Wealth Planning, Business Advisory Services
The Private Bank

Abbot Downing

In this Wealth Planning Update:

  • The U.S. Department of the Treasury issued regulations that are aimed at curbing the use of discounts when valuing family business interests.
  • The current proposed regulations would disregard most, if not all, restrictions used to support valuation discounts for transfers of interests in family entities.
  • If you are considering forming a family entity and/or plan on transferring interests in a new or existing entity, you should meet with your legal counsel soon to determine the best approach.
  • Given the likely significant impact of these proposals, if your family currently has an operating family business, it is strongly recommended that you meet with your legal counsel as soon as possible to discuss how the proposals may impact your unique situation.

Download the report (PDF)

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.