Treasury Proposed Regs Will Affect Your Estate Plans: Act Now

The long expected proposed regulations concerning the valuation of interests in corporations, LLC's, partnerships and other entities and arrangements for estate, gift and generation-skipping transfer tax purposes were published on August 4, 2016. For over a year it has been rumored that proposed regulations would be issued that would eliminate any restrictions that effectively reduce the otherwise determined value of the family-owned business.

In substance, the proposed regulations have the effect of substantially reducing the discount for lack of marketability to that component related solely to “market liquidity”. This dynamic suggests it may be a good time to consider inter-family transfers.

Currently, section 2704(b)(2) generally provides that, if a transferor transfers an interest in a business to (or for the benefit of) a member of the transferor's family, and the transferor and members of the transferor's family hold, immediately before the transfer, control of the entity, then, the "applicable restriction" is disregarded in valuing the transferred interest. However, an applicable restriction does not include any restriction "imposed, or required to be imposed, by any federal or state law".

Under the proposed regulations, any of the following restrictions would be disregarded and the fair market value of the transferred interest would be determined under generally applicable valuation principles as if the restriction did not exist, and thus, there is deemed to be no such restriction on liquidation of the entity or an interest in the entity. A restriction is disregarded if it:

  • Limits the ability of the holder of the interest to liquidate the interest;
  • Limits the liquidation proceeds to an amount that is less than a minimum value;
  • Defers the payment of the liquidation proceeds for more than six months;
  • Permits the payment of the liquidation proceeds in any manner other than in cash or other property, other than certain notes

The effective date of the regulations will be 30 days following the final regulations being published in the Federal Register. This means that the regulations may not be finalized for approximately 90 days. Thus, there is still opportunity to make gifts under the current rules

Author

Michael Rauchwarg, Partner | Tax