IRS Proposes Regulations Restricting Certain Valuation Discounts Used in Gift & Estate Transfers

On August 2, 2016, the U.S. Treasury issued proposed regulations under Internal Revenue Code Section 2704 that place new restrictions on the common practice of realizing valuation discounts on transfers of family-controlled entities. The Treasury believes these regulations are necessary to close a tax loophole in what it perceives to be an understatement of fair market value of family controlled interests for transfer tax purposes.

If the proposed regulations are finalized in current form, they would overturn techniques that for decades have allowed valuation discounts to be applied to these interests as part of a family’s overall business succession plan. In short, valuation discounts for lack of control (minority interest discounts) would go away, with very little room to work with to achieve discounts. The result would be less ability to leverage lifetime transfer tax exemptions and a substantial increase in transfer taxes payable at the transfer of the interests, whether during life or at death.

These regulations are currently only proposed and they could change substantially, or they could be left intact. A public hearing is scheduled for December 1, 2016, and the regulations could become effective at that point.         

If you have been considering transferring closely held business interests either through lifetime gifts or at death, we recommend that you consult with your estate planning attorney and other advisors quickly to determine if action before December 1 is advisable.

If you need assistance with this or other gift and estate planning issues, please contact your Yeo & Yeo professional.