By Executive Order, President Trump froze implementation of all new federal regulations, including proposed 2704 Regulations affecting family businesses
On August 4, 2016, IRS issued proposed regulations severely restricting the ability of donors to discount the value of intra-family transfers of closely held businesses and threatening the successful transition of such businesses to the next generation. While we interpret President Trump’s January 20, 2017 Executive Order as withdrawing these proposed regulations indefinitely, business succession planning remains imperative and should be kept front of mind.
What are Discounts?
When an ownership interest in a business is valued for gift and estate tax purposes, appraisers routinely apply discounts for lack of marketability (i.e. not publically traded) and for lack of control interests (i.e. minority voting power), reasoning that the valuation must reflect that the interest cannot easily be sold and/or that a minority interest can’t control the operations or economics of the business. Historically, such valuation discounts have ranged from 25-50% for such interests. These discounts often make it possible for the family business owner to transfer it successfully to the next generation, ensuring its continuity and its place in the family and the community.
At the very least, the Executive Order enacts a 60-day freeze on implementation of the IRS 2704 regulations through the administrative process and may indeed withdraw them indefinitely, pending reassessment by the new administration.
In addition to President Trump’s Executive Order, bills have been introduced in the House (H.R. 6100) and Senate (S.B. 3436) that aim to legislatively prevent enactment of the proposed IRS 2704 Regulations.