Estate and Gift Tax Planning: Recently Issued Proposed Regulations

Family-owned entities, such as corporations, partnerships and limited liability companies, are often used to manage and control family businesses or family assets.  These entities may serve as both a succession planning and an estate planning tool in which gifts or bequests of ownership interests in the entity are made while taking advantage of valuation discounts in order to reduce tax burdens.

Recently proposed regulations (IRC Section 2704) regarding the elimination or curtailment of such discounts, were issued on August 2, 2016.  The earliest date they can go into effect is some time in December of 2016.  The exact date as to when these proposed regulations will be final is still to be determined.

One of the provisions in the new regulations will make it more expensive to transfer wealth to family members due to increased values, and therefore, increased estate and gift taxes.  The IRS dislikes discounts because they feel that discounts reduce taxes, but do not reduce the economic benefit received by the recipient family member.

The proposed regulations apply to virtually all family owned businesses, and cover both operating and asset-holding entities.  The new proposed regulations eliminate (or severely limit) discounts by requiring valuators to ignore certain restrictions in place within the governing documents of the entity.  Family attribution rules will now apply to minority owners, which in effect, forces valuators to assume that the minority holder can control and liquidate the entity. These restrictions are often the justification for taking discounts.

Once again, the earliest that proposed regulations become final is when the Treasury publishes a decision adopting the proposed regulations as final.  As noted above, that date is not yet determined, but will not be earlier than December 2016.

The ability to utilize discounts in family wealth transfers could be drastically changing.  Please keep in mind the changes that are (or may be) coming, and discuss with your trusted YHB advisor whether it makes sense to accelerate any gifts.

Learn more about the YHB Business Valuation Team