Significant Changes Proposed to Rules for Valuing Interests in Family-Controlled Entities

August 10, 2016

Last week the IRS proposed new regulations that would, in many cases, prohibit the use of certain discounts customarily applied when valuing interests in family-controlled entities, such as corporations, partnerships and limited liability companies.  Clients frequently employ estate planning techniques designed to take advantage of these valuation discounts to shift wealth to younger generations in a tax-efficient manner.

The value of a minority interest in a family-controlled entity is generally discounted to reflect the fact that the interest is restricted.  Typically, the owner cannot control the entity or liquidate or redeem his or her interest.  Among other changes, the effect of the proposed regulations would be to treat these restrictions as if they would not be enforced by the family and, thus, should be disregarded when valuing the interest for transfer tax purposes.

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