Private Client Services Tax Alert – August 2016

August 2016

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Issuance of Proposed Regulations Impacting Valuation of Family Controlled Businesses for Estate, Gift and Generation Skipping Tax Purposes

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Summary

Gift, estate and generation skipping taxes are imposed on the value of property transferred.  Proposed regulations regarding estate planning and valuation discounts were released on August 2, 2016, and if they become final, would significantly impact the availability of minority or lack of control discounts for transfers of family controlled business interests among family members.  In general, the effective date will be the date the regulations are published as final regulations.  Prop. Treas. Reg. Section 25.2704-3, concerning transfers subject to disregarded restrictions, will apply to transfers occurring 30 or more days after the date of publication. 
 

Details

On August 2, 2016, the IRS and Department of Treasury issued proposed regulations amending current regulations under IRC sections 2701 and 2704.  If these proposed regulations are made final they will have a profound impact on estate planning and valuation discounts with respect to family controlled entities.


Effective Date of Proposed Regulations

In general, the effective date will be the date the regulations are published as final regulations.  Prop. Treas. Reg. Section 25.2704-3, concerning transfers subject to disregarded restrictions, will apply to transfers occurring 30 or more days after the date of publication.  A hearing is scheduled to receive comments concerning the proposed regulations on December 1, 2016, thus the regulations will not become final until after that date.


Substantive Changes

The preamble and proposed amendments to the regulations contain 50 pages of complex technical discussions and rules.  A full discussion of the rules and issues raised are beyond the scope of this Alert. 
In brief, the proposed regulations would accomplish the following:
  1. Expand definition of entities beyond simply a corporation and partnership to include LLCs and other entities and arrangements;
  2. Create a bright-line test for deathbed transfers (within 3 years of death) that result in a lapse;
  3. Treat assignee interests as a lapse subject to transfer tax;
  4. Redefine “applicable restriction” to eliminate the state law safe harbor; and
  5. Add a new provision disregarding certain restrictions that are not “applicable restrictions,” including any restrictions that prevent an owner from causing a redemption of his or her interest after 6 months’ notice.
Item 5 of this list will have the most impact on estate planning because the focus is on the ability of the owner to have his or her interest redeemed rather than restrictions on the ability to liquidate the entity.

 
BDO Insights

The proposed regulations would have a significant impact on lack of control and minority discounts for estate, gift and generation skipping tax purposes when clients transfer interests in family controlled entities.  Given that the regulations, as proposed, may become final as early as the end of this year, clients holding interests in family controlled businesses may want to complete estate planning transfers of such interests prior to the date the regulations could be published as final.
 

For more information, please contact one of the following regional practice leaders: 
 
Jeff Kane
National Managing Partner - Private Client Services
                     Marty Cass
Regional Practice Leader - Private Client Services

 
Brooke Anderson
Regional Practice Leader - Private Client Services
  Jerry Guillott
Regional Practice Leader - Private Client Services

 
Chuck Barragato
Regional Practice Leader - Private Client Services
  Jack Nuckolls
Technical Director Private Client Services

 
Sharon Berman
Regional Practice Leader - Private Client Services
  Traci Kratish
Managing Director Private Client Services

   
Mike Campbell
Regional Practice Leader - Private Client Services