Treasury Proposes to Close Estate and Gift Tax Loophole

The U.S. Treasury Department has issued a new regulatory proposal that would “close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift tax purposes,” according to Mark Mazur, the Treasury’s assistant secretary for tax policy.

“It is common for wealthy taxpayers and their advisors to use certain aggressive tax planning tactics to artificially lower the taxable value of their transferred assets,” Mazur writes on the Treasury’s blog. “By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes.”

Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques solely for the purpose of lowering their estate and gift taxes, according to Mazur.

According to Rose Watson, director of advanced planning at Commonwealth Financial Network, the proposed regulation would largely impact transfers of intrafamily ownership interests in closely held businesses (corporations or partnerships). 

Traditionally, ownership restrictions — such as on liquidation, voting rights or lack of control — provide the ability to take a minority interest discount to reduce the value of the property for estate and gift tax purposes when the ownership interest is being transferred. 

The proposed regulations aim to curtail this loophole.

The new regulatory proposal could also affect the lapse of a liquidation or voting right, according to Watson.

“Provisions in agreements that result in the lapse of a liquidation on death,” Watson told ThinkAdvisor. Adding, “Previously those have been disregarded as an exception to the valuation rules and those would now be valued.”

Watson said taxpayers and their advisors may wish to review their operating agreements for potential amendments.

“A secondary action would be to consider whether they want to accelerate intrafamily transfers,” she said, “to be able to take advantage of the current regulations before [the new regulations] become final.”