Potential Impacts on Family Companies of IRS Regulations

Thursday, October 13, 2016

Eric J. Wikstrom, CPA, JD, Managing Director Tax Advisory Group

Last month, the IRS issued proposed regulations that, if finalized, will dramatically impact future planning options for Family Companies (LLC’s, Limited Partnerships, General Partnership, and Corporations). At Brighton Jones, it is our mission to ensure that our clients are well-informed when it comes to changes that could potentially impact their finances and planning for the future. Here is our high-level overview of the proposed IRS regulations:

What are the proposed regulations?
The proposed regulations fall under Section 2704 of tax code and are the IRS’ attempt to address valuation discounts associated with family-owned companies. It’s important to note that these regulations follow the IRS’ failed legislative attempts to address the same issue. Not surprisingly, the IRS’ proposed regulations are incredibly complicated and are still in review by the practitioner community. The new regulations are working to accomplish the following:

  • Reduce or eliminate lack of control/minority interest discounts in valuing Family Companies for estate and gift tax purposes
  • Reduce marketability discounts for Family Companies
  • Add a complicated three-year look-back rule to capture lost estate tax value on transfers of Family Companies made within three years of death
  • Attack existing planning techniques that transfer Family Companies, including use of non-family member charity, assignee rights and state law restrictions.

What is the timeline?
There is a public hearing scheduled for December 1, 2016 to discuss the proposed regulations. The earliest that regulations could become final is 30 days after the public hearing, but it is unlikely that they will be finalized by the end of 2016. We expect that regulations will be finalized sometime in 2017 due to the IRS’ emphasis in this area. Furthermore, we expect the regulations will be challenged, and could potentially be overturned. However, this process could take years, so we should plan for the present and the future as if these regulations will be approved.

How do we solve it?
Clients that have Family Companies, or are considering them as a mechanism to transfer wealth, should look into the option of accelerating that process in 2016 and into 2017 in order to accomplish this at a potentially lower tax and valuation cost. Clients may be able to do this through outright gifts (i.e. a trust) or sales of the family interest at a discounted value.

For more information please contact our team of Tax Advisers today.

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