In August newly proposed regulations under section 2704 of the Internal Revenue Code would permanently change estate planning for families that own a controlling interest in a privately held entity. The concern from agricultural groups and representatives is that it could discourage farmers from continuing to desire to grow their business and represents a significant tax hit in the process.
Historically, taxpayers could reduce the value of their taxable estates or the value of taxable gifts by placing assets in family-owned partnerships, LLCs or closely held corporations and claiming lack of marketability and/or lack of control discounts. The combined discounts typically reduced the value of the ownership interests by 25% to 45%.
For example, under current tax law, by placing $10 million worth of assets inside a closely held entity, a taxpayer might reduce the value of his/her estate by $2.5 million to $4.5 million. Given the current 40% estate tax rate, they could achieve a reduction in the estate tax payable by $1 million to $1.8 million.
In two separate letters to Treasury Secretary Jacob Lew, members of Congress and thousands of organizations expressed opposition to the new estate tax regulations proposed in August and asked for their withdrawal.
The letter from 41 Senate Republicans explained that the proposed regulations eliminate or greatly reduce the discounts for lack of control and lack of marketability for family farms and businesses and will, thus, discourage families from continuing to operate and build their businesses.
“We ask that the proposed regulations not be finalized in their current form as they directly contradict long-standing legal precedent, create new uncertainty for taxpayers and put family-owned businesses at a disadvantage relative to other types of businesses,” according to the senators' letter, led by Sens. John Thune, R-S.D., and Orrin Hatch, R- Utah, chairman of the tax-writing Senate Finance Committee.
“The proposed guidance is one of the most sweeping changes to estate tax policies in the last 25 years and would be detrimental to active enterprises and family-owned businesses that employ millions of workers throughout the nation,” another letter sent on behalf of 3,800 organizations and family-owned enterprises pointed out. “In particular, these rules would impose significant new tax costs on family-owned businesses, diverting capital from business investment, costing jobs and threatening the ability of families to pass businesses on to the next generation of owners.”
Danielle Beck, director of government affairs for the National Cattlemen's Beef Association, said the regulations would eliminate or greatly reduce available valuation discounts for family-related entities, which, in turn, would increase the tax associated with common transfers, including inheritance.
“These proposed regulations would eliminate or greatly reduce marketability for family-related entities, effectively discouraging families from continuing to operate or grow their businesses and pass them on to future generations,” Beck said. “Producers are often forced into selling land or cattle in order to pay the tax and, in some cases, are put out of business. The Administration is causing unnecessary economic harm to family businesses.”