Members of family-owned businesses avoided potentially costly estate planning rules now that the IRS has withdrawn controversial proposed regulations.
The IRS proposed late in 2016 a new set of regulations governing family-owned entities under Section 2704.
Conducting a formal business valuation of a closely held family entity is often a necessary part of estate planning. If prepared in the context of gifting or bequeathing the company (or partial interest), it is a common practice for valuators to employ discounting factors such as “lack of marketability” and “lack of control” to determine the company’s value. These discounts are an acceptable way to lower the value of a business, which in turn lowers the potential gift and estate taxes.
However, the IRS has tried for years to limit the use of this valuation tactic, and in August 2016, the Obama Administration proposed regulations that were designed to curtail this practice. In particular, the new rules would impose a three-year lookback to determine whether a minority valuations discount should apply, would introduce new “disregarded restrictions” in situations where the family will retain control post-transfer, and would shift away from only looking at restrictions that are “more restrictive” than available state law.
In short, the proposed regulations would have ended most forms of the lack of marketability and control discounts for intra-family transfers of businesses.
As a result, however, of strong opposition to these proposed rules, the Treasury Department last week withdrew these proposed regulations, thereby retaining the traditional rules governing gifting of interests in family businesses.
Please let us know if we can help you in any of your estate planning needs.