IRS Issues Proposed Regulations That Would Eliminate Valuation Discounts on Intra-Family Transfers

The IRS issued long-awaited proposed regulations designed to prevent taxpayers from lowering the estate and gift tax value of transferred assets.  The regulations will “close a tax loophole that certain taxpayers have long used to understate the fair market value of their assets for estate and gift purposes”.

The proposed regulations focus on the long-time planning technique of discounting the value of part ownership in a closely held business.  Currently the discount is allowed for estate and gift purposes because a partial interest in an entity is considered to be worth less than the whole interest due to factors including lack of marketability and/or lack of control.

The net result is that the proposed regulations would appear to eliminate almost all minority (lack of control) discounts for closely held entity interests, whether the entity is a Family Limited Partnership holding just marketable securities or an active business owned by a family.  To accomplish that, restrictions under the governing documents and even those under state law would be disregarded for valuation purposes.

The IRS has scheduled a hearing regarding these proposed regulations for December 1, 2016.  The proposed regulations also state that the final regulations will not become effective until at least 30 days after the IRS issues the final version of these regulations.  Therefore, these new regulations may be effective for any transfer to a family member whether it occurs by sale, gift or bequest in early 2017.   Based on this impending major change in the law, now is the time to consider making gifts to younger family members for anyone who owns an interest in a family owned corporation, partnership or LLC.

If you have any questions or concerns on how we can assist you in taking advantage of this estate  and gift tax planning technique  please feel free to contact David Friedlander at 847-940-3240 or Larry Bober at  847-964-5335.

About FGMK

FGMK is a leading professional services firm providing assurance, tax and advisory services to privately held businesses, global public companies, entrepreneurs, high-net-worth individuals and not-for-profit organizations. FGMK is among the largest accounting firms in Chicago and one of the top ranked accounting firms in the United States. For more than 40 years, FGMK has recommended strategies that give our clients a competitive edge. Our value proposition is to offer clients a hands-on operating model, with our most senior professionals actively involved in client service delivery.

 

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