The Internal Revenue Service (IRS) recently proposed regulations that could change estate planning for families that own a controlling interest in a privately held corporation, partnership or limited liability company. If adopted, the proposed regulations would restrict or eliminate available discounts, increasing the tax on certain transfers.
The proposed regulations under section 2704 of the Internal Revenue Code will primarily impact individuals that exceed the $5.43 million estate tax exemption (nearly $11 million for couples), and anyone with an interest in a family controlled entity may be affected.
While the proposed regulations may adversely impact farmers with estates that exceed the exemption levels, those below the threshold may benefit from a potential greater step-up in basis value. Farmers are encouraged to discuss with tax advisors for additional information and to determine specific impacts to your farm, business and family.
The stated purpose of the new proposed regulations is to limit taxpayers’ ability to give “insignificant” interests to nonfamily members in order to escape being subject to the rules.
For purposes of determining control, the proposed regulations would ignore interests held by nonfamily unless:
- The interest has been held by the nonfamily member for at least three years;
- The interest is at least a 10 percent equity interest;
- Nonfamily members in the aggregate hold at least 20 percent of the equity of the entity; and
- Each non-family has the right to put his or her interests to the company and receive a share of the underlying value.
The potential final regulations could be finalized and effective in early 2017. There is a public comment period on the proposed regulations that closes on Nov. 2, 2016. While the exact timing of when any final regulations would take effect is uncertain, they could not take effect before December of this year. It is likely that comments submitted to the IRS will result in modifications and clarifications and it will take the IRS some time to process the final regulations.
The American Soybean Association (ASA) will continue to monitor and analyze the regulations to determine the impact to soybean farmers.