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Family businesses could lose valuation discounts

If you own a family business, or interests in a family business, you may want to pay attention. The Internal Revenue Service has been looking closely at, and may be ready to take action, on reducing or eliminating valuation discounts.

Family limited partnerships or family limited liability companies (companies similar to limited or limited partnerships, but family owned and operated) have been taking advantage of valuation discounts for some time as a "wealth transfer tax planning" strategy. A valuation discount is a reduction in the value of property that is allowed by the IRS when a limited or unlimited business owner gifts or sells part of their interests in the company to their children or others. This discount results in reduced inheritance taxes.

In an FLP or an FLLC, family members can transfer wealth, sometimes in the form of property or securities, to the business in exchange for interests; thus, they become limited partners. They in turn reduces their tax liability on the entity. Limited partners are usually passive investors, and have little or no management functions of the business.

The IRS is now set on new regulations of IRC Section 2704(b)(4) , which will have a big effect on FLCs or FLLCs. The proposed changes would significantly reduce or eliminate the discounts altogether. When? Possibly as early as mid-September.

Whether such entities that already exist in a family business will be "grandfathered" in or not is speculative at this time. If they are not, the current valuation discounts would only be applied to transfers made prior to the new regulation's effective date.

If you own or are in invested in an FLP or FLLC, you may want to seek legal advice on ensuring that your business securities are handled properly in the best interests of the business, its investors and future beneficiaries. Any time significant tax changes of this kind are made, it can have a huge effect on the value of one's family estate and estate planning.

Source: The Press-Enterprise, "BEST IN LAW: IRS moves mean it's time to shift family entity wealth," James Harper, July 29, 2015

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