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Valuation Discount Planning Restrictions Being Considered

Business_meetingProposed regulations, if adopted into law, would make it harder to use this estate planning technique. If your estate plan includes the use of valuation discounts, now is the time to speak with your estate planning attorney.

According to the post “Estate, Gift, and Generation-skipping Transfer Taxes: Restrictions on Liquidation of an Interest,” changes to regulations that address the use of valuation discounts from the Treasury Department and the IRS are pending. They concern the valuation of interests in corporations and partnerships for estate, gift and generation-skipping transfer (GST) tax purposes.

These regs would amend § 25.2704-1 to address deathbed transfers that result in the lapse of a liquidation right and to clarify the treatment of a transfer that results in the creation of an assignee interest. The changes would refine the definition of “applicable restriction.” It eliminates the comparison to the liquidation limitations of state law. It would also add a new section to address restrictions on the liquidation of an individual interest in an entity and the effect of insubstantial interests held by persons who are not members of the family.

If and when finalized, the proposed regulations would do the following:

  • Treat a lapse of voting and liquidation rights for transfers made within three years of death of interests in a family-controlled entity as an additional transfer, eliminating or limiting the lack of control and minority discounts for these transfers;
  • Eliminate discounts based on the transferee’s status as an assignee and not a full owner and participant in the entity;
  • Disregard the ability of most nonfamily member owners to block the removal of covered restrictions, unless he or she has held the interest for more than three years, owns a substantial interest in the entity and has the right—with six months’ notice—to be redeemed or bought out for cash or property—not including a promissory note issued by the entity, its owners or anyone related to the entity or its owners;
  • Disregard restrictions on liquidation that aren’t mandated by law in determining the fair market value of the transferred interest; and
  • Clarify the description of entities covered to include LLCs and other entities and business arrangements—as well as corporations and partnerships.

If these regulations become law, a commonly used estate planning technique for family-owned entities will be lost. Speak with an experienced estate planning attorney to discuss how this may impact your family business and your estate plan.

Reference: (August 4, 2016) “Estate, Gift, and Generation-skipping Transfer Taxes: Restrictions on Liquidation of an Interest”

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