By: Andrew Ziolo, CPA 


One of the biggest concerns I have seen facing family-owned businesses is transferring the business to family as cheaply as possible, from a tax perspective.  And who can blame someone for wanting to do this? It is hard to find people who want to pay more in tax than they have to.  After building the business your entire life, you are looking to get out of the business and let the next generation grow it and reap its benefits.

New proposed regulations may affect the succession planning for some family businesses.



If you have a net worth of $5,450,000 in total asset value (single) or $10,900,000 (married) and certain elections are made (amounts are indexed for inflation), you may be required to pay tax on the fair value of the business if you either gift it to family members or leave it in your estate.  The tax on the value of your business can create a significant tax burden – up to 40% of the taxable federal estate, plus state estate tax.


One way to reduce the gift/estate tax due on a family transfer is to have a professional valuation performed of the business to determine the true value of the ownership being transferred. This involves an expert determining the value of your business and its interests.


In the past, you could take a discount (reduction) on the full value of the interest being transferred for things such as minority ownership. This is because as a minority, you do not generally have enough power to overrule the majority shareholder and to make certain decisions.  This discount can be substantial and have a huge impact on the value of your gift or estate; in certain circumstances the discount for a minority ownership can be as high as mid-40%’s.


The IRS recently released Proposed 2704 Regulations that could remove the ability for family owned businesses to take advantage of the minority discount.


Currently, the IRS views the minority discount, as it relates to family owned businesses (the rules do not remove the minority discount if it is not family owned) as a tax loophole that can be used to lower taxes.  The IRS appears to be assuming that all families get along that have family businesses, and will work together and have each other’s interests in mind. This, in my experience, is not always the case as each family member is often concerned with their own liability, and lowering the tax liability for their siblings may not be one of their concerns.



If you have a family owned business and want to transfer a portion to a family member or for the benefit of a family member, what can you do?

Here are some a few things to consider and potentially discuss with your tax adviser:

  • Have a professional valuation performed and transfer the business interest prior to these regulations becoming final, which is likely to happen in early 2017. You are able to do this because the rules are only proposed and do not have to be followed until they are considered final or are considered temporary (potentially intended to be changed/reviewed in the future).

  • Depending on the situation, you may be able to put your business interest in certain types of trusts in order to shield them from the proposed regulations.

  • Make a future gift of your interest in the business. By doing this, you may be able to get a discount on the current gift because the donee will not receive the gift for many years and the current cash value of the gift gets extrapolated out for time value of money.

  • Sell the business to your heirs and set up a payment plan with them to pay you for it along with interest. This is considered an installment sale. If you do this, you have to be careful of the sale price as well as the interest charged.

  • You could gift small portions of the business tax free each year to your heirs. The government allows gift tax exclusion for each person you gift to, currently the amount that you can gift tax free each year is $14,000 per person.

  • If the estate has illiquid assets, you could also consider taking out a life insurance policy on the decedent to help cover the estate tax that will be owed upon death.

Hope these proposed regulations simply go away. This actually could happen as there have been legislative proposals by Congress to stop these proposed regulations. Rep. Davidson of Ohio has put forth legislation in response to the proposed rules, continue reading by selecting the link below.  


Public hearings were held on the proposed regulations on December 1, 2016.


Given the world we live in, the final ruling may be very different from the proposal. However in the meantime, affected families should begin to prepare for the possibility of diminishing availability of valuation discounts.

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