Gift and Estate Reduction Technique - Time May Be Running Out

We want to bring to your attention a potentially dramatic change in the rules regarding the valuation of interests in LLCs, partnerships and certain other privately held entities, which may take effect as early as January 1, 2017. This concerns the proposed regulations recently issued by the IRS under Internal Revenue Code Section 2704(b) (the “Proposed Regs”).

The Proposed Regs are nearly 50 pages long. Essentially, they are intended to severely limit or even eliminate techniques involving the valuation discounts for minority non-controlling interests and/or lack of marketability with respect to wealth transferred through privately held entities such as LLCs, partnerships and certain corporations, sought by many attorneys and accountants on behalf of their clients. For example, historically practitioners have reported discounts of 30% to 40% of underlying asset value; many practitioners analyzing the Proposed Regs believe that such discounts could be reduced to 10% or less.

The Proposed Regs would also require the transferor to survive for three years after a transfer to benefit from the limited valuation discounting remaining under the Proposed Regs.

If you have been considering, or would like to bolster, a plan of gifting to members of your family, we believe elements of these techniques would be beneficial. With them, you may achieve substantial valuation discounts in making transfers of valuable assets.

If finalized as proposed, the Proposed Regs would take effect thirty days after finalization. Based on the IRS’ current timetable, this would be approximately January 1, 2017. It is possible that the IRS will revise the Proposed Regs before finalizing them, delay their implementation or even withdraw them, based on input from the tax community (from which the IRS is currently seeking comments). However, the IRS could finalize the Proposed Regs in their current form on their current timetable. This timetable leaves a potential opportunity for the gifting or sale of additional interests in existing or new entities, under the current rules, before the end of 2016.

If you would like to talk with us about the Proposed Regs, their applicability to your situation, and/or opportunities that may allow you to take advantage of the current rules before the Proposed Regs can become effective, please contact us.