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CLIENT ALERT: IRS Issues Proposed Regulations Restricting the Use of Valuation Discounts by Family-Owned Entities for Estate and Gift Tax Purposes

September 1, 2016
Warren Gleicher and Shirlee Gordon

The IRS recently issued proposed regulations which seek to reduce or eliminate the use of discounts in the valuation of assets for estate and gift tax purposes. If adopted, the regulations would have a significant impact on lifetime and death transfers.

Valuation discounts are often used in connection with the valuation of interests in closely held companies. Appraisers generally apply discounts to interests in family- owned entities for factors such as lack of control or restrictions on transferability. These discounts can range anywhere from 15-50%, substantially reducing the value of assets in determining estate and gift taxes on transfers to the future generation. 

For example, a family-owned limited liability company owning real estate would generally provide in its limited liability company agreement that the entity could not be liquidated without the consent of the other members, no member could withdraw and receive fair value for their interests and no member could transfer their interest without the consent of the other members. When valuing such an interest in the limited liability company, the valuation discount appraiser would take into account various discounts for lack of marketability and control based on these restrictions.

However, the proposed regulations would require that all family- owned entities whether an operating or passive business be valued without taking into account any discounts if the entity is owned at least 50% by members of the same family.

If the proposed regulations are adopted in their current form, the use of discounts in valuing family businesses will be eliminated, resulting in significantly higher estate and gift taxes. Generally, proposed regulations do not become effective until they are put in final form. A public hearing on these regulations is scheduled for December 1, 2016.

Anyone considering a gift or a sale of an interest of real property or in a family owned entity to a trust or to another family member should take advantage of the discounts available today before the regulations become effective. Please contact one of our estate planning practitioners listed below to discuss alternatives.

This publication is issued by Olshan Frome Wolosky LLP for informational purposes only and does not constitute legal advice or establish an attorney-client relationship. In some jurisdictions, this publication may be considered attorney advertising.

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