Proposed Regulations Will Likely Limit Discount-Based Tax Planning

Aug 17, 2016   Print PDF

Related Practices: Business and Estate Planning & Administration

On August 2, 2016, the IRS issued proposed new regulations under Internal Revenue Code (“IRC”) Section 2704.  The proposed regulations are designed to eliminate or significantly reduce the discounts that will be available when valuing interests in family-owned entities for gift, estate and generation-skipping transfer tax purposes.

Valuation discounts have traditionally been recognized when interests in family-owned entities are sold, gifted or transferred at death to other family members.  Those discounts are often in the range of 25% to 40%.  The amount of the discount depends on the nature of the interest being transferred, and the restrictions imposed on the ability to control or receive economic benefits from the interest under the terms of any applicable agreements (e.g., a company’s bylaws or operating agreement) or state law.

Under the new proposed regulations, discounts would no longer be recognized when transfers are made between family members except in very limited circumstances.  As a result, any gift, estate or generation-skipping transfer tax consequences applicable to the transfer of family-owned interests will be greater.  Valuation experts are currently debating whether some limited discounting (e.g., 5% -10%) may still be available under the proposed regulations, but it is clear that the traditional amount of discounts will soon no longer be available.

These proposed regulations are subject to a public comment period and are to become effective after the regulations are finalized.  Although it is not likely for the effective date to occur until early 2017, it could be as early as December 31, 2016.  Families that are considering transferring interests in family-owned entities or family-held real estate should consider making those transfers as soon as possible.  In addition, individuals who have made gifts or have sold interests in family companies in the last two years should have their current estate plans reviewed.  The application of the new proposed regulations is fact-specific and will need to be considered in the context of each family’s particular situation.

To discuss issues specific to your planning, contact one of the Stokes Lawrence Estate Planning attorneys.