The IRS never fails to hit your pocket where it hurts. In this case, family-owned businesses are at risk. The Internal Revenue Service has proposed new regulations that will make passing on a family business to ones’ child extremely difficult.
Reducing estate and gift taxes on assets given to members of family upon death is a big priority for wealthy taxpayers. There are many individuals who give stocks of their family-owned business as a gift for their children upon there death. 1 out of every 1000 estates have to pay these taxes, while some manage to fly under the radar due to not having assets over $5.45 million. The IRS is trying to change that beginning January 2017, and this may lead to serious tax problems.
Estate tax does not only apply to businesses owned as a whole, but also partial ownership. For example, if 3 siblings each own 1/3 of a business, and one of the siblings passes away, the other 2 will be liable for the estate tax owed on the deceased siblings portion.
This causes a major issue. The other 2 siblings may not have enough cash to cover that estate tax cost, which only leaves them with the option of selling off that 1/3 of ownership to an outsider. And of course, if you’re a family owned business, this is the last thing you want to happen.
Also, there is no guarantee that you’re going to be successful in selling off that portion. Seriously, there’s not may individuals who are excited about the idea of owning part of a family owned business where they don’t own majority of the company, due to the other 2 siblings being in control by owning majority.
Now, the IRS does allow discounting for minority stakes in a business. This is a method that will allow them family owned businesses facing this dilemma to keep the business strictly with the family. However, the Obama administration doesn’t like this. This has led to the IRS proposing the regulation to limit a company’s ability to discount stakes in a business.
As of now, the federal estate and gift tax rate holds at 40% for anyone with assets worth $5.45 million per individual, and $10.9 million for couples who are married. December 1st is when the IRS will hold hearings on these proposed regulations. If approved, the new regulation will be in effect 30 days after December 1st, which is sometime in 2017.
If this regulation is finalized, the savings that wealthy individuals receive will be in jeopardy. However, between now and December is a suffice amount of time to make family interests gifts just in case this regulation is passed on December 1st.