Valuation Discounts – Long Awaited Proposed Regulation Finally Unveiled
The Treasury Department recently issued long-awaited proposed regulations that will restrict or eliminate valuation discounts for family owned businesses. A valuation discount is a discount that owners receive on the value of an asset in their estate because it is a minority interest or can’t be easily sold. This discount in the value can allow an individual to gift larger amounts during their lifetime in order to avoid a greater death tax on the asset. For example, assume you own a 10% interest in a business that is valued at $10 million. If you try to give that interest to your son or daughter without a discount, the gift is worth $1 million and reduces your lifetime gift tax exemption by that amount. However, if you could claim 30% discount because you lack control of the company, that gift is now only $700,000, leaving you an additional $300,000 to gift. For individuals potentially subject to the estate tax, this is a big deal for at least a couple of reasons. First, it allows you to give away more of the existing estate. Second, all the growth on those gifts is happening outside of your estate.The IRS has not met with success in combating these discounts over the years, either in court or in Congress. They are now seeking to do by executive action what they could not accomplish in the courtroom or through legislative action. The proposed regulations may go into effect as early as December of 2016. Only transactions that are completed prior to the effective date will be grandfathered under existing law. The proposed regulations would significantly curtail and potentially eliminate discounted transfer opportunities for transfer tax purposes. If you hold an interest in a family-controlled businesses you should take action by year end if you want to take advantage of valuation discounts under the current rules.