Historically, the IRS has closely scrutinized transfers of interests in family-owned entities between family members. In particular, it has sought to curtail the use of discounts to decrease the estate and gift tax value of such interests. The latest effort from the IRS came on August 2, 2016, when it issued proposed regulations that would greatly reduce (and perhaps eliminate) the tax benefits of valuation discounts. If you are considering a gift of an interest in a family-owned entity, you may want to act now in order to secure a valuation discount and reduce the tax cost of your gift.

Valuation Discounts as a Tax Planning Tool

When valuing an interest in a closely held entity, appraisers typically apply discounts for factors such as restrictions on marketability and lack of control. These discounts are based on the theory that such an interest is less valuable than a controlling interest or one that is readily marketable, or an interest in the underlying assets themselves. Thus, when valuation discounts are applied to interests in family-owned entities, they can reduce or eliminate federal estate and gift taxes on transfers of such interests to family members.

Impact of Proposed IRS Rules on Valuation Discounts

If the proposed regulations are adopted in their current form, the impact of factors such as lack of marketability, lack of voting power, and lack of control will be ignored when valuing an interest in a family-owned entity transferred to a family member. As a result, the estate and gift tax cost of transferring such interests will increase substantially. Further, in a departure from previous IRS positions, the proposed regulations would apply to all family-owned entities, including operating businesses.

Moving Forward

As these are only proposed regulations, much remains uncertain. It is not known whether, when, or in what form the regulations will be adopted and—if adopted—whether they will include "look back" rules designed to capture transfers made before the end of this year. For now: (1) it is certain that the regulations will not take effect in any form before December 31, 2016 and (2) it is unlikely that discounts will be disallowed for transfers made before year-end.

Accordingly, if you are considering a gift or sale of an interest in a family-owned entity to another family member (or family trust), we recommend prompt action, so that appropriate transactions can be completed for year-end.

If you would like to discuss the transfer of an interest in a family-owned entity further, please contact a member of Ballard Spahr’s Family Wealth Management Group.


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.




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