August 6, 2016


The U.S. Treasury Department recently proposed new regulations that promise to eliminate most, if not all, valuation discounts for interests in family-owned entities, including both operating businesses and passive entities created to hold real estate or other investment assets. For taxpayers with estates large enough to be subject to federal transfer taxes (currently, $5,450,000), the proposed regulations, once finalized, may result in an additional effective estate tax equal to 40% of the value of most, if not all, discounts to which their estates might otherwise have been entitled. For example, if a taxpayer gives a child one half of his or her 51% interest in a family business worth $5,000,000, the value of the gift for transfer tax purposes today might be $828,750 after applying a 35% discount to reflect the donee's inability to sell or liquidate the interest at will. The value of the taxpayer's remaining 25.5% interest might similarly be discounted. Under the proposed regulations, however, these valuation discounts would no longer apply to either party, resulting in additional transfer taxes of $357,000.

Of course, for those taxpayers who are not concerned with transfer taxes, the new proposed regulations should have a positive effect. Namely, by increasing the value of ownership interests in family-owned entities for tax purposes, the new valuation rules should result in a higher income tax basis for the beneficiaries of the taxpayer's estate. This, in turn, will reduce the capital gains taxes that may ultimately be payable when a beneficiary disposes of the interest.

Some commentators believe the proposed regulations exceed the Treasury Department's authority, while others think the current provisions will be modified somewhat before they are finalized in early 2017. However, all agree that the end is nigh for generous valuation discounts for family-controlled entities.

If you own an interest in a family-owned entity and are concerned about future estate taxes, our attorneys will be happy to discuss these developments with you and help you determine whether there are any steps you might take before the new regulations become effective. Please call (804) 565-2300 if you would like to schedule an appointment.