The Treasury Department is proposing to significantly curb the use of certain adjustments (i.e., discounts for lack of control and/or marketability), which commonly apply in the valuation of transferred interests in operating businesses and family limited partnerships for estate, gift, and generation skipping transfer taxes. The new proposed regulations aim to close a perceived loophole in Section 2704 of the Internal Revenue Code that enabled taxpayers to apply these discounts when transferring non-controlling business ownership interests. In the eyes of the IRS, such transfers can have “minimal economic effects, but result in a transfer tax value that is less than the value of the interest…”
The implication of these regulations is increased gift and estate taxes for taxpayers, if they transfer interests in businesses to beneficiaries. For some taxpayers, the increase in taxes may be substantial as valuation discounts can range from 10% to 50% depending on the facts and circumstances applicable to the fractional interest. Thus, for business owners with a desire to eventually transfer part of their business to family members; it might make sense to consider tax planning strategies before the regulations go into full effect.
As always, a properly executed estate planning strategy involving transfers of business ownership interests should include an objective and well-supported valuation analysis. For information about how Aronson can provide assistance in this area, please contact Jimmy Zhou at 240.364.2698.