On August 2, 2016, the United States Treasury Department (the “Treasury Department”) released proposed regulations under Section 2704 of the Internal Revenue Code (the “proposed regulations”). These regulations, if finalized, would dramatically alter traditional valuation methodologies for estate and gift tax purposes. In particular, valuation discounts for transfers of non-marketable, minority interests would no longer be permitted for many types of transfers.
The proposed regulations were published in the Federal Register on August 4, 2016, and will not be effective until finalized. This delay provides a window of opportunity to make transfers of family assets at lower values than could be the case after the regulations become effective. If these proposed regulations are enacted as final regulations, the tax cost of transferring (by gift, sale or upon death) an interest in any family controlled limited liability company, partnership or corporation will be significantly increased. The regulations change how interests in family-held entities are valued for purposes of calculating Federal estate, gift and generation-skipping transfer tax liability and subject certain types of transfers made within three years of the transferor’s death to Federal estate tax liability, for which no marital or charitable deduction is available.
The Treasury Department will accept written and electronic comments until November 2, 2016, and a public hearing has been scheduled for 10:00 a.m. on December 1, 2016. This means that the opportunity is open until at least December 1st to transfer interests in family-held business entities under the current regulations, which afford estate, gift and generation-skipping transfer tax savings that could benefit multiple generations. Because of this window, and because transfers made prior to the date regulations are enacted may still be affected if the transferor dies within three years of death, any transfers of interests in family-held entities should be made as soon as possible.