Pending Limits on Valuation Discounts Associated with Family Estate Planning are Ominous


Section 2704 is the section of the Internal Revenue Code (the tax bible) used to set the rules for how discounts are computed for transfers of businesses or rights within a family.  The Internal Revenue Service is proposing changes on these rules.

One of the most popular structures utilizing this Code, and my personal favorite, is the family limited partnership (FLP).  The FLP is created by the family to hold assets.  Normally the assets belong to Mom and/or Dad (Parent) and they desire to get the potential growth in these assets, and the asset value itself, out of their estate.  Parent creates the entity and transfers the assets into it.  Parent normally owns a general partner interest and controls the entity.  Parent gifts the limited interest to heirs.  Because the recipient is not able to vote, leverage, or sell their interest the fair value of the interest given is less than the value of the underlying assets.

The technique is a very powerful way of savoring the current estate tax exemption.  If the gifting can utilize a 35% discount of value, an estate exemption of $5.3M allows you to give entities with underlying assets of $8.15M!

This new Proposed Regulation, will make the calculation of the fair value more difficult and certainly, at least initially (until we figure something else out) reduce the discount eligible to the gift.

HOWEVER, the other goal of the planning tool is to remove the value of the gift from the estate and retain control of the total earning power of the assets given.  THESE attributes are not lost with the proposed regulation.

Are you interested in learning more about FLP’s?  Please give us a call at 314-993-4285.


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