Year-End Tax Update – 2016
Now that the election has been decided, tax law modifications are likely to accelerate. Not only have several revisions been legislated thus far in 2016, but now we can look to President-elect Trump’s proposals for modifications down the road. This Year-End Tax Update will review the changes already implemented, as well as those which will be under consideration.
Tax Law Changes Already in Place:1. Elimination of Valuation Discounts on Family Controlled Entities
For Estate Planning purposes, the IRS has allowed, and courts have supported, the idea that closely-held entities, even those controlled by a single nuclear family, are entitled to valuation discounts. Depending on the specific facts and circumstances as delineated in legal documents and as applicable under state laws, both lack of control and lack of marketability often give rise to discounts on enterprise value of 30% or more. These discounts were akin to those allowed when ownership has not been held by families. Even though the IRS has challenged discounts over the years, meaningful discounts have continued to be available based on the specific facts and circumstances.
Earlier this year, Treasury released Proposed Regulations under Section 2704 which will completely disallow valuation discounts when a single family controls more than 50% of an entity. Comments on these Proposed Regulations have been requested by Treasury and a hearing was held on December 1 where, among other aspects of the regulations, definitions and transition rules were reviewed.
With President-elect Trump in the White House and both chambers of Congress in Republican control, the importance of these Regulations may be substantially lessened. For example, if the Estate Tax is eliminated, even for only a period of years, these discounts may not be relevant. Complexity will surely set in down the road if the Estate Tax is reintroduced, so aggressive planners are sticking to their guns and recommending accelerating transactions, many by year end, taking advantage of the existing discounts.