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Proposed IRS Changes on Business Valuations for Estates, Gifts, and Transfers

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In response to proposed changes in the 2017 IRS regulations, astute business owners are making strategic estate, gift, and transfer plans now, while the regulations remain relatively favorable.

Like shoppers who wait until Christmas Eve to buy gifts, procrastinators risk limited options and excess spending if they don’t take proactive steps to address transfer issues.

The 2017 fiscal year budget proposal contains substantive changes to estate and gift tax regulations, which present significant concerns to family-held businesses. Such businesses have historically reduced their tax liabilities on the transfer of assets by discounting their value. These discounts were permitted, because the holdings, often minority interests or other illiquid assets, were considered more challenging to sell.

Sheltering assets via ownership discounts has proven advantageous to families looking to minimize their tax burdens, and these opportunities may vanish by 2017. If the proposed regulations are implemented, and the current discounts are eliminated, transition planning and next generation ownership transfer will become more costly for taxpayers, particularly those with medium to large sized businesses.

The proposed changes include the following:

  • Decrease the exemption amounts for estate and generation-skipping transfer taxes by approximately $2 million.
  • Reduce the lifetime gift tax exemption from roughly $4.5 million to $1 million.
  • Increase the top gift, estate, and generation skipping transfer tax by 5%, taking it from 40% to 45%
  • Prohibit any decrease in the annuity during the term of the Grantor Retained Annuity Trust (GRAT)
  • Prohibit tax-free exchanges of assets held in the GRAT
  • Limit the time to 90 years that multi-generational, dynasty trusts would remain generation skipping tax- free and estate tax free.
  • Create a new category of annual gifts.
  • Increase the annual gift limit to $50,000 per donor.
  • Expand the definition of “gifts.”

If you have not created an estate plan, now is most certainly the time to do so. If you have a plan that was crafted before the proposed changes were announced, it is wise to have it professionally assessed to consider the implications of the new regulations, and alter it accordingly.

VMI advises making any gifts, and transfers now, before the proposed regulations are implemented . This is especially crucial for medium to large sized operating companies and asset holding entities, which may feel the most impact if/when the regulations are approved in 2017. Once the changes to the tax code are made, the current savings may disappear, potentially leaving businesses and individuals exposed to higher estate and gift taxes.

Just as your spouse/significant other was less than thrilled with the last minute holiday gift purchased hastily at a convenience store, your heirs will bear the brunt of last minute, or worse yet, no estate planning that may result in negatively impacting the value of your estate.. This is easily solved with proactive financial planning.