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Taylor Porter Estate Planning Alert: New Proposed Regulations for Family-Controlled Entities

By John McDermott, Partner

On August 2, 2016, the U.S. Treasury Department issued proposed regulations under Internal Revenue Code § 2704 that may affect your estate planning. These regulations are intended to reduce the valuation discounts applicable to transfers of interests in family-controlled entities (including partnerships, LLCs, and corporations 50% or more of which are owned or controlled by family members).

Historically, interests in family businesses could be valued for gift or estate tax purposes taking into account discounts attributable to lack of marketability or lack of control. These discounts could reduce the value of a gift of an interest in a family business substantially, typically by 25% to 45%.

If the proposed regulations become final in their current form, the basic effect will be to require that an interest in a family-controlled entity transferred to a family member be valued at the net value of the entity (the value of the entity’s assets, reduced by the entity’s liabilities), multiplied by the percentage being transferred. For example, without discounts a gift of 10% of a family business owning $20 million worth of assets might be worth $2 million, but with discounts applied, the same gift could be worth $500,000 to $900,000 less.

The regulations are not effective until they become final, which will be after the December 1, 2016, hearing date. For planning purposes, we should anticipate that the regulations will become effective early in 2017. We strongly recommend considering transfers of interests in family-controlled entities as soon as possible and before the regulations become effective if you wish to take advantage of the valuation discounts currently available.