August 31, 2016 In Estate Planning

IRS Eliminates Valuation Discounts for Family Owned Entities: TAKE ACTION NOW!

The IRS Has Issued Regulations Limiting or Eliminating the Use of Valuation Discounts.

One of the key benefits of Family Entities over the last several years has been the opportunity for significant valuation discounts for estate and gift tax purposes for clients with taxable estates. Last year, we advised in our Estate Planning Newsletter that we expected the IRS to issue regulations limiting or eliminating the use of valuation discounts for family owned or controlled entities. Earlier this month, the IRS finally issued those proposed regulations. The regulations are set to virtually eliminate the use of family entity valuation discounts as an estate planning tool.

family entity valuation discounts estate planning attorney However, there is still time to take advantage of valuation discounts. But, you need to act now.

What is a Family Entity?

A Family Entity is exactly as it sounds — a company (limited liability company, corporation or partnership) that is owned and controlled by the organizer and the members of his or her family.

What Are Valuation Discounts?

Traditionally, ownership interests of a Family Entity have been valued at a reduced or discounted value. The basis for the discount is lack of control, lack of marketability, and other factors that result from the entity structure. An ownership interest in a Family Entity is often valued at 20%-40% less than the actual fair market value of the underlying asset. This means that you could transfer an asset to a Family Entity and then later transfer your ownership interest in the Family Entity (either through lifetime gifting or at death) at a value significantly less than the fair market value of the underlying asset.

The use of family entities to obtain valuation discounts is a well-tested Estate Planning tool. Other methods of Estate Tax Planning often do not provide the same benefits. Because this method of estate and tax planning has proven so effective, it is imperative that clients with potentially taxable estates take advantage of Family Entity Valuation Discounts before the new IRS regulations take effect.

What’s the Hurry?

Entities created and funded prior to the enactment of the new IRS regulations will be governed by the current (more favorable) rules. But, there is very little time left to take advantage of Valuation Discounts. While it is not yet clear exactly when the new regulations will become final, many Estate Planning Attorneys believe they could become effective as soon as December 1, 2016. No one can be certain of the date, which is why you should act now.

Our Advice to You

We recommend that any client wishing to take advantage of Family Entity Valuation Discounts as an Estate Planning strategy do so well before December 1, 2016.
If you already have a Family Owned Entity, this is a good time to consider whether additional gifts or sales of ownership interests would be beneficial in order to maximize the value of the gift or sale.
Anyone with a current Family Entity should contact us to discuss taking further advantage of the current IRS regulations.
If you are concerned about the value of your estate for Estate Tax purposes or if you are interested in learning more about Family Entity Valuation Discounts, please contact us at (901) 372-5003 or email us here so we can determine if a Family Entity can yield significant tax and other benefits for you and your family.

November 15, 2011 In Estate Planning

Who are my Beneficiaries? A critical question in planning for the future.

beneficiary designations estate planning lawyer

How does Property Pass to Beneficiaries?

Do you know who your beneficiaries are? When we ask clients this question, their first response is often quick and affirmative. However, we frequently discover through the estate planning process that the beneficiaries listed on our clients’ life insurance policies and retirement accounts are not who they think they are, nor are they the intended recipients of the property.

One of the most common misconceptions we see is how property passes at someone’s death. Accounts that have beneficiary designations pass to the beneficiary or beneficiaries named on the beneficiary designation form for that account regardless of what your will or trust says. So, for example, if my Will says that everything passes to my spouse at my death, but my beneficiary form on my life insurance names my children as beneficiaries, my life insurance proceeds pass to my children and not to my spouse. Here are some examples of accounts that typically designate beneficiaries:

life insurance
retirement accounts
transfer on death accounts (TOD)
payable on death accounts (POD)

Periodically Review Your Beneficiary Designations

The Supreme Court case of Kennedy v. Plan Administrator of DuPont highlights the unintended results that may occur if your beneficiary designations are not reviewed periodically. In this case, William Kennedy named his wife, Liv, as the sole beneficiary of his pension and retirement savings plans at DuPont. When the couple later divorced, the Qualified Domestic Relations Order (QDRO) provided that Liv gave up her rights to receive any benefits from William’s pension and retirement plan. Unfortunately, however, the court order was never submitted to DuPont and the beneficiary was never changed. When William later died, DuPont paid out the plan benefits to his ex-wife, Liv. Their daughter, Keri, was appointed as Executor of William’s Estate and filed suit claiming that the Estate should receive his retirement benefits because the QDRO clearly provided that Liv had waived any interest she might have in those benefits. The Supreme Court upheld the ruling of the Circuit Court in saying that DuPont properly paid the benefits to Liv and that Liv was entitled to the pension and retirement funds even though the parties were not married at the time of William’s death and the QDRO clearly provided otherwise.

Moral of the Story

The moral to the story is that the beneficiary designation governs. Thus, it is very important that you know who is named on your various beneficiary forms so that your property goes to the beneficiary or beneficiaries that you intend for it to go to. It is clear that William did not intend for his benefits to go to his ex-wife instead of his daughter, but the Supreme Court held that the beneficiary designation governed and that DuPont properly paid the benefits to Liv.

Tips for Beneficiary Designation Forms

Here are some tips and common problems to watch out for with your beneficiary designation forms:

1. Do you know where the form is? Generally, employers maintain records of the form, but if they cannot find their form when the time comes, the burden may be on you to produce a copy of the form.

2. Is the form up to date? Changes in your life may require you to review the forms periodically. If you have had a recent marriage, divorce, birth or death in your family, it is important to review your beneficiary designations. And remember, your Will does not change who the beneficiary is on an account or insurance policy.

3. Do you have a contingent beneficiary named? If the beneficiary you have named dies before you or is involved in a common accident with you, you may not know who the benefits will go to if you do not name a contingent or secondary beneficiary.

4. Have you named a minor as a beneficiary? Minors cannot legally hold title to property, including these benefits. If you have named a minor, a guardianship may have to be established and administered through the Probate Court concerning applicable funds.

Want to talk it over with an Estate Planning and Probate Lawyer?

If you have questions regarding your beneficiary designations and how they factor into your Estate Plan, please call us at 901-372-5003 or email us today. We’re ready to help you plan for the future.