The window of opportunity to benefit from valuation discounts when transferring assets to family members may be closing very soon. Representatives of the U.S. Treasury Department and Internal Revenue Service have suggested that new Proposed Regulations will be issued as early as this September to curb or eliminate the availability of such discounts on intra-family transfers. The extent, timing, and even validity of these Proposed Regulations are uncertain. (As an example, there have been indications that the Proposed Regulations may not apply to interests in active businesses, but only to interests in entities holding "passive assets." Unfortunately, no one knows on which side of the line rental real estate will be placed.) Nevertheless, clients who are considering the use of a valuation discount in their wealth transfer planning are advised to contact us as soon as possible to discuss this development.
Overview of Valuation Discounts
One of the most popular wealth transfer techniques that benefits from valuation discounts is the family limited partnership (FLP), limited liability company, or similar entity, in which a portfolio of assets is contributed to the FLP by the senior generation, and then minority interests in the FLP are transferred to or for the benefit of the next generation or generations. The value of a minority interest in the FLP is worth less than its proportionate share of the FLP's assets. As a result, these minority interests are said to be "discounted." These discounts can range from 15% to more than 40% (as determined by a qualified appraiser).
Why Time May Be Running Out
As noted above, it is possible that these Proposed Regulations may be issued this September. In speeches, the Treasury Department and Internal Revenue Service representatives have stated that the Proposed Regulations are likely to be effective for intra-family transactions that occur on or after the date the Proposed Regulations are issued.
The Sky May Not Be Falling, but Better to Be Prepared
As noted above, the extent of these Proposed Regulations is uncertain. For example, Treasury has not indicated whether the Proposed Regulations would simply limit or reduce the valuation discounts for intra-family transactions, or eliminate them entirely. Nor can we be certain as to when the Proposed Regulations may be issued. Nevertheless, because the Proposed Regulations are likely to apply immediately to new transactions, we encourage clients contemplating entering into such transactions to contact us to discuss this development as soon as possible.