Call to Action: Proposed Regulations May Limit Valuation Discounts

Legal Alert

September 7, 2016

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 interest in a family-controlled entity is being transferred the value of the interest is reduced for transfer tax purposes since the interest being transferred lacks control over the entity, as well as because the interest is not freely marketable outside of the family. 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 succession planning regarding your family business or other family enterprise, it may be in the best interest of you and your family to speed up the process so that such discounts can be realized in valuing interests in the entity.

Although the exact content of the new regulations will not be known until final regulations are issued, we know that changes in the way interests in family-controlled entities are valued will be less favorable than in the past. 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 the Private Client Group at Smith, Gambrell & Russell, LLP.