The end of the year is a busy time for estate and business transition planners. It is a time when clients want to update estate plans and implement transition plans – most notably through the use of annual exclusion gifting plans. When clients are looking to transfer business entities to the next generation or to key employees, Schwabe, Williamson & Wyatt often recommends that they do so over several years. The end of the year is a natural time to make those gifts, as it allows the business owner to maintain the control associated with any interest he or she may be gifting until the end of the year. It is also advantageous for tax filing purposes, as it often avoids the need to do any mid-year accounting changes or returns and, if paired with gifting at the beginning of the next year, can save on valuation costs. At the end of the year, advisers also try to anticipate changes in the law so that we can inform clients on how anticipated law changes might affect their plans.

In past years, Schwabe, Williamson & Wyatt has rushed at the end of the year to implement certain plans because of anticipations that the tax cost of those plans would rise in the next year. This year appears to be the opposite. Given election results and the prospect of a Republican Congress and president, significant tax reform may well occur in 2017. If so, any expected changes would reduce, not increase, estate taxes.

The current federal estate tax imposes a transfer tax on estates in excess of $5.45 million per person. This exemption will rise to $5.49 million in 2017. It includes both lifetime giving and transfers made at death. In its current form, the federal estate tax affects an exceptionally small portion of the population (0.2 percent of the people who died in 2015, according to the Joint Committee on Taxation). Both Mr. Trump and the Republicans have included the repeal of the federal estate tax in their tax proposals.

If the estate tax were to be repealed, it is possible that some business transition plans and estate plans could be simplified to eliminate the tax-driven features, though this possibility is limited for Oregon and Washington residents.

Oregon imposes a state estate tax that affects individuals with estates in excess of $1 million. Washington imposes a state estate tax on individuals dying in 2016 with estates over $2.079 million. These lower thresholds affect a greater percentage of individuals than the federal estate tax. Neither state has a gift tax. It seems unlikely that Oregon or Washington will do away with their estate taxes, even if the federal estate tax is repealed. Given the relatively low estate tax thresholds, Oregon and Washington business owners are still going to need to account for those taxes in their plans.

A question that remains is: What, if anything, might replace the estate tax? Mr. Trump has proposed to treat death as a recognition event for income tax purposes and tax unrealized gains in excess of $10 million at death. There are few details about exactly how such a proposal might work, but it seems clear that the number of individuals affected by this tax will still be very low.

Given the likelihood that any tax reform in 2017 is likely to decrease estate taxes rather than increase them, there may be little need for business owners to rush to accomplish year-end planning in 2016. If the estate tax is repealed, planners may shift their focus toward income tax consequences of various transition strategies.

In the short term, the best advice is to check with an adviser to make sure plans still accomplish goals in the most tax-efficient manner possible under current law. Also, plan to check in again in 2017 as any potential changes become evident. Business owners should also check to make sure any plans for 2016 have been implemented.

The beginning of the year is a great time to do a more comprehensive review of an existing business transition plan and estate plan. Are all key individuals named in the plan still the right people to be involved in the business transition? Have there been changes to family dynamics or desired disposition of the estate that would necessitate changes to a will or trust? Have changes in the business occurred over the last year that should be discussed with advisers? Are an updated durable general power of attorney and an advance directive in place? Are all business and tax records up-to-date? If there is a trust, are all assets properly titled? Are all of the beneficiary designations on life insurance and retirement plans current?

Taking these steps now can simplify things for loved ones and a business in the event of an owner’s death and should not be put off – even if one is holding out hope for law changes that will reduce taxes.

Jennifer Woodhouse is an associate with Schwabe, Williamson & Wyatt. She focuses her practice on natural resources and technology. Contact her at 503-796-2858 or jwoodhouse@schwabe.com.

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Discounts can be a powerful tool for transitioning the wealth inherent in a closely held business to the next generation at a reduced transfer tax (estate and gift tax) cost. As a result, discounts are often critical elements of many business transition plans, particularly for family-owned entities.

The IRS commented recently that forthcoming regulations could affect the discounts available to family-owned businesses. To the extent that an existing business transition plan relies on discounts, consult advisers about possible impact. In certain cases, advisers may recommend taking steps to complete transfers that rely on discounts before the regulations are released to increase the chance that current discounts will be available.

