For many years, in certain circumstances the IRS has allowed a taxpayer to gift or sell interests in corporations, LLC’s and partnerships to family members with significant reductions in valuing those transfers for the lack of control and lack of marketability of minority and/or non-voting interests. The discounts reduce transfer taxes. This discount planning has been used to gift/sell interests in entities which own rental (commercial or residential) real estate, an operating business and, often, marketable securities.
For example, if an S Corporation owning a car dealership is recapitalized to provide for voting and non-voting shares, and those non-voting shares are gifted to children, discounts of up to 40% generally have been allowed to reduce gift and estate taxes. Assuming the S corporation has an underlying net asset value of $10,000,000, the gift of 49% of the equity in the form of non-voting shares could be valued at $3,000,000 (rather than $5,000,000) to use less of the donor’s lifetime gift tax exemption. For those clients who want to sell discounted interests in order to maintain their cash flow, rather than making a gift, such sales can be made to a grantor trust on an income tax-free basis.
We often utilize these discounts, supported by appraisal, in arranging for gifts of interests in entities or sales to trusts for the benefit of family members. The discounts have been a powerful tool for the transfer of wealth, often allowed by IRS and the Federal Courts for over 20 years.
However, the IRS recently issued proposed treasury regulations designed to eliminate many of these intra-family valuation discounts for transfers of family-controlled entities. If ultimately approved, these new rules would take effect after December 1, 2016.
We urge clients who are considering the transfer of interests in closely-held entities and who want to reduce transfer taxes to act promptly to take advantage of discount planning opportunities.