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Estate tax savings option could be coming to an end

8/19/2016 | Kaplin Stewart Blog

Some Pennsylvania families have been able to enjoy a profitable estate planning option that involves transferring interests in a family-controlled business. That option may be coming to a close, however, with the announcement of proposed regulations that the IRS would like to employ. Should those proposals become law, this opportunity for families to reduce their estate tax and gift tax obligations could be severely limited.

Currently, family members can transfer interests in a family-controlled business under a discounted valuation plan. The shares are valued far lower than similar shares that are traded on the open market. Part of that discount is based on the assumption that the limited nature of the shares would make them less marketable and therefore more difficult to sell. The value is also lowered due to the fact that the shareholders have limited control over the company.

The proposed regulations would strictly limit the application of such discounts. That would leave family members open to higher taxation. It would also make the transfer of interests in a family-controlled entity a far less attractive means of transferring wealth from one generation to the next.

For Pennsylvania families who have made use of these valuation discounts, there is still a measure of hope. The proposed changes are not yet law, and many experts expect stout resistance to them in court. That could take years to resolve, leaving families with a window in which to take advantage of the current state of affairs. If the changes are passed into law, then it may be time for some families to look for alternative estate tax savings opportunities.

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