Withdrawal of Proposed Tax Regulations Affecting Availability of Valuation Discounts to Family Business Owners

Withdrawal of Proposed Tax Regulations Affecting Availability of Valuation Discounts to Family Business OwnersIn September and December of last year, we posted blog articles discussing the Treasury Department’s issuance of proposed regulations under Section 2704 of the Internal Revenue Code (sometimes referred to as the 2704 proposed regulations) that could have significantly impacted the valuation of interests in family-owned businesses for estate and gift tax purposes.

On October 2, 2017, the Treasury Department and the IRS announced that the proposed regulations will be withdrawn in their entirety. The proposed regulations, targeted at curtailing artificial valuation discounts, could have reduced (or even eliminated) discounts (primarily, lack of control and lack of marketability discounts) historically used when valuing gifts or other transfers of family-owned businesses.

Among other factors cited by Treasury, the proposed regulations are being withdrawn because compliance with the regulations would have been unduly burdensome on taxpayers and could have affected valuation discounts even where discount factors were not created artificially as a value-depressing device.

The withdrawal of the proposed regulations means that family business owners who transfer ownership of part of their business to younger family members will still be able to make transfers at values that take into account appropriate valuation discounts. For example, a transfer of a 10 percent interest in a family business from parents to children does not represent a controlling interest in the business. The 10 percent interest is also not readily marketable and cannot be sold quickly like publicly traded stocks and other marketable securities. Therefore, discounts for “lack of control” and “lack of marketability” may still be applied to arrive at the value (for gift or estate tax purposes) of a minority, closely held business interest whenever the interest is transferred.

If you are interested in making transfers of ownership interests in your family business, the members of our Family Business team are available to discuss the various strategies available to you.

Laying the Foundation for Success: Structuring the Board of Directors in a Family-Owned Business

Laying the Foundation for Success: Structuring the Board of Directors in a Family-Owned BusinessMy husband and I are about two weeks shy of completing construction on our new home, so outside of work, construction is our life. In construction, the concept of compounding defects means a defect in the foundation compounds as you build up, impacting everything from the framing to the drywall. This concept applies to family-owned businesses as well. Failure to build a corporate governance structure makes a family-owned business susceptible to conflicts of interest, family infighting, and other inefficiencies, impacting everything from the CEO to the future growth of the company.

The board sets the overall strategy and policies of the company, so your corporate governance foundation starts with structuring the board of directors.  As the overall governing body, the board elects the officers of the company and provides oversight of management without getting into the day-to-day management of the business. In a family-owned business, the board may take family politics into consideration, but fiduciary duties dictate that the board must act in the best interest of the company, not any individual shareholder. These concepts give the family the ability to rely on the board to challenge management, set long-term goals, and engage in conflict management when necessary.

Given the role of the board, the family-owned business must determine the best structure for its board.  Requirements for the board are typically set forth in the company’s governing documents (e.g., bylaws or operating agreement). Here are a few questions to consider when structuring your board:

  1. How are directors elected to the board?
    Shareholders or members elect the directors to the board. The company’s governing documents may require that a nominating committee nominate qualified individuals before they may be voted on by shareholders. The governing documents may also set forth certain qualifications for directors.
  2. How many directors should be on the board?
    Applicable law may require a minimum number of directors, but otherwise, the company has the ability to set a range for the required number of directors. Typically, an odd number of directors is preferred to prevent a deadlock.
  3. Should the directors have staggered terms?
    The board may be divided into different classes of directors with staggered terms. Utilizing staggered terms promotes continuity on the board, but makes it more difficult to replace an entire board if the shareholders are dissatisfied with the current corporate strategy.
  4. Should the board include non-family members?
    This can be a difficult decision for family-owned businesses, and the answer may depend on the current stage of the business. For example, a family-owned business in the first generation may prefer a closely held structure of a limited number of family member directors. On the other hand, a family business on the third or fourth generation may be better served by including non-family members who can bring a fresh strategic perspective or a new experience base to the board.

Just like a strong foundation ensures that a building will weather the test of time, putting a strong corporate governance structure in place sets the family-owned business up for success as it grows and experiences generational shifts.

