Valuation Discounts for Estates and Gifts May End

Earlier this month, the IRS released proposed regulations aimed at eliminating certain practices of transferring value to descendants at a discounted value.  The proposed regulations under IRC Section 2704 are aimed at two current estate planning methods:Transferring your business to your kids may change

  • Lapses in voting or liquidation rights
  • Restrictions on liquidations

Here is an example of why this has a far reaching impact.

Let’s assume an individual has a family limited partnership that holds $100M of assets.  Assume the father owns 70% and his two children each own 15%.  The father’s ownership includes a right with the units held that states upon his death any voting rights and any rights to dissolve and liquidate the partnership lapse or expire.  Upon his death, the 70% ownership would hold a $70M value, but because of the lapses in rights, the value of the units for estate tax purposes are discounted down to $50M.  This $20M decrease is excluded from the estate, saving millions of dollars in estate taxes.  Under the proposed regulations, the value included in the estate would be the full $70M.

If we change the above example slightly, let’s assume instead of having a lapse, there is language in the partnership agreement requiring unanimous consent of the partners in order to dissolve the partnership.  In this case, the fair value of the assets again would be $70M for the father, but at his death, the amount included in his estate might be discounted down to $60M, saving $10M of value and lowering his estate tax bill.  Under the proposed regulations, the value included in the estate would be the full $70M.

The expectation is they will be finalized sometime in late 2016 or early 2017.  Time will be short in order to act on these before they become final.  Please be sure to contact us to help with your estate planning needs at 952-979-3100.

About the Author: Wade Christensen

Wade Christensen, CPA is a tax partner at Froehling Anderson specializing in working with businesses, professional athletes, and high net worth individuals.