By: James L. Greene - Written for Valorem Principia
Some of you may remember the article I wrote in 2012, the "Lady or the Tiger" based on Frank R. Stockton's fable, as this allegorical expression seemed apropos to the uncertainty then facing clients with taxable estates and signified a problem that was unsolvable. Virtually no one knew whether or not the Congress and the President would change the relatively favorable estate and gift tax structure then in place. What was one to do?
Under current law, well-established valuation methods continue to permit the application of discounts for the lack of control and lack of marketability of a transferred interest. However, on August 2, 2016 the IRS proposed regulations under IRC Section 2704(b)(4) which, if adopted, will eliminate the lack of control and lack of marketability discounts in family entities such as partnerships, LLCs and corporations. And, if adopted in the proposed form, the new regulations will significantly change the estate planning landscape according to major practitioners.
You will recall that in The Lady or the Tiger fairy tale the king constructs an elaborate public arena with a Community notice stating on an appointed day the fate of a subject would be decided in the arena. When the subject steps out into the amphitheater, he finds two doors, exactly alike and side by side and it is his duty and privilege to walk directly to these doors and open one of them.
Behind one door is a hungry tiger, the fiercest and most cruel which will immediately spring upon him and tear him to pieces. Behind the other door is a fair lady who is the most desirable for the subject's years and station, and if he opens this door the subject's reward is to be married immediately and live happily ever after. The subject steps up to the door and opens it. That is where the story ends. We are challenged with the question: Does the tiger come out of the door selected, or does the lady? The author of the fable states that is not for him to answer the question. Instead he leaves it to all of us: Which came out of the selected open door----the lady or the tiger?
That was a fairy tale, but this is real life. The doors facing us are marked ACTION NOW and NO ACTION NOW.
The changes to Section 2704(b)(4) have been talked about for quite some time. However, the reality of the situation is that the Treasury Department has requested comments on the proposed regulations from the public until November 2, 2016, and a public hearing set for December 1, 2016, with possible issuance of final regulations as early as year-end 2016.
Those opening the ACTION NOW door are cognizant of the effect of these regulations in significantly increasing the transfer tax cost of transferring interests in family-controlled entities and are consulting with their trusted tax, legal and valuation advisors now. Further, they realize that because the proposed regulations will not be effective until final regulations are published, there may be a limited window of opportunity to utilize appropriate valuation discounts in wealth transfer planning before the law is changed.
Those with family-owned entities that these rule changes would affect and who are contemplating NO ACTION NOW should realize that these entities can currently be discounted for transfer tax valuation purposes. It would be prudent to understand the implications of doing some planning in advance of the regulations becoming effective. On the other hand, these regulations may never be finalized; however, many estate planners are assuming they will be.
In the words of that immortal philosopher Yogi Berra, "it seems like déjà vu all over again."
Which door will you open?