WASHINGTON—The U.S. government on Tuesday proposed making it harder for wealthy business owners to transfer assets to heirs without paying estate and gift taxes. The plan from the Treasury Department and Internal Revenue Service would place new limits on a common technique used to transfer interests in family businesses. The regulations address the practice of discounting the value of ownership stakes in closely held businesses or land. The discounts are permitted because some stakes are worth less since they are harder to sell or represent a minority interest. The reduced values allow wealthy families to pack assets inside the $10.9 million lifetime exclusion from estate and gift taxes for married couples. A typical strategy would place, say, $14 million worth of assets—stock, a business, real estate or even cash—into a company with restrictions on some of the owners’ ability to sell their pieces, said David Scott Sloan, a partner at Holland & Knight LLP in Boston who advises high-net-worth families. Those restrictions could allow the owners to get an appraisal saying that the actual value of those assets was about $10 million. “By taking advantage of these tactics, certain taxpayers or their estates owning closely held businesses or other entities can end up paying less than they should in estate or gift taxes,” Mark Mazur, the assistant secretary for tax policy, said in a statement. “Treasury’s action will significantly reduce the ability of these taxpayers and their estates to use such techniques.” The government’s proposal would make it harder for taxpayers to claim valuation discounts that taxpayers typically have used to reflect the diminished value of minority interests, said Richard Dees, a partner at McDermott Will and Emery in Chicago. “This is going to be a major problem for all family-owned businesses,” Mr. Dees said. “This all boils down to the question of whether a family business should be valued as if it’s owned by one person.” The government has signaled for months that the regulations were imminent. Estate planners have urged clients to complete transfers before the government acted. Such efforts may accelerate, because the regulations must first go through a 90-day, public-comment period and parts of the regulations won’t take effect until 30 days after the government issues a final version. Estate and gift taxes apply at a top rate of 40% above the $5.45 million per-person exclusion, which means the estate tax affects about 0.2% of those who die each year. In 2014, about 5,200 estates filed taxable returns, according to IRS data. Republican presidential candidate Donald Trump wants to eliminate the estate tax. Democratic presidential candidate Hillary Clinton says she would make the estate tax apply to about twice as many people. She proposes returning to the law in effect in 2009, when there was an estate-tax exclusion of $3.5 million per person, a $1 million per-person gift-tax exemption and a 45% tax rate. In fiscal 2016, the U.S. is projected to collect $20 billion in estate and gift taxes, less than 1% of federal revenue, according to the Congressional Budget Office.
Write to Richard Rubin at richard.rubin@wsj.com