IRS New Attacks on Valuation Discounts

Published on: 19:40PM Aug 18, 2016

~~Under current rules, a farmer can transfer units in an entity (such as a corporation, partnership, or LLC) and the value of these units are discounted to reflect various discounts as follows:
•Lack of Marketability - This discount reflects the fact that an owner of a privately held business cannot easily sell their interest.  If you own Google, you can sell it easily today.  If you own 5% of a farm operation, there are not too many buyers lined up to buy your stock.  Usually this discount is in the 10-25% range.
•Minority Discount - This discount is due to having less than 50% ownership in the company and no control.  This discount usually ranges slightly less than the lack of marketability discount.
•Non-voting Discount - If the entity has both voting and non-voting stock/units, a discount of a few percentage points is usually warranted.

The Proposed Regulations would essentially eliminate the discount for minority discount if the "family" remains in control.  A family includes ancestors and descendants, brother-sisters and any spouses.  If this family retains at least 50% (notice that is does not have to be more than 50%), then it is very likely that no minority discount will be allowed.

Additionally, if these transfers qualify for a minority discount, but the transfer occurred within three years of death, a "phantom asset" equal to the minority discount taken would be included in the estate.

The Proposed Regulations are very complex and we don't know all of the answers yet; however, any transfers made before December 2, 2016 (at least until then) should fall under the old rules.  Therefore, if you have a taxable estate and want to make larger gifts, it may make sense to do it now.

You should discuss this with a qualified tax advisor.