On August 2, 2016 the U.S. Treasury Department issued proposed regulations addressing transfers between family members of interests in family-controlled entities (e.g., corporations, partnerships and LLCs). If enacted, these rules will eliminate most valuation adjustments for lack of liquidity and marketability (i.e. “minority interest discounts”) for gift and estate tax purposes. Hearings on the proposed regulations are scheduled for December 1, 2016, and the final regulations may be effective thirty days later.
Currently, a taxpayer might hold a business, marketable securities or real estate in an entity (e.g., a partnership, LLC or corporation). A gift or sale of the taxpayer’s non-controlling interest in the entity to his children or grandchildren, or a trust for their benefit, is typically appraised at a value that reflects minority interest discounts. These discounts arise from the recipient’s inability to control the entity and to freely transfer or “cash out” of the transferred interest. Under the proposed regulations these minority interest discounts would be largely disregarded for gift and estate tax purposes.
This results in a savings of $2.4M in gift and estate tax compared to the tax if no gifting had been done. Further tax savings may occur as the appreciation and growth on the gifted assets is outside of the Spouses’ taxable estates.
Under the proposed regulations, the minority interest discounts would essentially be disregarded under both examples. The resulting gifts, or the sales price, would be at the full $20M undiscounted value, and the potential $2.4M in gift and estate tax savings would be unavailable.
Clients who have an appropriate asset profile, and have contemplated lifetime gifts or sales to descendants, or trusts for descendants, should accelerate their consideration of this planning. The favorable valuation principles under current law may be unavailable as early as the end of 2016. Several months are often required to properly consider, document and implement such gifts.
Note: This article is only intended as an information alert, and a general summary of how the new proposed treasury regulations could impact estate planning opportunities. The application of these proposals in a particular client situation will vary, and should be discussed with qualified advisors to determine if further action is appropriate.