The Treasury Department appears to be about to finalize regulations that limit valuation discounts linked to family-owned business and, as Think Advisor reports in “GRAT Valuation Discounts Disappearing Soon,” the regulations probably won’t become effective until the middle of next year. So, there is still time to use the current regulations.
For many small businesses, a grantor retained annuity trust or “GRAT” can form part of an effective planning strategy. This would allow you to use both the value of the GRAT strategy and today’s family-business valuation discounts.
The proposed changes to Section 2704 are aimed at cutting out the valuation discounts for interests in family-owned businesses when transferred and the family controls the entity both before and after the transfer (most likely it’s a transfer within the family). The current rules allow certain restrictions on liquidation rights in the family-owned business situation that mean big valuation discounts—but these restrictions are ignored if they’re more restrictive than the default state law that would apply to the entity.
The proposed regulations would all but eliminate the reference to state laws and state laws will only be considered when determining whether a discount is appropriate if an applicable state law provision is mandatory. Also, restrictions that limit a transferor’s ability to require liquidation or redemption of his or her own business interests will be disregarded in valuing the interests. Instead, it’ll be assumed the transferor has a six-month “put” option to liquidate or redeem the business interests.
In summary, the new proposed regulations would substantially limit the ability of family-owned businesses to take advantage of discounts for lack of control over the business or lack of marketability.
To use the valuation discounts that currently apply for small business interests, a GRAT strategy can be implemented to “freeze” the current value of these interests and transfer the appreciation to the beneficiaries. A GRAT combines a trust that’s established for a certain predetermined period of time with an annuity that pays the trust creator a set value each year of the trust's existence. At the end of the GRAT term, the remaining value passes to the beneficiaries, so it’s out of his or her estate.
An estate planning attorney can guide you in dealing with the current and future regulations.
Reference: Think Advisor (Sept. 14, 2016) “GRAT Valuation Discounts Disappearing Soon”