Long-awaited proposed regulations were recently issued by the U.S. Treasury. These regulations would, if adopted, have a significant impact on the valuation, for gift, estate and generation-skipping transfer tax purposes, of interests in family-controlled entities.
Under current law, discounts for lack of control and minority interests are typically applied by appraisers when owners of family businesses transfer company interests to their children and loved ones. These discounts substantially reduce the amount of gift, estate and generation-skipping transfer tax exemption an owner uses to make the transfer.
The primary aim of these proposed regulations is to treat the lapse of voting or liquidation rights as an additional transfer, and to disregard certain restrictions on liquidation in determining the fair market value of a transferred interest. The result would be to eliminate or substantially limit the lack of control and minority discounts for transfers of interests in a family-controlled entity.
If the proposed regulations become effective, taxpayers will have lost a highly effective estate planning technique, and the cost of transferring interest in family-owned entities will increase significantly. Clients who are contemplating the transfer of interest in the family business should consider making the transfers as soon as possible, as there is a small window of opportunity to take action before these proposed regulations become effective. We expect these rules not to become effective before December of this year, making it necessary to complete any discount-related planning during the next several months.
Please contact Lara M. Sass, PLLC to determine what steps should be taken in 2016 to move forward with succession planning and to take advantage of the minority and other discounts currently available.