Published On: Fri, Aug 26th, 2016

New Regulations May Make It Difficult to Avoid the ‘Death Tax’

In the United States, estate tax is levied on estates with a value of more than $5.45 million per individual, or $10.86 per married couple. Estates that exceed that value are subject to taxation up to 40%.

But new proposed regulations from the Treasury Department on Tuesday may make it more difficult to dodge this tax, which up until now, has been relatively easy to avoid with proper estate planning  and with a good lawyer.

Some estimates show that wealthy families can easily reduce their tax level to 16%, but attorneys argue that a good estate planner can drop that rate to zero.

Mark J. Mazur, assistant secretary for tax policy, recently said in a blog post that it was common practice for “wealthy taxpayers and their advisers” to use “aggressive tax planning tactics” to effectively lower their estate tax rate.

Photo/donkeyhotey  donkeyhotey.wordpress.com

Photo/donkeyhotey donkeyhotey.wordpress.com

The Treasury has proposed new regulations that would close this tax loophole.

One such loophole involves placing assets in a limited liability company to lower taxes. In this case, the family can argue that the assets should be valued below fair market rate because selling a portion of the corporation would be a challenge.

The Treasury Department is hoping to disallow these valuation discounts through the new regulations.

The proposed restrictions target family limited partnerships primarily and similar entities that are often created for the purpose of avoiding or reducing estate taxes.

The Treasury Department did not state how many families would be affected by the changes or how much tax revenue it may gain as a result of the new regulations.

The Center for Budget and Policies Priorities estimates that only 2 out of every 1,000 estates will need to pay estate taxes.

While the new regulations may present another hurdle in minimizing the death tax, attorneys argue that estate planners can still find ways around the rules. State lawmakers may play a role in that, as they can pass laws that would make it easier to avoid the new regulations.

Some also argue that the regulations may have adverse effects on business owners as well. Others suggest that, for the purpose of reducing estate tax, business owners or wealthy individuals should consider forming a family limited partnership now before the regulations are finalized.

The regulations are still subject to a 90-day public comment period and will not go into effect until comments are considered.

If the proposed regulations are finalized, it will be difficult or virtually impossible to claim valuation discounts on FLP assets, experts say.  

The death tax is a hot-button issue that’s been widely debated for many years. Conservatives argue that it penalizes the wealthy as well as small business owners and farmers. Liberals argue that the tax ensures wealthy individuals pay their fair share of taxes.

Hillary Clinton, Democratic nominee, has proposed an increase to the estate tax. Donald Trump, Republican nominee, has taken the opposite stance, proposing to eliminate it altogether. Under Clinton’s proposal, the federal estate tax threshold would be reduced from $5.45 million for individuals to $3.5 million.

Author: Jacob Maslow

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