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Potential changes to valuation of family entity interests on the horizon

Trust, Estate and Family - 15 Jul 2015

It is understood that the Internal Revenue Service is due to announce new regulations later this year relating to valuation discounts when transferring interests in family entities to other family members. It seems that later this year, the government is looking to put a stop to supposed abuses of valuation discounts. Under Section 2704 of the Internal Revenue Code, which was enacted in 1990 as a first step to curtailing perceived abuse it is stated that in cases where an interest in a family entity is passed to another family member, then any “applicable restriction” can be disregarded when it comes to valuing the transferred interest.

Let’s first be clear about what an “applicable restriction” is: this is a restriction that limits the ability of the family entity to liquidate; the restriction will lapse after the transfer but does not include restrictions “imposed, or required to be imposed, by any Federal or State law.” Due to this stipulation regarding Federal or State law, Section 2704 is not applicable to partnership and LLC transfers in a number of states, as numerous state-specific laws have been revised to be more taxpayer-friendly.

Under President Obama’s administration, various changes to valuation discounts have been put forward in successive budgets. More recently, however, Section 2704 has been missing from Congress budget proposals; this has led to speculation as to whether this is reflective of the Treasury Department’s wish to avoid statutory change by issuing new regulations that add another category of restrictions. It is widely believed that the Treasury Department will add an additional category of restrictions that will be disregarded along the lines of if the restriction does not ultimately reduce the value of the interest to the transferee.

With the possibility of such changes coming about by September, time is running out for those thinking about estate and succession planning. For more information on the changes, contact our expert team at Frank Hirth for guidance and details on how valuation discounts may affect you.

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