In this guest post, Minneapolis Foundation trustee Todd Lifson, a partner at Lurie, and his colleague Matthew Brown explain why it’s important for people with family-owned businesses to review their estates in light of proposed regulations recently issued by the IRS.
Family businesses are a cornerstone of the economy. The owners of these businesses work hard to provide for their families and be a part of their community with the goal of one day leaving the business to the next generation.
The IRS has recognized the nuances of a family business for years. Since 1959, the IRS has defined fair market value as the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts. This definition has left room for discounts for lack of control and lack of marketability for family businesses that account for their uniqueness.
The fair market value definition has stood the test of time and has been utilized in estate and gift tax valuations for over 60 years. Recently, however, the IRS proposed changes that could impact family businesses. The IRS has proposed amendments to Section 2704 of the Internal Revenue Code that will have a substantial impact on future transfers of family member’s interest in family businesses. The IRS is proposing that there be no valuation discounts for inter-family transfers of interests in closely held companies owned or controlled by a family. In addition, the IRS is proposing limiting the use of promissory notes to fund the buyout of family members’ interests. This would impact the value of the estate or gift and affect taxpayer’s desired bequests to charities, their children and their grandchildren.
The proposed regulations are ignoring empirical market data that the economic value of a minority interest in a family business is less than its pro rata share. This same principle is true in publicly held businesses.
Without discounts, family businesses are hit especially hard. A valuation that doesn’t account for the dynamics of a family owned business among multiple generations could result in future generations being faced with the possibility of needing to sell the business to pay for estate taxes upon a parent or grandparents’ death.
After a public hearing on the proposed regulations in December 2016, the IRS will decide whether or not to enact these regulations or make changes based on comments and suggestions made by the advisors and advocates representing family businesses. If the regulations stand, they could be enacted within 30 days of being finalized.
Now is a good time to revisit your estate in the context of the proposed regulation. Make sure to involve your advisor network, including your Attorney, Accountant, Financial Planner, Philanthropic Advisor and a Valuation Specialist to determine what impact these regulations could have on your family business. Your legacy and the future of the family business are that important.
Todd J. Lifson, CPA, CFE, CGMA, IFRS Cert. is a partner at Lurie. Matthew T. Brown, CPA, JD is a Tax Services Manager at Lurie.