November 1, 2016

The deadline to take action on the IRS’s proposed tax hike on family forests is November 2 at midnight. Continue reading for more on the issue from the Forest Landowners Association.

The IRS has proposed changes to the way business assets would be valued for estate tax purposes when they are part of a family-owned partnership, LLC or corporation, placing the long-term viability of multi-generation family forests ownership is under threat as the tax bill for estate and gift taxes might rise by up to 50 percent due to new proposed regulations.

Under current rules, the value of inherited family business assets can be discounted (reduced) because of the following:

  • Lack of Marketability: Current rules allow the value of assets to be reduced because heirs can’t easily sell their share of the family business. An example is a person who inherits part of a farm and would find it difficult to find a buyer who wants to be in the business partnership.
  • Minority Discount: Currently, asset values can be reduced if heirs don’t have control over their share of the business. An example is a person who inherits less than half of a farm and can’t unilaterally make business decisions.

The proposed rule eliminates the ability to apply the marketability discount in estates worth more than $5.45 Million.  This would significantly impact family owned companies.
Under current rules the fair market value of an interest in a family-held business where no current market is available is based on the “willing-buyer/willing-seller” test; this test establishes a value a willing buyer would pay for that portion of a family-held business. In recent court cases challenging valuation discounts for gift and estate taxes the IRS used significantly higher valuations than CPA firms hired by the family-held businesses often resulting in the IRS seeking larger tax collections.
The proposed rule would disregard any restrictions on liquidation or redemption an heir uses to claim a valuation discount if that restriction either lapses after the transfer or the heir or heir’s family has the ability to remove the restriction after the transfer. An heir, under current law, could claim a lack of marketability discount if there is a restriction on sale of the interest, the proposed rule would eliminate that discount if the heir or their family has the ability to remove that restriction. The proposed rule also eliminates lack of control discounts to assignees.
Let the Treasury Department know how this provision would impact your family forests and business and tell them to support family businesses seeking to pass to the next generation by withdrawing their proposed changes to Section 2704.

 TAKE ACTION TO SUBMIT COMMENTS TO THE IRS ON THE PROPOSED RULE.  When submitting comments, it is important to highlight several points:

  1. Tell your story  how long have you owned your land and business, how many generations has it been passed down to or are currently owners, what state(s) do you own land and/or operate, how many acres do you have in timberlands?
  2. How does your succession plan use valuation discounts to help pass on the business? If your business has already survived one generation, were valuation discounts useful in that transfer?
  3. How will the proposed rule affect your succession plan and the transfer of your business?
  4. If the rule change increases your estate tax liability, what will that do to your timberland and employees?
  5. Could this change potentially cause the liquidation of the business to pay estate or gift taxes and therefore convert working forests to other uses?