- On July 16, 2015
The IRS has recently signaled the possible release of newly proposed regulations by mid-September which would likely include new “disregarded restrictions” built into family entity strategies that would, in turn, reduce or eliminate the use of valuation discounts in many plans.
Provisions in the Internal Revenue Code were imposed to limit the use of certain “applicable restrictions” in family business entities like Family Limited Partnerships (FLPs) or Family Limited Liability Companies (FLLCs). When included in planning, those applicable restrictions would otherwise cause a reduction in the value of equity interests in such entities, allowing families to leverage gifts or sales of equity interests in family entities, shifting more wealth to other beneficiaries (usually, a younger generation).
Over the past few decades courts have whittled away at those Internal Revenue Code limitations, consistently finding in favor of taxpayers whose entity valuations reflected discounts for minority interests (i.e., lack of control) and lack of marketability. Although discounts have been more generously given for entities that have underlying business operations, discounting has also been successful in family entities that hold securities and do not operate businesses.
The Service has often challenged valuation discounting strategies in court, generally with limited success. Without much help from the judiciary, the Service turned to the President’s budget proposals for help. Those proposals did not advance the challenge to these strategies.
If past budget proposals are to be reflected in the anticipated proposed regulations, we might expect to see the addition of “disregarded restrictions” which would dramatically reduce the impact of valuation discounts, especially in family entities that do not have actual business operations.
There is further speculation that existing family entities would not be “grandfathered” under the proposed regulations. Only gift or sale transactions which are completed before the effective date of the proposed regulations would be grandfathered.
The window may be rapidly closing for families to take advantage of valuation discounting in family entities. If you wish to shift significant value out of your estate and into the hands of future generations, while still having some control over these entities, the time to complete the plans and transfers is now, before the opportunity to leverage those transactions through discounting is gone.
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