On August 2, 2016, the IRS and the Treasury Department proposed new regulations under Section 2704 of the Internal Revenue Code. The proposed changes will significantly impact the valuation discounts taxpayers have typically leveraged in connection with the sale or gift of interests in owned partnerships, limited liability companies and corporations for Federal gift, estate, and generation skipping transfer (GST) tax purposes. The proposed changes may require many families to rethink their estate planning strategies, or to consider making transfers of such interests sooner than originally planned.
What Could Change Regarding Section 2704 Valuations?
Under the current regulations, individuals’ interests in family entities may be subject to valuation discounts for lack of marketability, or when a non-controlling, minority interest is transferred. These valuation discounts have been used to reduce the costs of transferring these assets to future generations, and have been under attack by the IRS, usually without success, for a number of years. Depending on the entity, these discounts can be significant in reducing the value of the interest being transferred, thereby lowering the transfer tax cost of such transfers.
If the proposed regulations are finalized, they would eliminate, or at least substantially reduce, the availability of these valuation discounts, which have been commonly applied to intra-family transfers of interests within family entities. In summary, the new proposed regulations will make it more difficult for an individual to transfer interests to another family member, or to a trust for a family member’s benefit, free of transfer taxes.
What Do I Need To Do Now?
In general, the regulations will apply to any interests in a family owned entity transferred on or after the date the regulations are published as final regulations. The IRS has scheduled a public hearing on the proposal for December 1, 2016, and it is likely there will be at least some minor changes to the proposed regulations as a result of the critical analysis that will be discussed at the hearing. Despite the expected criticism of the regulations in their current form, we believe that the regulations will be published as final regulations shortly after the hearings, possibly as soon as year end or in early 2017.
If you are contemplating a transfer of an interest in a family owned entity to another family member, or to a trust for their benefit, or are currently in the process of such a transfer, we recommend finalizing that transfer as soon as possible in order to avail yourself of potential discounts.
MBAF can help you to assess the potential effect of the Proposed Regulations to your estate, gift, or succession planning. Please call our Private Client Wealth Advisors at 1-800-239-1474 for your questions regarding the use of current valuation discounts and other complex estate, gift, and succession planning issues. MBAF can also assist in the preparation of the valuation reports which reflect the appropriate discounts that may be available for estate and gift purposes.