Historically, individuals with ownership in family businesses may have been encouraged to transfer the business to LLCs or partnerships to take advantage of discounting for estate tax and other reasons. While the discounts created lower values, there was also less benefit from step-up in basis. (Step-up in basis essentially means the heir of the entity ownership is allowed to adjust the basis in entity value from the date the decedent acquired the interest to the value at the date of the decedent’s death.) Individuals were accepting of the discounting and minimal step-up in basis to avoid paying little or no federal estate tax. Those were the days of low federal estate tax exemptions.
However, times have changed…
With the federal estate tax exemption increase to $11.2 million for individuals and $22.4 million for married couples effective January 1, 2018, very few individuals will face estate tax problems. Therefore, it may be time to consider liquidating family business LLCs and partnerships given the potentially deep discounts inherent in owning a minority interest in such entity. The discounts derive a lower value which does not allow the heir to have as great of a step-up in the basis of entity value. Consequently the discounts for estate and gift tax purposes may no longer be desirable.
The table below illustrates the impact of moving away from LLCs and limited partnerships holding family businesses:
In this instance, the heir gets to “step-up” to a new basis from $75 (the value when the decedent acquired the interest) to $160 or $200 (the value at the decedent’s death for interest held in an LLC/Partnership or held outside an LLC/Partnership, respectively).
The difference between $2 and $10 in this example doesn’t seem like much. However, it might seem like a big deal if we add three or four zeros behind each figure!
This subject matter can be difficult to comprehend. Call the KTLLP Business Valuation Team to discuss your specific situation.