Proposed Regulations Will Restrict Valuation Discounts for Estate & Gift Taxes

cular types of restrictions included in the entity’s governing documents. Taxpayers implementing proper discount planning have been able to reduce the federal transfer tax value of their family business interests by 25 to 45. However, Section 2704 authorized the Treasury to issue additional regulations in the future to address other restrictions which should be disregarded for valuation purposes. The proposed regulations issued in August are the IRS’s most recent attempt to limit the availability of valuation discounts.

Among other things, the proposed regulations do the following:

  1. Provide that any lapse of liquidation or voting rights occurring as a result of a transfer within three years of death is treated as an additional transfer subject to transfer tax, thereby eliminating valuation discounts in connection with deathbed transfers.
  2. Create a new class of restrictions which are ignored for purpose of valuing an interest in a family controlled entity if the restrictions will lapse after the transfer,IRS or if the transferor or the transferor’s family may remove the restriction. These disregarded restrictions include provisions that: (a) limit the owner’s ability to liquidate the interest; (b) defer payment of the proceeds from liquidation for more than six months; (c) allow payment of liquidation proceeds in any manner other than cash, property or notes; or (d) limit the liquidation proceeds to an amount less than the fair market value.
  3. Disregard liquidation restrictions which are not mandated by state or federal law in determining the fair market value of the transferred interest.
  4. Eliminate valuation discounts which are based on a transferee’s status as an assignee and not a full owner of the entity.
  5. Broaden the definition of family control for purpose of determining which persons may participate in the removal of a disregarded restriction.

If and when finalized, the proposed regulations will reduce and potentially eliminate the valuation discounts currently available for gift and estate tax purposes. A public hearing is scheduled on December 1, 2016 in Washington, DC to discuss the proposed regulations. It is unknown at this time when the proposed regulations will be finalized, but current scuttlebutt is that the proposed regulations will not be finalized until next summer. It also seems likely that transfers completed before the proposed regulations are finalized will not be subject to the restrictions set forth in the proposed regulations. Accordingly, now is a good time to complete gift transfers if you want to benefit from the currently available valuation discounts.

Please contact one of our tax or estate planning attorneys at 937-223-1130 or or if you would like to know more about valuation discounts, gift planning, or the proposed regulations.


AUTHOR: Jeff Senney

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