Tax Loophole For Family Businesses Targeted For Closure

The United States Treasury Department has proposed new regulations which would substantially curb the ability of family owned businesses to transfer wealth from one generation to the next.

For many years, families have been able to lawfully transfer interests in their business to the next generation through entities including Limited Liability Companies, Family Limited Partnerships and Corporations. Specifically, in each of these entities, control is retained by the older generation while economic interests have been transferred to the younger generation.

Because control has been retained by the older generation, the value of the interests transferred has been able to be discounted substantially on the theories that the interests transferred are not controlling interests and are virtually unmarketable. Thus, for example, a majority owner of a corporation could transfer $100,000 of shares to his or her children but claim that lack of marketability and lack of control discount the value of same by 20% which, in turn, would allow the owner to claim that the gift was worth only $80,000. This allows $20,000 to be transferred outside of gift and estate tax exposure.

Proposed REG-163113-02 would restrict these types of transfers. A hearing on these regulations is scheduled for December 1, 2016. Thus, any business owner who is considering this form of gifting may wish to do so prior to this date.

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Established in 1876, Capehart Scatchard is a diversified general practice law firm of over 90 attorneys practicing in more than a dozen major areas of law including alternative energy, banking & finance, business & tax, business succession, cannabis, creditors’ rights, healthcare, labor & employment, litigation, non-profit organizations, real estate & land use, school law, wills, trusts & estates and workers’ compensation defense.

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