Is the End of Discounting at Hand?

IRS Attorney Cathy Hughes announced at a recent meeting of the American Bar Association’s Section of Taxation that the IRS intends to release new proposed regulations for IRC §2704(b) in September that may reduce or eliminate the use of valuation discounts in family entity strategies. It is no secret that the IRS has had these strategies in its sights for some time.  Several recent Presidential budgets have included proposals aimed at minimizing the effectiveness of these strategies. The strategy involves forming a family limited partnership or limited liability company to hold assets. Because of the lack of control and the lack of marketability of the ownership interest, it is often valued for tax purposes at significantly less than the fair market value of the assets owned by the FLP or FLLC.  An asset that was worth $1 million in your estate now may only be worth $700,000 for tax purposes when owned in a family entity.  This allows for the leveraging of gifts or sales of equity interests, shifting more wealth than might otherwise be accomplished.  If the speculation proves true, the window may be closing for families to take advantage of valuation discounting.