“Family limited partnerships” – that is, family investment entities usually structured as LLCs or limited partnerships – have been a popular estate planning technique for years. Generally speaking, a client can transfer non-voting, non-marketable interests in these types of entities to children or a trust, and claim a valuation discount due to the restrictions that apply to the interest transferred. It appears, however, that the IRS will soon release proposed regulations under Code §2704 that are expected to limit the use of valuation discounts in these situations.
Code §2704 governs certain “applicable restrictions” that may apply to ownership interests in family entities. The law provides that certain restrictions are disregarded for valuation purposes. The law also permits the IRS to issue regulations providing for other restrictions (as determined by the IRS) to be disregarded in determining the value of a transfer to a family member, if a restriction has the effect of reducing the value of the transferred interest but does not ultimately reduce the value of such interest to the transferee.
After including new Code §2704 regulations on its list of priority guidance for the past 11 years, it appears (based on comments made by an IRS spokesperson to the ABA Tax Section) that the IRS will soon issue these regulations. While the scope and specifics of the regulations are unknown, it is expected that the proposed regulations will restrict the use of discounting by defining new restrictions that are to be disregarded when valuing a transfer of an interest in a family entity. The effective date of the proposed regulations and possible “grandfathering” opportunities are also currently unknown.
Accordingly, if you have been considering this type of estate planning transaction, it would be prudent to contact us and discuss with one of the attorneys in our group.