John R. Bullis: Valuation discounts save death and gift taxes

The current IRS rules that allow valuation discounts may be changed in the near future. Say an asset, such as a family business or a bundle of traded stocks and bonds, is gifted or transferred after a death, and it is worth $10 million. With the proper set of facts, valuation discounts of 30 percent or more can reduce the value subject to gift or death (estate) tax.

Then the $10 million asset is valued less because of valuation discounts, maybe the value after the discounts is $7 million or less. That saves tax at the 40 percent tax rate. Forty percent tax rate times $3 million reduction could mean savings of $1.2 million.

Some folks think IRS will change the rules to reduce or eliminate the valuation discounts. The changes might come even before the new president takes office.

Some experienced attorneys think IRS has the authority and power to make changes in valuation discounts, without any changes by Congress.

If you want to consider doing a family limited partnership or similar entity to own the assets, maybe it is time to get all the details and facts and consider making the transfers now, before the tax rules on valuation discounts are changed.

There are many non tax reasons to set up a family limited partnership or a similar entity. It can be beneficial to involve the next generation in learning how to manage money and assets while you are still around and able to help them.

This year an individual can die and leave $5,450,000 of assets without a death tax, if no taxable (large) gifts have been made. If you made gifts of more than the Annual Gift Tax Exclusion ($14,000 total gifts in the year, per each person you choose) then that “taxable” gift reduces the death tax exemption of $5,450,000. If you made a taxable gift of $114,000 in a prior (or this) year to one individual, the Annual Exclusion of $14,000 is subtracted from the gift and it is a taxable gift of $100,000. That reduces your death tax exemption to $5,350,000.

There are instances when making large taxable gifts can help achieve your long term goals and desires. In some cases, it can even be advantageous to make taxable gifts that are large enough to pay a little gift tax.

Maybe it is time to look at your situation and goals and desires to see if taking action this year can avoid the problem of reduced valuation discounts.

Did you hear? “Collecting more taxes than is absolutely necessary is legalized robbery,” by Calvin Coolidge.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.


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