What You Need to Know About Section 2704 Proposed Regulations

The IRS has recently made proposals that could limit the use of discounts applied to gift and estate tax valuations. The two main proposals include:

  • Restricting “deathbed transfers” by not allowing discounts when a transfer has taken place within three years of a person’s death; and
  • Doing away with discounts applied to intra-family transfers.

The most significant of these proposed changes relates to transfers among family members. The IRS is essentially making the argument that the value of an entity should not be discounted simply because it is transferred between family members. According to the American Society of Appraisers (“ASA”), these proposed changes to intra-family transfers would result in an increase of estate and gift taxes for family businesses and partnerships by 25% to 50%.

It should be noted that this proposed change has received a significant amount of push back from valuation professionals and professional organizations. Additionally, the courts agree that discounts can be applied in intra-family transfers (Estate of Bright vs. United States). In other words, the proposed changes seem to run counter to previous court rulings.

So what does this all mean for you?

We believe that discounts should be applied when interests are transferred among family members. From a practical standpoint, we feel that is unreasonable to assume that family members will always be in agreement when making decisions.

It is our opinion that the proposals made by the IRS in their current form (especially as they relate to intra-family transfers) will not come to fruition. Many have speculated that these proposed changes are simply leverage from the IRS in order to pass the restrictions on “deathbed transfers” and other smaller proposals. Others have suggested that they are merely designed to get a discussion going and put pressure on congress to codify specific guidelines as they relate to gift and estate tax transfers. We work with numerous attorneys and advisors who are encouraging their clients to transact quickly before the end of 2016 to ensure the proposed regulations won’t impact their client’s estates. As the final product of these proposals begins to take shape, EP can assist you with navigating the changes and how they relate to valuing gifted and transferred units.