On August 2, 2016, the IRS proposed new regulations that would prevent taxpayers from lowering the estate and gift tax value of transferred assets through valuation discounts. If implemented, this proposed regulatory change would ultimately close an estate and gift tax loophole that many closely-held and family-owned businesses use for estate and gift tax planning.
In short, IRC Section 2704 defines lapsing rights and restrictions and how, if at all, they can be considered for valuation purposes. Such rights and restrictions typically apply to a family entity and can significantly lower the value of a minority interest transferred by gift or held by an estate. The proposed regulations disregard common restrictions upon liquidation and expand the definition of which restrictions and interests would be ignored for valuation purposes. The new regulations also apply these rules to certain deathbed transfers. The proposed changes would only be applicable to transfers of interests in investment partnerships and LLCs.
The proposed regulations are subject to a standard 90-day public comment period. Hearings are currently scheduled for December 1, 2016. The regulations themselves will not go into effect until comments are considered and then 30 days after, the regulations are finalized.
Looking Towards Tax Planning and Business Succession Planning for 2017
This pending tax law change poses a substantial estate and gift tax planning opportunity for closely-held and family-owned businesses between now and the end of the year. Contact your MCB Tax Advisor today to discuss how these changes may impact your business and to assist you in year-end tax planning and business succession planning before the proposed regulations become finalized late this year or early 2017.