The IRS stands poised to take definitive action respecting its long-standing
aversion to valuation discounts utilized in business succession and estate
planning. On August 2, 2016, the United States Treasury Department issued
proposed regulations under Section 2704(b). The proposed regulations,
if enacted, stand to severely limit valuation discounts associated with
transfers of intra-family interests held in family limited partnerships
(“FLPs”) and limited liability companies (“Family LLCs”).
Since 1990, when the Internal Revenue Code (“IRC”) Section
2704 that deals with the treatment of limited voting rights and other
restrictions became effective, attorneys have counseled their clients
with respect to the formation of family owned partnerships and limited
liability companies as an effective family wealth management and estate
planning vehicle. Traditionally, the entities would be created to hold
family investments or business interests. In addition to the centralization
of management that these entities afford, the FLP and Family LLC structures
facilitate estate planning by permitting distribution of participatory
interests in the entities rather than portions of individual assets. Traditionally,
under IRC Section 2704, if the transferred interests were fractional shares
or were otherwise encumbered by restrictions on transfer and voting or
control, the limitations supported discounts in the value of the transferred
interest. The lower valuation would, in turn, result in reduced estate
and gift taxes.
The IRS has long sought to curtail these valuation discounts. Prior to
the new proposed regulations, IRC Section 2704(b) had disregarded restrictions
affecting marketability in only certain and very defined circumstances.
The proposed regulations, however, go much further. Newly proposed regulation
§25.2704-3 provides that restrictions on marketability or control
will, in most cases, be disregarded in assessing fair market value for
The proposed regulations are complex. Most practitioners in the trusts
and estates field are opining that the proposed regulations extend too
far. For example, rather than targeting only closely held family entities,
the proposed regulations infringe on intra-family transfers in well-established
businesses where business succession and active participation are part
of a family business succession plan.
Certainly, the proposed regulations are not law as of yet. There is a hearing
on the proposed regulations on December 1, 2016 and the proposed regulations
do not become law until 30 days after the regulations become final. Until
the hearing, the IRS is inviting the public to submit their commentary.
However, if changes implemented as proposed, they stand to have a dramatic
impact on business succession, gift and estate planning. As with any significant
change, it is important to revisit your estate plan in light of the impending
change and discuss with your financial and estate planning professionals
how these changes may impact your estate plan.
For more information on the topic discussed, contact
Yolanda Kanes, Chair of Tannenbaum Helpern’s Trusts & Estates practice, at
email@example.com or at 212.508-6721.
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