August 13, 2020

Volume X, Number 226

August 12, 2020

Subscribe to Latest Legal News and Analysis

August 11, 2020

Subscribe to Latest Legal News and Analysis

August 10, 2020

Subscribe to Latest Legal News and Analysis

End of Valuation Discounts in Estate Tax Planning?

Families with interests in closely held entities have long benefitted from reduced estate and gift tax exposure due to valuation discounts. If regulations proposed by the Internal Revenue Service are adopted in their present form, however, valuation discounts will no longer be available for intra-family transfers. 

Valuation Discounts 

An owner of an equity position in an entity who can neither control the entity nor find a ready market for sale of his or her interest could not sell that equity position for its liquidation value, so that equity position has traditionally been valued at a discount to its pro-rata value of the underlying entity assets. Families have taken advantage of this rule over the years by making discounted gifts and sales of non-controlling minority interests in family controlled entities. While the Internal Revenue Service has had some limited success in challenging the effectiveness of these gifts in abusive situations, where such planning is a legitimate part of the taxpayers financial and family structuring these gifts have had the added benefit of reducing gift and estate tax exposure over time. 

Proposed Regulations 

The Internal Revenue Service has now issued proposed regulations which would in many cases eliminate the valuation discount previously available for non-controlling minority interest intra-family gifts and sales. If these regulations become effective (as soon as December 31, 2016) then intra-family gifts and sales of interests in an entity after the effective date will likely be valued without discounts. 

What Does This Mean to Me? 

While there is no certainty that the proposed regulations will be made final any time soon or in their current form, it seems likely that the days of steep valuation discounts will soon be behind us. Families who currently own or can quickly create entities holding family assets can still benefit from valuation discounts if gifts or sales are completed before the proposed regulations are effective (as soon as December 31, 2016). Anyone considering such a gift or sale would be well advised to begin immediately to allow sufficient time for careful planning. 

All is not lost, of course, if/when valuation discounts are no longer available. Some family members may find the lack of valuation discounts actually reduces capital gains tax on interests that have passed to them due to the death of a family member. Gifts and sales of closely held entities often make good sense for a family even without the added benefit of estate tax avoidance through discounts. Tax savings will still be available through the "grantor trust" status of gift recipient trusts and through techniques passing appreciation out of the donor's estate, and the many other advantages of family entities (including asset protection and centralized management of family wealth) will be unaffected. Families who are not in a position to act quickly to obtain valuation discounts may still want to move forward to take advantage of these additional benefits.

© 2020 Bilzin Sumberg Baena Price & Axelrod LLPNational Law Review, Volume VI, Number 250


About this Author

In addition to Chambers USABest Lawyers in AmericaMartindale-HubbellFlorida Trend’s “Legal Elite,” and Florida Super Lawyers, our Estate Planning attorneys are listed in Chambers High Net Worth (HNW), the first of its kind international resource for family offices and professional wealth advisors. Our attorneys provide highly customized wealth preservation and estate planning services for U.S. and foreign high net worth individuals, families and closely-held businesses. They assist personal representatives, trustees, and...