On August 2, the IRS issued proposed regulations that impact a powerful and frequently used estate planning tool -- valuation discounts. These discounts typically apply to valuations of family-controlled entities such as closely-held businesses or family limited partnerships, both upon transfer and at death. Under these new rules, valuation discounts for lack of control or lack of marketability would essentially be sharply reduced or eliminated.
The IRS won't finalize these regulations until after a public hearing, scheduled for December 1, but it is very likely that these rules will become effective, virtually unchanged, late this year or early next year. Until effective, there is a still a window of opportunity to take advantage of the current valuation discount rules and implement planning strategies that involve family-controlled entities.
In brief, Internal Revenue Code Section 2704 defines lapsing rights and restrictions and how, if at all, they can be considered for valuation purposes. Such rights and restrictions typically apply to a family entity and can significantly lower the value of a minority interest transferred by gift or held by an estate. The proposed regulations disregard common restrictions upon liquidation and widen the definition of what restrictions and interests would be ignored for valuation purposes. The new regulations also apply these rules to certain deathbed transfers.
These rules are quite complex and far-reaching. Whether the new regulations apply depends on the facts and circumstances and a number of technical definitions, but be advised that they could affect anyone who owns part of a closely-held business or family limited partnership and would be subject to federal or state estate or gift tax.
As of this moment, these proposed rules are not in effect, which means that the current rules on how we determine discounts still apply (although such transfers may still be subject to IRS scrutiny). In any case, if you are contemplating an estate planning strategy involving a closely-held business or family entity, it may be in your best interest to make a move now, especially since many planning moves require time to implement. Please contact your Friedman advisor to discuss these new rules, how they apply to you and what steps, if any, you should consider.