Uptick in BV work reported due to Section 2704

BVWireIssue #168-1
September 14, 2016

Valuation practitioners tell BVWire they are already seeing an increase in valuation engagements triggered by the proposed Section 2704 regulations (prior coverage here). And they expect this to gain steam as the regs continue to sink in with attorneys, wealth planners, and clients. This is by no means a scientific poll, merely the result of conversations with practitioners we talk with continuously.

Under the wire: The proposed regs seek to curtail valuation discounts on transfers of interests in family entities. Letters we’ve seen from wealth planners, law firms, and other advisors are urging clients to plan before year-end when these new rules could become effective. This harkens back to 2012, when the reduction in the estate tax exemption triggered a year-end rush of estate plan activity before the change took effect. Of course, it could take months or years to finalize the regs—and they may never see the light of day in any shape or form. But advisors are proceeding as though the regs will be finalized as proposed.

Another issue to consider is the upcoming presidential election. If Donald Trump is elected, he proposes to eliminate the death tax. Of course, just because a president proposes it doesn’t mean that it will happen, points out former IRS manager Michael Gregory (Michael Gregory Consulting LLC), during a recent interview. If Hillary Clinton is elected, she plans to reduce the estate tax exemption to $3.5 million and increase the tax rate from 40% to 45%. “With that decrease in the exemption, it would roughly double the number of estates subject to tax, from 0.2% to 0.4% of all estates,” says Gregory. While that number is still small, it represents a significant amount of tax, especially with the increase of the tax rate to 45%, he says. But, with proper planning, “it’s quite possible to reduce that using vehicles including minority interest discounts along with other planning tools to minimize that tax,” he says.

Down but not out? “I do not think they have succeeded in eliminating valuation discounts in fair market value determinations for family partnerships or other family entities,” writes Chris Mercer (Mercer Capital). In a new white paper, he goes through an example using the proposed changes in the regs and concludes that some discounts would still be appropriate. The paper states: “The problem with the Proposed Changes is that they fail to realize that even with no restrictions on transfer, and if all applicable restrictions are ignored and we consider all of the named disregarded restrictions, appraisers are left with illiquid minority interests in family partnerships that have investment characteristics that still require analysis to determine fair market value.”

In any event, it’s important for the profession to submit formal comments by the November 2 due date. Details on how to submit comments are in the proposed regs, which you can download here. A public hearing will be held at the IRS in Washington, D.C., on December 1. BVWire will be there!

Extra: Learn more during our September 29 webinar with Curtis Kimball  (Willamette Management Associates): The IRS’ Proposed Section 2704 Regulations: The Impact on and the Future of Estate and Gift Valuation.
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