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Changes to Business Valuation Discounts on the Horizon

Changes to Business Valuation Discounts on the Horizon

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Late 2016, the IRS proposed measures that would effectively reduce, or outright eliminate, the possibility for valuation discounts on estate transfers. Businesses will have to seek a commercial attorney to help figure out just how to transfer their assets to family members without the gift tax claiming large portions of it.

How Valuation Discounts Currently Work

Valuation discounts serve to lower market value of privately held companies, or their stock, when transferring those assets to another. This lowers tax liability, which can help to save a large chunk of the monetary value of the transferred asset. There are two main types of valuation discounts.

Discount for Lack of Control (DLOC) – These discounts come into play if the entity to receive the transferred assets does not have full control of those assets. For example, the person initiating the transfer can set up a family LLC that retains control, while giving the bulk of the assets to the transferee.

Discount for Lack of Marketability (DLOM) – Many privately owned companies lack marketability since they’re not publically traded. Liquidating the assets may require a lot of time and expense. Therefore, it’s possible to seek additional valuation discounts based on lack of marketability.

There are many other types of business valuation discounts as well. Each one can help to lower the amount of tax liability involved in a transfer of assets.

Section 2704 of the Internal Revenue Code

IRC Section 2704 provides valuation rules for intra-family transfers of interest in businesses, real estate, and other assets. Proposed changes to that code introduce many stipulations.

  • Removal of some of the lack of marketability criteria
  • Expansion of scope to include LLCs, and other types of business entities
  • Removal of the ability to give nominal shares to non-family to affect valuation
  • Who can claim control over an LLC
  • Outright increase of estate taxes
  • Additional restrictions that countermand previous valuation methods

These proposals can cause the transfer itself to cost so much the transferee may have to liquidate some of the assets just to cover the taxes.

What Can Businesses Do about Possible Valuation Discount Changes

Proposed changes have a long road before they become law. Businesses should accelerate their planning. It’s important to implement strategies while valuation discounts still work, and before the enacting of new regulations. The faster a business and commercial attorney can hammer out the details, the more secure the future disposition of that business will be.

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