Proposed Changes to Family Valuation Discounts (article)

Proposed Changes to Family Valuation Discounts (article)

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The use of valuation discounts is an important tool for estate planning. Discounts are commonly claimed for lack of control (minority interest discount) and lack of marketability. Applying such discounts in the context of family-controlled entities has long been a point of contention for the IRS. Unsuccessful in attempts to restrict the use of valuation discounts through legislative changes, the Treasury Department is contemplating new regulations to accomplish this goal.

Historically, the IRS maintained that a minority interest discount was not available in valuing an interest in an entity (corporation, partnership or limited liability company) that was controlled by family members. The IRS conceded this argument in 1993, when it issued Revenue Ruling 93-12. The fact pattern of that ruling involved a shareholder owning 100 percent of a corporation, who made gifts of 20 percent of the stock to each of his five children. The IRS ruled that the family's control of the entity would not be considered in valuing the gifts of minority interests. After the ruling, family limited partnerships (FLPs) and limited liability companies (LLCs) became more popular estate planning vehicles because the available valuation discounts allowed for more wealth to be transferred free from estate, gift & generation skipping transfer (GST) taxes.

The Obama Administration proposed changing the law over several annual budget proposals in order to restrict or eliminate valuation discounts on transfers of interests in family-controlled entities. The Administration was not successful in having the tax law changed and has excluded this provision from the past three budget proposals. Now the IRS is exploring other means to reach the same end – specifically new tax regulations. These new regulations would piggyback onto an existing provision of the Internal Revenue Code that authorizes the IRS to provide guidance in this area. Whether these new restrictions will withstand challenge remains to be seen.

In May, at the American Bar Association Tax Section meeting, Cathy Hughes (Estate and Gift Tax Attorney-Advisor in the Office of Tax Policy of the U.S. Treasury Department) indicated that proposed regulations to restrict family valuation discounts could be issued by mid- September. Hughes indicated that taxpayers could look to the Obama Administration's prior budget proposals on valuation discounts for clues about what the proposed regulations might provide. It seems likely that the proposed regulations would limit minority interest and lack of marketability discounts for interests in family-owned entities (corporations, FLPs, LLCs). The regulations would probably target only entities that do not operate an active trade or business.

The IRS has been frustrated that Congress has not acted to change the law restricting valuation discounts, and it is possible that these regulations could be made effective as of the date the proposed regulations are released. This means that it is likely that any transfers of interests in family entities that took place before the regulations were issued would be "grandfathered" in, i.e., the IRS would respect the ability to use the discounts.

If you are in the process of planning your estate and are considering forming an FLP or an LLC you should be aware of this development. The family valuation discounts to which we have become accustomed over the past 20 years may only be available for a very short while. If you have an existing family entity, you may want to revisit your estate plan to see if you would like to make additional transfers. Many taxpayers have remaining lifetime transfer tax exemption (gift, estate and GST). If you have previously used your lifetime exemption (e.g., 2010 or 2012), you may have additional lifetime transfer tax exemption available due to the annual increase for inflation indexing. Please contact your CBIZ MHM tax advisor or your estate tax attorney for additional information.


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Proposed Changes to Family Valuation Discounts (article)Applying valuation discounts in the context of family-controlled entities has long been a point of contention for the IRS. Unsuccessful in attempts to restrict the use of valuation discounts through legislative changes, the Treasury Department is contemplating new regulations to accomplish this goal....2015-08-10T11:52:00-05:00

Applying valuation discounts in the context of family-controlled entities has long been a point of contention for the IRS. Unsuccessful in attempts to restrict the use of valuation discounts through legislative changes, the Treasury Department is contemplating new regulations to accomplish this goal.