IRC Section 2704 concerns certain lapses and restrictions in family controlled entities that can affect the valuation of transferred interests for estate and gift tax purposes. Broadly, it limits the ability to claim large valuation discounts by disregarding some restrictions on liquidation or control when those restrictions are more severe than what would apply in an arm's length setting. The statute targets situations where a family creates or manipulates partnership and operating agreement provisions primarily to depress values for transfer tax reporting. For life insurance and wealth transfer planning, Section 2704 is relevant when families use closely held entities to hold investment portfolios, real estate, or operating businesses, especially if those entities are part of a larger strategy to fund buy sell plans or provide liquidity for estate taxes with insurance.

In real practice, advisors encounter IRC Section 2704 when clients form family limited partnerships or LLCs and later transfer interests to younger generations, often while retaining control themselves. Valuation experts may apply discounts for lack of control and lack of marketability, but Section 2704 and its regulations require scrutiny of voting rights, liquidation restrictions, and lapses of control that occur at death or transfer. If certain restrictions are disregarded, discounts may be reduced, increasing the taxable value of the transfer. Advisors coordinate with attorneys and appraisers to ensure entity structures have genuine non tax purposes, commercially reasonable terms, and well documented governance. Life insurance can be layered onto these entities to provide liquidity for buyouts or estate tax, but Section 2704 reminds planners that valuation driven strategies must withstand IRS scrutiny. Understanding 2704 helps producers and planners set realistic expectations about discounts and integrate insurance into compliant, sustainable family entity planning.