2704 Regulations Explained: Proposed Rules Negating Gift and Estate Tax Valuation Discounts May Ensnare Your Vacation Home Too
As mentioned in several recent posts, the proposed regulations under Code Section 2704 are aimed at reducing valuation discounts associated with transfers of interests in family-controlled businesses. So that the proposed regulations capture certain entities that may be disregarded for federal income tax purposes, such as single-member limited liability companies, the definition of a family-controlled entity under the regulations casts a wide net. In fact, this net is so expansive that it has the ability to reach certain business arrangements that are significantly different from the typical family business.
Consider, for example, three siblings who own a vacation home as tenants-in-common. Assume that the siblings have executed a co-tenancy agreement that restricts each tenant’s ability to partition and sell their interest (as many of these agreements do). If this arrangement constitutes a controlled entity under the proposed regulations, then the regulations would apply to this co-tenancy arrangement in generally the same manner that they would apply to an active trade or business. Should the proposed regulations apply, if a co-tenant transfers his or her interest in the vacation home (either during life or at death), the value of this interest for transfer tax purposes may be computed without regard to the restriction on partition in the co-tenancy agreement and, in turn, any valuation discounts that this restriction may warrant. In this event, the application of the proposed regulations may result in a higher gift or estate tax value associated with this transfer.
This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.
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