If you own a business and plan on passing partial ownership regulations proposed by the Treasury Department could result in a higher tax bill for your beneficiaries. The regulations concern possible removal of valuation discounts for operating businesses and family limited partnerships holding securities resulting in higher estate taxes.
Valuation discounts have been around since the 1990’s. They are granted for what is considered a lack of marketability for minority interests in family businesses. The logic behind them (minority interest and marketability discounts) is that if your child obtains a 10% interest in your $100 million business, he or she is not really receiving something worth $10 million because it may be difficult or impossible to sell that interest for $10 million. The value is reduced or discounted to reflect the difficulty of marketing the non-controlling interest in a business.
The proposed regulations would limit or end this planning tool by ignoring certain transfers between family members when determining a controlling interest. If the proposed regulations go into effect (possibly as early as December 31st) the ability to claim discounts could be significantly curtailed or eliminated, reducing tax and asset protection planning flexibility. In the worst case scenario these potential rules could result in increased estate taxes on the death of owners of family businesses, causing them to liquidate the business or sell big pieces to outsiders.
With the end of 1999 the world feared our technologically-based world would grind to a halt because not all computer software could handle a year ending in “OO.” In the estate planning world the panic came in 2012 when there was a fear the gift, estate and generation skipping transfer tax exemption would be lowered from $5 million to $1 million in 2013. This fear resulted in heavy costs in time, money and effort for some who changed estate planning to prepare for a change that never happened.
If you and your family might be affected by changes in discounts, 2016 is very different from 2012. The change is not certain, it’s only a proposal. The proposed regulations could change and even be withdrawn. But a more likely scenario is they will be finalized after public hearings (scheduled for December 1st) and could go into effect in early 2017.
If the proposed rules go into effect as is it won’t end family wealth transfers they just won’t have all they benefits they had in the past. If the family business is doing well or you want a child to get on the “ground floor” of a promising venture it may still be a good idea even without a valuation discount. But if things don’t pan out as you hoped there just won’t be the same cushion for negative performance a valuation discount can provide.
If you were planning on transferring interests in a closely held business or other family entity, you may want to speed up that process because of these potential changes. If you own a family business and have not considered pursuing this strategy, it’s something worth thinking about.
If you have any questions about estate taxes or estate planning or would like to schedule a free consultation, please feel free to contact us at your earliest convenience.