written by Michael Wirth

Now could be the time to transfer interests in family-controlled entities.

The use of valuation discounts is an important component of estate planning. Irrespective of the presumed value of an asset, by using valuation discounts, an asset may be treated as having a substantially discounted value for gift and estate tax purposes. Discounts are often claimed for lack of control and lack of marketability. It is not uncommon for these discounts to range from 15% to more than 40% when valuing certain interests in family-controlled entities.

For years, the IRS has been unsuccessful in seeking to eliminate these valuation discounts, arguing that Internal Revenue Code “applicable restriction” includes any restriction that limits, in a manner that is more restrictive than state law, an owner’s ability to liquidate his/her interest in the entity. In light of these failed attempts, proponents of reduced and/or eliminated valuation discounts are seeking new regulations through the U.S. Treasury Department.

Cathy Hughes, Estate and Gift Tax Attorney-Advisor in the Office of Tax Policy of the U.S. Treasury Department, spoke at a recent American Bar Association Section of Taxation meeting. She indicated that proposed regulations could be released as early as September 2015. Hughes directed the tax community to look to the Obama Administration’s prior budget proposals on valuation discounts for clues about what the proposed regulations might provide. The Obama administration’s 2010 through 2013 fiscal year budgets all contained a proposal to restrict or eliminate valuation discounts on transfers of interests in family-controlled entities.

It is entirely possible that proposed regulations would only target discounts in family-controlled entities that are non-operating businesses; targeting only family limited partnerships and limited liability companies that primarily hold readily marketable assets and other passive investments, and leave those that operate an active trade or business still in the clear. The timeframe for implementation of these potential proposed regulations in unknown as well. Regulations are typically effective as of the date final regulations are issued, but it is possible that these regulations may become effective retroactive to the proposal issuance date.

While there is speculation about the contents of the final proposed regulations and their timeframe, given the currently available information, it may be wise to revisit your current estate plan and consider taking action now while we know valuation discounts are still available. Time is of the essence because it may take several days, or even weeks, to make the necessary arrangement and correctly structure transfers. However, taxpayers should be reminded that tax consequences should not be the sole motivating factor in driving a business decision such as transferring an interest in a family business. The transfer should make sense from both a personal and business perspective as well.

Please contact us if you have any questions about Valuation Discounts 417-881-0145.


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