The IRS recently proposed regulations that, if adopted in final form, appear to increase the tax burden on wealthy individuals whose estate plan includes shifting assets to family members through transfers of minority interests in family controlled entities.
Under current law, individuals currently have the ability to shift assets to family members in a tax-efficient manner by transferring minority interests in family controlled entities, such as family businesses, family limited partnerships, and limited liability companies. What makes these transfers tax-efficient is that a taxpayer can claim significant discounts when valuing the interest for transfer tax purposes, primarily because the gifted minority interest lacks control and marketability.
While it has been expected that the IRS would eventually issue regulations that would curb the use of valuation discounts, the breadth of the newly proposed regulations is an unexpected development. If enacted in final form, the proposed regulations appear to severely limit, or eliminate, valuation discounts on transfers of minority interests in family controlled entities.
Planning around the proposed regulations will be challenging due to their complexity, and also because it is not yet clear what form the final regulations will take. In addition, it is likely that there will be court challenges to any final regulations, although it may be some time before such actions are filed and adjudicated.
Despite these uncertainties, it is clear that the loss of valuation discounts would eliminate a valuable planning strategy for wealthy individuals and families that have created, or are considering creating, such entities as part of their estate plan. If you think you may fall within that group, I urge you to contact our office as soon as possible to discuss the impact of these recent developments and to take any needed planning steps prior to the anticipated effective date of any final regulations.
It is difficult to predict when the proposed regulations will become effective. Nonetheless, it appears that most of the proposed regulations, if and when adopted in final form, will not become effective for at least 30 days after a hearing scheduled for December 1, 2016. This provides a window, though not a large one, to consider and implement appropriate planning steps prior to the date that the regulations would become effective.
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