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Proposed IRS Regulations Restrict Valuation Discount Planning for Closely Held Companies

On August 2, 2016, the U.S. Treasury Department issued proposed regulations that, if adopted, would significantly limit or prevent taxpayers from discounting the estate and gift tax value of certain closely-held family companies. The proposed regulations affect the estate and gift tax valuation of ownership interests in family-controlled entities, including operating companies as well as family holding companies that are established to facilitate a multigenerational stewardship of family capital.  The proposed regulations relate to Section 2704 of the Internal Revenue Code, a section that, in part, enables the Internal Revenue Service to disregard for transfer tax purposes certain restrictions on liquidation of interests in family-controlled entities – provisions that would otherwise support valuation discounts.  The proposed regulations seek to expand the reach of this section with the effect of significantly reducing or eliminating the transfer tax valuation discounts that so often attend family-controlled entities.

Effective Dates

A public hearing on the new proposed regulations is scheduled for December 1, 2016.  The proposed regulations provide they will generally apply to transfers made thirty (30) days after the regulations become final (and certain transfers made before that date if the transferor dies after the effective date but within three (3) years of the date of the transfer).  The earliest that the proposed regulations would likely become final is in the first quarter of next year, and that could be on the early side, as there is likely to be considerable comment coming in from taxpayer representative organizations.

Immediate Planning

The proposed regulations are controversial, and there is no certainty as to how they will appear in their final form.  Whatever may transpire in the processing of the proposals, it will be advisable for high and moderately high net worth families who have not availed themselves of this aspect of estate planning to seriously consider the formation and implementation of a family holding company arrangement at this point in time.  For families who have controlled entities in place (whether an operating company or a company of relatively passive holdings), a current assessment of the arrangement is likewise in order.  We will be happy to consult with our clients and their advisors regarding the planning opportunities that may remain available to them pending the issuance of the final Section 2704 regulations.

Updates Needed for Washington LLCs

As outlined in our last Alert, major changes to Washington’s Limited Liability Company Act became effective January 1, 2016.  A number of changes were made to the laws concerning basic governance of LLC’s, including the addition of stated fiduciary duties, new member voting rules, and new provisions regarding members’ access to company records.  Clients who have not yet addressed the changes and the possible impact on their LLC documents should do so, as most Washington LLC agreements need to be updated to reflect the new Act.  Please contact your Karr Tuttle Campbell attorney for more information and assistance.

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