SEE ALSO >>> Estate Tax Planning
Recently, the Treasury Department issued new draft regulations that will impact the way many taxpayers with family businesses conduct estate and gift tax planning. The regulations, if made permanent, will restrict valuation discounts for interests in family businesses for estate and gift tax planning purposes. This change is significant because it will eliminate a common tax saving tool used for years by financial professionals. The changes will impact deathbed transfers, applicable restrictions and disregarded restrictions, designed to close loopholes which have allowed taxpayers to reduce their tax liabilities. To help clients, prospects and others understand the proposed changes and the impact it could have on them, Wilson Lewis has provided a summary of key points below.
- Applicable Restrictions – To take advantage of valuation discounts, taxpayers would transfer restricted – non-voting, non-marketable – interests to, say, their children or a trust to reduce the value of those interests in the family-controlled business (and thereby reduce applicable taxes). To counter, the proposed regulations require that when a business interest is transferred within the family, certain “applicable restrictions” will be ignored when determining the value of the transferred interest. This applies to a restriction that will lapse at any time after the transfer or if the family retains the ability to eliminate the restriction after the fact. The proposed regulations remove the exception for restrictions that are less restrictive than generally applicable state law and also provide a new exception for restrictions where all of the parties have a right to liquidate or “put” his or her interest to the entity and receive cash within six months.
- Disregarded Restrictions – While applicable restrictions apply to complete or partial liquidations of the entity, a new “disregarded restriction” category looks at the value of what the interest holder (not the holders of the entity in general) would receive if they did liquidate their interest. Discounts will be disregarded for restrictions that limit the ability of the holder of the interest to liquidate, limit the liquidation proceeds to an amount that’s less than a “minimum value”, defers payment of the liquidation proceeds for more than six months or allows for payment of the liquidation proceeds in any form other than cash, other property or certain secured notes. The regulations also permit the IRS to issue further regulations providing for other disregarded restrictions if it reduces the value of the transferred interest but does not ultimately reduce the value of that interest to the transferee.
- Deathbed Transfers – Under current rules, it’s possible for a majority stockholder in a family entity to make a late-in-life gift to a family member of just enough stock to break his or her majority, allowing the estate to claim a lack of control discount on the now-minority share of the company. The IRS has argued that “deathbed transfers” are meant only to depress the transfer tax value of the assets. To stop taxpayers from abusing the exceptions applying to the lapse of control or liquidation rights through deathbed transfers, the proposed regulations contain a three-year look-back period during which these transfers or lapses would be considered to happen at death. This change means that the transfer would no longer trigger a minority interest discount, leaving taxpayers in a less than advantageous position.
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It is likely there will be changes to the draft regulations as the Treasury Department, IRS and others need to participate in a comment period, public hearing and other feedback processes before any final changes can be made. The public hearing on the regulations is scheduled for December 1, 2016, so there is still time to assess estate planning strategies. If you believe your family business or estate tax planning strategy will be impacted or have questions, Wilson Lewis wants to help. For additional information, please call us at 770-476-1004, or click here to contact us. We look forward to speaking with you soon.