The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants

On the HR 436 Proposal for FLPs

By Linda Trugman; CPA, MBA, ABV, ASA, MCBA

On January 9, 2009 the US House of Representatives introduced HR 436. The Bill would establish the federal estate tax exemption at $3,500,000, and set the tax rate for estates exceeding that amount at 45 percent, eliminating the currently scheduled 2010 phase-out and subsequent reversion to pre-Bush tax cut levels with the $1 million exclusion and a 55 percent tax rate.

Estate Planning Technique Elimination

Importantly, the Bill, if enacted as proposed, would remove a popular estate planning technique by eliminating most discounts associated with what is referred to generically as family limited partnerships [FLPs, a general term applied to closely held asset holding companies often holding non-business assets].

FLP Non-Controlling Interests

Currently, when a physician-investor or any other individual transfers a non-controlling interest in a FLP, whether by gift or at death, the interest is valued at the price that a willing buyer would pay for the partnership interest, or fair market value. Since such FLP 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.

Case Model:

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. Rather, because a buyer of the partnership interest cannot sell the interest on the open market, nor exert control prerogatives on the partnership, he or she would pay materially less for the interest [perhaps 30 percent to 50 percent less]. 

Elimination of FMV Standards

The Bill as drafted would be effective for transfers occurring after the date of enactment. However, there is always the possibility 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 towards keeping and strengthening the estate tax. 

If HR 436 becomes law, appraisers would no longer be allowed to apply Fair Market Value standards to valuing these non-control FLP interests; they would not be able 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. 

Assessment

The Bill as drafted would be effective for transfers occurring after the date of enactment. However, there is always the possibility 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 towards keeping and strengthening the estate tax. I have attached the proposed legislation to this post.

File:  hr-436 

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

Our Other Print Books and Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest E-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Filed under: Accounting, Estate Planning, Financial Planning, Investing, Research & Development, Taxation | Tagged: Estate Planning, fair market value, family limited partnerships, FLP, FMV, HR 436, limited partnerships | Leave a comment »