Proposed Regulations Target Discounts in Gift & Estate Planning

By Brenda K. Lowe, CPA, PFS |

For owners of family-controlled businesses, the thought of transferring ownership to the next generation can be daunting. But in light of new estate and gift tax regulations proposed by the Treasury Department, owners considering such a transfer may want to take action before the end of the year.   

The proposed regulations are designed to restrict or eliminate valuation discounts and deathbed transfer discounts available under existing rules. This change could significantly reduce the tax benefits of transferring interests to family members. It’s worth noting the IRS has targeted these discounts for years.

Valuation discounts disregarded

When it comes to shares of family-owned and closely held businesses, valuation discounts typically address “lack of control” and “lack of marketability.” Combined, these discounts have the potential to significantly reduce the value of the transferred interests. The proposed regulations “disregard” some restrictions that have historically been used to apply these discounts.

The proposed regulations also target some deathbed transfers, as well as transfers within three years of death. Transfers of interests that result in the expiration of the power to liquidate, i.e. fractionalizing the interests thru multiple transfers, and then claiming a “lack of control” discount or if there is a lapse of a liquidation right. If the family as a whole has control before and after, the restrictions may be ignored and the full value of the entity must be included in the decedent’s estate.

What could this mean for me?

If you were planning to gift, sell or transfer assets to a family member under the current regulations, discounts could be used to reduce the value of the transferred interest, thereby reducing the estate or gift tax. For example, if the initial value of your transfer was $100,000 and applicable discounts totaled 30 percent, the net value of your transfer would be $70,000. If all of the discounts were disregarded, the transfer would be at the $100,000 value.

There’s a window of opportunity before year-end

The IRS will hold a hearing on the proposed regulations on Dec. 1; the earliest the proposal could be finalized is Dec. 31, 2016. This means you still have time to make transfers under the current, more favorable regulations.

If you think you could be affected by this new tax development, get in touch with your JAK accountant as soon as possible. We are familiar with the proposed regulations, and our tax professionals can help you understand your options. At the least, it’s worth knowing how you could be affected, so you can plan a successful business succession.