Individuals contemplating the transfer of interests in family-controlled entities should consider making such transfers as soon as possible.
Under Section 2704 of the Internal Revenue Code (the “Code”), an interest in a family-controlled entity may be transferred from one family member to another at a significantly reduced transfer tax cost if valuation discounts are taken for minority interests and lack of marketability. Although certain “applicable restrictions” are disregarded for purposes of calculating any valuation discounts, an exception exists for “any restriction imposed, or required to be imposed, by any Federal or State law”. Many States include in their partnership and LLC laws restrictions on the transfer of interests by a limited partner or a member of an LLC, with the effect that such restrictions may be considered in calculating any valuation discounts on intra-family transfers of interests in family-controlled entities.
Section 2704(b)(4) of the Code authorizes the IRS to issue regulations treating other restrictions as disregarded applicable restrictions for purposes of calculating any valuation discounts on intra-family transfer of interests in family-controlled entities, if such restrictions have the effect of reducing the value of the transferred interest but do not ultimately reduce the value of such interest to the transferee.
In past years, the Obama administration has proposed a change to Section 2704 that would limit or remove valuation discounts on intra-family transfers of interests in family-controlled entities. However, this proposed change was not included in the budget proposals in 2014 or 2015, which has led to speculation (bolstered by certain statements from officials at the Treasury Department) that the Treasury Department was planning to issue regulations that will include additional restrictions on the factors that may be considered in determining discounts on the value of such transfers. It is now rumored that the new regulations will be announced in September 2015.
While we cannot comment on whether the Treasury Department will in fact issue regulations preventing future use of discounts in intra-family transfers of interests in family-controlled entities, or when any such regulations would be effective, we suggest that anyone who is contemplating an intra-family transfer of an interest in a family-controlled entity consider doing so as soon as possible.
If you have any questions regarding this Bulletin, please contact Hume Steyer (212-574-1555), David Stutzman (212-574-1219) or Scott Sambur (212-574-1445) of our Trusts and Estates Group.
