As you may have heard, the IRS recently issued proposed regulations that will impact the valuation of closely-held, family entities for gift, estate and generation-skipping tax purposes. For years, the IRS has been asking Congress to change the Tax Code to minimize or eliminate certain valuation discounts for interests in these entities. Having been rebuffed by Congress and having lost in the courts, the IRS is now trying to accomplish this through regulations.
The proposed regulations are very technical. However, the main goal of the regulations is to eliminate certain discounts that have otherwise been available for transfers of interests in closely-held, family entities (such as family corporations, partnerships and limited liability companies). For example, a 10% ownership interest in a $10 million family-held entity was often worth less than $1 million due to restrictions on its transferability and the inability of a minority equity holder to control the entity. Thus, the gift of a 10% interest might have a value of only $700,000. These proposed regulations might impose a $1,000,000 value for tax purposes, even if one could not sell it for more than $700,000.
The proposed regulations are just that—proposed. Public hearings are scheduled for December 1, and when they would become finalized is difficult to predict. According to the IRS pronouncement, the effective date for some of the provisions in the proposed regulations will be when the regulations become final, but for others it will be 30 days after the regulations become final. A conservative approach would be to enter into estate planning transactions before the government has a chance to finalize the regulations.