Last month the U.S. Treasury Department released proposed regulations that will reduce or remove entirely the ability of taxpayers to take valuation discounts on gifts or bequests of assets to family members. Use of these discounts to reflect the actual fair market value of assets has been allowed in gift and estate planning for decades. In essence, the IRS is now dictating valuation methods for family transfers.
To illustrate (and forgive me if you already know this), assume your company, as a whole, is worth $100. At first blush, a gift of a 10% interest in the company would be valued at $10. However, until now, it has been a commonly accepted valuation principle that a 10% interest is worth less than $10 because that 10% owner has no control over what goes on in the company and because it would be extremely difficult for the owner to sell the interest. As a result, the gift in the above example might not be $10, but instead be $5 or $6 or $7 because of these discounts.
The new regulations propose to do away with these discounts in a family context. So, in the above example, the gifted interest would be valued at $10. As a result of these changes, the value of these types of taxable transfers to family members, whether occurring during life or at death, will be higher.
Of course, the proposed regulations are much more detailed, and contain other rules in this area, but none as draconian as the changes mentioned above.
The Treasury Department is currently accepting public comments on the proposed regulations and will be holding a public meeting in early December before the regulations are finalized. As a result and unless changed, it is likely that they will be finalized in early 2017.
If we have been discussing gifting assets, it may be time to accelerate that gifting before the end of this year. Even if we have not, this may be a planning option you want to consider, again, before the end of this year.
Please call Rich Miller or Lori Sills in our Estate Planning/Tax Practice Group at 503.323.9000 if you would like to discuss further.