Succession Lessons from The Crown

Succession Lessons from The CrownAt my daughter’s urging, earlier this summer I watched the Netflix series The Crown. The Crown is the story of the reign of England’s Queen Elizabeth II. The first season presents the transition of the crown from King George VI to daughter Elizabeth due to the king’s untimely death. Recall that George VI became king because his brother, King Edward VIII, abdicated the thrown (a/k/a: quit the job) to marry an American divorcee. That is a succession story for a future blog.

As I watched the 10 episodes, my thoughts gravitated to the difficulties of leadership transition in family businesses. I can’t help it — it’s what I do. In the case of Queen Elizabeth II, the transition of leadership in the family business (and what a business it is!) was an emergency succession. The good news is that there was a long-standing succession plan in place. But, although there was a plan, the transfer of leadership was not easy. It seemed especially hard on Elizabeth’s younger sister, who was not chosen for the job, and the former king’s executive team, who now had to answer to a leader who was just a 25-year-old “kid.” It happens all the time!

As you know, Elizabeth persevered. In fact, she has now been Queen of England for 64 years. That’s what we call a successful transition of leadership.

Leadership transition from parent to child in a family-owned business is challenging.  I noted a few factors in the successful, though difficult, transition portrayed in The Crown that may be helpful in your own “kingdom.”

  • First, Elizabeth knew from very early in life that she would take over from her father at some point. The expectation was set well in advance of the transition.
  • Second, since all stakeholders – family and executive team – knew the plan, all were focused on educating, mentoring and training Elizabeth for the role. They all had ample time and proper motivation to make certain the transfer of power would be successful.
  • Third, the family and executive team understood, ultimately, that Elizabeth’s success was paramount to the success of the nation (i.e., the business). They put the “the crown” before self to support and aid the queen. Elizabeth also understood and embraced her duty, accepting that she had a duty not only to her family, but also to the entire British Empire.
  • Finally, she had an incredibly strong COO – Prime Minister Winston Churchill.

The prime minister knew the history of the family and the empire.  He had been with “the organization” for a very long time. He also held strong views about how the organization should be run and shared his wisdom with the queen. But through the transition and her early reign, he remained doggedly loyal to her and often served as a buffer. Churchill’s support for his boss and commitment to her success was unflagging.

Most family-owned businesses don’t resemble the British Empire, obviously, but lessons from The Crown do translate to these businesses in many ways.

  • If the desire is to have the next generation lead the family enterprise, start the process at birth. Teach the next generation about duty, not just to the family owners, but also to the employees of the company and their families, and to the communities where those families live.
  • Educate, mentor and train the next generation in the business. Teach the history and customs of the family and the business. Employ the next generation in the business from the ground up, and send them out into the “empire” to get to know the people.
  • Make sure the executive team understands the goal of a successful leadership transition. Involve the team in the process. Emphasize to the senior team that their support and aid is essential – failure is not an option.
  • Finally, if you can hire Winston Churchill as your COO . . . . do so!

God Save the Queen!

Family Business Interests, Charitable Remainder Trusts and Life Insurance: Q & A with Capital Strategies Group

Family Business Interests, Charitable Remainder Trusts and Life Insurance: Q & A with Capital Strategies GroupBradley’s Family Owned Business team asked our friends at Capital Strategies Group, Inc. to share a case illustrating how high-net-worth families involved in family businesses are using life insurance in creative ways that go beyond the standard uses for term or whole life policies. Here’s a Q & A with Preston Sartelle, Director of Business Development at Capital Strategies Group, Inc., that shows how a large block of life insurance can enhance the results and yields of business succession and estate plans for families.

Capital Strategies: We recently had the pleasure of working with a family of first-generation wealth looking to exit their business in a way that met several goals. First, they wanted to pay as little income tax as possible, which was problematic due to the extremely low basis in their company stock. Second, they wanted to provide a significant benefit to charity, and third, they wanted to maximize wealth to the second generation. After considering various options, the family settled on a Charitable Remainder Trust (CRT) combined with a life insurance policy insuring a family member from the first generation.

