On Aug. 2, the U.S. Department of Treasury issued long-awaited proposed regulations under Section 2704 of the Internal Revenue Code, which are designed to eliminate the opportunity for “discounts” on inter-family gifts of interests in family controlled business entities. For this purpose, a family is considered to “control” a business entity if it collectively controls 50 percent or more of the vote under an intricate and comprehensive scheme of “attribution” rules among family members. The earliest date on which the proposed regulations would become final appears to be Dec. 1, so, there remains an opportunity for families that act quickly and diligently to still have a chance of engaging in planning with discounts, at least until that date.
Planning to lock in discounts for transfers of family-owned business entities has been a key component of estate planning for many high net worth families facing a steep federal estate tax at death for decades. The tax planning goal of such transfers is generally two-fold: to eliminate future growth on the asset from a client’s taxable estate and to take advantage of the opportunity to secure discounts related to the recipient’s lack of control over the transferred asset (by utilizing a discount, the client is reducing the taxable value of the transfer being made). Even if the IRS is able to succeed in its goal of eliminating the discounts, families will still be able to benefit from making transfers of assets before death to allow future appreciation to escape the federal gift and estate tax system.
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