Big Changes in Estate Taxes and Planning Opportunities

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Estate & Trust

Aren’t estate taxes and estate planning based on the “fair market” value of assets at the date of death or the date of the gift? You only thought so!

Fair Market Value is defined as “…the price at which property would change hands between a willing buyer and a willing seller when the former is under no compulsion to buy and the latter is under no compulsion to sell, both parties having reasonable knowledge of all relevant facts.” It is being proposed by the Treasury Department that this will not be the standard of value used when valuing minority interests in family-controlled entities

On August 2, 2016, The US Treasury Department released proposed regulations under Internal Revenue Code Section 2704. The proposed regulations change significantly the manner in which minority/non-controlling interests in family controlled entities are valued for estate, gift, and generation skipping transfer tax purposes. The proposed valuation regulations impact these interests in family limited partnerships, family owned C and S corporations, family owned LLCs, and family owned joint ventures. In addition, “family controlled” is the governing wording. The entity need not be owned 100 percent by the family, it need only be controlled by the family.

The Treasury Department is proposing to eliminate the application of the lack of control discount. As appraisers, we access data bases which provide objective observations of the existence and magnitude this discount for lack of control (DLOC). The Treasury Department is, with these regulations, re-defining “fair market value” as it pertains to these types of non-controlling interests. Objective observations suggest the magnitude of this discount could be 10percent, and maybe as high as 90 percent or more, with 20 to 30 percent normal. This means the value of the interest on which your client, the estate or the person making the gift, will be paying the estate and gift tax, may be 40% or higher.

The time period during which comments regarding the proposed regulations will be accepted ends December 1, 2016. Business appraisers, en masse, are arguing against the implementation of these regulations. We appraisers will live with it if it happens, BUT CAN YOUR CLIENTS AFFORD IT?

The proposed regulations do not eliminate all applicable discounts. The discount for lack of marketability (DLOM) will still be applicable. This is the discount which reflects that lack of liquidity implicit in privately held business interests. This DLOM may be as large as 40 percent or more, but the resulting value, after applying the DLOM, will still be significantly higher than the market would pay for the interest.

Some pundits believe the Treasury is “overshooting” what it will accept, in hopes it at least gets the elimination of the DLOC for non-controlling interests in family controlled entities which exclusively hold marketable securities, leaving the valuation of non-controlling interests in family controlled operating businesses to use the DLOC in its determination. Even if this is the case, this is a slippery slope.

House Republicans in the current Congress have introduced two bills which would nullify the proposed regulations, and members of the Senate Finance Committee have sent the Treasury Secretary a letter requesting the proposed regulations be withdrawn.

Estate planning for transfers no later than December 31, 2016, may be appropriate. Elections have consequences.

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