IRS Issues Proposed Regulations That Will Severely Impact Discounts for Gifting to Family

By Julie Frey

Private_Wealth-webDiscounts for gifts of closely held business interests to family members may be significantly restricted soon.  On August 2, 2016, the Internal Revenue Service issued new Proposed Regulations under Section 2704 of the Internal Revenue Code that would eliminate discounts if the transferor and/or members of the family control the entity immediately before the transfer. Moreover, any restrictions in the business entity on transferability will be disregarded unless federal or state law requires such restriction. Thus, a buy-sell agreement or restriction in an operating agreement as to liquidation or redemption of an owner’s interest will be disregarded in terms of valuing the interest unless such restriction is mandated by law. In the past, if the entity was properly structured, one could take a discount for lack of control and lack of marketability for a gift of a limited partnership interest. For example, a gift of a limited partnership interest might be discounted from $1,000,000 to $700,000 for gift tax purposes based on such discounts, which in essence meant that you could transfer more value to your family members because of the discounts.  Under the proposed regulations, these discounts will not be available and the interest transferred to a family member will likely be valued at full value. read more

IRS Proposes Regulations to Limit Strategy to Avoid Estate Tax

By Jason Palmisano

The IRS has issued a notice of proposed regulations to limit the valuation discounts individuals have been afforded when they engage in certain types of intra-family transfers involving their family owned corporation or family partnership.  Under the proposed regulations, the valuation discount — sometimes up to 40% — that is given for the transfer of assets that have limited liquidation rights would not apply for “deathbed” transactions, only to transfers that occur more than three years before the transferor’s death.  While the proposed regulations are very specific, the restriction on the valuation approach could apply to the inheritance of most family businesses.  You can read more about the proposed rules the IRS wants to implement in the Wall Street Journal. read more