January 19, 2021

Volume XI, Number 19

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January 18, 2021

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Family Entity Valuation Discounts at Risk

Proposed regulations under Section 2704(b) may be released this fall which would disallow certain discounts on the value of family-controlled entities for transfer tax purposes.

Currently, Section 2704(b) provides that certain restrictions that would normally justify valuation discounts are to be ignored in valuing interests in family-controlled entities transferred to other family members if, after the transfer, the restrictions will lapse or may be removed by the family. Since the enactment of Section 2704(b) in 1990, however, court decisions and new state statutes have limited the restrictions that are ignored. Consequently, statutory proposals to expand the category of disregarded restrictions under Section 2704(b) were included in the Obama Administration’s proposed budgets for fiscal years 2010 through 2013. The proposals were absent from subsequent budgets, causing speculation that the Treasury Department would pursue regulations that would disregard more restrictions.

Treasury Department officials recently indicated that proposed regulations under Section 2704(b) may be released as early as mid-September 2015. The proposed regulations could prohibit discounts for liquidation restrictions that are more restrictive than a specified regulatory standard (currently, restrictions are compared to the terms of applicable default state law). The proposed regulations may also disregard limitations on a transferee’s ability to be admitted as a full member of the entity. Additionally, for purposes of determining if a restriction may be removed by family members, certain interests held by third parties (including charities) may be deemed to be held by the family.

There are indications that the proposed regulations will be effective as of their release date. If released, it is unclear whether such proposed regulations will affect all family-controlled entities or if they will distinguish between entities holding primarily marketable securities and entities operating active businesses.

Clients considering transfers of interests in family-controlled entities are advised to take steps to accomplish such transactions as soon as possible due to the potential changes in the law.

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Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume V, Number 239
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About this Author

David H. Patzer Taxation Attorney Godfrey Kahn Law Firm
Shareholder

David Patzer is the chair of Godfrey & Kahn's Estate Planning Practice Group in the Milwaukee office. His areas of practice include fiduciary income taxation, estate and gift taxation, probate administration, and the preparation of marital agreements, wills, trusts and other estate planning instruments.

David received his bachelor's of business administration degree from the University of Wisconsin-Madison with a major in accounting. In 1996, he graduated from the University of Minnesota Law School and is currently a member of the state bars...

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