On August 2, 2016, the Treasury Department issued new proposed tax regulations that would substantially eliminate many of the valuation discounts used for transfer tax purposes by family-owned businesses. The regulations disregard restrictions on the redemption and liquidation of a family-owned business for valuation purposes. In effect, this would mean that the value of an ownership interest in a family-owned company would be valued as if the recipient could immediately cause a liquidation of the company and receive their proportionate share of the proceeds.
The new regulations provide that agreements (and even state laws) that restrict the ability of an owner of a family-owned business to force a liquidation of the business will be ignored for purposes of valuing an ownership interest. Provisions of a company governance document, such as an Operating Agreement, or state law restricting the ability of an owner to force liquidation would be disregarded under such a valuation approach if the family members are able to change or remove the restriction. Other disregarded restrictions will include any restriction on the timing of payments in liquidation beyond six months or any limitations on the value an owner would receive in liquidation.
These proposed regulations could severely limit the application of valuation discounts for lack of marketability or lack of control for transfers of closely-held business ownership interests between family members. This type of discount planning is often used to great success in estate planning. The proposed regulations, if adopted as final regulations as presently proposed, will present significant challenges to this type of planning in the future.
The regulations do not become effective immediately but will be effective for transfers of property that occur on or after the date the final regulations are adopted and published in the Federal Registry. The Treasury Department will receive comments from the public and hold a public hearing on the proposed rules December 1st in Washington. There is a minimum thirty day waiting period after that before the regulations can be adopted as final regulations. Thus, taxpayers have at least until the end of the year to continue to use discount planning techniques. If (or more likely when) the final regulations are adopted, a significant estate planning tool may be effectively eliminated so individuals and families with family businesses or significant wealth should consider transferring property prior to the end of 2016 or else risk losing the benefit of this type of discount planning to reduce their estate tax liability.