Time to Start the Estate Planning Conversation with Your Privately Held Business Owner Clients

Susan P. Rounds, JD, CPA, LL.M. (taxation), AEP®, TEP

Long promised, the proposed regulations under IRC Section 2704 were released August 2nd. The proposed regs aim to curtail use of valuation discounts resulting from restrictions on the ability to liquidate a closely held business – whether or not the business is an active operating business. Valuation discounts are commonly sought for estate planning purposes when transferring family owned businesses and can greatly enhance the effectiveness of the current $5.45 million exemption per taxpayer.

Generally, the rationale for receiving a discount is that the bundle of ownership rights is limited, so that the owner does not enjoy any one or all of the rights to sell the interest, force liquidation, or control the entity. Because of the restrictions, the interest owned is worth less than it would otherwise be with unfettered ownership. Under the proposed regs, the restrictions will be ignored irrespective of whether they are built into the governing documents or result as a matter of state law.

There will be a 90 day public comment period with a hearing scheduled December 1st. Once a final version is released, there will be a 30 day period before becoming effective. The timing is such that the effective date could be very close to the start of 2017.

The majority of business owners do not have a business succession plan in place. The list of reasons can be quite long, but boil down to the Three T’s: Time (not enough of it); Training (there has been no discussion of the alternatives for management and ownership succession); and, Team (the business owner does not have the right team of advisors on which to rely on for this kind of advice.)

The third factor is on us. Those of us in the estate planning community can use this development as an opportunity to perk interest and start the conversation. Don’t let your business owner client, or any client, go with the “No Plan Plan.”

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This information is provided for discussion purposes only and is not to be construed as providing legal, tax, investment or financial planning advice. Please consult all appropriate advisors prior to undertaking any of the strategies outlined in this article, many of which may involve complex legal, tax, investment and financial issues. This communication is not a Covered Opinion as defined by Circular 230 and is limited to the Federal tax issues addressed herein. Additional issues may exist that affect the Federal tax treatment of the transaction. The communication was not intended or written to be used, and cannot be used, or relied on, by the taxpayer, to avoid Federal tax penalties. MRG026830