It used to be easier to minimize taxes when passing the business baton to the owners next generation, but the IRS is tightening regulations on transfers.
But there are steps you can still take to help ease the impact of transition for the future.
The IRS just issued new proposed regulations that are designed to reduce the ability to take valuation discounts on intra-family transfers of interests in privately-held businesses.
These proposed regulations would reduce the ability to apply valuation discounts when implementing future estate and gift tax planning. The current valuation discount allows taxpayers to get more of their estate or gift tax value under the federal estate and gift tax $5.45 million lifetime exclusion ($10.9 million for married couples).
In the past, discounts have been permitted in valuing minority interests in privately-held businesses because minority interests may be harder to dispose of, or come with a host of other restrictions on their transfer. Indeed a minority interest in a family business could be illiquid or be subject to restrictions on an owner’s right to sell his or her interest such as to only those approved by other family members or other insiders.
The IRS has perceived abuses in valuation discounts taken for transfers of interests in family-owned entities, because after the transfer, the restrictions may lapse on their own, or the restrictions can be removed by other family members acting alone or together collectively.
The IRS has indicated for some time that the rules in this area are going to be tightened. Because of this, estate planners have suggested that their clients take action in advance of any such tightening. It now appears that new rules are forthcoming.
We recommend that those who own interests in privately-held family businesses review their estate and gift planning strategies now or in the next few months. Given that new regulations will probably be finalized before the end of 2016, an opportunity exists now to accelerate the gifting of a closely-held entity to family members and/or trusts.
It should also be noted that gifting should be considered sooner than later due to the uncertainty of the future estate and gift tax exemption being substantially reduced.
For more information on how the new proposed regulations apply to your estate and gift tax planning, contact us here.