News & Events


On Aug. 4, 2016, The IRS issued proposed regulations that will dramatically affect your ability as a business owner to transfer wealth to the next generation in a tax efficient manner. The time to act is now as these changes could be in force by the end of this year. These regulations are currently open for public comments which could result in changes, however waiting may not be the most prudent option.

THE IMPACT ON VALUATION DISCOUNTS

Often partnerships or corporations contain restrictive distribution, liquidation or redemption/sale provisions which may lapse due to an event such as death or time. Due to these restrictions, the valuation of the entity may be lowered, enabling an individual to transfer wealth at a value less than what the transferee would receive once the restrictions are lifted. By issuing the proposed regulations, the IRS has taken the first step in minimizing the effects of restrictive provisions upon the valuation of the property being transferred.

The regulations address the lapses of rights or restrictions on the investment in the property being transferred. These rights/restrictions will be ignored for purposes of valuing an interest in a family-controlled entity being transferred to related family members, unless dictated by state law. This is especially true if the family members have the right to remove or change the restrictions after the transfer or they lapse after some period of time. Some of these rights/restrictions include:

  • Limitation on the right of the holder to liquidate the interest in the property;
  • Limiting the amount of the liquidation proceeds to an amount that is less than the minimum value;
  • Deferring the payment of the liquidation proceeds for more than six months (such as by a promissory note); or
  • Allowing the payment of the liquidation proceeds to be other than cash or other property.

Another effect of these regulations is that if there is a transfer within three years of death whereby there was a lapse of a liquidation right, then the IRS will treat this as a transfer that occurred at death and treat the transfer value as if there were not any restrictions. Thus it could affect prior gifts that have already been made and what would be included in an estate for a decedent.

The good news is you still have a short window of time in 2016 to get things done if you act quickly. If you were planning, or ought to have been planning, on doing some transfers of ownership to family members, you should strongly consider doing this before these rules become effective.

To develop an action plan, contact your professional at UHY Advisors today.