In an interim report, the U.S. Treasury has found the Estate Tax Valuation rules fall into the category of a tax regulatory burden that could be due for a review following President Trump’s executive order to reduce these types of tax burdens. By September 17th, a final report from the Treasury is expected to arrive on the President’s desk.
Forbes’ recent article, “Hated Estate Tax Valuation Rules On Trump's Hit List,” reports that the proposed rules, “Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes” under Section 2704, would curb valuation discounts and result in increased estate taxes upon the deaths of owners of family businesses.
Proponents contend that the rules would close a tax loophole for the wealthy. The valuation discounts allow a person to pass more on to heirs free of gift tax and estate tax, by putting a lower value on what they’re giving away. However, many didn’t like the proposed rules that were announced last August. They discussed their concerns in Treasury hearings in December. They claim that there are legitimate reasons for the use of discounts, and that the proposed rules shouldn’t apply to family operating businesses. However, discounts for family limited partnerships holding securities, by contrast, are said to be riper for abuse and regulation.
The Family Business Coalition says the regulations would “remove important tools business owners use to adjust for lack of control and marketability, when valuing minority shares of a small business.”
However, it’s unlikely the rules will ever see the light of day. It might all be moot if Trump gets rid of the estate tax, but you can’t bet on a repeal being permanent. Most folks are proceeding as usual, doing transactions like sales to defective grantor trusts and GRATs, which are ways to move the wealth forward without a gift tax.
Most are taking valuations based on the way the current law works, and not considering the impact of the proposed regulations (if you take a position on your tax return that’s contrary to proposed rules, you must note it). Therefore, get a qualified appraisal, file a gift tax return and make an “adequate disclosure.”
A word to the wise: business owners should speak with an experienced estate planning attorney at Cottrell & Jacobs, before making decisions about transferring assets. Remember that the IRS could potentially dispute valuations during the course of an audit. If they win the dispute, you’ll have to pay gift tax. If the estate tax is repealed, the whole thing would have been unnecessary.
Reference: Forbes (August 11, 2017) “Hated Estate Tax Valuation Rules On Trump's Hit List”