A proposed new IRS regulation could eliminate the tax advantages of transferring interest in family-owned businesses to family members.
Under current rules, interest in family business may be transferred to family members at a discount. The specific amount of the discount varies depending upon a number of factors including restrictions in the partnership agreement and the appraised value of the business. The proposed new rules could eliminate the allowable discount altogether.
As an example, consider what would happen if the owner of a family business wanted to transfer a 20% minority interest to her children. The business has an appraised value of $7,500,000 and restrictions in the partnership agreement set the discount value for transfers to family members at 25%.
|
|
Current Regulations |
Proposed New Regulations |
|
Interest Value |
$1,500,000 |
$1,500,000 |
|
Discount Amount (25%) |
$375,000 |
n/a |
|
Taxable Value of Gift |
$1,125,000 |
$1,500,000 |
|
Federal Transfer Tax (@ 40%) |
$450,000 |
$600,000 |
Since the discount amount could be higher, the possible impact could be even greater. The public hearing on the proposed regulation will be held on December 1, 2016, and it could take effect as soon as December 31, 2016.
If a family business is a significant asset – and potentially a significant part of your estate – you should act as soon as possible to determine whether it makes sense for you to transfer interests before the end of 2016. A business valuation is required and it may be necessary to create a partnership agreement if one does not already exist. While this can be done at the same time, it typically takes 6-8 weeks.
The estate planning team at Holm & O’Hara LLP is available to help you make an informed decision and execute the vital legal documents to ensure a smooth share transfer.
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