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An End to Valuation Discounts Could Mean Higher Tax Liabilities for Some Estates

09.15.2016

As Seen in BizTalk in the St. Louis Business JournalWealth management, estate and tax planners and advisors have their eye on December 1, 2016, the day the Internal Revenue Service (IRS) will hold a public hearing on proposed regulations that would limit valuation discounts for family-controlled businesses and partnerships.  Discounts for lack of marketability (DLOM) and lack of control (DLOC) are widely used in wealth transfer transactions between family or related parties. If the proposed regulations become law, they would likely result in higher tax liabilities for these families.

What is the potential impact of these proposed regulations?

It is unclear how courts may interpret the regulations, but it is clear that the intentions of the IRS are to restrict or limit the application of valuation discounts applied in a wealth transfer setting between related parties.

Legal professionals have commented that the proposed regulations are an attempt at overturning case law that serve as precedent for the use of discounts. The IRS’s position stems from their view that professionals in the wealth management industry too often take advantage of the current regulatory environment by advising their clients to structure family businesses in ways that maximize their ability to apply discounts. While these wealth management techniques often do lower tax bills for wealthy family business owners (a result that is less favorable from the IRS’s perspective), the underlying concepts that allowed for the acceptance and application of valuation discounts in the first place remain grounded in economic reality, research, and valuation theory.

Who will be affected?

The proposed regulations are expected to be made final in 2017.  Thus, if you are an individual that has or expects to have an estate valued at more than $5.45 million ($10.9 million in total for married couples), you could be affected.  Significant tax savings may be realized by executing a wealth-transferring transaction prior to the rollout of these new rules.  However, since estate planning is complex, each situation must be carefully examined and discussed, so time is of the essence.

What should you do?

Individuals and families that may be affected by the potential elimination or restriction of these discounts should consult soon with their estate planning advisors to assess the impact of these proposed regulations on their unique family situation.

David P. Heilich, CPATo learn more about the impact of valuation discount regulations, click here to request a meeting or contact David Heilich, Partner and Practice Leader of the Family Wealth Planning Group, at dheilich@bswllc.com or 314.983.1273.

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