The proposed regulations from the Treasury Department would greatly restrict the availability of valuation discounts for family-controlled entities. This could significantly increase some families' federal estate tax exposure by limiting discounts that allow more wealth to pass to heirs outside of estate taxes. The proposed regulations would disregard many restrictions that currently result in valuation discounts and contain broad family attribution rules. Key considerations for families include whether federal estate taxes are a current risk and whether planning strategies should be implemented in light of the potential changes to current estate planning laws if the regulations are finalized.

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By: Julia Weaver, J.D., Director, Family Office Services and
The Trust Company of Oxford
Kara Talbott, CPA/PFS, CFP®
, Senior Wealth Strategist
Scott Simmons, J.D., LL.M., Wealth Strategist
Highlights and Planning Considerations
 On August 2, 2016, the Treasury Department issued its proposed regulations under
Section 2704 that, when and if finalized, could greatly alter the availability
of valuation discounts for family-controlled entities.
 In our January, 2016, article, "Estate Planning Freeze and Squeeze Strategies", we
mentioned the Treasury had publicized its intentions to issue these restrictive
regulations. After months of silence, it finally released these long awaited
proposed regulations that are much more restrictive than originally anticipated.
 The impact on many current and future estate planning strategies could be
significant and would greatly impair the ability to receive valuation discounts on
interests in a family-controlled entity. This could potentially cause a significant
increase in some families federal estate exposure.
 Several estate planning considerations should be assessed in determining the
proper course of action for each client's unique situation.
The current strategy of transferring discounted interests in a family-controlled entity
typically enables more overall wealth to be transferred to heirs, free of estate
taxation. By way of example, consider the following: Rather than passing only $10.9
million worth of actual value with the $10.9 million exemption (for 2016), it is far
better to pass $15.5 million of interest (reduced by a 30% valuation discount),
thereby “squeezing” more value through the $10.9 million exemption portal.
Simply put, less of the taxpayer’s gift and estate tax exemption is utilized when
transferring a discounted value of interest, leaving more exemption remaining to
apply to subsequent transfers. Valuation discounts also serve to potentially reduce
the taxable value of the estate.
Key Provisions in the Proposed Regulations
Immediate reactions to the proposed regulations include concerns that nearly all
minority and lack of control discounts could be disallowed in certain circumstances,
and that operating entities may be impacted as well as investment entities. The
following is a summary of five things you should initially know about these proposed
regulations.
1. Certain restrictions that previously resulted in valuation discounts on interest in
family-controlled entities would be disregarded when valuing a transferred
interest. This provision could cause the interest to be valued at a minimum value
which could potentially be the fair market value of the property held within the
entity, reduced only by outstanding obligations.
2. Certain transfers of interest in family-controlled entities occurring within three
years of the transferor's death would be treated as a lapse of voting and liq-
uidation rights occurring on the transferor's date of death. This would cause the
value of the reduction attributable to the minority status to be includible in the
gross estate.
 Example – John gifts, after the regulations are finalized, 20% of the Family
Limited Partnership to each of his three children. John dies two years later.
The value reduction is brought back into John's estate.
3. Certain interests held by non-family members would be disregarded unless they
meet specific requirements.
 The non-family member must have held the interest more than three years.
 The interest must be more than 10% of the value of equity interest or capital
and profits interest.
 The interest held when combined with other non-family interests must total
more than 20% of equity interest or capital and profits interest.
New Proposed Regulations Restricting Valuation Discounts for Family-Controlled Entities
August 2016 Issue WWW. OFGLTD.COM

