The Treasury released the new Proposed §2704 regs. in August of 2016 that will affect estate planning and valuation of family owned business interests and real estate. Most estate planners and related professionals have been waiting for the regulations to be released for about the last 12-18 months. Hearings on the proposed new regulations are set for public comment on December 1, 2016. The final regulations could go live as soon as December 31st, just 30 days later.

IRC Section 2704 governs the discounting rules for Federal Estate and Gift Tax purposes when valuing minority and family owned buisness and real estate interests. For example, if you owned $15,000,000 in real estate holdings owned in several LLCs and/or Limited Partnerships, there are likely many restrictions that could be built into those legal entities that make the entity difficult or nearly impossible to transfer to a third party except for family.

Because of that lack of marketability, the IRS has allowed families to claim a smaller than fair market value on gift and death tax returns for this type of property. In this situation, imagine a very skilled qualified appraisal company rendering a discount valuation report that the property in the entities was entitled to a lack of marketability discount of 30%. That would make the reported value of the property $10,500,000, not $15,000,000.

If you had $400,000 in other assets in your estate and your were married owning the entities as community property (and you and your spouse had not used up any of your respective $5,450,000 Unified Federal Estate Tax Exemption to date), you could save about $1,800,000 in estate and gift taxes just by gifting or selling the entities to a specially drafted irrevocable grantor trust to benefit your children or other beneficiaries.

This is because instead of having an estate that would be subject to $15,400,000 being counted for federal estate tax purposes, you would have a reportable estate of $10,900,000. Or in other words, you would have $15,400,000 in assets less your married combined $10,900,000 estate tax exemption plus a 30% discount of $4,500,000 on your real estate subtracted from the $15,400,000 total estate.

When applying a 30% discount to the $15,000,000 of family owned real estate in LLCs or FLPs, the total estate size would be $10,900,000 and there would be NO estate tax due.

Time is running out however and the sooner you can take action to take advantage of the current law, the better.

To learn more about valuation discounting and the irrevocable grantor trust strategy combined with a note sale or gift transaction, request a copy of my book Estate Planning Secrets of the Affluent (2015) by clicking here: Enter code 2704 to get your copy for free.

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