What Do New Proposed Regulations Under Code Sections 2701 and 2704 Mean to You?

IRS has issued proposed regulations concerning the valuation of interests in family-owned entities for gift, estate and generation-skipping transfer tax purposes.  The proposed changes would essentially eliminate the valuation discounts currently in place.

Currently, if a business owner transferred a portion of his or her business to children or a trust for children, the tax value of the gift would most likely be reduced by certain discounts allowed for reasons such as the recipient’s inability to participate in management, lack of a ready market for future sale of interests, and restrictions on the sale or other transfer of such interests as outlined by the partnership agreement.  These combined discounts can be as much as 30% to 40%, or more.

The proposed regulations would severely limit the use of such discounts and reverse long standing court decisions.  They would provide among other things, that when valuing property for estate and gift tax purposes, that certain restrictions on the ability of an entity to liquidate are disregarded.  These changes would apply to both gifts made during life and transfers made at death.

A public hearing is scheduled for December 1, 2016 and regulations could become final as early as 30 days after the hearing.  If you are considering a gift or transfer of interest, you may want to complete the transaction before the year end to take advantage of discounts currently in place.

Provisors Presentation 8-23-16

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