate taxes.

According to a recent wsj.com article, new  rules are coming to limit so called “valuation discounts,” that allow people with estates worth more than $5.45 million per person (or $10.9 million per couple) to lower the value of such estates in order lower or even avoid estate taxes upon their deaths. Given that the top estate tax rate is 40 percent, the savings could be substantial. 

To take advantage of this discount, an estate owner would put pieces of the estate in holding companies or other entities and assign pieces to family members or charities. Since control of the entity is dispersed (and the estate owner may not have a controlling interest) the value of the asset assignable to the estate owner is substantially lowered.

Indeed, courts have allowed estate owners to use this method for years, but the IRS is reportedly making rules to disallow these discounts. Naturally, critics of the proposed rule say that the IRS is overstepping its bounds in defying case law. In the meantime, the U.S. Treasury Department and the IRS are accepting comments on the proposed rule, and a hearing is scheduled for December 1. Some insiders believe that the new rules will be implemented before the new president takes office.

If you have additional questions on valuation discounts, an experienced tax attorney can assist you.

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