Possible Changes on the Horizon for Estate and Gift Taxes

 By: Justin Linscott, CPA, CFP®, CGMA, CITP- Principal

We’ve been waiting and watching for them, and now they are about to be a reality- the proposed regulations issued by the IRS that will place major restrictions on estate valuation discounts. These regulations are significant and present modifications to Internal Revenue Code  Section 2704. They will essentially make it more difficult for wealthy family and closely-held business owners to transfer assets to family members without paying the proper amount of estate and gift taxes.

 IRC Section 2704 was enacted in 1990 and is designed to prevent the reduction of taxes through valuation discount techniques in an attempt to reduce the value of an estate, thus lowering the value of property and assets gifted to taxpayer’s beneficiaries. The new proposed regulations will change the landscape of this tax exercise drastically, no longer allowing for the understatement of the value of assets and interests as they apply to intra-family transfers. IRC Section 2704, as it stands now, only refers to corporations and partnerships. The proposed regulations would broaden the reach and also apply to limited liability companies and other entities and business arrangements.

These regulations would present many valuation rules for family-owned operations. Let’s take a look at just a few of them:

·         The Scope will Broaden: IRC 2704 will no longer cover just partnerships and corporations if the amended proposal becomes a reality. It will also extend to business types including limited liability companies, a classification selected by many family-owned businesses.

·         Family Matters: Family members owning a controlling interest with the privately-held business in aggregate will see the IRS require the interest be valued as if it has the right to liquidate, should the proposed regulations become permanent.

·         Changes to Assignee Interest: The new regulations would banish any discount based on the transferee’s status as an assignee as opposed to a full-voting owner for an interest being transferred to a family-owned business.

Again, these are just a few of the proposed regulations. Many changes could be taking place and a hearing on this matter will be held on December 1, 2016 in Washington, D.C. – I plan to be in attendance.  Our firm works with too many people that could be impacted for me not to be on the front lines as this takes shape. Depending on how the hearing goes, the Treasury Department has stated that the proposed regulations wouldn’t take effect for at least 30 days.

This means taxpayers have some time to work with and may want to consider taking action ahead of regulations becoming permanent. Valuations discounts can still be taken advantage at this time for those looking to execute a gift, estate or transfer within their estate plan. Contact H&M for assistance with these matters ahead of these regulations becoming final. At the very least, this should prompt you to revisit your estate plan on a whole. We can look at how the regulations will affect you should you elect not to take action ahead of them possibly becoming final.