Keep Thinking About Family Business Planning as Treasury Changes the Rules

Keep Thinking About Family Business Planning as Treasury Changes the Rules

September 14, 2016

I've written before about the new proposed Treasury Regulations under Section 2704 of the Internal Revenue Code. The new regulations would limit the ability of owners of family businesses and other closely held business interests to transfer a portion of their ownership at a discount. These regulations would change asset transfer techniques that have been used for many years, and that have saved taxpayers many millions of dollars in federal estate taxes and state inheritance taxes. Very basically, if you transfer a minority interest in a business to someone or to a trust or other entity, and that minority interest has no control over the business and can't be sold, it's worth less than the underlying value of the assets transferred. The amount of the discount is established by an expert appraiser. These discount techniques are well-established, but because they generally result in a loss of tax revenue, the Treasury doesn't like them.

The new regulations aren't effective yet, and probably won't be until some time next year, so there is time to make some transfers now to use the discount techniques. But, as many commentators have said, it's not a good idea to make transfers solely to save taxes. It should be part of an overall transition plan. Who should receive a portion of the business, and when? What if anything should be done for other family members who are not involved in the family business? How do the transfers fit within the original owner's plans for retirement or lesser activity in the business? Every situation stands on its own facts, but now is a good time to start thinking about the process and, if appropriate, to make transfers before the new rules go into effect.

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