Valuation Discounts: Going, Going,…

Fennemore Craig Update

Valuation Discounts: Going, Going,…

For those considering transferring an interest in a family-owned business entity (a corporation, partnership, or LLC) to family members…the era of significant valuation discounts may be coming to a close.

Previously we have seen valuations from qualified experts reflecting 35%, 40%, 45%… combined discounts for lack of marketability and lack of control (including minority interest discounting).

The IRS recently issued proposed regulations which, if finalized in their present form, may have the effect of materially reducing the magnitude of valuation discounts that now typically apply when interests in family-owned entities are valued for gift or estate tax purposes.

As an illustration, assume that you own all of the stock of your corporation, and that the corporation has a value of $10 million. If you transfer 49% of the stock to your children (or to a trust for their benefit), the children will not have voting control, because you retain 51% of the stock. Additionally, because there is not typically a ready market for stock in a closely-held business, it will likely be difficult for the children to sell the stock.  Historically, this lack of control and marketability reduced the value of the children’s stock to something less than 49% of the overall value of the corporation. This reduction in value is sometimes referred to as a valuation discount.

The application of appropriate valuation discounts can enable certain individuals to pay less tax on death or in connection with lifetime gifts. If the proposed regulations become law, the amount of those valuation discounts may be significantly reduced.

Hearings on the proposed rules will take place in December of this year. If you have a family-owned business entity and are considering transferring a portion of it to family members, we should analyze and discuss your alternatives as soon as possible… and well before December of this year.  Please contact us at your earliest convenience.

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