In a common family business transition plan, the owner slowly transfers ownership of the business to other interested family members. This is generally preferable to leaving the entire business to children at death because of the way the transfer would be taxed. At death, state and federal estate taxes are imposed on the fair market value of everything owned by the decedent.  For tax purposes, the fair market value is the price that would be reached between a willing buyer and a willing seller.

If the decedent owned the entire business, its value is higher than if the decedent owned only a portion. This is because the fair market value of a partial interest may be less than its proportional value due to the application of discounts. Valuation principals (and common sense) indicate that a hypothetical willing buyer would pay more for a controlling interest in a business than a non-controlling interest, which gives rise to a “minority discount.” Similarly, the value of a partial interest in a closely held business may be discounted because it can be difficult to sell as there is usually no established market for such interests. This gives rise to a “lack of marketability discount.”

Discounts have two primary benefits in the estate planning and business transition context:  reducing the value of the interest and freezing the value of the interest for transfer tax purposes.

Consider a family construction business owned entirely by A. If A intends to pass the entire business to family members at death, state and federal estate tax will be imposed on its entire value. Federal estate tax is imposed when a decedent’s lifetime giving plus assets at death exceed $5.45 million (for deaths in 2016). This amount is indexed for inflation. Estate tax in Oregon is imposed if the decedent’s estate exceeds $1 million. Washington imposes an estate tax if the decedent’s estate exceeds $2.054 million (this amount is also indexed for inflation). Neither Oregon nor Washington includes lifetime giving in determining the estate tax imposed and neither state has a gift tax.

Given the current tax landscape, a more tax-efficient approach may be for A to transfer small interests in the business to children involved in the business over time. In addition to the tax benefits, this approach offers the benefit of involving the children in the business before A’s death, which provides long-term continuity of operation in the event of A’s death or incapacity. If the transfers are made by gift, federal gift tax laws apply. An annual exclusion is available for gifts, and allows an individual to give up to $14,000 (for gifts in 2015 and 2016) each year to any number of recipients without federal tax consequences. Such gifts cannot be included in a decedent’s estate and are not taxable.

The value of a gift is determined by considering its fair market value. So if A passed a 2 percent interest in the business to A’s two children, that interest would likely be worth less than 2 percent of the entire business’ value due to the application of discounts. Combined discounts for a minority interest and lack of marketability in the range of 35 percent are not unusual. Discounts must be determined and substantiated by a professional appraisal.

If the construction business was worth $6 million, a 2 percent interest before discounts would be worth $120,000. If an appraiser determined a 35 percent discount on the interest applied, the value of the gift would be reduced to $78,000. If the gift qualified for the annual gift tax exclusion, only $50,000 of the transfer would be taxable, as A could apply a $14,000 annual exclusion for each of the gifts to A’s two children. In this scenario, A has transferred 2 percent of the business (worth $120,000 in A’s hands) to A’s children, but for tax purposes, the taxable gift is only $50,000 because of the use of discounts and the annual gift exclusion. Furthermore, A has removed 2 percent of the business from A’s estate and shifted all future appreciation and income from that portion of the business to A’s children.

Discounting is often a feature in a well thought-out business transition plan because it offers such significant tax benefits. The IRS recently announced its intention to issue regulations that could change the availability of discounts from existing practice. Until regulations are issued, it is unclear what changes the regulations might make, though practitioners generally anticipate the changes will limit the availability of discounts in a manner that is unfavorable to taxpayers.

Given the changing discount landscape, owners with an existing transition plan in place should review their plan and consult with their advisers as soon as possible to determine whether the anticipated regulations might affect the plan and whether any part of the plan should be implemented immediately.

Jennifer Woodhouse is an attorney with Schwabe, Williamson & Wyatt, and a member of its business transitions group. She focuses her practice on tax controversy and estate planning. Contact her at 503-796-2858 or jwoodhouse@schwabe.com.

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After a business succession plan is chosen, implementation may occur over many years. Meanwhile, an estate plan frequently remains securely tucked away. But that is a mistake. To ensure that an estate plan meets needs for successful transition of a business, periodic review must take place.

Evaluate whether the estate plan is still coordinated with the business transition plan.

• Has someone familiar with the business been named as the fiduciary? If the trust owns an interest in the business, make sure that the trustee understands the business and can implement the exit plan.

