The Department of the Treasury announced yesterday that it intends to withdraw proposed regulations under Section 2704 of the Internal Revenue Code that were introduced in August 2016, in a step that should, at least for the time being, provide relief to owners of interests in family partnerships and LLCs.

Section 2704 was enacted in 1990 to limit the applicability of valuation discounts for intra-family transfers of interests in certain family partnerships and LLCs. Such discounts have long been an important component of high-end estate planning strategies, significantly reducing the federal estate and gift taxes payable on the transfer of assets from one generation to the next. With proper planning, discounts for lack of marketability and control have enabled families to transfer assets to lower generations for significantly less than fair market value, with combined discounts sometimes reaching 30 to 40 percent or more.

Section 2704 requires that certain restrictions on the ability to liquidate family-controlled business entities be disregarded in valuing the family business entity for transfer tax purposes and allows the IRS by regulation to expand the class of restrictions to be disregarded. The proposed regulations under Section 2704 would have greatly expanded the class of restrictions that are disregarded under Section 2704, thereby reducing the availability of valuation discounts for intra-family transfers of family business entities.

Although the Treasury has long signaled its intent to promulgate regulations under Section 2704, the proposed regulations released last year were met immediately with significant criticism for, among other things, being overly broad and unclear, and many families rushed to complete intra-family transfers before the regulations could be finalized.

In announcing the withdrawal, the Treasury acknowledged that the proposed regulations are not only unworkable and impractical, but also could eliminate valuation discounts in situations where they properly should apply. The Treasury and the IRS intend to publish the withdrawal shortly in the Federal Register.

Although the Treasury certainly could introduce new proposed regulations at any time, this seems unlikely to occur before the current negotiations regarding the future of the federal estate tax are complete – especially given that the Treasury has chosen to withdraw the proposed regulations in their entirety while simultaneously recommending the substantial revision of other regulations.

The Tax and Wealth Planning Group at Venable is here to help you understand how these current and future changes affect your estate planning.