Earlier this month, the US Treasury issued proposed regulations that, when finalized, will significantly increase the transfer tax cost of transferring interests in family-controlled entities to other family members, both during lifetime and upon death. These regulations relate to how the value of the transferred interest is determined for gift, estate, and generation-skipping transfer tax purposes. Under current law, well-established valuation methods permit the application of discounts for the lack of control and lack of marketability of the transferred interest. Under the proposed regulations, however, these types of discounts would be largely eliminated for intra-family transfers.
If adopted in the proposed form, the new regulations will significantly change the estate planning landscape. Because the proposed regulations will not become effective until final regulations are published, there may be a limited window of opportunity to utilize valuation discounts in wealth transfer planning before the law is changed. The Treasury Department has requested comments on the proposed regulations from the public until November 2, 2016, and a public hearing has been scheduled for December 1, 2016. Therefore, final regulations could be issued as early as the end of 2016.
You may be impacted by the new regulations if the value of your estate exceeds the estate tax exemption amount (currently $5.45 million per person) and is comprised of real estate and/or a family-owned entity (such as a corporation, partnership, or LLC). You also may be impacted if you are holding a purchase option or are subject to a sale option (such as the options commonly contained in a buy-sell agreement) that calls for the purchase or sale price to be determined using valuation discounts.