August 31, 2015
By: Mary Anne Cody
Employees at the U.S. Treasury Department have spoken publically about pending regulation changes that would significantly restrict the ability to take valuation discounts in certain circumstances. Many practitioners are recommending that their clients act now and make gift of appreciating assets to the next generation to avoid the implication of these proposed restrictions.
Valuation discounts have been an important tool in transferring wealth from one generation to the next. When a transfer is made either as an estate distribution or a lifetime gift, the value of that gift for transfer tax purposes is fair market value. To determine fair market value for a minority interest in a family owned entity, such as a family limited partnership or family LLC, valuation firms considers such things as lack of marketability for minority interest, a lack of control or potential built in gain. When these issues are considered there can be a discount applied to the fair market value which can then have a significant impact as a reduction of the value utilized for the transfer tax that is required to be paid by the transferor.
Estate planners have used “freezing” techniques to move the appreciation of assets from the senior generation down to the next generations often with the establishment of family owned partnerships or LLCs.
In 1990 Internal Revenue Codes Sections §§2701 – 2704 were enacted to discourage these estate freezes. These Code Sections did not have the desired result, as there are still numerous means by which to freeze an estate bay gifting to a family owned entity and employ valuation discounts.
Based upon proposed legislation and statements from the U.S. Treasury Department it is predicted that there will soon be new regulation under Internal Revenue Code Section 2704(b) released which will add significant restrictions to the ability to take discounts on gifts of minority interest in family owned entities to the next generation.
Estate planners are now recommending that if their clients are considering gifting appreciated assets to family members and utilize discounts in the valuation, the transactions be completed before the effective date of the new regulation.