Written by Michael Esders and William Kunz
With the much anticipated release of proposed regulations under Section 2704 of the Internal Revenue Code expected to occur this fall, there has been heightened buzz over the continued availability of certain adjustments (i.e., discounts for lack of control and/or marketability) in valuing ownership interests in family-controlled entities (e.g., a Family Limited Partnership or a Family Limited Liability Company).
The governing documents of many businesses, including family-controlled entities, restrict the manner and circumstances in which ownership interests and associated rights can be transferred. When establishing the fair market value of an ownership interest in a family-controlled entity, such restrictions can give rise to valuation discounts for lack of control and/or marketability. The practical effect of the soon-to-be proposed regulations under Section 2704 may be to limit the application of such discounts for lack of control and/or marketability when arriving at values for transferred family-controlled entity interests, which in isolation will result in higher values.
Precisely when these new rules may take effect is not currently known. While regulations typically take effect when finalized, there are indications that these regulations could be effective as of the date the proposed regulations are released. As a result, business owners intending to transfer ownership in a family-controlled entity may want to take action now in order to take advantage of potential valuation discounts.
As always, a properly executed state planning strategy involving transfers of business ownership interests will require an objective and well-supported valuation analysis. For information about how Aronson can provide assistance in this area, please contact Will Kunz or Michael Esders at 301.231.6200.