Client Alerts

Possible Changes in Valuation of Business and Investment Interests for Estate and Gift Tax Purposes

By: B. Scott Boster, John C. Goheen, James A. Goldsmith and Frederick N. Widen

About: Trusts & Estates, Tax, Business Succession Planning

The Treasury Department and Internal Revenue Service (IRS) recently released proposed regulations concerning the valuation of business and investment interests for purposes of gift, estate and generation-skipping transfer taxes.  The regulations relate to the interpretation and implementation of Internal Revenue Code (“Code”) section 2704.  Code section 2704 provides special gift, estate and generation-skipping transfer tax valuation rules for valuing transfers of interests in corporations and partnerships subject to lapsing voting or liquidation rights and restrictions on liquidation.  Although Code section 2704 as originally enacted referred only to corporations and partnerships, the proposed regulations would clarify that they also apply to limited liability companies and other entities and business arrangements.

It is the use of differing  voting and liquidation rights in entity interests that allow appraisers to determine discounts from fair market value for these interests in connection with transfers subject to federal estate or gift tax.

Proposed Regulations

On August 2, 2016, the Treasury Department and the IRS released new proposed regulations under Code section 2704. The regulations are just  proposed at this time.  If the proposed regulations become final, however, they will reduce the availability of valuation discounts (e.g., minority and marketability) in valuing business interest transfers between family members where the family controls the subject entity.

There is a 90-day comment period on the proposed regulations and a public hearing on them is currently scheduled for December 1, 2016. Given this timeframe, final regulations could be issued as early as December 2016 and the new regulation would go into effect 30 days after they are finalized.

Action Steps to Consider Now

Considering the prospective effective dates of the proposed regulations, taxpayers may have a significant opportunity to complete gift, estate, and generation-skipping planning utilizing the current rules. Such rules permit valuation discounts for transfers of property interests between family members for family-controlled entities. Thus, these planning opportunities may exist only until sometime around the end of 2016.

Because of this, taxpayers should immediately consider:

Ulmer & Berne can provide strategic advice to those business owners contemplating such a transfer.  Please contact us with any questions about these issues.