For many years owners of family-controlled businesses have been able to value transfers (during life by gift, sale or part sale/part gift, or at death) of business interests (e.g. stock in a corporation or membership interests in a limited liability company that operates the business and/or owns the business assets), an integral step in the transition to the next generation, by taking into account factors such as lack of control and marketability. The result is a value that is substantially less than the product of the underlying worth of the business or assets. These factors gave rise to a commonly used phrase known as “valuation discounts.” Much to the ire of the IRS, many court decisions have approved such a valuation approach, notwithstanding attempts by the IRS to disallow it.
In 1990, Internal Revenue Code Section 2704 was enacted to substantially curb the use of valuation discounts for gift and estate tax purposes. In the years that followed, court decision after court decision continued to acknowledge the legitimate application of valuation discounts, notwithstanding Section 2704. The IRS revisited the drawing board and on August 2, 2016, issued proposed additional regulations under Section 2704. The proposed additional regulations, if finalized in their current form, will substantially restrict the conditions under which valuation discounts will continue to be recognized for family-controlled businesses interests. The end result being additional gift and estate taxes on family-controlled business owners.The end result being additional gift and estate taxes on family-controlled business owners.
The effective date of the proposed regulations remains unknown. However, considering that on December 1, 2016, the IRS is holding a public hearing on the proposed regulations, the effective date will likely not be before December 1, 2016. Thus, there remains time within which to implement a transfer of business interest plan that includes valuation discounts for gifts or sales of family-controlled business interests. To implement such transfer plans, family-controlled business owners must also realize that such plans invariably require a comprehensive review of the business owner’s estate plan, the business’ operating documents, and retaining qualified business valuation professionals. Thus, time is of the essence to take advantage of this time-sensitive planning opportunity before it closes. For those business owners who have been reluctant to “take the next step,” the cost of continued procrastination is more apparent now than in the past.
The estate planning and business succession attorneys at McGuire, Wood & Bissette, P.A., are uniquely qualified to assist business owners in considering their options. Please feel free to call us at (828) 254-8800 to arrange a meeting to discuss your options.