IRS Proposes Regulations Restricting Discounts on Family Transfers
Experts have been able to assist families transfer wealth between generations using methods that reduce the value of closely-held entities. By properly drafting the governing documents and deploying some valuation “slight-of-hand”, experts have been able to make 2+2=3. Though this is a great answer for family gifting, the IRS didn’t find the trick entertaining, and is taking steps to shut down the magic act.
Specifically, the IRS recently issued proposed regulations that reduce our ability to apply valuation discounts to intra-family transfers in entities like corporations, partnerships and LLCs. Currently expected to occur sometime in early 2017, these proposed regulations are not yet law, but will become effective once they are finalized.
If you are considering a gift or sale of an interest in a family-controlled entity to another family member, completing the transfer before these rules become final will most likely result in a lower valuation, lessening gift-tax consequences. These rules apply to both operating companies and “holding companies.” However, the mechanics of how they apply are complicated. While it appears that the valuation of holding company interests will be more directly impacted, operating company transfers to family members could also be affected.
You may only have one last opportunity to take advantage of the great disappearing-value act before the show closes. Call your advisor now if you are planning or considering these types of transfers and we will discuss your situation and options. We might still have a trick or two up our sleeves.
Author: Keith Meyers, CPA, ABV, CFF, Shareholder