Transfer taxes

Clients with Interests in Family Held Entities Urged to Consider Transfer Tax Planning While Discounts Remain Available

Minority and marketability discounts are important benefits in transfer tax (estate and gift tax) planning for clients with closely held family entities and businesses, such as limited liability companies (LLCs), closely held corporations and limited partnerships (LP). However, these discounts – which allow for significant transfer tax savings – may expire in the near future.

Proposed regulations under Internal Revenue Code Section 2704 were issued by the Department of the Treasury on August 2nd and may severely restrict or even eliminate the availability of discounts in transfer tax planning. The use of discounts is currently an important benefit of transfer tax planning with interests in family held entities in that the discounts allow for significant transfer tax savings.

For example, let’s assume a client owns 100 percent of a Real Estate LLC which is valued at $10,000,000, and would like to gift 35 percent interest in the LLC to her children. Since an owner with 35 percent interest cannot force liquidation of her interest and may not be able to transfer the interest freely, there are minority interest and marketability discounts available which have the potential to significantly decrease the value of the transfer. If the discounts (computed by a qualified appraiser) were determined to be 30 percent, then the gift tax value would be $2,450,000, resulting in a reduction in value of $1,050,000. Without the use of discounts, the gift tax value of the interest is $3,500,000. This example clearly illustrates the benefits of utilizing discounts as it reflects a potential gift tax savings of $420,000 ($1,050,000 X 40 percent.

Many practitioners, including those in our firm, predict that the available discounts for transfers of closely held interests between family members may be completely, or mostly, eliminated.

The Treasury’s desire to curtail the use of valuation discounts has been in existence for quite a while. The issuance of these proposed regulations is a large step towards the accomplishment of its goal. There is currently a window of opportunity to execute estate plans using valuation discounts. Now is the time to act while the window of opportunity exists.

We expect taxpayers to have until the end of 2016 to take advantage of these discounts while they remain available, and therefore urge clients to act quickly if they have a family business and transfer tax planning is something they have considered.

Our law firm is available to assist you and your clients in any estate and gift tax planning that you may be doing, with regard to obtaining a valuation of the interest being transferred.