Proposed Regulations Threaten Valuation Discounts, Spur Immediate Estate Planning Need by Barry M. Brant, CPA

Posted on August 15, 2016 by Barry Brant

High-net-worth families may have a more difficult time transferring real estate and business assets to their heirs under proposed regulations recently issued by the U.S. Department of Treasury. At risk are the tax-saving discounts that entrepreneurs have used for decades to transfer ownership interests in closely held businesses and real estate, either by gift or at death. These valuation discounts, which could be as high as 35 or 40 percent, have been a source of ire for the IRS because, the agency believes, they “understate the fair market value of assets” and allow some taxpayers to completely escape estate and gift taxes on intra-family asset transfers.


The use of valuation discounts is based on the principle that a partial ownership interest in an asset is worth less than its comparative share of the entire asset. More specifically, because individuals who hold minority interests in corporations or partnerships do not have the power to exercise their shares to control the entity’s ongoing operations or its potential sale, they should be entitled to a discount on the value of those interests. Due to this lack of control and lack of marketability of privately held companies, assets owned by entities that are not controlled by a grantor/decedent may be in a structure that allows for discounting. As a result, owners of the non-controlling interests may absorb less of their $5.45 million per-person gift and estate tax exclusions, or $10.9 million exclusion for married couples.


To illustrate how this works, consider a family with $100 million in business assets held in a limited partnership, limited-liability company or corporation. A gift, sale or other transfer of the non-voting or non-controlling interests to family members has been generally eligible for a discount of up to 40 percent of the transferred assets’ value, thereby removing from the estate of the transferor up to $40 million in taxable assets. For gift and estate tax purposes, the transferred interests would be valued at $60 million, and the family would pay less estate taxes than it would have on the $100 million of undiscounted value.


Under the proposed regulations, which, if adopted, are likely to be challenged in court, all minority and lack of control discounts for closely held interests would be eliminated, essentially putting some taxpayers’ existing succession plans in disarray. When valuation discounts are an important part of taxpayers’ existing estate and business-succession plans, prompt action should be taken to maximize the existing tax savings strategies as soon as possible. This could include expediting the implementation of discounted wealth transfer strategies, restructuring the way family assets are held and/or making use of specific trust instruments.

The advisors and accountants at Berkowitz Pollack Brant and Provenance Wealth Advisors work extensively with business owners, real estate investors and high-net-worth families to develop estate plans that meet wealth-preservation and tax-efficiency goals. Implementation of estate plans utilizing discounts for intra-family transfers should be considered prior to the formal adoption of the proposed regulations, which is expected later this year or early 2017.


About the Author: Barry M. Brant, CPA, is director of Tax, Consulting and International Services with Berkowitz Pollack Brant, where he leads the firm’s private client group and provides guidance on complex tax matters and issues related to multi-national holdings, cross-border treaties and wealth preservation and protection. He can be reached in the CPA firm’s Miami office at 305-379-7000, or via email at