Proposed IRS Regulations Could Close Tax Loopholes Used to Minimize Gift and Estate Taxes

Bigstock-Couple-running-bookshop-13904324Perhaps you’re considering retirement and succession planning for your business. One option is to transfer the business to children to minimize estate taxes; however, there may be possible changes to tax laws in the future. Take advantage of certain discounts that are currently available sooner rather than later.
A recent cincinnati.com post, “Planning can minimize bite on business from estate tax,” explains that the IRS recently released proposed regulations that would close the tax loopholes some taxpayers use to minimize gift and estate taxes when transferring interests in a closely held family business to relatives.
If a person wants to transfer a minority interest to his or her children, there are the tax advantages of “discounts” that help preserve the owner’s lifetime exemption. Discounts usually range between 25 percent and 40 percent and fall into two categories: minority discounts and lack of marketability discounts. The reason to apply discounts in situations where a minority interest is transferred is that an ownership position with less than 50% of the voting rights lacks the ability to control. There are quite a few things a majority owner can control that a minority member can’t—like setting management compensation, creating policies, deciding the amount and timing of distributions, and liquidating, dissolving or selling the company.
Using discounts in tax and estate planning can create a big benefit and allow for greater transfer of wealth to family members. So, if you wanted to transfer a minority interest in your business to your children with a value of $1 million, a discount of 30% would mean that you would only have to reduce your lifetime exemption by $700,000 instead of $1 million.
If you think your estate will be under the $5.45 million or $10.9 million exemption amount, you should weigh the desire to transfer the business with the potential to step-up the basis upon your death. Based on the business structure, your current basis may be significantly less than the business’ current value. Any gifts made of the business interest would have carryover basis for the recipient. If the owner died owning the business, the recipient would get a basis that’s generally equal to the fair market value as of the date of death—a difference that can be valuable if you have a low basis and if you don’t otherwise anticipate owing estate tax.
A public hearing on the proposed regulations is scheduled for December 1, and the regulations wouldn’t be effective until at least 30 days after they’re finalized. These regs would dramatically restrict the availability of discounts when transferred interests in family businesses are valued for taxes. If the regulations are approved as they’re proposed, they would apply prospectively. As such, there would be a window of opportunity to take advantage of the current regulations if you are considering transfers of interests in family businesses.
Reference: cincinnati.com (August 31, 2016) “Planning can minimize bite on business from estate tax”

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