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Closely Held Family Entities in Grave Danger: Minority Interest and Lack of Marketability Discounts About to Disappear?

After years of slow boiling anticipation, statements made by the IRS and the Treasury this year heated up the conjecture and anticipation which finally came to a head on August 2, 2016. I’m of course talking about the just-released proposed regulations under Internal Revenue Code Section 2704 and the far reaching, highly negative implications for closely held family entities and the whole area of family business succession planning.

While it will take some time to fully digest and analyze the proposed regulations, the crux of the matter is that the Treasury department has issued proposed regulations which appear to eliminate almost all minority/lack of control discounts for closely held interests, certainly including family entities. Such discounts are, to the mind of many practitioners, appropriate because they reflect the reality that a partial ownership interest is worth less than its proportional share of the total business. Additionally, the minority discounts are a powerful tool that is widely used to reduce valuation of property; thereby, allowing it to be more tax efficiently moved to younger generations. In other words, a powerful estate planning tool might no longer be viable.

Again, while it will take some time to fully digest, it’s safe to say that advisors and taxpayers need to fully consider the possible implications and whether it makes sense to execute considered plans this calendar year. The Treasury is holding a hearing on December 1, 2016, and stated that the final regulations won’t take effect until at least 30 days after finalization. That timeframe does not leave a lot of time to formulate and carry out advanced planning.

For any questions, please feel free to contact Hal Snow at hsnow@gsblaw.com or at 206.816.1418 or Matt Teagarden at mteagarden@gsblaw.com or at 206.816.1303. Our Family and Closely-Held Business Practice Group, with attorneys located in Anchorage, Portland, Seattle, New York and Washington, D.C., is ready to assist you with any needs or questions.

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Garvey Schubert Barer’s family-owned and closely held businesses practice group comprises strategic advisors and core practitioners who understand the intersection between law and the unique challenges of running a family business. With more than one hundred years of combined experience, our family-owned and closely held businesses practice offers clients extensive resources and a knowledgeable team of family wealth advisors across the Unites States.
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