Discounts Eliminated for Estate Planning?

Valuation in the News: It’s Baaaaaaack – Sec. 2704 Set to Eliminate Valuable Discounting Techniques

Earlier this week, the Wall Street Journal reported that the Treasury Department readdressed and released its proposed Sec. 2704 regulations limiting the discounts that can be applied for estate tax valuations associated with gifting among family members.  Both the marketability and minority interest discount considerations are on the chopping block.

As we have previously reported during last year’s talks of the impending changes, it was thought that the long anticipated statute was only going to extend to Limited Liability Companies (LLC’s) and Family Limited Partnerships (FLP’s) holding marketable securities such as stocks and bonds.  This has been clarified.  The statute is proposed to extend to all family-owned entities, including operating companies and will extend beyond the date of death to include a period of 3 years post mortem.

The hearing for this proposal is scheduled for December 1, 2016 and will become effective within 30 days of a final rule being issued.

Takeaways for our Business Owner Clients:

Taking advantage of marketability and minority interest, or lack of control, discounts, can aid in the reduction of both federal and state transfer tax liabilities.  Combined discounts for a non-marketable, non-controlling interest tend to range between 10-40% based on intrinsic characteristics of the interest at hand.  Take the following scenario that we have previously shared as an example of the impact of the proposed statue:

An LLC was formed by the Jones family to own some New Jersey real estate appraised at $50M. Mr. Jones is looking to gift a 15% non-controlling interest to his daughter. Without a discount, the value of this gift is $7.5M, well above the $5.43M gift tax exemption; however, after an estimated 30% discount (discounts associated with an illiquid asset portfolio typically range between 20-35%), the value of the gift drops to $5.25M. This is a significant difference to the Jones family.

Schedule a Call Today:

We’d be happy to discuss this further with you.  We also encourage you to consult your legal and tax professionals as soon as possible to discuss your estate.  We are available to schedule a conference call to collaborate on these discussions in order to make sure we are able to address your gift tax and estate planning considerations before these regulations go into effect.

Takeaways for our Trust & Estate Attorney Practitioners:

We encourage you to schedule a call with us to review your current client portfolio and come up with a proactive plan to address any family wealth transfers before the proposed Sec. 2704 regulation comes into effect.

We are able to provide a report within 10-15 business days following the receipt of all requested documentation.  Typical documentation required for gifting includes:

  • 3-5 years financial history of the operating entity
  • Schedule of assets held (if applicable)
  • Operating/Shareholder agreement (if available)
  • Client Questionnaire