The fight to block Obama-era proposed rules that family business owners say will wreak havoc on their legacy plans is heating up again.
In response to President Trump’s executive order to reduce tax regulatory burdens, the U.S. Treasury has identified the valuation rules as a significant and ripe for review in an interim report. It’s accepting comments through August 7 on whether the rules should be rescinded or modified.
A final report to the President is promised by Sept. 17.
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 mean increased estate taxes on the deaths of owners of family businesses.
Proponents say the rules would close a tax loophole for the wealthy. With valuation discounts, you can pass more on to your heirs free of gift tax and estate tax by putting a lower value on what you’re giving away. Estate planners and their clients cried foul when the rules were proposed last August, and in Treasury hearings in December. They say there are legitimate reasons for the use of discounts, and that the proposed rules shouldn’t apply to family operating businesses in any case. (Discounts in the case of family limited partnerships holding securities, by contrast, are arguably more ripe for abuse and regulation.)
The Family Business Coalition, for example, has already filed comments, renewing its call for a complete withdrawal of the proposed rules. “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,” according to the comments.
Will the rules ever see the light of day? “Unlikely,” says Richard Dees, a trusts lawyer with McDermott Will & Emery in Chicago.
What about a modified version? “If they give dispensation to family operating businesses, does that annihilate the regs?” asks Diana Zeydel, a trusts lawyer with Greenberg Traurig in Miami.
Would all of this be moot if President Trump succeeds in killing the estate tax? You can’t count on repeal being permanent anyway, suggests Zeydel. “For the most part, people are just proceeding as usual.” That means doing transactions like sales to defective grantor trusts and GRATs, methods that move the wealth forward without incurring gift tax.
Most people are taking valuations based on principles of current law, regardless of the proposed regulations, Zeydel says. Note: if you take a position on your tax return that’s contrary to proposed rules, you have to signal that. So you get a qualified appraisal, you file a gift tax return and make an “adequate disclosure.” That’s key. A recent IRS chief counsel memo found that gift tax could be assessed retroactively in years where no gift tax returns had been filed, and another year was open for assessment because the gifts were not adequately disclosed on the return.
You don’t want to be too aggressive in transferring assets, Dees warns, because the IRS could dispute your valuation on audit. If the IRS is successful, you’d owe gift tax. That could turn out to have been unnecessary if the estate tax is repealed. “Uncertainty always creates hesitation to be aggressive in giving when you don’t know what the law’s going to be next year,” he says.