Wealth Planning, Business Advisory Services
The Private Bank
In this Wealth Planning Update:
Valuation discounts are regularly applied by appraisers when valuing family business interests transferred in connection with wealth transfer planning, often citing factors such as lack of marketability and lack of control. On August 2, 2016, the U.S. Department of the Treasury (“Treasury”) issued regulations aimed at curbing the use of discounts when valuing family business interests. While these regulations have been anticipated for some time, the breadth of these proposed regulations is troubling, particularly since they appear to apply to transfers of family-controlled, operating businesses as well as entities that hold only passive investment assets. In addition, they provide a 3-year period after the transfer has been made in which the value may be re-determined if the donor dies. These regulations are currently in proposed form only and may be significantly altered before they become final.
Effect of proposed and final regulations
The proposed regulations are subject to a notice-and-comment period and a hearing date for discussion of issues is scheduled for December 1, 2016. Treasury will consider public comments before it issues its final regulations. Additionally, Treasury has indicated that the regulations will not become effective until they are published in final form. Based on this comment period and the scheduled hearing, we do not anticipate that the regulations will become final and effective until after December 1, 2016.
At this point, the full impact of the proposed regulations in specific situations is unclear. The facts of each family and the entity involved will be a crucial consideration. Consultation with valuation experts, as well as outside counsel, will be crucial.
Operating family businesses may be impacted
Many experts who had anticipated some action on the part of Treasury in this area prior to the issuance of these proposed regulations did not expect that operating family businesses would be impacted. However, the regulations, in their current proposed form, do not distinguish between operating family businesses and family entities holding investment assets, such as Family Limited Partnerships or Family Limited Liability Companies. For those taxpayers with illiquid family business interests that would be subject to estate tax, the impact could be substantial.
Planning considerations in the near term
Individuals considering transfers of family-controlled entities should meet with legal counsel as soon as possible to determine whether specific action should be taken. It may be important that planning strategies are completed prior to the date the regulations are issued in final form in the event that the final regulations are not significantly altered after the public comment period and hearing. Final regulations could be issued as soon as December 2, 2016 or potentially several years after the hearing date. Since the timeline is unclear, individuals considering transfers of business interests to family members and charitable structures where a discounted value would be beneficial should begin discussions with counsel immediately. Note, however, that death of the donor within 3 years of the date of transfer may also result in the imposition of these new rules.
Wells Fargo Wealth Management and Wells Fargo Private Bank provide products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries.
The information and opinions in this report were prepared by Wells Fargo Wealth Management. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Wealth Management’s opinion as of the date of this report and are for general information purposes only. Wells Fargo Wealth Management does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
Wells Fargo and Company and its affiliates do not provide legal advice. Please consult your legal and tax advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared.
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