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Game Changer? Succession Planning Targeted by IRS

by Michael Hackman and Kira S. Masteller

Tax Attorney EncinoCertified Tax Law Specialist Trusts & Estate Planning

The Department of the Treasury wants to place limitations on valuation discounts that are currently commonly used to reduce asset values in family-owned and closely-held businesses, in an effort to increase tax revenue. The Treasury released proposed new regulations to that effect last week. If approved, the Regulations would revise Internal Revenue Code Section 2704.

Under current rules, through estate planning, individuals can transfer significant assets to the next generation at discounted values – primarily by transferring fractional interests in real property and businesses. Generally, family relationships are disregarded when determining the fair market value of an asset at the time of transfer.

The fractional interests – let’s say 10 percent limited partner interests in a Family Limited Partnership (FLP) with a net value of $4 million are transferred to each of four children – the interests are characterized as having lack of control and lack of marketability. Such characterizations have allowed appraisers to justify significant, so called minority discounts regarding the fair market value of the  minority interest in a business.

For example, if the FLP interest is appraised at a 25 percent discount, each of these gifts with an underlying value of $400,000 would be valued for estate or gift tax purposes at $300,000.

If the Treasury Department’s proposals are enacted, and this could happen by year end, key trust and estate planning tax-saving vehicles will be less effective, or curtailed altogether. The new Regulations could also affect the terms of an entity’s operating or partnership agreement. 

There is no doubt that if these regulations go into effect, they will be vigorously challenged by estate planning attorneys. While these challenges will be based on a variety of technical arguments, there is no assurance that they will prevent the IRS from taking the proposed action. 

There also is no way to predict how these regulations might affect discount appraisals. The key to obtaining a significant discount is to obtain a proper appraisal that has an additional discount analysis. Appraisers may be less willing to confirm aggressive discount appraisals in light of the proposed regulations. 

In any case, family business and property owners who intend sometime to give or leave their business or property to family members should strongly consider taking advantage of the presently available discounts before the new roadblocks are placed in their way.


Michael Hackman is a Certified Specialist in Tax Law, and Chair of our Tax and Trusts & Estate Planning Practice Groups. Kira S. Masteller is a Shareholder in our Trust & Estate Planning Practice Group. 

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