Proposed IRS regulations create limited window for valuation discounts

Proposed IRS regulations create limited window for valuation discounts
Under current estate tax rules, married couples can now transfer nearly $11 million during life or at death before federal estate or gift taxes become due. For most families, then, these “transfer” taxes are not a significant concern. However, for those who might be affected by these taxes, new proposed regulations threaten to curb what has been a valuable tool in planning strategies to mitigate the federal estate tax: valuation discounts.

Why does this matter?

These proposed regulations could have a dramatic impact by eliminating valuation discounts. These include, but are not limited to, valuation discounts associated with transfers of intra-family interests that are held in corporations, partnerships and limited liability companies.

Consider the following illustration.

ABC Company is worth $10 million and is owned by Husband and Wife. Husband and Wife transfer 20% of the company to each of their two children. Historically, the value of the 40% gift would have been something considerably less than $4 million because each 20% gift is valued separately, and a 20% interest in a closely held business is not marketable and doesn’t allow the recipient to control the business. As a result, a business valuator may conclude the value of the 20% interest totals $2.5 million, instead of $4 million. The $1.5 million is what we call the “valuation discount”.

If these proposed regulations are adopted as currently written, then the valuator may be forced to ignore valid governance and market conditions that justify the $1.5 million discount and to conclude the value of the 20% interests for estate and gift tax purposes is much closer to $4 million. This has the potential to increase the estate tax exposure for Husband and Wife by $600,000 or more.

What should I do about this?

The proposed regulations will become effective after they are published as final, which could occur December 30, 2016, at the earliest. As a result, there is a limited planning window within which individuals with potential estate tax exposure should evaluate gifting strategies.

Be sure to contact your WK advisor at (573) 442-6171 or (573) 635-6196 with any questions you might have about these new regulations and how they interact with your estate plan.

MISSOURI TAX CUTS TO TAKE EFFECT IN 2017. Missouri tax cuts passed by the state legislature in 2014 will begin to take effect in the upcoming 2017 tax year.
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WHY CONSIDER AN IRREVOCABLE TRUST? A variety of estate planning tools are available these days, but one we see used frequently is an irrevocable trust. This tool allows you to gift assets in the way you choose, provides tax benefits, and allows for creditor protection. And, irrevocable trusts can be used for reasons other than estate planning, so it might be helpful even if you don’t consider yourself especially wealthy.


Posted By Mark Gingrich, CPA, J.D. on 9-20-2016 | Topics: Client Alerts, Ledgers, Newsletters,