Last month the Treasury Department proposed rules that could dramatically impact estate tax planning. Specifically, the Treasury Department is planning to limit, or even eliminate, the use of "valuation discounts" for closely-held companies, LLCs and other assets. The Treasury Department issued these proposals in August. On December 1, 2016, there will be a public hearing to discuss the merits of this proposal. It is possible the Treasury Department will formalize changes to these rules before the end of 2016.
What are valuation discounts?
Valuation discounts allow individuals or businesses to divide interests in an asset, thereby reducing its value. For instance, if a business owner divides a family-owned business into three equal parts and gives a part to each child, the value of each piece is less, often much less, than the value of the whole business, since a portion of the business is likely to hold little value. By using valuation discounts, assets that could have faced the estate tax as a whole would not be subject to the estate tax in parts.
Valuation discounts can apply to nonbusiness assets as well. Commonly, the owner of the assets will distribute assets to a holding company or a charity. Owners of the assets could then hold onto their part of the asset until the statute of limitations for an audit has passed, and then sell the assets at full market value.