For years, taxpayers have been able to use valuation discounts when gifting family business interests and family partnerships to the next generation. The value of the asset transferred was discounted due to it being a minority interest as the recipient had no ability to compel a sale, distribution of profits, etc. It provided a useful tax saving method to keep the business in the family.
On August 2, 2016, the Department of the Treasury and the IRS released proposed regulations to Section 2704 of the Internal Revenue Code, which, in its current iteration, would essentially eliminate minority (or lack of control) discounts and thereby end a tax planning strategy that has helped to pass interests in family businesses to younger generations. While the proposed regulations are quite lengthy and complex, here are some of the highlights:
- Creation of a three year rule for transferring interests. If the transfer occurs within three years of death, it is treated as having occurred at the time of death and no minority discount will be allowed.
- Elimination of any discount for recipients who are not full or majority owners.
- End the ability to decrease the transfer tax value of the interest (which is allowable under current regulations) by deeming that default state law restrictions superceded by governing documents are NOT a restriction imposed by state or Federal law.
- Clarification of the description of entities. The proposed rules will not only affect corporations and partnerships, but LLCs as well.
The elimination of these valuation discounts not only mean higher estate taxes, but could, in some instances, compel the sale of the family business as the only option of meeting the estate tax burden. Public hearings are being scheduled by the IRS on December 1, 2016. The regulations will go into effect 30 days after they are finalized, sometime in the first quarter of 2017. Rothman Gordon strongly recommends closely-held family business owners and family partnership owners review their estate strategies and act quickly if they plan to gift interests to the next generation, before the new regulations take effect.
Mark S. Weis, Esq., CPA
About the Author
Mark Weis has built a diverse practice that includes estate planning and administration, elder law, employee benefits, ERISA, and tax law. A Certified Public Accountant, with an advanced degree in Taxation, Mark is uniquely positioned to counsel clients on tax issues and implications, whether regarding their personal finances, those of an elderly family member, or a business or corporation of which they are an owner or shareholder. Mark can be reached at (412) 338-1122 or MSWeis@rothmangordon.com