On August 2, 2016,
the Treasury Department issued proposed regulations under the authorization
contained in Section 2704(b) of the Code, with a hearing scheduled on December
1, 2016. The proposed regulations will
essentially take away all valuation discounts for interfamily transfers of
entities controlled by the transferor and his or her family.
It is likely that
the proposed regulations will not take effect until sometime next year, making
it necessary to complete any discount-related planning throughout the next
several months. Some of the major changes that will be adopted in
the proposed regulations are discussed below.
The proposed
regulations give a broad definition of control. Specifically, control is
holding 50% of equity in an entity (corporation, partnership or LLC). For a
limited partnership, control is equivalent to having an interest in the general
partner.
Under
2704(a) the lapse of a voting right or liquidation right in a family owned
entity is treated as a transfer by the individual holding the right immediately
before it lapses. The current regulations exempt such a transfer if the rights
with respect to the transferred interest are not restricted or eliminated. The
proposed regulations would deny such exemption for transfers occurring within
three years of death if the entity is controlled by the transferor and members
or his or her family immediately before and after the lapse.
The
proposed regulations will significantly change valuations for transfer tax
purposes of interests in family owned entities that are subject to restrictions
on redemptions or liquidations. Specifically, such restrictions will be
disregarded in valuing such an interest for gift/estate tax purposes when the
interest in transferred by a family member. The reasoning for this is the fact
that after the transfer the restriction will lapse or can be removed by the
transferor or a member of his or her family.
The
proposed regulations remove nearly all discounts by disregarding the interests
held by non-family members as well. Interests held by non-family members that
may otherwise give such non-family member the power to prevent the removal of a
restriction will be disregarded unless those interests have been held for at
least three years; make up at least 10% of the entity; the total combined
non-family interests is more than 20% of all interests; or they hold a put
interest in the entity to receive a minimum value.
The proposed
regulations issued under Section 2704 would, if adopted in final form, have a
significant impact on the wealth transfer tax valuation of interests in family
controlled entities. Essentially, almost no minority discounts would be
allowed.
It is essential for
anyone interested in reducing their estate taxes by gifting interests in
entities, whether operating businesses or investment entities, contact our
office immediately as these may disappear before the end of 2016.
