Tuesday, November 29, 2016

Proposed 2704(b) Regulations - Update

As the end of the year approaches, we are moving closer to the time in which the proposed 2704(b) regulations may take effect. Such regulations, if finalized, will essentially eliminate the traditional discounts available for family controlled entities (See Wealth Preservationist post August 15, 2016).

One of the biggest concerns of the proposed regulations is the creation of “disregarded restrictions.” These are common restrictions that will no longer be considered in the discounting of the value of family controlled entities.

Disregarded restrictions include restrictions that:
1) Limit the ability of the holder of the interest to liquidate such interest;
2) Limit the liquidation proceeds to an amount that is less than minimum value;
3) Defers the payment of the liquidation proceeds for more than 6 months; and
4) Permits the payment of the liquidation proceeds in any manner other than in cash or other property.

These new restrictions will effectively eliminate any restriction on liquidation, thus removing an otherwise legitimate valuation discount that has been available due to lack of liquidation rights.

Although there have been quotes from attorneys within the Treasury Department to the contrary, it does not appear that any significant changes will be made to the proposed regulations. Thus it is extremely important to reach out to your estate planning attorney in order to make any such transfers of family controlled entities as soon as possible.