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Proposed Regulations May Eliminate Common Estate & Gift Discounts

08/18/2016  |  By: Chris Lovin, CPA/ABV/CFF, CFE, Shareholder, Practice Leader Valuation & Litigation Support Services


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The U.S. Treasury Department has issued proposed regulations that may severely limit and essentially eliminate the use of valuation discounts for transfers of limited liability company (LLC), partnership, and corporate ownership interests among family members. If finalized as proposed, the regulations will result in the practical end of a prevalent and long used tool of clients and estate planners which significantly aided in the tax-advantaged transfer of wealth to successive generations.

Presently ownership interests in a family-owned or closely held corporation, partnership, or other business entity are discounted when the interest being transferred does not have the ability to control the management of the business (minority or non-voting interest), and in situations where the interest is non-marketable, whether by agreement or otherwise. These valuation discounts are commonly referred to as lack of control discounts and marketability discounts, and they are frequently utilized as a means to minimize the value of transferred interests for gift, estate, and generation-skipping transfer tax purposes.  The proposed regulations if finalized may reduce or in effect eliminate the majority of these discounts particularly in situations where the interest being transferred to or for the benefit of a family member is in a family-controlled entity.  

Based on the current timeline, if the proposed regulations are adopted and finalized they should not take effect or apply to transactions completed before December 31, 2016 and in fact the potential final effective date may be much later than that.

The preceding is a brief overview of only some of the potential impacts of the extensive proposed regulations. If you are considering transferring interests in a family-controlled business entity or if you have questions regarding the application of the proposed regulations to your estate plan or steps you can take to reduce or eliminate future gift or estate tax obligations, please contact LBMC, PC.  We look forward to hearing from and assisting you in any way we can.

Tagged with: Business Valuation
Proposed Regulations May Eliminate Common Estate & Gift Discounts