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Proposed Regulations Impact Gift and Estate Tax Planning

Bea Rosenberg

The IRS has recently released proposed regulations that would close so-called tax loopholes that many wealthy taxpayers have used to minimize gift and estate taxes when transferring interests in a closely held family business to relatives. If finalized, the regulations would significantly limit the effectiveness of certain tax-saving vehicles, i.e. family-controlled corporations, partnerships and limited liability companies, for reducing the taxable value of transferred interests.

If you’ve been considering such a strategy, you may need to act soon to take advantage of current tax provisions in the event the rules change.

Valuation discounts narrowed

The proposed regulations would dramatically limit the availability of discounts when transferred interests in family businesses are valued for tax purposes. Currently, taxpayers can obtain significant discounts for lack of control and marketability. These discounts, which could be as much as 40%, can help keep the value of taxpayers’ estates within the lifetime gift and estate tax exemption. (For 2016, the exemption is $5.45 million for individuals or $10.9 million for married couples.)

When quantifying discounts for lack of control and marketability, valuators consider a variety of factors including the nature of the underlying assets, historical and expected income distributions, market conditions, and rights and restrictions granted in the operating agreement. The proposed regulations would significantly limit these factors that could be considered when discounting a family-business interest.

Act now

A public hearing on the proposed regulations has been scheduled for December 1, 2016, and the regulations won’t take effect until at least 30 days after they’re finalized. But the IRS faces an uphill battle against many taxpayers, estate planning advisors and some lawmakers when it comes to closing the door on this gift and estate planning tool. Opponents argue that the IRS may have overstepped its authority in issuing these proposed regulations. The IRS might be persuaded to water down its proposal before finalizing it.

If the regulations are approved as-is or in a modified format, they will apply prospectively, so you still have a window to take advantage of the valuation discounts available under the current regulations. We can help you structure transfers and apply discounts while the opportunity to do so still exists. If you would like more information or are considering transfers of interests in a family business, please call us.

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