Recently issued Proposed Regulations may Significantly Affect Valuation Discounts on Intra-Family Transfers

August 9, 2016
Robin Paule, Tax Partner, Eniko Earley, Tax Principal

On August 2, 2016, the IRS issued the long-anticipated proposed regulations under Internal Revenue Code Section 2704.  These regulations would close tax loopholes that taxpayers commonly use to take significant discounts for lack of control and lack of marketability when valuing transfers of ownership interests in family-owned business entities such as partnerships, limited liability companies, and corporations.

In general, the proposed regulations provide that when valuing an interest in an entity transferred to a family member, certain restrictions set forth in operating or shareholder agreements must be disregarded.  Discounts of 30-40% have previously been applied in valuing these interests, and while not completely eliminated under the proposed regulations, they will be significantly reduced.

Some interesting items to note:

  • 2704 will apply to transfers within three years of death, including transfers by gift, GRAT or sale.
  • Applies to marital transfers but not to charitable or non-family transfers (close friends and/or significant others).
  • Members of the family do not include a former spouse.
  • Eliminates states’ ability to increase restrictions which would have resulted in greater discounts.
  • Control is defined as at least 50 percent of either capital or profits interest of the entity or arrangement.  Thus two parties could effectively be deemed to control an entity owned 50/50.
  • The proposed regulations only govern interests in entities.  Thus, they do not affect undivided interest in real estate or promissory notes.

Hearings on the proposed 2704 regulations are scheduled for early December 2016, and when finalized, would likely become effective as early as January 2017.  If you are considering doing any gift or estate tax planning involving the transfer of assets that would be the subject of valuation discounts, you should contact us as soon as possible as the time window to implement certain planning ideas will be limited.  

About HCVT:

HCVT provides tax, accounting, business management, and mergers & acquisition services to private companies, closely-held businesses, public companies and high net worth individuals and family offices. We provide auditing services to privately held businesses, funds, and employee benefit plans. Today, we are a team of over 450 members, 48 partners, and 47 principals. We serve our clients from eight offices in Southern California and offices in Walnut Creek, CA, Ft. Worth, Texas and Park City, Utah. We are highly specialized and focus on specific industries and market niches.

Robin Paule is a tax partner at HCVT and addresses the tax complexities associated with estate and gift tax planning, stock option and retirement planning, business succession planning, planning for sales of businesses, charitable giving strategies, and tax-exempt organizations.

Eniko Early is a tax principal and specializes in investment partnerships, trust analysis, compliance and administration, and estate and gift tax planning and compliance.

To learn more about HCVT, see www.hcvt.com

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