Now is the time you should revisit your current estate plan! In August of this year, the U.S. Department of Treasury released proposed regulation designed to eliminate valuation discounts for transfer of interest in family-controlled entities. These proposed regulations, if passed, would mean increased estate taxes on the death of owners of family businesses, possibly causing families to liquidate the business or sell large shares to outsiders. Republicans in the House of Representatives and the Senate have introduced bills to derail the proposed regulations to nullify and prevent future regulations, and to cut federal funding associated with its enforcement. Despite these Congressional roadblocks, the Treasury appears determined to eliminate these tax benefits. Careful estate planning can preserve your family business, ensuring that the next generation can operate the company without an overly burdensome tax liability.
The Death of Discounts
Current valuation methodology for gift and estate tax purposes often includes discounts for privately owned businesses. The discounts reduce the value of such assets for transfer tax purposes and make it possible to move family owned businesses at a reduced tax burden. Discounts can and have ranged from an average of 15-50%. Modern estate planning sometimes includes investments in family owned investment pools or family limited partnerships that would be subject to discounting. The IRS has expressed concern for years about valuation discounts in a family setting and whether those discounts were being used to artificially depress the value of the business or investments.
The proposed regulations would require that all intra-family transfers be valued by ignoring certain “disregarded restrictions” such as liquidation restrictions or voting restrictions. Liquidation restrictions are at the heart of normal valuation discounts, such as minority discounts and discounts for lack of marketability or transferability.
The substantive impact of these regulations is that it would end most forms of lack of control and marketability discounts for intra-family transfers of businesses, because most transfers would easily be captured as “disregarded restrictions”. In addition, the rules will not even allow family business owners to attempt to reduce their ownership interest in order to claim a minority or lack of control discount at death on their remaining shares.
When Will These Changes Take Effect?
A public hearing is scheduled for December 1, 2016. The effective date of the nal regulations would then take place 30 days after their publication in the Federal Register. A swift publication is not entirely out of the question, which means the regulations could take effect as soon as January 1, 2017, closing the door on most family discounts. Now is the time to address current gifting or succession planning that can benefit from valuation discounts in a family setting.
What Should You Takeaway From All This?
Make an appointment to review your estate plan. If you are a business owner or hold an interest in a family partnership or investment and have contemplated family succession planning, consider taking action now while valuation discounts can still be applied to family related transfers. Use of direct gifts, Grantor Retained Annuity
Trusts (GRATs), sales to family members (or trusts for their benefit), gifting trusts, and structured buyouts are all useful techniques. We can help determine which method is right for you and your family.