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Recently Released Proposed 2704 Regulations Attack Gift and Estate Valuation Discounts

Aug 17, 2016

On August 2, 2016, the Treasury released proposed regulations under Section 2704 of the Internal Revenue Code that would essentially eliminate valuation discounts currently available to gifts and bequests of non-controlling interests in family owned entities. These regulations apply to transfers of interests in family owned corporations, partnerships and limited liability companies, whether or not they are active operating businesses. 

In the past, many taxpayers created family limited partnerships or limited liability companies that were used to transfer wealth to their children or grandchildren at a discounted value by giving them a non-controlling interest in the entity. Often, these discounts were significant and the Internal Revenue Service was unsuccessful in challenging the viability of the entity or the applicable discounts. These regulations are intended to curb this type of planning. However, they cast an even broader net by also applying to many transfers of family owned operating businesses that were not created for this purpose.

As a result, the planning landscape will change dramatically if these proposed regulations are finalized in their current form. Should this happen, taxpayers, for the most part, will no longer be able to transfer interests in their family owned entities at a discounted value. However, the good news is that these regulations likely will not be finalized until sometime in early 2017. Until then, there is a limited window of opportunity to make discounted gifts of non-controlling interests in family-owned entities.

As always, we suggest you speak to your tax advisors to examine the potential planning opportunities presented by these proposed regulations, as well as their impact on your current estate plan.

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Karen L. Goldberg

Karen L. Goldberg Partner-in-Charge of the National Tax Trusts and Estates practice, within the Private Client Services Group. She specializes in estate planning for closely held business owners, senior corporate executives and other high net worth individuals.

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