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Estate Planning Regulation Impacts Small Business And Estate Tax Planning Strategies

Estate Planning Regulation Impacts Small Business And Estate Tax Planning Strategies

Author: James F. McDonoughDate: January 10, 2017

The government lost estate and gift tax cases that attracted headlines. In response, the Department of Treasury (“Treasury”) proposed new regulations in early 2016 that would amend definitions in the 1992 regulations that were problematic in the court cases. In addition, Treasury it added requirements designed to defeat valuation discounts in the estate and gift tax areas.

The 1992 regulation gave IRS the right to disregard certain provisions in shareholder partnership and operating agreements for purposes of estate and gift tax valuation. The 1992 regulations defined an applicable restriction, however, it applied only to a transferor and members of his or her family. An applicable restriction effectively limits the ability to liquidate the entity (in whole or in part) and is more restrictive than a limitation imposed by state law. The law in many states limits the ability of a partner in a partnership or a member in a limited liability company to liquidate the entity. The result was that one could rely upon state law to avoid any problem. A second aspect of the regulation was the definition of a lapse. A liquidation right would lapse when it was eliminated or restricted, so the mere transfer of an interest that held such a right was not a lapse. These rules provided a clear framework for planning and were an obstacle for the government.

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