Family Business Assets Could Be In Jeopardy
For years, the Family Limited Partnership (FLP), has proven to be a safe way to manage family businesses and personal assets – much like one would protect a treasured collection of sea shells. Read on to learn why that tactic may be in jeopardy.
As a child growing up by the beach, I would spend countless hours scouring the shoreline for shells and sea glass. Some of my most treasured finds were sand dollars, purple clamshell pieces and blue sea glass – the quest for which would create a mostly friendly competition among little girls. The collection was undoubtedly one of my most prized possessions. So, to keep it safe, I would store my treasures in a strong container on a high shelf – hidden away from my siblings’ curiosity. After all, it’s only natural to want to protect those things that matter most to us.
Families that have worked hard to build and grow their small businesses are particularly sensitive to economic risk. The Family Limited Partnership (FLP), an entity designed to centralize family business or investment accounts, has been proven to withstand the test of time for business and estate planning purposes. Not only has it provided owners with a strong “container” to manage family business and personal assets, it offers families the option of a metaphorical “high shelf” to keep assets safe from the overly sticky fingers of certain outside interest holders and tax collectors.
However, recent legislative efforts have sent this ordinarily stable vessel into the proverbial eye of a regulatory storm.
Read Also: Gifting a Business Interest?
The Voice of the Small Business Owner
Last August, the Treasury Department proposed new Section 2704 regulations, a measure that would curtail the valuation discounts that have been typically applied in estate planning for family businesses over the past 25 years.
According to an article by Ashlea Ebeling, staff writer for Forbes, “the proposed rules had drawn 9,477 comments and resulted in the largest crowd ever at a Treasury public hearing.” The hearing, which was held in early December, turned into an all-day affair, included emotional pleas from small business owners, as well as numerous expert technical critiques.
In response to the concern of small business owners within their constituencies, lawmakers have also responded with comments and measures of their own.
Congressman Warren Davidson (R-OH) said the proposed rule changes undermine settled law, and “effectively increase the death tax by 30 percent or more on family-owned businesses.
“One of the industries hardest hit by the estate tax is family-owned farms that get passed on from generation to generation – an embodiment of the American Dream,” said Davidson.
Davidson and Senator Marco Rubio (R-FL) sponsored individual pieces of legislation (H.R. 6100 and S. 3436, respectively) in an attempt to block the IRS measures, and reaffirm Congressional power “to lay and collect taxes” according to the Constitution. Both bills have garnered support from numerous co-sponsors, and free market and business groups alike, including the U.S. Chamber of Commerce.
In the September 2016 press release that introduced the Senate bill, Rubio, along with co-sponsors Senator Jerry Moran (R-KS) and Senator Jeff Flake (R-AZ), and 38 Senate colleagues, included a joint statement formally appealing to former U.S. Treasury Secretary Jacob Lew to withdraw the proposed changes. The statement highlighted that “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.”
Both bills have since been referred to their respective committees within the House and Senate – where they currently remain.
Regulations In Limbo
What now? Where do things stand? At this time, there are no definite answers. According to the U.S. Department of the Treasury, regulations will not go into effect until comments are carefully considered, and then 30 days after the regulations are finalized.
The good news is that with the new administration ushering in a more deregulatory environment, there is optimism that long-standing valuation practices for FLPs will remain in place. The bad news is that, if action isn’t passed soon to specifically block this measure, a possibly modified Section 2704 is in fact on schedule to begin implementation this year.
While lawmakers continue to knock heads and hash out details, the best approach for small business owners is to keep calm and speak with a professional valuation expert. The business valuation team at Rea & Associates is staying abreast of the situation, and is dedicated to keeping the business owners with whom we work informed of any late-breaking developments that could impact your gifting strategy. Email us to learn more, and plan to keep those seashells safe from the breaking waves of current political uncertainty.
By Cathy Levins, Client Service Specialist (Dublin office)
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