The IRS has proposed new regulations that will substantially
impact family-controlled entities. Specifically, the regulations
will affect determining the value of certain assets for gift,
estate and generation-skipping transfer tax purposes.
The Way It Is
Under current law, the standard for determining the value of an
asset for transfer tax purposes is simply the value a willing buyer
would pay a willing seller. In determining transfer taxes, a lower
value is advantageous as it results in reduced transfer taxes.
Non-voting ownership interests and minority ownership interests are
worth less than their voting or controlling counterparts due to a
lack of control. Non-publicly traded ownership interests also are
discounted for their lack of marketability. Combined discounts for
lack of control and lack of marketability can decrease the value of
the interests often by as much as 40 percent.
The Impact of the Proposed Regulations
The proposed regulations introduce a concept called
"disregard restrictions" and ignore certain restrictions
on an owner's ability to liquidate an interest in an entity and
receive a minimum value (as determined under the regulations). By
removing or limiting the discounts for lack of marketability or
lack of control, an owner of a family-controlled business may have
to pay transfer taxes on the undiscounted value. For example, under
the current law, a 50% non-voting interest in an entity that has an
overall value of $2 million could be valued at $600,000 instead of
$1 million, due to the lack of control and lack of marketability of
the interest. The $400,000 decrease in value could result in a gift
or estate tax savings of $160,000. Under the proposed regulations,
that same 50% non-voting interest could be valued at $1
Still Time for Tax Savings
The new regulations could go into effect as early as the
beginning of 2017. However, the disregarded restrictions portion of
the regulations will not apply to any transfers occurring before
the regulations are effective. Thus, there is still time for tax
savings if you act this year. If you have an operating business,
consider transferring non-voting interests to a trust for the
benefit of family members or a trust created for your benefit. If
you do not have an operating business but own real estate or
marketable securities, consider creating a family investment entity
and transferring non-voting interests to a trust for family members
or a trust created for your benefit. The rules are complex, as is
drafting the trust documents to navigate the tax laws. Give us a
call to learn what you can do to take advantage of the current laws
before they are changed.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The election of President Donald J. Trump, combined with Republican control of Congress, makes fundamental U.S. federal income tax reform more likely than at any time since the enactment of the Tax Reform Act of 1986.
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