“Clients who had planned to incorporate these valuation discounts into their business succession and estate planning strategies may find that their plans are no longer viable in light of the new regulations.”
A few months ago, the Treasury Department announced its proposed regulations that will, if finalized as currently written, substantially limit the applicability of current valuation discounts for transfers of interests in family-owned businesses.
As Think Advisor says in its article “GRAT Valuation Discounts Disappearing Soon,” since the regulations probably won’t become effective until the middle of next year, you still have some time to capitalize on the valuation discounts still available.
For many small businesses, a grantor retained annuity trust or “GRAT” can form part of an effective planning strategy. This would allow you to use both the value of the GRAT strategy and today’s family-business valuation discounts.
The proposed changes to Section 2704 are aimed at cutting out the valuation discounts for interests in family-owned businesses when transferred and the family controls the entity both before and after the transfer (most likely it’s a transfer within the family). The current rules allow certain restrictions on liquidation rights in the family-owned business situation that mean big valuation discounts—but these restrictions are ignored if they’re more restrictive than the default state law that would apply to the entity.
The proposed regulations would all but eliminate the reference to state laws and state laws will only be considered when determining whether a discount is appropriate if an applicable state law provision is mandatory. Also, restrictions that limit a transferor’s ability to require liquidation or redemption of his or her own business interests will be disregarded in valuing the interests. Instead, it’ll be assumed the transferor has a six-month “put” option to liquidate or redeem the business interests.
In summary, the new proposed regulations would substantially limit the ability of family-owned businesses to take advantage of discounts for lack of control over the business or lack of marketability.
To use the valuation discounts that currently apply for small business interests, a GRAT strategy can be implemented to “freeze” the current value of these interests and transfer the appreciation to the beneficiaries. A GRAT combines a trust that’s established for a certain predetermined period of time with an annuity that pays the trust creator a set value each year of the trust's existence. At the end of the GRAT term, the remaining value passes to the beneficiaries, so it’s out of his or her estate.
A qualified estate planning attorney can help you navigate these complexities.
Do you live in South Florida? Are you a small business owner or do you have a family business you are looking to pass on to the next generation when you retire? Call me (305-443-3104) right away for peace of mind. I can help!
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- have prepared over 4,000 estate plans in 30+ years in practice,
- have administered over 600 estates through Probate, and
- am a Certified Financial Planner Professional™, plus
- I am also a Florida Certified Public Accountant (CPA).
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Reference: Think Advisor (Sept. 14, 2016) “GRAT Valuation Discounts Disappearing Soon”