Proposed Tax Regulations Threaten Valuation Discounts in Wealth Transfer Planning

The U.S. Treasury Department recently proposed regulations addressing the use of family-controlled entities in wealth transfer planning. In addition to providing important business ownership benefits, family-controlled entities (partnerships, corporations, and LLCs) have been popular wealth transfer planning vehicles because their values can often be discounted for tax purposes. If there are certain restrictions on the right to liquidate the company when an interest is transferred to another family member, a taxpayer can reduce the value of the interest and therefore reduce estate and gift taxes. However, the new regulations would ignore many commonly-used restrictions when valuing interests in a family-controlled entity, resulting in higher values for gifts and estates, and therefore increased estate and gift taxes.

If adopted in their current form, the regulations would apply to all family-controlled partnerships, corporations, and LLCs—both active businesses and investment entities. The proposed rules could go into effect as early as December 2016.

If you own an interest in a family-controlled partnership, LLC, or corporation, your planning must be considered in the light of the potentially higher tax exposure. In addition, you might consider making a transfer to another family member or a family trust before the new, less favorable rules take effect. Contact a member of Arnall Golden Gregory’s Private Wealth practice to discuss how the possible changes affect your estate plan. We are glad to assist.