On August 2, 2016, the IRS proposed new regulations that will greatly change estate planning for families that own a controlling interest in a privately held business. These families often take advantage of valuation discounts to minimize their estate and gift tax burden. Under the current tax rules, it is typical for a family member to transfer a minority interest in a private family business and to receive a combined discount of up to 20% – 35% on the value of the business. These discounts are typically as follows:
Lack of Marketability – This discount reflects the fact that an owner of a privately held business cannot easily sell their interest. If you own General Electric common stock, you can sell the shares easily through a brokerage account. If you own 5% of a family owned automobile dealership, there are significantly fewer potential buyers and the process will take months at a minimum, as such a discount is warranted. Usually the lack of marketability discount is in the 10-25% range.
Minority Interest Discount – This discount is due to having less than 50% ownership in the company and lacking control. Usually the minority interest discount is in the 10-20% range.
Under the proposed regulations, the IRS would significantly curtail the use of valuation discounts when the “family” remains in control. A family includes ancestors, descendants, brothers, sisters and spouses. If the family retains at least 50% ownership of the entity, valuation discounts will be limited.
As of now, these new regulations are in proposed format. However, the IRS has indicated that this is a high priority item for them and they are looking to finalize the regulations by early 2017. For anyone considering the transfer of part of a family held entity for estate tax purposes, you still can act. Minority interest discounts are permitted on transfers until these new regulations are finalized.
If you have any questions in regard to this article, please contact James Downey at 800-849-6022 or at jmdowney@downeycocpa.com.
