Aug 11, 2016

Call to Action: Proposed Regulations May Limit Valuation Discounts

The Internal Revenue Service published proposed regulations on August 4, 2016 that will severely limit valuation discounts on the transfer of ownership interests to family members in family-controlled entities, such as corporations, partnerships and limited liability companies.  The proposed regulations will apply to all family-controlled entities, even those that own operating businesses.

Generally, when a minority or non-voting interest in a family-controlled entity is transferred, the value of the interest is reduced for transfer tax purposes since the interest being transferred lacks control over the entity, and because the interest is not freely marketable outside of the family.  Appraisers are of the opinion that the reduced value more accurately reflects the true “fair market value” of the transferred interests.  These discounts or reductions in value result in substantial gift and estate tax savings.  Basically, the new regulations will prohibit such discounts when transfers occur within the family unit.

The new regulations will not become effective until final regulations are issued, sometime after a public hearing on December 1, 2016.

If you are considering or actually engaging in estate, gift or succession planning regarding your family business or other family enterprise, it may be in your best interest to speed up the process so that such discounts can be utilized in valuing interests in the entity before the new regulations become final.

Although the exact content of the new regulations will not be known until final regulations are issued, we know that the way interests in family-controlled entities are valued will be less favorable in the future.  However, we believe you still have the opportunity to take advantage of the discounts currently available if you act quickly.

If we can be of assistance to you, please contact us.

This client alert is intended to inform clients and other interested parties about legal matters of current interest and is not intended as legal advice.


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