Proposed Changes to Valuation Rule

The Potential Impact on Transfers on Closely Held Businesses or Similar Assets

Last week on August 3, 2016, the Treasury issued the long anticipated proposed regulations under Internal Revenue Code Section 2704. The proposed regulations call for disallowance of valuation discounts that currently apply to gift and estate tax planning.

There will be a public hearing to discuss the proposed regulations on December 1, 2016. If accepted, the regulations will go into effect no earlier than 30 days after the regulations become final.

Background

In order to prevent people from taking advantage of the tax system, the Treasury enacted IRC Section 2704 in October of 1990. Subtitle A essentially caused a taxable event to occur when liquidation or voting rights lapse. 2704(b) — which is the main topic of the newly proposed regulations — stated that in valuing property for estate and gift tax purposes, some restrictions on the ability of an entity to liquidate would be disregarded. Furthermore, the Treasury would have the authority to issue regulations that would make other restrictions that reduce valuation be disregarded.

The proposed regulations we see today are expected to eliminate almost all minority (lock of control) discounts for closely held entity interests. This includes family owned businesses.

If you have questions or concerns about how these new regulations will affect you, please contact one of our estate and trust experts at info@ssfllp.com or at 925.271.8700.