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An Estate Planning Overview January 2017

Posted by BEACo on January 19, 2017

By Larry Grant, ASA, BV/RE, President
Business Enterprise Appraisal Co., Inc.


For well over a year, the appraisal and estate planning communities anticipated that the IRS would introduce proposed changes to Section 2704 of its Code. The changes we assumed would address unreasonably high valuation discounts to interests in family limited partnerships holding marketable securities - formed solely for the alleged avoidance of paying taxes. Instead, when the proposed regulations came down, they included numerous restrictions to be placed on businesses and firms formed for legitimate reasons – for entities that hold other investments including real property and ongoing businesses.

As an appraiser of family limited partnerships, general partnerships and LLCs, and non-controlling interests in these entities, I was very concerned that the IRS would change the governing term "fair market value" and impose restrictions on the discounts that are attributable to lack of control and lack of marketability. Well, I'm less concerned now than I was several months ago, after reviewing the following article that I am bringing to your attention:

What's Happened To Date

In the January 2017 Issue of the BVR (1), "An unprecedented number of speakers testified at the December 1 IRS hearing to fight...the regulations." The speakers included valuation experts, attorneys, wealth planners, trade groups and family business owners. The speakers addressed the following issues of the regs, stating in part:
    The regs are too broad and convoluted and should be withdrawn. They are so complicated that they are beyond repair. Section 2704 should remain as the standard of value for estate and gift tax purposes, and that it should not be replaced with a new artificial concept called "minimum value".

    The proposed three-year rule that would nullify discounts taken for certain transactions taking place within three years of the decedent's or transferor's death, that would impart inflexible conditions on legitimate businesses, is potentially abusive.

    A change in the definition of control to at least 50% from the "more than 50% ownership" definition employed by all business valuation standards should not be enacted, and that the more than 50% ownership remain as a legal context, consistent with valuation and legal principles.

    The family attribution rules, IRS Revenue Ruling 93-12 is back again in the proposed regs, in an attempt to reduce or eliminate valuation discounts for intra-family transactions. The IRS was reminded that this ruling was repealed years ago.

So What's Next?

The article continues under the subheading "What's Next", indicating that the IRS will "seriously consider" the comments made at the hearing and what was submitted to its website. Also, that it is highly unlikely that the proposed regs would be finalized as written because of remarks made by IRS officials at the hearing. Also, that "Some observers think the regs will be tweaked and rushed through before the Trump administration moves in, otherwise they will have little chance to see the light of day."

My Take

We may find several changes to Section 2704 of the IRS code when it is finalized. However, I don't believe that the final regs will abolish the real world discounts that are applicable to non-controlling minority interests in businesses, partnerships and LLCs. Nor do I believe that the final regs will change the valuation term "fair market value" under which estate tax and estate planning appraisals have been prepared in the past.
    (1) Article entitled "Strong Pushback of Sec. 2704 Regs at IRS Hearing", Business Valuation Update, BVR What It's Worth, Vol. 23, No. 1, January 2017