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Act Now - Impending Limit on Family Business Valuation Discounts

(posted: September 1st, 2015)

It is anticipated that new IRS regulations will soon go into effect, restricting wealth transfers by discounting the value of family business interests.

Employees at the U.S. Treasury Department have spoken publicly about pending regulation changes that would significantly restrict the ability to take valuation discounts in certain circumstances, and the general consensus is that this change could occur as soon as the end of September.

Valuation discounts long have been an important tool in transferring wealth from one generation to the next without bearing the full brunt of gift and estate taxes and generation-skipping transfer rules. This strategy may be ending, or losing some of its luster when the new rules go into effect.

LLC & LLP Valuation Discounts

When a transfer is made either as an estate distribution or a lifetime gift, the value of that gift for transfer tax purposes is fair market value.

To determine fair market value for a minority interest in a family owned entity, such as a family limited partnership or family LLC, we generally consider aspects such as:

  • Lack of control when the transfer is to a child or grandchild (the minority interest discount)
  • Lack of marketability

The amount of the discount varies with the specific assets the transfer represents and their relative liquidity. When these issues are considered there can be a discount applied to the fair market value which can then have a significant impact as a reduction of the value utilized for the transfer tax that is required to be paid by the transferor.

Estate planners have used “freezing” techniques to move the appreciation of assets from the senior generation down to the next generations often with the establishment of family owned partnerships or LLCs.

Section 2704(b) gives the Secretary of the Treasury the power to issue new regulations disregarding additional restrictions if the restrictions reduce the value of the transferred interest but not the value of the interest to the transferee. The IRS has interpreted this grant of power broadly and has long maintained its authority to further restrict valuation discounts, and this is not the first time the IRS has attempted to limit the use of valuation discounts to reduce tax liability through family business wealth transfer.

For those of you who hold interests in a family-owned entity, we are here to help!

Please Contact Us to determine if you can benefit from valuation discounts before they disappear.

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