The IRS may take action very soon to eliminate or reduce a widely used and valuable family business entity wealth transfer strategy. The window of opportunity to take advantage of this strategy may close within the next month or so.

Family business owners who have considered, or are already using, a Family Limited Partnership or Family Limited Liability Company should promptly contact a knowledgeable business succession and estate planning attorney.

FLP and FLLC are used by many family business owners for estate planning, wealth preservation and tax minimization. Often, senior family business owners create FLPs or FLLCs to own family businesses or properties, and then gift or sell minority, noncontrolling interests in the entities to their children or others. The value of these equity interests have traditionally been discounted for valuation and tax purposes, since the interests are not generally marketable and do not have any rights to control the family business entity.

These valuation discounts have to be obtained from qualified valuation experts each time a new transfer is made. The discounts frequently can be in the substantial range of 20 percent to 50 percent.

Discounts have been used and allowed more generously for family business entities with underlying business operations. Valuation discounting also has been successful in some instances for family entities that simply hold significant net worth in securities, instead of an operating business in the more traditional sense.

In effect, the discounts leverage the transfer of wealth to the future generation of family business owners, while using the senior owners’ annual gift tax exclusions and potentially decreasing future transfer taxes.

In addition to shifting value out of the senior business owners’ estate, use of discounted equity interest transfers in FLPs or FLLCs can also can shift a portion of business income out of the senior owner’s higher income tax bracket to the presumably lower income tax bracket of the children.

IRS representatives recently signaled their intent to release new regulations under IRC Section 2704(b)(4) that would drastically reduce or eliminate the use of valuation discounts in these entities. The new regulations may be released as early as mid-September.

Commentators speculate that existing family entities may not be “grandfathered” under the new regulations. If so, only transfers that are completed prior to the effective date of the proposed regulations would be able to use valuation discounts.

Family businesses that want to take advantage of FLPs or FLLCs and valuation discounting may be facing a rapidly closing window of opportunity to shift significant value out of their estate into the hands of their children or others. It takes time to complete the necessary planning, valuations and transfers. With the regulations possibly coming out by mid-September, the time to act is now.

* This article first appeared in The Press-Enterprise on Aug. 9, 2015. Republished with permission.