The IRS recently signaled that it may be ready to issue new regulations that will affect valuation discounts on family business entities by early September.
What Are the Benefits of Planning With a Family Business Entity?
For years wealthy families have taken advantage of limited partnerships and limited liability companies (collectively “family business entities”) to hold a family business or investments for the following reasons:
It is only this last benefit – valuation discounts for gift and estate tax purposes – which the new IRS regulations will attempt to curtail. If you would like to teach your children and grandchildren about investing, protect their inheritance from creditors, predators and divorcing spouses, all the while maintaining control of your investments, you should consider consolidating your investments into a single family business entity to accomplish these and the other goals listed above.
How Do Valuation Discounts on Family Business Entities Work?
Under current rules a family business entity allows for the shifting of wealth from older generations to younger generations at a discount for gift tax and estate tax purposes due to the following:
What Will Be the Effect of the Impending New Regulations on Valuation Discounts for Family Business Entities?
Under §2704(b)(4) of the Internal Revenue Code, the IRS is given broad authority to impose regulations that would disregard certain restrictions in determining the value of an interest in a business entity transferred to a family member. Throughout the years the drafting and implementation of these regulations has been put on hold for various reasons, but IRS officials have now indicated that the regulation project is progressing, with new regulations being issued as early as September 2015.
Speculation is that these regulations will create a new category of restrictions that will be disregarded when valuing an interest in a family business entity, in turn reducing or even eliminating the use of valuation discounts for these entities. Further speculation is that the new rules could be made effective when they are released.
With New Regulations Looming, What Should You Do Now?
While an operating family business with actual sales will most likely still provide planning opportunities using valuation discounts after the new regulations go into effect, family business entities that are created mainly to take advantage of valuation discounts will become all but obsolete. Therefore, if you are interested in setting up a family business entity for the purpose of taking advantage of valuation discounts, you must proceed without delay to insure your planning can be implemented before the new regulations go into effect.
Sorrell Law Firm, PLC is available to assist you with the immediate implementation of your wealth transfer plan using valuation discounts. Please call our office at 480-776-6055 to arrange for your consultation.
Whitney Sorrell is a lawyer, CPA, and former IRS Revenue Agent and senior partner of Sorrell Law Firm, PLC, in Scottsdale, AZ. Mr. Sorrell’s law practice focuses on business organizations and federal tax planning, IRS dispute resolution, asset protection planning for small business owners, and estate planning for nigh net worth individuals.