In early August, the IRS issued Proposed Regulations for section 2704. The Treasury Department has been trying to fix what it considers loopholes in that statute since at least 2009. It has sought legislative changes to section 2704 to address what it perceives as abuse. Due to the lack of progress on the legislative front, Treasury decided to address its concerns with regulations.
The regulations would undermine the minority and lack of marketability discount planning that is done with Family Limited Partnerships, FLLCs, etc. Here’s a link to the Proposed Regulations for section 2704. The Proposed Regulations would expand the reach of section 2704. For example, there would be a new class of “disregarded restrictions” even if those restrictions were not more restrictive than state law, as currently required.
Many commentators opine that the Proposed Regulations may not be valid and exceed the authority of the Treasury Department (and IRS), as put forth in the statute. This was a concern of Treasury and is why it originally sought a legislative, rather than regulatory, solution. The Proposed Regulations may not be entirely valid. But, they will certainly be valid in many aspects.
The bottom line is, if and when these Proposed Regulations become final, are you going to advise your client to continue planning without complying with them? No, a prudent practitioner would not. It is not likely that your client would want to incur the time, expense, and aggravation.
You should advise clients of this potential change coming down the pike and get them to complete the planning before the Proposed Regulations become final.
Here is a link to a more in depth analysis of the Proposed Regulations.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555