The U.S. Treasury Department’s recent proposal to place extensive limits on valuation discounts has caught the attention of family-owned business owners and their estate planning attorneys.
The proposal seeks to limit commonly used techniques in which families can minimize estate and gift taxes attributable to family-owned entities by claiming lack of control and lack of marketability discounts.
Under current regulations, valuation discounts vary widely, but with proper estate planning often range between 15 to 40 percent depending on the nature and structure of the family business. As recently reported by the Wall Street Journal, if a married individual’s ownership interest in a family business worth $14M is restructured so it receives a 40 percent valuation discount, under our current death tax regime the owner’s family could save up to $1.5 million in estate taxes.
Furthermore, if it is anticipated that the family business will be a highly appreciable asset, a lifetime gifting plan which incorporates large valuation discounts could provide even more estate tax savings by removing the value of any future appreciation from being subject to estate taxes.
Due to the potential for taxpayer abuse, the IRS has long wanted to amend several sections of the tax code to minimize or eliminate the role of lack of control and marketability valuation discounts.
For business owners seeking to take advantage of valuation discounts in their estate planning, there is limited time to act. The proposed regulations will not become law until a 90 day public comment period lapses and a final regulation is issued.
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Rob Hazard is an attorney and CPA with GSRM. Rob offers families and individuals comprehensive estate planning solutions that are tailored to their particular needs and goals. GSRM attorneys regularly appear in probate court in contested and uncontested cases involving estates, conservatorships and trusts. If you are seeking legal or other professional advice, we encourage you to reach out directly to us – after you have fully read and understand our disclaimer.