Section 2704 regulations would unfairly penalize family businesses
Recently, the Treasury Department released new proposed regulations (section 2704) which could put family businesses in a situation where they may be subject to higher taxes than businesses owned by people not in the same family. Under the proposed regulations, otherwise identical businesses, one controlled by family members and one by unrelated individuals, would be valued differently for estate tax purposes. This is inherently unfair, and could lead to situations where family businesses would be forced to liquidate in order to pay the higher estate taxes that would be an outcome of these new proposed regulations.
Studies support how hard it is for family businesses to survive from one generation to the next. These proposed regulations would make it even harder. Especially hard hit would be the “land rich, cash poor” family businesses where a considerable percentage of the value of the enterprise is tied up in real estate. These types of businesses may lack the sources of liquidity necessary to pay the higher estate taxes and be forced to liquidate in order to pay the required taxes, making their plans to continue the business in to the next generation impossible.
With current estate tax exemptions protecting estates worth up to $10 million, many people feel like this is an issue that doesn’t affect them, but that could change. One of the recommendations under Hillary Clinton’s proposed tax changes would be to restore the federal estate tax to 2009 levels. That would increase the estate tax rate to 45 percent and reduce the exemption to $3.5 million.
Even if the family business isn’t currently worth that much, assuming modest growth in the value of the business of 6% per year, a business would just about double in value in 12 years. How many more family businesses could this potentially impact? While there is no guarantee that her proposed changes would make it through Congress, if they do, the combination of these two things could potentially impact a huge number of family businesses.
So what should you do? If you, or someone you know, owns a family business that could be effected by these proposed regulations, let them know they need to take action. The first step is to petition Congress to block these unfair regulations and prevent them from becoming law. I encourage you to contact your representatives and let them know you are opposed to the proposed Treasury Section 2704 regulations.
I would also recommend consulting with your advisors to see if there are any changes that need to be made to your current estate transfer plans in order to mitigate the potential impact of these proposed changes.
In any event, I encourage you to not wait and to take action now. The survival of your family business could literally depend on it.
