In early August, the U.S. Treasury Department released long-anticipated proposed regulations (REG-163113-02) relating to the valuation of family controlled business interests for estate, gift, and generation-skipping transfer tax purposes. These proposed regulations are the IRS’s attempt to severely reduce or eliminate the use of valuation discounts, such as discounts for lack of control and lack of marketability, when valuing ownership interests in family-controlled corporations, partnerships, and limited liability companies that are transferred among family members.
To put this in context, these discounts have in the past resulted in reductions in gift values of approximately 35%. For example, a gift of $1,000,000 before these discounts would result in a gift value of $650,000 after the discounts. For someone subject to estate tax, this $350,000 reduction could produce a federal estate tax savings of $140,000 at the current 40% rate. The savings could be even greater depending upon the amount of the gifts contemplated and the size of a person’s estate. It is important to keep in mind the current federal estate, gift and GST exemption amounts of $5.45 million that each person is entitled to, as well as the state where a person resides. By eliminating these discounts, the proposed regulations will likely have a negative tax impact on the amount of wealth a family may transfer from one generation to another.
While there is some uncertainty as to when the final regulations will be issued and what the final regulations will entail, the IRS has scheduled a public hearing on December 1, 2016 after which the IRS will look to make the proposed regulations final and effective shortly thereafter. Based on this process, there is a window of opportunity for those who wish to take advantage of these discounts while they are still allowed under the current rules, but you must act sooner rather than later.
To review your options and the estate and wealth transfer planning strategies that may be suitable for you and your family, please contact Steve Colella, Partner in the Private Client Group at (781) 937-5377 or firstname.lastname@example.org, Jody Goldman, Partner in the Business Valuations Practice at (781) 937-5393 or email@example.com, or a member of your DGC service team.