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Treasury Department Proposes Limit on Use of Valuation Discounts in Estate Planning

Last week, the Treasury Department issued new tax regulations intended to reduce significantly the use of valuation discounts in estate and gift tax planning.

The Role of Valuation Discounts

For decades, estate planners designed and implemented strategies in which family business interests could be valued at a discount. Such discounts reflect that a minority interest in a family business does not confer control and cannot be sold in the market.

Treasury Proposals Would Hamper Estate Planning

Among other provisions, the proposed Treasury regulations (pdf) would ignore restrictions imposed by state law or by agreement. This would burden the ability of a family business owner to control and enjoy the interest.

Assume a parent gives his or her child a 10% interest in a family business partnership. The partnership in question does not allow partners to freely transfer their interests to third parties or withdraw from the partnership.

Under the proposed regulations, the government values the parent’s gift to the child as if those restrictions do not exist. The Treasury and the IRS assume such restrictions do not actually burden the value of the interest in the child’s hands – a strange position to take.

In this scenario, the value of the interest for gift tax purposes would likely be greater than what the parent would receive if he or she sold the same interest to a third party.

What’s Wrong with the Treasury’s Proposal

Critics of the proposal point out that, contrary to settled law, this proposal appears ignorant of the fact that family members who co-own a business may have different (or even adverse) interests.

Although the U.S. Treasury targets perceived valuation abuses, the proposed regulations appear overbroad. These new rules, if approved, present a strong departure from fundamental valuation principles.

The proposed regulations will be subject to public comment and a hearing on December 1, 2016.

How Family Business Owners Should Protect Themselves

Expect a challenge from the family business and estate planning communities. If the Treasury issues these new rules in final form, they will not become effective until 30 days after that date. Family business owners should consider implementing estate planning now – before these regulations finalize.

Moreover, business owners who already performed estate planning or who put a business succession plan in place may wish to check the health of those plans in light of this law change.


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About Michelle Huhnke

Michelle Huhnke is a Partner at Sugar Felsenthal Grais & Hammer LLP. She focuses her practice on estate planning, charitable planning and wealth preservation.

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