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Planet Fitness franchise owners may miss out on a valuable opportunity to transfer wealth to family members and future generations and bypass significant estate and generation skipping transfer( GST) tax hits. This is because one of the most frequently used techniques to transfer franchise wealth and reduce or eliminate estate taxes on the amount transferred may come to an end if recently proposed Treasury regulations are implemented.
The problem In a previous communication to all Planet Fitness franchise owners, you were informed about the proposed regulations released in August 2016 under Internal Revenue Code § 2704. The proposed regulations would, among other things:
• Bring discounts back into the grantor’ s taxable estate for death-bed transfers( defined as transfers within three years of death).
• Eliminate valuation discounts for family-controlled business entities( i. e. corporations, partnerships and LLCs) for gift, estate and generation skipping transfer( GST) tax purposes.
Effective dates of the proposed regulations
The 90-day comment period closed Nov. 2, 2016, and a public hearing was scheduled for Dec. 1, 2016. Technically, the regulations could be finalized by Dec. 31 but may not be finalized until early next year.
What if you do no estate planning?
If you do no estate planning, here is what you can expect. Let’ s assume you die in 2016, and at that time, your Planet Fitness interests have a fair market value of $ 30 million. Of that $ 30 million, $ 5.45 million will be free of federal estate tax( the“ applicable exclusion amount” for 2016). For the purpose of this example, we will assume that your Planet Fitness interests will pass to someone other than a spouse( because you can transfer an unlimited amount to a spouse without any federal estate tax at the death of the first spouse). The federal estate tax rate in 2016 is 40 percent. You would owe federal estate tax on the amount of $ 30 million minus $ 5.45 million at that 40 percent rate, which means your estate would owe $ 9.8 million to the federal government and would be obligated to pay this within nine months of your date of death. Several states impose an additional inheritance and estate tax, often increasing the amount of estate tax that must be paid. That’ s a big tax hit. Many estates will not have the liquidity to pay the estate tax without selling the franchise.
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GearedUp | 2016 Issue 3
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