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 The non-family member must have the right to "put" the interest to the entity
and be paid the minimum value as determined under the regulation, in cash or
other property, which cannot be a note issued by the entity, holders of interest in
the entity or a person related to the entity or any holder of interest in the entity.
In the case of an entity engaged in an active trade or business, if 60% or more of the
entity's value consists of non-passive assets of the trade or business and the
liquidation proceeds are not attributable to passive assets then proceeds may include
a note.
Families with operating businesses should discuss with legal and tax counsel to verify
that buy-sell agreements comply with the proposed regulations.
 Example 1 – John and his brother's wife, Dana, own an active business equally.
However the proposed regulations would treat them as family members forcing
John's estate at his death to value his business interest without regard to
discounts for lack of control.
 Example 2 – John, Bill and Susan are not related by blood or marriage. Each own
1/3 of an active business. Their buy/sell agreement calls for the entity to
repurchase a deceased owner's interest and issue a promissory note over a five
year period. They executed this agreement in order to allow for the continued
viability of their business without burdening its cash flow. They should consult
with legal and tax counsel to determine if their entity value and assets comply
with the regulation as finalized. If not, it is possible that no lack of control
discount would be available for their 1/3 interest at their death.
4. Also potentially disregarded would be certain restrictions created by transfers to
an assignee rather than a partner, as well as certain restrictions that are imposed by
state law.
5. The proposed regulations contain very broad family attribution rules, further
impacting the use of closely held entities as a planning strategy for minimizing estate
and gift taxes.
Control of an entity is defined as having at least 50% of the equity or capital and
profits interest. It would also include any equity interest held with the ability to cause
a full or partial liquidation. For determining control, interests held by members of the
transferor's family, defined as the transferor's spouse as well as the transferor's
ancestors, descendants, siblings and the spouses of all listed, are included in
determining control.
It is important to note that the proposed regulations are not effective immediately.
They will be effective after they have been adopted as final regulations. A public
hearing has been scheduled for December 1, 2016, suggesting that December will be
the earliest the new regulations would become effective.
Planning Considerations: Absence of Federal Estate Tax Exposure
Ironically, for many taxpayers the best planning strategy may be to simply do nothing
at all. As we highlighted in our July article, "Income Tax Planning with Family Entities
- The Quest for Basis Step-Up", many families have been relieved of exposure to the
federal estate tax due to the increasing exemptions amounts since 2002.
As we stated, "[t]he focus for these families is squarely upon income tax planning [and
the ability to obtain] a step-up in basis to the asset's fair market value on the date of
death. Consequently, when the value of an asset is reduced by valuation discounts,
the basis step-up potential is equally reduced... [S]hould heirs liquidate interest after
Senior's death, the heir must recognize that difference as gain for income tax
purposes."
In that article, we discussed strategies to eliminate valuation discounts in these
certain circumstances. The Service, however, may have just provided the ideal
mechanism to accomplish this strategy, to wit: do nothing at all.
Planning Considerations: Clear and Present Danger of Federal Estate Tax
For families where federal estate tax remains an ongoing threat to their legacy
wealth, there are certain planning strategies that may be considered in light of this
potential change in current laws. As always, any such strategies should be thoroughly
discussed with legal and tax counsel.
In some respects, currently discounted family-controlled entity interest is somewhat
akin to an appreciating asset. Once the regulations become final, the discounts may
fall off, resulting in a rapid increase in the value of the interest. Various planning
techniques may be structured so that this increase in value occurs outside of the
taxable gross estate, thereby avoiding the 40% federal estate tax on the increase in
value.
Such strategies may include sales to Intentionally Defective Grantor Trusts ("IDGTs") or
Grantor Retained Annuity Trusts (GRATs), as well as some asset titling opportunities,
all of which should be thoughtfully analyzed for each taxpayer's individual situation.
Additionally, the loss of discounts may cause a significant increase in a taxpayer's
federal estate tax exposure. Taxpayers should consider having their federal estate tax
analysis updated, along with a liquidity analysis for payment of any increased tax
obligations.
Caveats and Cautions
As with any estate planning strategy, caution must be exercised to avoid structuring
any potentially abusive transactions, including a transaction considered to have
pre-planned "steps" to achieve tax avoidance. A good estate planning attorney should
review any strategy so as to avoid this “step-transaction” doctrine, wherein the entire
strategy would be collapsed.
Additionally, the proposed regulations contain a potential three (3) year claw-back
period wherein any transfers made within 3 years of the transferor’s death could be

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treated as a lapse causing inclusion in the gross estate of the value of the reduction of
the transferor’s interest attributable to certain previous discounts.
Next Steps
As discussed, there are vastly differing strategies for each taxpayer's specific situation
particularly depending upon whether there is current or anticipated federal estate tax
exposure. Along with coordinating the appropriate legal and tax review of the issues
discussed above, your Oxford advisors can assist with determining the proper course
of action for each client's unique situation.
*The Federal Estate Tax Exemption for 2016 is $5.45 million per person/$10.9 million per married couples,
above which all wealth is taxed at the rate of 40% upon any non-marital transfer.