IRS Proposes New Estate & Gift Valuation Rules for Family Owned Businesses

Jenifer Schembri - Bradenton Attorney

Jenifer S. Schembri, Estate Planning, Board Certified in Tax Law, The Florida Bar

In August, 2016 the IRS issued long anticipated proposed regulations under Section 2704 of the Internal Revenue Code that, if finalized, will substantially impact the estate and gift tax planning of family owned businesses.  Pursuant to the proposed 2704 regulations, no discounts would be available in valuing a family owned business, which would include lack of marketability and lack of control discounts.  Generally the proposed Regulations provide:

  • These rules will apply to businesses where family members hold more than 50% of the voting control.
  • For estate and gift tax purposes, the value will be the net equity value of the asset transferred (i.e., fair market value of the assets minus liabilities), which does not allow for lack of control or minority interest discounts.  Therefore 10% of a $50 million dollar company will be $5 million, regardless of any restrictions in a shareholder agreement or operating agreement which may impose real restrictions on the 10% ownership interest.
  • There is a 3 year look back period, meaning if a decedent’s ownership or voting control is transferred within 3 years of death, no minority interest discounts are available for the estate in valuing the interest.

The proposed Regulations are in the 90-day public comment period.  The public hearing is scheduled for December 1, 2016, and they could become effective in their current form, or in a revised form, at the end of 2016 or in early 2017.  The Treasury has provided that the proposed Regulations will be effective 30 days after they are finalized. Recently, Republicans in both the House and Senate have introduced bills in an attempt to derail the proposed regulations, this coupled with the election results, may impact treasury’s issuance of final regulations.

If the proposed regulations are issued, this will leave family business owners a very short time frame to take advantage of the current valuation discounts to the extent possible, as business valuations are essential to the planning process.  Therefore, we are encouraging families that are interested in planning to start early to ensure that the planning process can be completed prior to an effective date.

If you would like to discuss this or any other estate planning matters, please contact one of our attorneys.