Estate Tax Rule Changes: Will Proposed New Rules Take Effect?

A repeal of the federal estate tax may or may not happen when the Trump administration takes office. A lot will depend on the dynamics of the new, Republican-controlled Congress.

In the meantime, however, new proposed rules from the Treasury Department and the IRS on the taxation of interests in family-owned businesses are generating significant concern among small business owners.

In this post, we will use a Q & A format to update you on those concerns.

What prompted the proposal for new rules?

In August 2016, the IRS proposed new rules on how to valuation of ownership interests in businesses (corporations or partnerships) for estate and gift tax purposes. The rules concern taxes known as GST, for estate, gift and generation-skipping transfer taxes.

The proposed rules are supposed to prevent transferors of certain business ownership interests from undervaluing the transferred interests. In other words, Treasury said it was proposing the new rules to close a tax loophole.

What types of comments has the IRS received on the proposed rules?

Critics of the proposed rules say they go too far in discouraging discounted valuations, which are a legitimate component of business succession planning.

It would be one thing, critics contend, if the new rules applied only to family limited partnerships that own securities. Such partnerships do have a real temptation to undervalue interests that are being transferred. Instead, however, the IRS also extended the proposed rule to operating businesses.

The number of comments already received on the proposal is approaching 10,000. In addition, a public hearing on the proposed rules drew the largest audience ever for a Treasury Department hearing.

What is the status of the proposed rules given the upcoming change in presidential administration?

Uncertainty abounds. Given the high number of comments, it’s unlikely that the final rules will be in place by the end of the year. And then, less than three weeks after that, the new administration takes office.

Tags: Blog, Tax Controversies