It is not uncommon for families to use family controlled business entities, such as partnerships or limited liability companies, to make gifts using valuation discounts.  

The discounts arise because of various restrictions placed on the interest, such as the ability to participate in management, force a liquidation, distribution, transfer or sale of the interest.

The newly proposed Treasury Department Section 2704 regulations, if adopted in their current form, will make significant and sweeping changes which will all but eliminate valuation discounts on interests in family controlled business entities.  In the short term, if you are planning on conducting estate planning with family controlled entities, you should do so immediately, while valuation discounts are still available.  It is widely expected that the proposed regulations will take effect in early 2017.

This raises the question: How will the proposed new 2704 regulations impact estate planning for family controlled business entities after they are in place? From a long term perspective, we expect that numerous planning opportunities will remain viable, even after the regulations have been implemented.  In this blog, we identify three such opportunities:

Discounting Assets Held by the Family Entity

Most planners have focused on entity level discounts.  Going forward, a focus on an individual asset discount held by the entity will be more important.  For instance, we may place discountable assets, such as an undivided interest in real estate or a promissory note, into a limited liability company before gifting or selling the interest to family members.  This discounting will effectively lower the value of the interest gifted.

Discounting Promissory Notes

A common technique used by estate planners is to execute the sale of a business interest to a grantor trust in exchange for a promissory note.  While going forward, the business interest may garner little to no valuation discount, there may be an opportunity to discount the promissory note.  Promissory notes are not subject to the proposed Section 2704 regulations.  A major goal of estate planners going forward will be to take non-discountable assets and turn them into discountable assets

Transferring Real Estate Interest

Consider making a gift or selling for a promissory note, an undivided interest in real estate.  In valuing the interest, the gift or promissory note will be discounted based on a fractional interest owned.  Additionally, outright ownership of real estate is another type of transaction not subject to the proposed Section 2704 regulations.

While the proposed Section 2704 regulations may put a damper on discounting of business interests, there will still be planning opportunities to discount and gift assets.

If you would like to discuss planning opportunities for family controlled business entities with one of our advisors, click here to let us know how we can help. 

Chris Roe, CPA/PFS

Partner and Managing Director

Hall of