Uncle Sam is going after your client's family business. 

On August 2nd, the U. S. Department of the Treasury announced a new regulatory proposal to close what it characterized in a news release as a "tax loophole." 

As a rule of thumb, when either the Treasury or the Internal Revenue Service announces a new regulatory proposal, what it really means is: "We can't get what we want through Congress, so we will attempt get it through new regulations." 

This plan would place new limits on a common technique used to transfer interests in family businesses.

The government's proposal, according to the Wall Street Journal , would make it harder for taxpayers to claim valuation discounts that taxpayers typically have used to reflect the diminished value of minority interests. This would severely impact family-owned businesses. The key question becomes whether a family business should be valued as if it's owned by one person.

Here's a link to download a PDF of the government's proposal.

Some Perspective

Sometimes you have to go through the government spin to really hear what they are saying. So, let's put this into perspective. It is settled law that when a family member transfers privately held stock or real estate, he or she may apply a "discount" to the value of the transfer of closely held interest when there might be a minority interest or a lack of liquidity (think lack of market).  

The strategy and the law are settled. The usual question to answer is how much of a discount can be applied. Depending on the case, the discount might be modest or aggressive. If it's aggressive, then the taxpayer's estate may end up in court arguing over what should be the "right" discount. While the IRS has despised the technique, they have been stuck with case law supporting it. 

The Government's Cut

Under current law, federal estate and gift taxes apply at a top rate of 40 percent above the $5.45 million per-person exclusion. At this level, the estate tax affects about 0.2 percent of U.S. citizens who die each year. This fiscal year, the U.S. expects to collect about $20 billion in estate and gift taxes, according to the Congressional Budget Office.

There are several planning techniques using trusts, corporate entities, or both, if used properly, can minimize or eliminate estate tax. This level of planning requires the guidance of an experienced estate planning attorney.

'Winter Is Coming'

This proposal isn't exactly a surprise. The government has signaled for months that new regulations were imminent, according to the Journal

While it's true that proposed regulations must first go through a 90-day, public comment period, and that parts of the regulations won't take effect until 30 days after the government issues a final version, we believe it is best for clients to complete any transfers before the government acts. A public hearing has been scheduled in early December, 2016 leaving time to act before then.

What Should You Do?

At the very least, start a conversation with your attorney about the importance of this issue now, not later.

If you have an estate that includes a business or real estate, it may be worthwhile to give us a call and discuss your planning. 

We hope this information is useful to you and helps your clients and their families. If you have a specific case or a question, please don't hesitate to call our office at 919-4443-3035.
Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning
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