Will Valuation Discounts for Family-Controlled Entities be Eliminated?

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Many families establish Family Limited Partnerships (FLPs) or Limited Liability Companies (LLCs) and then gift interests in these entities to their children.  In doing so, they take advantage of valuation discounts (discounts for the lack of marketability of a family-controlled entity and for minority interests), and pass significantly more value than could be claimed for the purposes of transfer taxes.  Often these FLP or LLC interests are discounted by 30 to 40% for transfer tax purposes.

For years, the IRS has been challenging these discounts in court, with limited success.  However, on August 2, 2016, the IRS issued new proposed regulations to Internal Revenue Code Section 2704 that would limit (and possibly eliminate) valuation discounts.  The proposed regulations are not binding until they are issued as final regulations.  Currently, a public hearing is scheduled for December 1, 2016 to discuss this issue.  If you are considering making discounted gifts to family members, you have at least until December to take action and avoid the new regulations.

About the Authors

Laura Hoexter

As chair of the firm’s estate planning and probate group, Laura Hoexter’s practice focuses on wills, trusts and estates. She works with individuals to help them establish foundational documents, such as tax-saving wills and living trusts, financial and health care powers of attorney, and health care directives. She addresses complex issues that may arise, including non-citizen status, retirement benefit planning and life insurance arrangements. Laura has significant experience helping clients meet their more advanced estate planning goals, including the formation of charitable trusts and private foundations, as well as all types of irrevocable trusts such as life insurance trusts, special needs trusts, and qualified personal residence trusts.

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