PROPOSED TREASURY REGULATIONS COULD COST FAMILY MEMBERS MORE MONEY
If you operate a family-owned business, transferring interests in that business to other family members for less than fair market value – by way of gift or below-market sale – could be more costly than you realize.
Here’s what can happen. If you, or a family member, transfers interests in your family-owned business, the difference between the actual market value of the interest and what the recipient pays for it is treated as a taxable gift. And any gift in excess of $14,000 ($28,000 if married), to any one recipient will affect the amount your estate can claim tax-free at death.
Sound complicated? Well, it is. This is a key reason the advice of an attorney, well versed in tax law, is vital when you’re considering the sale of your business to family members.
Currently, when these family business interests are assessed a market value, discounts are applied if the interest transferred is a minority interest. These valuation discounts can reduce the value of assets owned by the business by as much as 65%, drastically reducing the value of gifts to relatives. That’s the essentials to the law at this time of writing.
On August 4, 2016, the Treasury Department and the IRS released proposed regulations under IRC Section 2704 which, if finalized, will severely limit, if not eliminate valuation discounts for interests transferred in a family controlled entity.
The current regulation does little to limit restrictions placed on voting, redemption and liquidation; while the proposed regulations would cripple the ability of family-owned businesses to place restrictions on voting, redemption and liquidation. As a result, it would decrease allowable discounts on transfers of interests in family-owned businesses - and increase gift and estate taxes to the Transferor and their families.
There are several areas of the regulations that will be changing and could affect your business. These include:
- Transfers Within 3 Years of Transferor’s Death that Result in a Lapse of Voting or Liquidation Right
- Restrictions Imposed or Required by Law
- Restrictions on Redemption or Liquidation
- Non-family Member Owners’ Ability to Block the Removal of Covered Restrictions
So what can you do as the owner of a family business?
Well, first, take note of the timeline. This could take effect as early as January 1, 2017. If you are planning to transfer interests in your family’s business to other family members, make your transfers before the end of 2016. Our team of attorneys at JDSA will identify the interests affected by these proposed regulations, and help you effectively make your transfers, before the end of the year, ensuring a more favorable gift and estate tax outcome.
To learn more about this topic, read the full article. To better understand how these proposed changes might affect your business and tax burden, call us today at JDSA Law.