Client Advisory Bulletin


The Department of Treasury's recently issued Proposed Regulations under Section 2704 once they become final would adversely impact the estate planning for some business owners by eliminating certain valuation discounts as well as reducing the ability to leverage the maximum amount of assets out of harm's way due to divorce, lawsuits or other claims.

Proposed Regulations Recently Issued: The Department of Treasury ("IRS") recently issued Proposed Regulations that could have a dramatic impact on your estate planning by eliminating valuation discounts. For high net worth individuals looking to minimize their future estate tax, this is critical. It can also be important for others as well. If you are concerned about protecting a family business from the risks of future divorce, or protecting your assets from lawsuits or other claims, discounts can enable you to leverage the maximum amount of assets out of harm's way, without triggering a gift tax to do so.

Act Now: Time is of the essence. Once the Proposed Regulations are effective, which could be as early as year-end, the ability to claim discounts might be substantially reduced or eliminated, thus curtailing your tax and asset protection planning flexibility.

What are Discounts Anyway? Here's a simple illustration of discounts. Tom has a $30M estate which includes a $15M family business. He gifts 40% of the business to a trust to grow the asset out of his estate. The gross value of the 40% business interest is $6M. Since a minority 40% trust/shareholder cannot force a sale or redemption of its interest, the non-controlling interest in the business transferred to the trust is worth less than the pro-rata value of the underlying business . Thus, the value should be reduced to reflect the difficulty of marketing the non-controlling interest. As a result, the value of the 40% business interest transferred to the trust might be appraised, net of discounts, at $3.6M. The discount has reduced the estate by $2.4M from this one simple transaction.

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