The Discounting of Discounts

September 4, 2015

In its recent 2015 – 2016 Priority Guidance Plan, the Internal Revenue Service signaled that it may soon be issuing regulations which may limit the availability of valuation discounts for closely-held business interests for federal gift, estate and generation-skipping tax (“transfer tax”) purposes.  These discounts are routinely applied by business appraisers in determining the value of a closely-held business interest which is the subject of a gift to an individual or to a trust, or which is includible in the estate of a business-owner for federal estate tax purposes.  A closely-held business can include any business which is not publicly-traded and is often either a limited liability company, limited liability partnership, S corporation or C corporation.

Valuation discounts can reduce significantly transfer taxes and can preserve the transfer tax exemptions which this year are a maximum of $5,430,000.  While the IRS often scrutinizes carefully these discounts and seeks to reduce them on audit of a federal gift or estate tax return – and is often successful – as a general matter the discounts have been approved time and again by the courts and have therefore long been a valuable estate planning asset.

The anticipated regulations are likely to apply to gifts made after, or to estates of individuals who die after, the date the regulations are first made public.  We do not know when the regulations will be issued or when they will become effective.  However, an individual who, as part of an estate and business-succession plan, is considering making gifts of closely-held business interests to family members, to others, or to trusts, should consult estate planning counsel as soon as possible to explore the options valuation discounts can provide for saving transfer taxes.