Treasury Kills Estate Tax Proposal

In a big win for family-owned businesses this week, the Treasury Department announced its intent to withdraw proposed estate tax regulations that would have increased estate and gift taxes on family-owned manufacturing companies by an estimated 30 percent or more, making it more complex and costly to transfer a business to the next generation of leaders.

The National Association of Manufacturers (NAM) vigorously opposed these regulations, which were issued in 2016. Last year, the NAM led a group of more than 3,800 businesses in a letter to the treasury secretary that pointed to regulations’ effect on small business owners.

One company, transitioning from the third generation of owners to the fourth and fifth generations, noted that the regulations would increase the cost of transferring stock by 43 percent. This would have led the family to “underinvest the capital required to grow or even sustain our company . . . diminish[ing] the ability to invest in job creating, value creating and value-retaining projects.”

The regulations represented some of the most sweeping changes to estate tax policy in the past 25 years. They would have upended a feature of current law that allows for a valuation discount to reflect restrictions on the ability to transfer the interest in a company. In its announcement this week, the Treasury Department described this aspect of the proposed regulations as “based on the fanciful assumption of a world where no legal authority exists.”

The regulations would also have curtailed the ability to take minority discounts into account, which are used to reflect the fact that an individual received less than a controlling interest in a company. As one NAM member noted, this change would have had profound effects on family-owned businesses.

The ability to use minority valuations to discount the value of transferred interests within a family-owned business is crucial for family-owned operating companies. These shares cannot be sold on the market, and since they are a minority, they have no control over the company. These regulations would divert capital from business investment, cost jobs and threaten the ability of families to pass businesses on to the next generation. This will have the unintended consequence of benefiting private equity firms and large companies that like to buy out family businesses at the death of a family owner.

Leave a Reply