One of the most powerful tools available to Tennessee families involves the ability to transfer interests in a family-controlled business from one family member to the next using value discounts. These discounts serve to lower estate taxes and gift taxes, allowing a family to transfer wealth from one generation to the next with minimal tax ramifications to either side. However, the IRS recently released proposed regulations that would severely limit the use of those discounts. Should that come to pass, many families would need to go back to the drawing board to seek new estate planning techniques.
The discounts work by reducing the value of interests transferred between family members in a family-controlled business. One discount assumes that such interests are limited in value because they are not as marketable as unencumbered shares would be. Another discount looks at the fact that the holder of these interests have minimal control over how the business is run.
The discounts are applied, leaving the value of the shares far lower than they would be for a publicly traded company. This means that less taxes are due on the transfer, leaving more wealth within the family. However, the proposed regulations would make this a far less appealing estate planning option.
For Tennessee families who have made use of a family-controlled business to reduce their estate taxes and gift taxes, there is a chance that the proposed changes could face significant legal challenges in court. That could take years to resolve, giving families plenty of time to some up with estate planning alternatives. Public comments on the matter are now being heard, and a public hearing will be held in December 2016.
Source: The National Law Review, "Transferring the Family Business Is About to Get More Costly", Gregg M. Simon, Gregory B. Mann and Kevin M. Noonan, Aug. 11, 2016