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TAX ALERT 2016-5: THE 2016 ELECTION: TAX CHANGES EXPECTED Valuation discounts. On August 2, 2016, the IRS released proposed regulations, which may limit valuation discounts for transfers of interests in family-controlled entities. These regulations contain many ambiguities, and the IRS requested comments and held a public hearing on December 1, 2016. The regulations are controversial, many comments were sent and only a few clarifying changes were provided at the hearing. Asa result of the election, we believe it is likely the IRS will not proceed with these regulations. For now, there has been no official word from the IRS. Planning. The proposal to repeal the federal estate tax appears straightforward, but will be complicated if it is temporary. The possibility of reinstatement of the estate tax may be a reason for traditional estate planning techniques, such as gifts and sales, to continue to be utilized. There is also significant uncertainty as to the related federal gift tax and basis step-up proposals. This makes current planning difficult because you may be comparing the consequences of taking action currently (such as making a gift), with the uncertain future consequences of not taking such action. Nevertheless, there are some general guidelines to consider. e It does not appear advisable to make a current gift that requires the payment of gift tax. Although the gift tax may be less costly than the estate tax, that would not be true if the estate tax is repealed. e There are many types of “free” gifts that do not require the payment of gift tax, such as annual exclusion gifts, tuition and medical gifts, gifts utilizing the lifetime gift exemption, and zeroed-out GRATs. o If such gifts are being considered only to save estate tax, it does not appear necessary to make these gifts, unless there is an applicable state estate tax*. However, if repeal is temporary and the estate tax will be reinstated, then such gifts may continue to be advisable. o If such gifts are being considered for other non-tax reasons (such as benefitting the recipient or asset protection), such gifts may still be beneficial. Even if the gift tax were repealed, you would still have made the gift for free. o Ifa gift will be made currently, it may be advisable to include flexible provisions, such as a trust which allows for discretionary distributions to the donor’s spouse. This could allow the gift to be “undone” in the future by distributions to such spouse, if that becomes desirable. As to future planning, it will obviously depend on what changes are enacted. If the estate tax is repealed, or if other significant changes are made, all wills, trusts and estate planning documents should be reviewed to determine if any revisions are desirable. Since most wills have dispositive provisions, such as credit shelter trusts and QTIP trusts, based on the estate tax, it will require a re-thinking of estate planning and what dispositions and trusts would be appropriate. Non-tax considerations, such as trust provisions, asset protection and fiduciary selection, will play an enhanced role. If federal estate tax repeal is only temporary, it will presumably be necessary to include alternate dispositive provisions, in case the tax is reinstated. CONCLUSION The results of the 2016 election are expected to lead to significant income and transfer tax changes, some through the potential repeal of the Affordable Care Act and others through a push for comprehensive tax reform. In this Tax Alert, we have highlighted some of the tax proposals, and the possible impact these changes may have on 3 We have a separate Tax Alert 2016-3, Proposed Regulations May Limit/Eliminate Valuation Discounts for Family Controlled Entities. * Certain states impose their own estate tax, independent of whether the federal estate tax is repealed. HOUSE_OVERSIGHT_014521