Proposed rules complicate valuation discounts on transfers to family-controlled entities

Tax Hot Topics: Transfers to family-controlled entitiesTreasury and the IRS issued long-anticipated proposed regulations (REG-163113-02) on Aug. 2 that are designed to curb potentially abusive valuation discounts claimed by taxpayers when interests in family-controlled entities (FCEs), such as family limited partnerships, are transferred.  

For decades, many high-net-worth individuals have used FCEs as part of their estate planning. FCEs are used to organize a family’s business and investment activities and can be used as vehicles for transferring family and business assets to the next generation, while addressing both tax and nontax issues. The government, however, has been wary of individuals’ using FCEs to artificially lower their gift, estate and generation-skipping transfer tax burdens by claiming what the government views as unwarranted discounts. The proposed regulations were issued to address this concern, and if they are finalized, the proposed regulations could materially increase the transfer tax value of interests in these entities and dramatically affect the estate plans of many high-net-worth families.

If high-net-worth individuals are contemplating using an FCE as part of their estate planning, they should consider making the transfers before Dec. 1, 2016. In addition, if FCEs have been used in prior planning, those structures should be carefully reviewed in light of the proposed regulations. The new rules can trigger additional taxes even if no additional transfers are made after the rules become effective. For more information, see this Tax Insights.

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