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Saturday, January 31, 2009


On January 9, 2009, Representative Earl Pomeroy introduced HR 436 ("Certain Estate Tax Relief Act of 2009"). The Bill would freeze the Federal estate tax exemption at $3,500,000 (the 2009 level), and retain the tax rate for estates exceeding that amount at 45 percent (50 percent for estates between $10 million and $23.5 million). The Bill, however, would also seek to eliminate popular estate planning techniques by disallowing most discounts associated with family limited partnerships containing "non-business assets" (such as marketable securities). A Democrat controlled White House and Congress, coupled with the current economic climate, have also caused predictions of additional estate tax reforms and there are at least four such bills currently pending in the House.

Valuation discounts (particularly of the minority and marketability type) may significantly reduce the values of transferred property. Under current law, if a taxpayer transfers interests in a non-publicly traded partnership, whether by gift or at death, the partnership interests would be valued at the "fair market value" of the property, generally defined as the price that a willing buyer would pay a willing seller for the partnership interests. Since family partnership interests are not publicly traded, and typically do not represent a controlling interest in the partnership, under current law, business appraisers typically assign substantial discounts when valuing properly structured partnership interests.

These valuation principles apply to any non-publicly traded entity and allow shifts in assets to younger beneficiaries in a tax effective manner. If HR 436 is enacted and becomes law, taxpayers would not be able to receive a discount on "non-business" assets held by their partnerships. Instead, those assets would be valued as though they had been owned directly and transferred to the recipients.

Finally, HR 436 would seek to deny "minority interest" discounts by providing that, in the case of the transfer of partnership interests other than an interest which is "actively traded", no discount shall be allowed by reason of the fact that the partner does not have control of the partnership if the transferor and his or her family have control of the partnership.

As proposed, HR 436 would apply to transfers occurring after the date of enactment. Nevertheless, there is the possibility that any tax law may be applied retroactively. Although it is uncertain whether this legislation will be enacted, it may reflect the attitude of the new administration of retaining and expanding the current estate tax laws.

Thanks to Jordan Klingsberg of our office for the above summary.

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