For decades, high net worth families have been structuring family controlled business entities as partnerships and corporations in order to take advantage of valuation discounts for estate planning purposes.

Valuation discounts, such as lack of marketability and lack of control, can provide significant gift and estate tax benefits, and be a powerful family business planning tool.

Valuation discounts are now under siege by the newly proposed Treasury Department Section 2704 regulations. If enacted, the proposed regulations may significantly limit the effectiveness of valuation discounts on the transfer of family controlled business entities.

What do the proposed regulations mean for owners of family controlled business entities?

A public hearing is scheduled for December 1, 2016, and the proposed regulations can potentially become final as early as January, 2017.  The regulations are expected to be finalized in a form substantially similar to those proposed.  Owners of family controlled business entities should act immediately in order to take advantage of currently available valuation discounts.

Who should take action based on the proposed regulations?

All family controlled businesses owners need to understand the impact that the proposed regulations will likely have on next generation wealth planning, and focus immediately on exploring the benefits of asset transfers using valuation discounts.  Additionally, individuals and families in the following circumstances may be impacted directly by the new regulations, should they go into effect as they are currently written:

  • Owners of family controlled business entities who have evaluated asset transfers using valuation discounts, but have not put anything into place, should consider employing this strategy now due to the tight window prior to the public hearing.
  • Families owning businesses not currently structured as a corporation, partnership or limited liability company should consider changing their legal structure in order to take advantage of valuation discounts while they are still available.
  • Owners of family controlled businesses structured as limited liability companies should be prepared to take action as well. The proposal seeks to significantly expand the scope of current regulations to include limited liability companies and other business entities and arrangements.
  • The proposed regulations do not distinguish between entities that own passive investments, such as marketable securities or real estate investments, and active investments, such as operating businesses. Thus, owners of family businesses with either type of investment should consider the benefits of leveraging valuation discounts for estate planning purposes while the opportunity still exists.
  • Older owners of family controlled businesses or those in poor health should also consider taking action immediately. The new regulations include a three year lookback, which would effectively eliminate valuation discounts taken by owners on transfers within three years of his/her death if the transfer takes place after the effective date of the new regulations.

While it remains to be seen in what form the regulations will be finalized, we expect that they will be expansive in size and scope. Appropriate next generation planning for family owned business entities which could benefit from existing valuation discounts, should be implemented now, while the opportunity still exists.

There will be additional estate planning opportunities subsequent to the regulation’s implementation, and this will be the subject of part 2 in our valuation discount series on Wealth Insights.

Chris Roe, CPA/PFS

Partner and Managing Director

Hall of