On 2 August 2016, Treasury released proposed regulations that made Section 2704 considerably more restrictive. Taxand USA presents an overview of this update.
It’s no secret that the popular estate planning mechanism of valuation discounts has been a targeted area of estate planning for many years. The Obama Administration had included recommendations to Congress in its annual proposed budget to restrict or eliminate valuation discounts for transfers of interests in family-controlled entities from 2009 to 2012.
While the Administration dropped this from the annual budget proposal in 2013, the IRS also had its sights set on these regulations and has included proposed regulations for Section 2704 since 2003 in its Priority Guidance Plan.
While there is considerable ambiguity as to many of the details, which hopefully will be addressed before they are issued in final form, it is evident that the days of widespread application of minority and marketability discounts on the transfer of interests in family-controlled entities are likely coming to an end.
If the proposed regulations are finalised in their current form, these rules will be effective for rights and restrictions created after 8 October 1990, on transfers occurring after the date the regulations are finalised. Given the broad impact on the transfer and gift tax regime, we expect the IRS to receive a significant amount of comments on these regulations before the public hearing on 1 December 2016. It will likely be early 2017 before final regulations are issued.