• Bill Introduced May Limit Family Limited Partnership Discounts
  • February 5, 2009 | Author: Mickey R. Davis
  • Law Firm: Bracewell & Giuliani LLP - Houston Office
  • Last week, Rep. Earl Pomeroy (D-ND) introduced HR 436. The Bill would fix the federal estate tax exemption at $3,500,000, and set the tax rate for estates exceeding that amount at 45 percent (50 percent for estates between $10 million and $23.5 million). The Bill also seeks to strike a major blow at a popular estate planning technique by eliminating most discounts associated with family limited partnerships. We are strongly encouraging our clients that have family limited partnerships to contact us to evaluate whether to make transfers now.

    Under current law, when an individual transfers a partnership interest, whether by gift or at death, the partnership interest is valued at the price that a willing buyer would pay for the partnership interest. Since family partnership interests are not publicly traded, and do not represent a controlling interest in the partnership, business appraisers often assign substantial discounts in valuing these interests. For example, a 10 percent limited partnership interest in a partnership that holds $1 million worth of securities would not be valued at $100,000 under current law. Instead, because a buyer of the partnership interest cannot sell the interest on the open market, and cannot control how the partnership assets are invested, he or she would pay less for the interest (perhaps $60,000 or $65,000). These valuation discounts are often utilized by estate planners to shift wealth to family members, whether by gift or at death, in a tax effective manner. These valuation principles apply to any non-publicly traded entity.

    If HR 436 becomes law, appraisers would not be allowed to apply any discounts to "non-business" assets held by partnerships or other entities. Instead, those assets would be valued as though they were transferred directly to the recipient.  In the foregoing example, if the $1,000,000 held by the partnership were cash or marketable securities, a 10 percent interest would be valued for gift and estate tax purposes at $100,000, even if a willing buyer might pay only $60,000 for the interest.  In addition, if a family controls an entity which is not "actively traded," in contrast to current law, no discounts will be allowed for the transferee's lack of control of the entity.

    The Bill as drafted would be effective for transfers occurring after the date of enactment. There is always the possibility, however, that any final statute might be applied retroactively. While the fate of this piece of legislation is uncertain, it may reflect the attitude of the new administration toward keeping and strengthening the estate tax.