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.

The proposed regulations will also broaden the types of entities that will be affected to now include limited liability companies and other types of business entities. These regulations will be effective 30 days after they become final, and there is a hearing scheduled for December 1, 2016.  If you have been thinking about making gifts to family members in which a discount for those gifts would be appropriate, you need to think about doing it NOW, as the entity must be established and the gifts made before the final regulations are issued. We would we pleased to discuss this with you, but again urge you to act now.

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