Focus on what counts

IRS Seeks To Shut The Door On Valuation Discounts For Closely Held Entities

August 22, 2016
view all archive
On August 2, the Treasury Department issued long-anticipated Regulations under Section 2704 of the Internal Revenue Code.  These proposed Regulations deal with limiting the discounts available when valuating interests in closely held entities for estate, gift, and generation skipping tax purposes. Very often these entities are referred to as Family Limited Partnerships, although several different types of entities can be used for these purposes.

Under the current rules, clients with an interest in closely held entities (S-corps, Partnerships, LLCs, etc.) are able to take advantage of reduced valuations for transfer tax purposes when fractional interests in such an entity are transferred to their family members.  The more restrictions placed on the ownership interests, the less a third party would be willing to pay for that interest; the greater the discount, the higher the portion that can be transferred to the next generation, estate and gift tax free. 

The proposed regulations take a three-prong approach to curbing the ability to claim these discounts by proposing an expanded definition of entities subject to these rules, expanding the definition of “control of an entity”, and dramatically reducing the restrictions on transfer that will be recognized for discount purposes.  In addition, certain discounts for lifetime transfers, which may still be allowed under the proposed regulations, will be brought back into the transferor’s estate if they die within three years of making the gift.

The IRS has scheduled a hearing on December 1st to address the proposed regulations and intends for the new regulations to take effect 30 days after finalizing them.  Therefore, clients currently owning interests in closely held entities, or considering creating closely held entities, may wish to consider gifting before the end of the year to take advantage of the current available discounts.  Please contact your Citrin Cooperman accountant to discuss these new proposed regulations and how they may impact your estate planning goals.

For more information on Trust and Estate Planning, please click here.