IRS Targets Valuation Discounts for Family-Controlled Businesses

The IRS has issued proposed regulations that would essentially terminate the ability of U.S. taxpayers to claim minority and lack-of-control valuation discounts for wealth transfer tax purposes in the context of family-controlled business and investment entities, such as corporations, family limited partnerships and limited liability companies. Historically, the ability to claim these valuation discounts has been an important benefit that has enhanced the overall tax savings in transactions involving gifts or sales of ownership interests in family-controlled entities. We believe these new regulations are likely valid and will likely be upheld (more or less) if later challenged.

Importantly, the proposed regulations do not apply to any transactions completed before the regulations are made final. We expect the proposed regulations will be made final sometime in 2017. Therefore, U.S. taxpayers who own interests in one or more family-controlled business or investment entities and who have been or should be thinking about reducing federal estate, gift and generation-skipping transfer tax exposure through gifts or sales of such ownership should be aware that there is likely now a limited time to act for the remainder of 2016 if valuation discounts are to be claimed as part of any such sale or gift transaction.

For more information on this topic, please contact one of our knowledgeable attorneys in our Estate Planning and Probate practice area.