Not every family member who owns a business intends to pass that business on to other family members.  But for high-net-worth families who are over the estate tax thresholds, just a few months remain to engage in transfer planning before some new, stricter, Treasury rules go into effect.
The new rules will be relevant only for individuals with a net worth of more than $5,450,000 ($10,900,000 for couples), whose estates would be subject to federal estate tax. Family business owners whose net worth falls below this threshold won’t need to be concerned.

For those for whom the clock is truly ticking, though, what is about to end are discounts for Family Limited Partnerships (FLPs) and family Limited Liability Companies (LLCs). Under current rules, discounts in estate tax may be claimed when business interests are transferred but the receiving family members do not possess full control over the interests they receive (in terms of voting or liquidation rights.

The lack of control, the logic is, leads to a lack of marketability for minority shares in the business. “If a family member, for example, wanted to sell his or her share in a partnership that was entirely owned by other family members, the pool of buyers might well be limited to his or her relatives.  They might not have the money – or desire – to buy him out,” observes Paul Sullivan, writing in the New York Times.

The marketability discount, which has often been as high as 40%, is about to end on December 1st of this year. Even worse, the new rules, if adopted, would impose a three-year “look-back”. That would limit deathbed transfers used to create a minority interest. It’s important to remember that the type of business transfer under discussion is irrevocable, taking place while the business owner is still alive. In fact, as estate planning attorneys, we often find ourselves emphasizing to clients that tax consequences should never be the “tail wagging the dog”.

The proposed Treasury Regulations are about to go through a ninety-day public comment period, followed by a public hearing in December, and final issuance wouldn’t take effect until 30 days later. Still, precisely because the timing is beyond families’ control, tax and estate planning for family businesses should be started now.

– by  Cory Judd of Rebecca W. Geyer & Associates