Is This the End of Discounting Transfer Taxes with LLC's and FLPs?

In the late 1980s, two Texas attorneys, John Porter and Stacy Eastland, introduced a new discounting technique relating to the formation of family limited partnerships which resulted in discounts of 30% and more to the value of the artificially created family limited partnership (FLP).  This technique was an anathema to the Internal Revenue Service; a review of many estate tax court cases litigated in the last 20 years involve the discounts taken on  FLPs. The bulk of these discounts were related to intrafamily transfers, many times saving millions of dollars in estate tax.

Now, the Internal Revenue Service is fighting back. A proposed regulation would beef up section 2704 of the IRC of 1986 to preclude many of the presently available discounting techniques. In addition, this proposed regulation would expand the purview of section 2704 to include not only partnerships and corporations but LLCs, S corporations, and other family "business" transfer entities.

Part of the proposal includes drawing a bright line between the family members and nonfamily members for the purpose of allowing discounts. The proposed regulation would enable the IRS to attack any entity created prior to October 8, 1990.

What this regulation will look like when it is finalized is somewhat conjectural but be prepared to take a hit on the use of heavily discounted entities within intra-family transfer transactions. It will be equally interesting to see what steps the estate tax planning community will take to try to blunt the thrust of these new regulations.
 

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Robert S. Blumenfeld  - 

 Estate Tax Counsel

Mr. Blumenfeld concentrates his practice in the areas of International Tax and Estate Planning, Probate Law, and Representation of Resident and Non-Resident Aliens before the IRS.

Prior to joining Marini & Associates, P.A., he spent 32 years as the Senior Attorney with the Internal Revenue Service (IRS), Office of Deputy Commissioner, International.

While with the IRS, he examined approximately 2,000 Estate Tax Returns and litigated various international and tax issues associated with these returns.As a result of his experience, he has extensive knowledge of the issues associated with and the preparation of U.S. Estate Tax Returns for Resident and Non-Resident Aliens, Gift Tax Returns, Form 706QDT and Qualified Domestic Trusts.