• Has the estate plan waived the fiduciary’s obligation to diversify assets? If not, the trustee may be required to diversify and sell a portion of the business. Consider including language that specifically directs the trustee to retain the business interests as an investment of the trust.

• Has appropriate planning taken place for beneficiaries not involved in the business? The plan may include creating voting interests for involved beneficiaries and nonvoting interests for beneficiaries not active in the business. Or, consider directing the trustee to allocate business interests and assets to the family members or managers participating in the business, and non-business assets to family members not participating. Are the business and non-business assets liquid enough to meet succession goals? Equal is not always fair.

• Are business interests held in an entity that is susceptible to partition or forced liquidation? This is of particular concern to businesses operated as sole proprietorships and general partnerships because beneficiaries could force a sale of the business.

• Does the plan allow the fiduciary to be involved in the business despite a conflict of interest? Consider using language that explicitly allows the trustee to serve as a co-owner, officer, director or employee of the business.

• Does the plan still reflect personal goals and desires? Is the business transition proceeding as planned – and if so, does the estate plan still complement the business plan to shift ownership or make generational change? If the transition has changed course, the estate plan will need to be revised accordingly.

Which other pieces of the estate plan should be reviewed?

• People. Are all the individuals named as fiduciaries (personal representative, trustee, etc.) and beneficiaries in the plan still alive? Have relationships changed such that they are no longer desired fiduciaries or beneficiaries? Have marriages, divorces, births or deaths changed wishes? Have key individuals in the business changed since the plan was drafted? Has the business moved to a different state since the plan was drafted?

• Entities. Has the business changed form or name? Has personal interest in the entity changed? Has a role in the entity changed? If charities are named in the plan, are they still in existence?

• Assets. Have personal assets changed significantly? In 2014, estate tax is imposed on estates in excess of $1 million in Oregon, in excess of $2 million in Washington, and federal estate tax is imposed on estates in excess of $5.34 million. There is no estate tax in Idaho. If assets have crossed any of these thresholds since the estate plan was drafted, it should be re-evaluated.

Does the structure of the estate plan still make sense under the current estate and income tax laws?

Federal estate tax laws have undergone a number of dramatic changes in the past five years. In particular, plans drafted before passage of the American Taxpayer Relief Act of 2012 (when the estate tax exemption was set at $5 million for 2011 and indexed for inflation, permanently unified with the gift tax exemption, and made portable) should be reviewed to ensure they accomplish goals in the most simple and tax-efficient manner.

The federal estate tax exemption increase has made the complicated planning that was previously done unnecessary for some clients. Estate planning documents that used trust funding formulas based on federal exemption amounts now have drastically different (and potentially undesirable) effects.

Additionally, because of the higher federal estate tax exemption and portability of the exemption between spouses, maximizing income tax benefits has become more important than estate tax planning in many cases. Depending on when the estate plan was drafted, review it to ensure that income tax planning opportunities are being maximized.

Do documents allow a representative to obtain one’s medical information?

Ensure that power of attorney contains a Health Insurance Portability and Accountability Act (HIPAA) release. It will allow the agent to obtain one’s health information that would otherwise be protected from disclosure. While HIPAA is not a new law, many estate planning documents do not contain HIPAA-compliant provisions allowing the release of information. These releases are critical in cases of incapacity.

Do documents contain provisions about digital assets?

It is important not to forget the transition of digital assets and digital devices. This includes, among other things, laptops, cellular phones, emails, digital music, digital photographs, software licenses, domain names, blogs, listservs, and online accounts. The same practices that make it difficult for hackers to steal personal information (choosing strong passwords and regularly changing them) make it very difficult for someone to act on another’s behalf with respect to those assets and devices in the event of death or incapacity. If estate planning documents do not include provisions dealing with these assets and devices, consult an attorney familiar with planning for these assets to update documents.

No matter how carefully an estate plan is crafted, it cannot possibly account for every change in one’s life or the law. It is only a snapshot in time of what was desired when it was documented. To ensure that an estate plan will accomplish goals and properly implement a transition plan, it must be reviewed periodically.

Jennifer Woodhouse is an attorney with Schwabe, Williamson & Wyatt, and a member of its business transitions group. She focuses her practice on tax controversy and estate planning. Contact her at 503-796-2858 or jwoodhouse@schwabe.com.

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