Will the IRS Change Its Rules Concerning Valuations of Family Limited Partnerships and Limited Liability Companies

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Estate Planning Attorney

For decades families have used family limited partnerships (“FLPs”) and limited liability companies (“LLCs”) as a core component of their estate plans. An attractive feature of FLPs and LLCs has been the sizable discounts afforded for “lack of control” and “lack of marketability” when valuing gifts of non-controlling interests in these entities. These discounts reduce the value of a gift and its transfer tax impact. Not surprisingly, the IRS has used a variety of methods to reduce the availability and size of valuation discounts. One of its common means of doing so is through the application of Internal Revenue Code Section 2704.

Section 2704 requires that certain types of restrictions in operating agreements and partnership agreements be disregarded when determining the fair market value of interests transferred between family members. When it applies, Section 2704 essentially eliminates the “lack of control” and “lack of marketability” discounts that would otherwise be available.

The IRS has announced that it will be releasing new 2704 regulations. With the new regulations comes speculation that the IRS will attempt to further restrict or even eliminate the use of discounts. The new 2704 regulations are expected to come out any time now.

We will be closely monitoring the release of the new 2704 regulations and advising clients of the possible implications on their estate plans. Until the new regulations are released, taxpayers should remain cautious in relying on these discounts to minimize their gift and estate tax liability, as the IRS will continue to enhance the restrictions on these discounts.

To discuss your NJ estate planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.