Once again, the IRS is trying to discriminate against family owned businesses by issuing Proposed Regulations under Section 2704, that would value an interest in a family business without taking into effect virtually all minority or lack of control discounts.
Thus for gift, estate and generation skipping tax purposes, the value of interests in family assets will increase substantially for tax purposes (generally 20%-50%). This will not occur with businesses owned by non-related parties. The Proposed Regulations takes effect 30 days after enactment. With hearings on the Regulations scheduled for December 1st, they should not be finalized until at least 30 days after that.
Many clients make gifts of stock in their family business and their family limited partnerships to trusts for their children. The purpose of the gift is twofold-- (1) to remove a portion of the family business from their taxable estates and (2) to reduce the value of their remaining interest in the family business for estate tax purposes.
For example, a married couple might transfer $20,000,000 in stocks and bonds to a family limited partnership and make a gift of a 50% limited partnership interest to a trust for their children. The gift of the limited partnership interest is valued at $7,500,000 on account of its 25% minority interest and lack of control discount. Each of the client’s remaining interest in the family limited partnership (because of community property laws) would be 25% and valued at $3,750,000. This represents an estate tax saving of $2,000,000 at the current 40% rate.
Should the regulation become final, this type of saving is in jeopardy. The regulation will be hard fought in the courts and ultimately, we expect that taxpayers will be able to successfully challenge these regulations as arbitrary and unfair.
Nevertheless, there may be a short window between now and December where this planning opportunity still exists, and there likely will be no better time to make gifts of family interests than right now.
If you have questions or need additional information, give us a call at 281-367-2483.