New Treasury Regulations May Limit Transfer Tax Savings

HIGHLIGHTS:

• The proposed Treasury Department regulations, which have not yet been circulated for review and comment, may impose new limitations on what corporate, partnership or limited liability company agreement provisions are considered when valuing transfers between family members.
• If you are or have been considering a gift or sale of a family-owned business interest, it may be prudent to complete the transaction as soon as possible to avoid the possible negative impact of potential new regulations on the valuation of the transfer.

Recent comments by Cathy Hughes, an Estate and Gift Tax Attorney Advisor in the Office of Tax Policy at the U.S. Treasury Department, indicated that the department may issue proposed regulations as early as September 2015 that would provide that certain provisions in the governing documents of closely held entities, called "applicable restrictions," would be disregarded for transfer tax purposes in valuing transfers of those interests among family members. Some have expressed concern that the proposed regulations may limit the availability of discounts for transfers of ownership to other family members of family-controlled entities.

Under current law, some interests in privately owned companies are valued at an amount lower than the value of the underlying assets of the business would be if they were owned outside the company. That helps account for the lack of control and lack of marketability of the particular corporate shares or interest in a partnership.

A lack-of-control discount may be applied in the case of nonvoting shares, or if the interest in the business, even though it has voting powers, is a minority interest. A lack of marketability discount may be appropriate if the transferred interest is not marketable on an established securities trading market, as would be the case in most private enterprises. These discounts reflect what an arm's-length purchaser would pay for the ownership interest and result in a reduced valuation of the interest, which, in turn, reduces the transfer tax imposed on a gift of that interest. Valuation discounts, while taxpayer friendly, accurately reflect the value of the specific ownership interest, which cannot easily be sold, pledged, or otherwise disposed of.

Possible New Limitations

The proposed Treasury Department regulations, which have not yet been circulated for review and comment, may impose new limitations on what corporate, partnership or limited liability company agreement provisions are considered when valuing transfers between family members. It is not certain whether the proposed regulations will cover all family business enterprises, including companies with an ongoing active business, or relate only to passive investment entities. It is also not clear what the effective date of the regulations might be.

If you are or have been considering a gift or sale of a family-owned business interest, it may be prudent to complete the transaction as soon as possible to avoid the possible negative impact of potential new regulations on the valuation of the transfer. The Private Wealth Services Group at Holland & Knight can assist you with planning for any of your family business gift and estate tax needs.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.