By Leo Matarazzo
Updated 7/30/2019. The Treasury Department recently issued proposed regulations targeting the use of discounts that reduce the value of a family-owned business and any other family controlled entity for estate and gift tax purposes, which lowers a taxpayer’s ultimate tax liability at death. Potentially millions of dollars of estate tax savings are at stake if these regulations are adopted so it is important to remain informed and proactive on the issue.
The regulations aim to eliminate virtually all discounts associated with transferring minority or non-voting interests due to lack of control or marketability, which would restrict the use of common estate/business planning techniques.
For example, a business owner wanting to maintain control of his/her business while reducing his/her estate tax exposure at passing, can recapitalize his/her company to create voting and non-voting shares, and shift, while he/she is alive – by way of gift, sale or combination gift/sale – the non-voting shares to a trust for the benefit of his/her spouse, children and future generations.
Because non-voting shares are being transferred, discounts typically ranging from 20% to 40% can be utilized, reducing the value of the transferred interest for estate/gift tax purposes, which in turn can result in significant estate tax savings.
The final regulations may become effective in early 2017, so it is prudent that all closely held business owners discuss with their advisors whether a potential gifting program is appropriate, or to accelerate the timeline for any estate planning transactions already being considered. Waiting until after the regulations are adopted could result in a lost opportunity to shift significant value out of one’s taxable estate.
To view the full list of proposed regulations, click here.
For further information, contact Wiss’ Director of Estate and Business Succession Planning, Leo Matarazzo at firstname.lastname@example.org or 973.994.9400.