The IRS Has Issued Regulations Limiting or Eliminating the Use of Valuation Discounts.
One of the key benefits of Family Entities over the last several years has been the opportunity for significant valuation discounts for estate and gift tax purposes for clients with taxable estates. Last year, we advised in our Estate Planning Newsletter that we expected the IRS to issue regulations limiting or eliminating the use of valuation discounts for family owned or controlled entities. Earlier this month, the IRS finally issued those proposed regulations. The regulations are set to virtually eliminate the use of family entity valuation discounts as an estate planning tool.
What is a Family Entity?
A Family Entity is exactly as it sounds — a company (limited liability company, corporation or partnership) that is owned and controlled by the organizer and the members of his or her family.
What Are Valuation Discounts?
Traditionally, ownership interests of a Family Entity have been valued at a reduced or discounted value. The basis for the discount is lack of control, lack of marketability, and other factors that result from the entity structure. An ownership interest in a Family Entity is often valued at 20%-40% less than the actual fair market value of the underlying asset. This means that you could transfer an asset to a Family Entity and then later transfer your ownership interest in the Family Entity (either through lifetime gifting or at death) at a value significantly less than the fair market value of the underlying asset.
The use of family entities to obtain valuation discounts is a well-tested Estate Planning tool. Other methods of Estate Tax Planning often do not provide the same benefits. Because this method of estate and tax planning has proven so effective, it is imperative that clients with potentially taxable estates take advantage of Family Entity Valuation Discounts before the new IRS regulations take effect.
What’s the Hurry?
Entities created and funded prior to the enactment of the new IRS regulations will be governed by the current (more favorable) rules. But, there is very little time left to take advantage of Valuation Discounts. While it is not yet clear exactly when the new regulations will become final, many Estate Planning Attorneys believe they could become effective as soon as December 1, 2016. No one can be certain of the date, which is why you should act now.
Our Advice to You
- We recommend that any client wishing to take advantage of Family Entity Valuation Discounts as an Estate Planning strategy do so well before December 1, 2016.
- If you already have a Family Owned Entity, this is a good time to consider whether additional gifts or sales of ownership interests would be beneficial in order to maximize the value of the gift or sale.
- Anyone with a current Family Entity should contact us to discuss taking further advantage of the current IRS regulations.
- If you are concerned about the value of your estate for Estate Tax purposes or if you are interested in learning more about Family Entity Valuation Discounts, please contact us at (901) 372-5003 or email us here so we can determine if a Family Entity can yield significant tax and other benefits for you and your family.