Have you heard about the new tax regulations that will eliminate valuation discounts for intra-family transfers? This is important stuff. In fact, for a lot of you, this could be a game-changer. Plus, there is a time-sensitive element to consider: A public hearing on the proposals will take place on December 1, 2016, and new regulations could become effective within 30 days thereafter. Thus, if fully enacted, these regulations will very quickly make sweeping changes to the current estate planning options available to taxpayers.

The use of family limited partnerships (FLPs) and limited liability companies (LLCs) has increased in recent years, with many families creating FLPs and LLCs to hold and transfer family wealth for estate planning purposes. These entities allowed families to maximize the advantage of valuation discounts. The IRS has repeatedly challenged valuation discounts and has issued its proposed regulations in an attempt to eliminate discounts for family controlled entities (both active operating businesses and passive asset holding entities).

Family entities are a significant component of estate planning with many families using them for multiple purposes, including asset management, creditor protection, and legacy planning. Intra-family transfers of interests in these entities are given valuation discounts based on the lack of control (also referred to as minority interest) and lack of marketability of the interests. Under existing rules, discounts of 30% or more have been allowed for transfer tax purposes on gifts and bequests of interests in FLPs and LLCs. The newly proposed regulations, found in Internal Revenue Code Section 2704, will restrict these valuation discounts, effectively limiting these wealth-transfer planning techniques.

Presently, intra-family transfers of interests in FLPs and LLCs that generate valuation discounts for lack of marketability, lack of control, or other voting or liquidation restrictions allow for efficient tax transfers. By disregarding the restrictions associated with a lack of control and marketability, the IRS’s proposals will cause an increase to the interest’s value for gift and estate tax purposes. The proposed regulations may also cause higher taxes on the transfer of the interest to other family members.

Key concepts that will affect your estate plan should be reviewed and discussed with your attorney. The new regulations will apply to all business entities; ownership and control will be key issues for effective transfers; and, most non-family interests will be disregarded. Additionally, there will be a claw-back provision causing transfers within 3 years of death to be included in the estate for tax purposes.

To make intra-family transfers using valuation discounts, you will need to take advantage of the current window for “grandfathering” and complete the transfersbefore the effective date for these new regulations. If you are already engaged in transfer planning, you should complete the process as quickly as possible. If you want to use the existing laws to your advantage for wealth transfer planning, you should begin planning immediately. Please contact us to discuss your personal situation if you have any questions about how these new IRS regulations may affect you and your estate plan.