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Estate and gift tax: New proposed limits on discounting

On Behalf of | Aug 8, 2016 | Probate Litigation |

When a share in a closely held family business or piece of land (i.e. the family vacation home) is passed down, it generally qualifies for a discount in value. This is because it is much harder to sell these minority stakes.

In a recent post, we discussed a court battle over various accounting methods used to determine how much a minority stake in a family business was worth. In this post, we look at a proposed federal rule change that could limit these discounts.

The lifetime gift exclusion is currently $10.9 million for a married couple. Gifts above the threshold are taxed at a top rate of 40 percent. The IRS estimates that in 2014, there were about 5,200 taxable estate tax returns filed.

One way to stay under the $10.9 million threshold has been to place certain assets (a family business, vacation property or investment portfolio) in a company that includes restrictions on the sale of an interest.

How discounts might keep assets below the threshold

A successful family business or ranching operation that could be sold for $15 million may be placed into a closely held company with shares going to each of the children. Restrictions might affect who could purchase a minority interest as well as what they could do with the interest. For example, it might be harder to convince others to liquidate the business.

Based on these restrictions, an appraiser might apply a discount that leads to a $10 million valuation.

Crackdown on misuse of discounting method

The government wants to crack down on the misuse of this discounting method. But it is going to make it more difficult for legitimate family-owned businesses. A new valuation method that assumes single ownership could lead to overvaluation and significant tax consequences.

The regulations must still go through a lengthy process before becoming law. Changes in the law are one of the reasons to schedule occasional consultations with an estate planning attorney to ensure your estate plan continues to effectively meet your needs.