Act Now to Transfer Shares in Family Business

Limited Window of Opportunity for Owners of Family Businesses to Take Advantage of a Valuable Tax Break.

The Treasury Department has issued “proposed final regulations” to eliminate a provision in the tax code that allows owners of family businesses to substantially discount the value of shares in a family limited partnership given to family members. If they become final, these regulations could become part of the tax code by January 1, 2017; therefore, a window of opportunity exists for the owners of family businesses to meet with their attorneys and accountants and discuss taking advantage of the existing regulations, which allow the discount.

As example of the tax savings available currently with the discount, consider what would happen if the owner of a family business wanted to transfer a 25% minority interest to his children. The business has an appraised value of $10,000,000 and restrictions in the partnership agreement set the discount for transfers to family members at 25%.

 Current RegulationsProposed Regulations
Share Value$2,500,000$2,500,000
Discount at 25%$625,00N/A
Taxable Value of Gift$1,875,000$2,500,000
Transfer Tax at 40%$750,000$1,000,000

As is demonstrated by the above example, the tax savings could be substantial if action is taken in 2016.  While it is not absolutely certain that the rule to eliminate the discounts will be adopted, it seems probable at this point.  At the very least, the discount is likely to be capped.

Next Steps:

There are four key steps to evaluating whether a share transfer is in your best interests and implementing the transfer.  Note that steps 2 and 3 are typically concurrent.

  1. Meet with your legal and accounting team to determine the optimal interest to transfer.  To take full advantage of the current rules, you will want to transfer the highest practical minority interest.  You will also want to consider your retirement, business succession and estate plans.
  2. Obtain a formal valuation of the business from a credentialed CPA holding one of the business valuation credentials (ABV, ASA).
  3. Consult the partnership agreement of the family limited partnership, if one exists, to determine the maximum allowable discount. If a family limited partnership does not exist, it will be necessary to meet with the legal team to establish one and determine the most beneficial structure.
  4. Execute the transfer in accordance with your partnership rules.

Ideal lead time for a business valuation is typically about 6 weeks and most attorneys want 4-8 weeks to establish a limited partnership.  If this is something you would like to explore, we recommend that you contact your AKM CPA right away to begin the process.

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