Alert: Proposed Regulations to Limit Intra-Family Discounts

The U.S. Treasury Department recently proposed regulations that, if implemented, will dramatically affect estate tax planning for high-net-worth families, particularly business owners.

Now, we recognize that the words “proposed Treasury regulations” may cause you to lose interest in reading past the first sentence of this article; however, if you are a high-net-worth business or real estate owner (or hope to be one in the future), you should pay close attention.

New Regulation You Should Know

The Current Strategy

In estate tax planning, it is common for business owners to transfer business or real estate interests to their children or to a trust for their benefit, while taking a “discount” off of the fair market value of the assets. This technique allows a business owner to move assets from his or her estate at a reduced value, while also removing all of the future growth of those assets from his or her estate.

How It Works

Here’s a quick example of this strategy in action. Consider a business owner who wants to move 40 percent of his or her $10-million company to a trust for the benefit of his or her children for estate tax planning purposes; one might expect that the gift would be valued at $4,000,000.

However, when valuing a minority interest (less than 50 percent) in a company, a valuation expert would generally assume a discount to the value of that 40-percent business interest, because the recipient does not have a controlling interest in the company.

Since there is no “ready market” for the recipient to go out and sell their discounted interest, the valuation expert would provide another discount; these marketability and control discounts often total between 25 percent and 40 percent (and sometimes more) on the value of the gift.

Through proper planning, the business owner in this example would only need to report a $3,000,000 gift or less on their gift tax return, instead of incurring a $4,000,000 gift. Assuming a 40-percent tax savings on the value of the discounted gift, this technique would save the business owner $400,000 or more on the current gift — not even including the value of the future growth on the assets.

What’s Changing?

The Internal Revenue Service (IRS) and the Treasury Department have petitioned Congress to limit the use of valuation discounts for years, and the new proposed regulations will have a significant impact on business owners who use the strategy. Specifically, the regulations will end most forms of marketability and lack of control discounts for intra-family transfers, both for lifetime gifts and for the valuation of minority interests at death.

What’s Next?

Please note that the regulations are only proposed and are not final at this time.
The Treasury Department has scheduled a public hearing for December 1, 2016, which will probably include significant commentary and debate from the legal and tax planning communities. The regulations cannot take effect until 30 days after publication and likely will not become final until 2017.

Keep in mind that the federal estate tax no longer applies to the vast majority of the population. The new regulations will only apply to those who have a net worth of more than $5,450,000 individually or $10,900,000 for married couples (these amounts increase annually with inflation), or to those who reside in states with lower estate tax exemptions. As a result, those business owners with a net worth below this threshold for estate tax values — and don’t anticipate surpassing that amount in the future — won’t need to worry about the new rules at all.

However, the rules will affect those high-net-worth individuals with a net worth that exceeds the estate tax exemptions — particularly business or real estate owners who have assets that are readily available for potential minority or marketability discounts.
If you fall within this group, the clock is ticking for you to use the rules as they currently exist.

Do you have questions about these regulations and whether you will be affected?


Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Dean Stange

J.D., CFP® | Principal, Senior Financial Advisor

Dean Stange, J.D., CFP®, is a Principal and Senior Financial Advisor with Wipfli Financial Advisors in Madison, WI. As an attorney, Dean has provided estate and succession planning advice to business owners for more than 20 years. He primarily focuses on the ways in which business ownership, tax and estate issues can impact long-term financial planning.

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Alert: Proposed Regulations to Limit Intra-Family Discounts

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