September 19, 2016
In transferring the ownership of family farms to the next generation, it is common to take advantage of certain valuation discounts in making transfers. The Department of Treasury recently released proposed regulations under Section 2704 of the Internal Revenue Code that will affect the ability to take advantage of these discounts.
Under the current rules, when an interest in a family-owned farm is gifted to or inherited by a family member, the transferor of the interest was able to take a discount in the value of that family-owned farm for lack of marketability or lack of control. If you are not a majority owner, you cannot control the farming business. A person who buys a minority interest will pay less than fair market value for that reason. Even someone purchasing a majority interest in the farm may pay less than full fair market value because the farm cannot be sold on a securities market like stocks and bonds. Under the current rules for valuing family-owned businesses, you can take into account minority discounts and lack of marketability in valuing the transfer of these interests to family members. Depending upon the facts, these discounts can be as much as 40-50% of the value. These discounts allow more value to be transferred with less tax impact.
Under the new regulations, these discounts are no longer available in a family setting. This means the transferor in making transfers will have to consider the full value of the farm without discounts in a family setting. The Regulations are only effective when they become final. Accordingly, there is a window of time when transfers can be made and the discounts can be utilized.
Robert D. Lyerly Jr. practices in the firm's Tax and Estate Planning Groups as well as part of NP's Agribusiness team. The agribusiness team harvests industry-wide experience in financing, immigration, litigation, real estate, environmental and tax and estate issues for lenders, multinationals and agricultural producers. Contact our team today if we can assist you in taking advantage of these discounts.