Death of Valuation Discounts for Family-Owned Business Transfers

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Nov 01, 2016

By Tim Terry, Founder of Terry Lockridge & Dunn/World Trend Financial

Still unclear...However, a new proposed regulation from the IRS is trying to significantly curtail the practice of using marketability and minority discounts when valuing the transfers of closely held family business ownership interests from one generation to the next, especially when using family limited partnerships (“FLPs”). These valuation discounts have assisted planners in completing gifts to the next generation utilizing the annual exclusion amounts (currently $14,000 per year per person), as well as using lower gift tax values to divest an older generation’s estate by freezing the value of an asset at the time that the gift is made and essentially transferring appreciation rights. Sometimes these transfers were completed with the use of FLPs or other limited liability entities, as well as by outright transfers.

The proposed regulation enacted for Section 2704 of the Internal Revenue Code now creates new categories of restrictions that will be disregarded in determining ownership values. The new enactment can properly be viewed as eliminating discounts in transfers to family members for minority interests, lack-of-control and marketability, especially for “deathbed transfers” made within three (3) years before the death of the taxpayer, and thus reducing the ability to minimize tax liability.

If the proposed regulation is enacted in its current form, certain restrictions that support the use of valuation discounts will be disregarded when specific conditions are met: (a) the transferor or a family member holds at least fifty (50%) percent, by a vote or value of equity in the entity; (b) there is a transfer of the business interest to or for the benefit of a family member of the transferor’s family; and (c) immediately before the transfer the transferor and members of the transferor’s family hold control of the entity. The regulation will have the effect of prohibiting the taxpayer from taking advantage of the lower tax cost in making the distributions.

Although the proposed regulation will not be effective until January 2017 (if it survives the strong oppositions from business groups and tax commentators), if you are currently an owner of a business for which you are considering implementing a succession plan to transfer the assets to the next generation, and have a gross estate exceeding the federal estate tax thresholds (currently $5.24M for individuals and $10.9M for married couples), then immediate planning should be considered to maximize current valuation discounts before the new rule takes effect.

The professionals at Terry Lockridge & Dunn can be reached at 319.364.2945 in Cedar Rapids, or 319.339.4884 in Iowa City. Tim Terry can be reached via email at