The US Treasury originally enacted IRC Section 2704 in 1990 to prevent people from taking advantage of the tax system. Specifically, IRC Section 2704(b) states that in valuing property for estate and gift tax purposes, some restrictions on the ability of an entity to liquidate would be disregarded. Currently, the regulation permits certain discounts for lack of control (minority interests) and lack of marketability that are commonly applied to lower the value of transferred interests for gift, estate, and generation-skipping tax purposes.

On August 3, 2016, The Treasury published proposed regulations under IRC Section 2704 that would have disallowed valuation discounts for interest in family controlled businesses that currently apply to gift and estate tax planning. By eliminating the valuation discounts, the proposed regulation would negatively impact succession planning for many small family owned businesses.

On October 4, 2017, the Treasury announced its withdrawal of the proposed regulations, explaining that they took an “unworkable” approach to the problem of artificial valuation discounts. In a press statement, the Treasury stated that the IRC Section 2704 proposed regulations: “would have hurt family-owned and operated businesses by limiting valuation discounts. The regulations would have made it difficult and costly for a family to transfer their businesses to the next generation.” Certainly, if passed, the proposed regulations would have disallowed discounts for lack of control and marketability commonly used by families in wealth transfer planning.

While the Treasury withdrew its proposed valuation regulations, it has released its annual inflation-indexed amounts for 2018:

1.   The annual gift tax exclusion amount (i.e., the amount that can be given annually gift-tax-free to an unlimited number of donees) will increase to $15,000 per donee (or $30,000 for a married couple that elects to split gifts for the year), up from $14,000 in 2017.

2.   The annual gift tax exclusion amount for gifts to a spouse who is not a United States citizen will increase to $152,000, up from $149,000.

3.   The gift, estate, and GST tax exemption amount (i.e., the amount of taxable transfers that can be given transfer-tax-free in the aggregate during lifetime or at death) will increase to $5.6 million per person (or $11.2 million for a married couple), up from $5.49 million.

4.   Recipients of gifts from foreign persons who are corporations or partnerships must report such gifts if the aggregate value of the gifts received in 2018 exceeds $16,111. The threshold for reporting gifts from a foreign person who is an individual will remain at $100,000.

Consulting with an attorney to learn about how valuation and taxation can impact your testamentary wishes is always wise.  If you have any questions about your estate planning needs, please contact the experienced attorneys at Lonich Patton Erlich Policastri—we offer free half-hour consultations.

Lastly, please remember that each individual situation is unique, and results discussed in this post are not a guarantee of future results.  While this post may detail general legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.