Proposed Treasury Regulations Prompt Immediate Action

The Threat to Planning with Family Business Interests:

Recently proposed regulations threaten a powerful planning technique – the use of valuation discounts in the transfer of interests in a family business. Essentially, valuation discounts recognize that minority business interests are less valuable because they (1) do not provide control over the business and (2) are difficult to sell. Courts routinely have recognized discounts, for example, in the 40% range. Such discounts have been used successfully in estate and business planning for years and yielded considerable transfer tax savings for well-advised business owners. If finalized (possibly as soon as early 2017), the proposed regulations effectively would eliminate the use of valuation discounts for family businesses.

An Example:

Assume that the assets of a family business are worth $10,000,000, the owner desires to give a 10% interest to a child, and valuation discounts total 40%:

  • Value of Interests Without Discounts: $1,000,000
  • Value of Interests With Valuation Discounts: $600,000

The value of the gift with valuation discounts is $400,000 less than the gift without valuation discounts.

What Should a Business Owner Considering Gifts of Family Business Interests Do?

Act now. Any business owner interested in making transfers of discounted family business interests should contact his or her estate planning advisor immediately and consider whether to proceed with gifts before the proposed regulations potentially are finalized.