The most successful estate planning techniques pass significant value from one generation to the next by freezing or establishing an appreciating asset's value and shifting the asset's growth to a younger generation (a "freeze technique"), resulting in significant gift, estate and generation-skipping transfer tax savings. These freeze techniques can provide even greater transfer tax savings if the asset transferred to the younger generation is eligible for valuation discounts. Historically, such valuation discounts have been achieved by funding a family limited partnership with the appreciating asset and then gifting or selling limited partner interests to the younger generation.

Section 2704 of the Internal Revenue Code of 1986, as amended (the "Code") is designed to eliminate perceived abuses by taxpayers in artificially reducing the transfer tax cost of intra-family transfers of interests in family limited partnerships and closely held corporations through the use of valuation discounts. Nevertheless, through careful navigation of the current rules under Section 2704, taxpayers have still been able to achieve valuation discounts in transferring interests in family limited partnerships and closely held corporations.

The IRS released Proposed Regulations under Section 2704 of the Code on August 2, 2016 that seek to further limit the availability of such valuation discounts.

In particular, the Proposed Regulations seek to expand the types of interests that would be subject to Section 2704 so that taxpayers cannot receive discounts on their interests in family controlled limited liability companies ("LLCs") and other entities beyond simply family limited partnerships and closely held corporations. Additionally, the Proposed Regulations would narrow the class of restrictions that will be recognized for discount purposes by prescribing a new class of "disregarded restrictions" that apply specifically to restrictions on the ability to force the liquidation or redemption of an individual partner's interest in the partnership in certain cases. The Proposed Regulations also seek to eliminate some of the other techniques that taxpayers have utilized to continue to benefit from valuation discounts, such as giving a small interest in the entity to a non-family member (such as a charity), which currently prevents Section 2704 from applying to an intra-family transfer.

However, the Proposed Regulations are not effective until they are published in final by Treasury in the Federal Registrar (or thirty days thereafter in some cases). There is significant opposition to the enactment of the Proposed Regulations. Additionally, with the election of a Republican President and the Republicans winning control of both houses of Congress, there is a possibility that the Proposed Regulations will be withdrawn or significantly changed.