On January 9, 2009, a bill was introduced in the House of Representatives and referred to the Ways and Means Committee which severely restricts the ability to obtain minority discounts for transfers of interests in closely held entities and also restricts the ability to obtain discounts when transferring non-business assets owned by privately held entities.
The effect of this bill can be illustrated with a person owning a 30% interest of an LLC that holds both an operating business valued at $30 million and separate investments valued at $9 million. For estate tax purposes or for gift tax purposes, the value of the business assets held by the LLC will be determined under the normal willing buyer/willing seller test with appropriate discounts applied for lack of control and minority interest. However, the value of the investment assets held by the LLC will not be discounted, and will therefore be valued at $2.7 million, i.e., 30% of $9 million.
The bill also pools the interests of family members owning closely held businesses. This means that if a person who, along with other family members, owns a controlling interest of an LLC, wants to make a gift of their individual LLC interest, they will no longer be able to apply a minority discount to the value of the gift. This bill will increase gift and estate valuations of family controlled minority interests by 20% to 30%.
If passed, the effective date of this legislation will be the date of enactment. Therefore, clients who are planning gift transactions involving closely held entities should consider accomplishing those transactions early in 2009, prior to any possible enactment.
Please contact a member of our Estate Planning Practice Group with any questions or concerns you may have about this important issue.
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