Use Business Ownership Valuation Discounting Under IRC 2704 To Mitigate Estate And Gift Taxes

March 01,2023 06:01 AM

Tax Mitigation Strategies
Using Business Valuation Discounting Under IRC 2704

You or your client have a total or partial interest in a family-controlled business and you seek to mitigate the potential tax impact that may occur when transferring that interest to the next generation. Your solution may be to take advantage of business valuation discounting available under Internal Revenue Code section 2704.

IRC Section 2704 provides rules that restrict the ability to discount the value of certain assets for estate and gift tax purposes. These rules are intended to prevent taxpayers from using certain valuation techniques to artificially lower the value of assets for estate and gift tax purposes, and thereby reduce the amount of estate and gift taxes owed.

One strategy that some taxpayers use to minimize the impact of IRC Section 2704 is to transfer assets out of family-controlled entities before the rules in IRC Section 2704 apply. This can be done through gifts, sales, or other transactions, depending on the specifics of your situation. It is critical to work with experienced professionals to ensure that any transfers you make are done in compliance with applicable tax laws and regulations.

IRC Section 2704 provides rules that limit the ability to discount the value of certain assets for estate and gift tax purposes. However, there are some discounting strategies that may still be available under the rules of IRC Section 2704, depending on the specific circumstances involved. Here are a few examples:

  1. Minority interest discounts: When valuing a family-controlled entity such as a family limited partnership or limited liability company, a discount for a minority interest may be appropriate. This is because a minority interest typically lacks control over the entity and may have limited ability to force distributions or influence management decisions.

  2. Lack of marketability discounts: Another common discounting strategy is to apply a discount for lack of marketability, which reflects the fact that certain assets may be difficult to sell quickly or may require significant time and expense to find a willing buyer.

  3. Control premiums: In some cases, it may be appropriate to apply a control premium to the value of a family-controlled entity, which reflects the additional value that may be attributed to an interest that provides control over the entity.

It's important to note that the applicability of these and other discounting strategies will depend on the specific facts and circumstances for you or your client. IRC Section 2704 is a complex area of tax law, and it's important to work with a qualified professional who can help you understand the rules and develop an effective estate planning strategy.

At IKT Business Valuations we perform our business valuations and discount calculations completely in-house, which helps you drive the impact of tax mitigation using IRC 2704 estate and gift tax business ownership discounting. Take advantage of 2704 with our three-step process. First, join us for a discovery call where we help you define your estate and gift tax goals. Second, we provide suggestions for excellent estate and tax attorneys to draft or update trust and estate planning documents. Third, we incorporate your discounted business valuation into your trust and estate planning documents. The result can be a significant reduction in your estate and or gift taxes for the transfer of your or your client's partial or total ownership interest in a family-controlled entity.

Contact Ian Kelly-Thomas, CEO, at (858) 358-6604 to discuss tax mitigation opportunities using IRC 2704 business valuation discounting.

NOTE: Always consult an attorney and or tax professional prior to making any decisions with respect to your personal or business situation. This article is not intended to be and should not be considered legal or tax advice. If you are seeking suggestions for qualified counsel, please do not hesitate to contact Ian Kelly-Thomas, CEO, at (858) 358-6604.

Ian Kelly-Thomas