2016 year-end tax letter: Estate and gift planning

In August, the Treasury Department released proposed regulations under section 2704, designed to curtail the use of discounts in determining the fair market value of interests in family-controlled entities when and as they transfer between family members — either during lifetime as gifts or at death as part of an estate’s disposition.

The proposed regulations try to address what the IRS and various administrations have perceived as the creation of family entities solely for purposes of transferring wealth between family members. Family-controlled interests transferred for gift and estate transfer reporting does not always diminish the real economic value to the recipient of the interest. In other words, by drafting into an entity’s ownership agreement certain rights and restrictions aimed at reducing the fair market value for transfer tax purposes, business owners may have momentarily manipulated the value without a true economic long-term reduction in value.

As drafted, there is significant disagreement about the regulations actual impact. Certain tax specialists believe they are aimed at doing away with all forms of discounts when valuing family interests as transferred. Others think these proposed regulations are not intended to be that far reaching and only aim to eliminate certain rights and restrictions when determining fair market value by reducing the size of the valuation adjustments. Still others believe the IRS should issue safe harbor language that sets standards to draft business agreements that do not run afoul of these rules.

On Dec. 1, 2016, the IRS is holding a hearing to listen to comments and objections about the language of these proposed regulations. As written, the impact of the regulations will generally occur when issued as final regulations. These rules are not aimed at entities and businesses that are not controlled by families. Valuation discounts on transfers of business interests between unrelated parties are still appropriate in determining fair market value. In addition to these possible changes, the results of the presidential election could significantly affect your estate planning. The two major-party candidates have differing views on gift and estate transfer taxes and the various techniques used to manage them.

The use of valuation discounts has always been a complex and often-subjective matter. While these proposed rules further complicate a difficult area of taxation, each taxpayer’s unique facts and circumstances carry considerable influence. Given the proposed regulations may become effective this year, action may be warranted before year-end, especially if you would like more certainty regarding the ability to use discounts as part of your planning. Planning should still be considered even if these regulations are finalized as currently drafted. However, the benefits of discounting fair market value may be gone or significantly curtailed if action is delayed.

Year-end planning. Individuals should focus on a number of things at year-end, including annual gift giving. Although the annual gift exemption for 2016 remains at $14,000 per donee, several options are available to maximize that $14,000.

If a child or grandchild has earned income, consider making a contribution to an IRA or Roth IRA to the extent of their earned income and the limit on contributions. By contributing to an IRA, their retirement savings starts early. There is also tax-free growth on the gift until the donee reaches age 70 and a half and has to start making withdrawals — unless, of course, the gift is to a Roth IRA and then it is never subject to income tax. The balance of the exclusion can be given in a more traditional manner — gifts to trusts or Uniform Transfers to Minors Act (UTMA) accounts.

If the child or grandchild does not have any earned income, the year is not yet over. In a family-owned business, employ the child or grandchild to earn some income and then contribute the amount to a retirement account. There is the added benefit of the child being introduced to the business.

Many people consider charitable giving at year-end to be writing checks to various charities. However, if appreciated stock is donated, especially stock with low basis, the overall savings can be significant. People often want to give larger amounts to charity at year-end, but may feel “cash poor” during this time. If stock has to be sold to make gifts, taxes will have to be paid on the gains. If the stock itself is donated, the donor still receives a deduction equal to its fair market value on the day of donation. Plus, no income taxes are paid on any inherent gain.

Gifts of stock can also be made to children and grandchildren instead of cash. Gifting stock can help preserve the donor’s liquidity and can allow the child or grandchild to start building a diversified portfolio.

Finally, year-end is the ideal time to do estate “housekeeping”:

  • Review wills to make sure they reflect your intent with regard to your beneficiaries.
  • Confirm trust agreements reflect your dispositive intent. There may be ways to decant the trust into a new trust to better align property distributions.
  • Review beneficiary designations on life insurance policies and retirement accounts to validate correctness.

View more insights in the 2016 year-end tax planning letter >

Download the 2016 year-end tax planning letter >


The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.