IRS ATTACKS FAMILY-OWNED BUSINESSES

The IRS recently proposed regulations that attack estate and gift tax planning of family businesses. Business owners, with taxable estates (presently $5.45 million) often take advantage of valuation discounts by the use of limited liability companies (LLCs), and family limited partnerships, etc. by making gifts of minority interests (i.e., partnership interests) to their children. The minority interest is presently treated as being less marketable and thus the basis is considered less for gift tax purposes. Furthermore, if the business owner has a minority interest at his or her death, this lowers the value of the estate for estate tax purposes – often by more than 30%. The new regulations should result in substantially reducing (if not eliminating) such planning as the IRS has proposed that transfers would be included in the transferor’s (business owner’s) estate if it occurred within three years of the business owner’s death. The transferred minority interest would be recaptured and there wouldn’t be a discount (for the estate) on the minority interest returned by the business owner.

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