On August 2, 2016, the Treasury Department issued Proposed Regulations to Section 2704 of the Internal Revenue Code. These proposed regulations are directed at family controlled entities (many of which hold operating businesses and/or real estate), including corporations, partnerships and limited liability companies. These regulations, if finalized, will substantially limit or eliminate the ability to obtain valuation discounts on the transfer of partial interests in family controlled entities for wealth transfer tax purposes.
Many estate planning techniques utilize valuation discounts to increase significantly the amount of property that may be gifted or otherwise transferred to or in trust for family members. These include Grantor Retained Annuity Trusts (GRATs), sales or gifts to Intentionally Defective Grantor Trusts (IDGTs), Charitable Lead Trusts (CLTs) and others. The discounts most often used in the transfer of interests in family controlled entities revolve around the lack of control (minority interest) and lack of marketability associated with the interest.
The proposed regulations would in general value an entity owned by family members in its entirety by disregarding such discounts and an individual owner’s interest would then be valued as a pro-rata share of the fair market value of the entity. The proposed regulations would also treat certain transfers made within three years of the transferor’s death as a date of death transfer, thereby increasing the transferor’s estate for death tax purposes.
There is a 90-day period for the public to comment on these proposed regulations and final regulations could be issued as early as 2017.
If you are in the process of an estate planning transaction that utilizes valuation discounts with family controlled entities, or if you are contemplating such a transaction, we suggest that you consider completing it promptly. There is still time to initiate new planning with family discounts before the proposed regulations take effect and we would be happy to discuss your options with you.
JMBM’s Taxation, Trusts and Estates Group
Jeffer Mangels Butler & Mitchell LLP has one of the leading taxation, trusts and estates practices in California, within a full service law firm. In addition to serving individuals, families, and closely-held businesses, our clients include organizations ranging from start-ups to Fortune 500 companies. When tax controversies arise, our clients rely on us to resolve the matter efficiently and effectively. At JMBM, tax and business counseling blend seamlessly. Our tax lawyers understand business concerns, and work closely with colleagues in the firm’s corporate and real estate groups to ensure the tax efficiency of organizational and transactional decisions.