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Possible end to valuation discounts

August 5, 2016

A standard method used in tax-efficiently transferring wealth from one generation to the next may be coming to an end as early as this December. For gift tax purposes, the value of closely held company stock, family partnership interests, or limited liability company interests transferred between family members is often subject to significant discounts for lack of marketability and lack of control. These discounts are based on what a willing buyer would theoretically pay to a willing seller for these interests and can be as high as 30 – 40 percent of the fair market value of the assets held within the business entity. While these discounts have historically been challenged by the Internal Revenue Service, the courts have typically upheld them in appropriate circumstances.

The Treasury has proposed new regulations which, if finalized, could have a serious impact on the ability of business owners to transfer interests in a business to family members at a discounted value. The effective date of the proposed regulations will not occur until after December 1, 2016, so there is at least a four month period during which you may rely on the existing valuation rules in making intra-family transfers. Although we don’t know whether the proposed regulations will be issued in the present form and the full impact of the regulations will require additional analysis, taking action in this four month period under the current valuation regime may present the best opportunity to transfer wealth on a tax advantaged basis. If you are considering the possibility of a significant wealth transfer, please contact one of our Trusts and Estates attorneys.