New rules would affect estate planning for farm, business owners

The IRS has proposed new regulations that, if enacted, could drastically affect estate planning for small business owners and farmers in California's Central Valley. Under the new regulations, the long-established practice of discounting shares of a family-owned business, including an agricultural business, would be curtailed.

Currently, individuals have a $5.45 million lifetime exclusion from federal estate and gift taxes. The exclusion is portable between married couples, meaning that each couple has a combined exclusion of $10.9 million. Estates that are smaller than the exclusion amount are not subject to federal estate and gift tax. But for a substantial estate, any assets over the exclusion amount will be taxed at the rate of 40 percent.

Estate planners for small businesses and family farms have for many years discounted the value of ownership interests in such enterprises. This has helped many people avoid unnecessary taxation when transferring the family farm or business to their heirs. Discounts of 30 to 50 percent have been common and have generally been upheld by the courts. Shares in a family business or farm have limited marketability and are often subject to restrictive buy-sell agreements, so courts have taken the position that they should not be valued on the same basis as shares of publicly owned companies.

The proposed regulations will be addressed at a hearing on December 1. Although it is theoretically possible they could be enacted as soon as 30 days later, it is unlikely they will take effect - if at all - until next year. Individuals and couples who wish to keep a family farm or business in the family may want to discuss this issue with a knowledgeable estate planning attorney before the end of the year.

Source:, "IRS Targets Popular Estate Tax Saver, Jesse Harding, Aug. 23, 2016

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