Bradley: It is likely helpful to offer a basic explanation of the workings of a CRT in this situation. There are, of course, several types of CRTs, each with complicating nuances, but the basic steps are relatively simple:

  1. The owner (donor) transfers the business interest to a CRT that is structured to pay the donor a specified amount during life, or for a certain term of years, with the remainder going to one or more designated charities or to a private foundation.
  2. The donor will be entitled to an immediate income tax deduction for the present value of the remainder interest given to charity, subject to the standard limitations on charitable deductions.
  3. The CRT is a tax-exempt entity and can sell the business interest without incurring capital gains tax at the trust level, thereby allowing the sales proceeds to be reinvested by the trust undiminished by taxes.
  4. During the donor’s life (or for the term of years), the CRT will distribute to the donor either a set dollar amount or a set percentage of the trust’s value determined annually—an income stream that the donor would not otherwise have if the interest was held until death. Each distribution is reportable by the donor as taxable income to the extent of any income that would have otherwise been recognized by the trust. In other words, any capital gains triggered by the sale are deferred over the course of the distributions to the donor, providing a tremendous advantage to selling the interest outright with all gain reported in the year of the sale.
  5. At the donor’s death (or at the end of the term of years), the charity or private foundation receives all remaining assets held by the CRT.

Bradley: What are some of the non-tax benefits of combining the CRT with an insurance policy?

Capital Strategies: The CRT can provide a boon to the next generation where the donor allocates the CRT distributions to a life insurance contract on the life of the donor. Often the amount of death benefit purchased with the CRT distributions far exceeds what the donor’s heirs stand to inherit from the business net of estate taxes.

As a quick example, consider a 70-year-old donor who owns $5 million worth of zero basis stock in the family business—a roughly $1.2 million capital gains tax liability if sold today. If the stock is retained by the donor and transferred to children at death after growing at 5 percent for 15 years, the children would inherit roughly $6 million net of estate taxes assuming the donor’s estate tax exemption had been otherwise used.

Instead, the donor could transfer the stock to a CRT, providing an income tax deduction for the present value of the remainder interest. The CRT could then sell the stock and pay the donor a 5 percent annuity for life, all or a portion of which the donor could use to purchase a life insurance contract. So, let’s assume a roughly $190,000 annual distribution to the donor, net of capital gains and income taxes – the actual amount will of course depend on actual CRT earnings.

Bradley: What are some other factors to consider?

Capital Strategies: The amount of insurance that could be purchased with the CRT distributions will depend on several factors, not the least of which is the donor’s health. If the donor is a standard, non-smoker underwriting risk, a universal life policy to the age of 100 with a lifetime premium schedule of $190,000 would result in approximately $6.85 million of death benefit proceeds to the next generation net of income and estate taxes—the amount the heirs stood to receive previously plus a 14 percent bonus. And, of course, the charity receives the residue of the trust, the amount of which will depend on the trustee’s investment experience during the CRT term. Earning a return equal to the 5 percent annuity rate will leave the charity the original $5 million principal.


CRTs can afford donors an efficient exit from an otherwise precarious tax position and make both the charity and the family better for it. Working with advisors such as Capital Strategies, Bradley’s team can recommend several ways life insurance, when structured intentionally and correctly, can elevate a client’s business or estate plan.

Family Office Series, Part IV: Family Office Trends

Family Office Series, Part IV: Family Office TrendsIn the previous posts in our Family Office Series, we have examined, among other topics, how family offices are structured and the pros and cons of forming a family office.

For the final installment of our Family Office Series, we are highlighting current trends in the world of family offices. Here are several family office trends to watch:

  • Instead of investing through private equity funds, family offices are making direct investments in deals (either alone or in combination with private equity funds or other family offices) with increasing frequency.
  • Family offices are teaming up with other family offices to buy entire companies with the intent to hold and operate them for the long term.
  • Family offices are engaging in impact investing—investments that are intended to make a profit and also have a positive social or environmental impact. A recent Financial Times survey indicated that family offices allocate on average 17 percent of their assets to impact investing.
  • Family offices are forming formal and informal networks with other family offices to share information about deal flow, pool cash for “club-deal” investments, and discuss investment strategies.
  • Investment banks, private equity funds and professional service firms are increasingly catering to family offices and forming dedicated teams to serve family offices.
  • Family offices are attracting talented executives from private equity funds, hedge funds and investment banks.
  • Some family offices are funding medical research and raising awareness for diseases and conditions which afflict one or more family members.

Our Family Business Advocates team is following these trends, and we plan to report on other family office topics in future blog posts.

Family Office Series, Part III: How Are Family Offices Structured?

Family Office Series, Part III: How Are Family Offices Structured?As we noted in a previous family office series blog post, “if you’ve seen one family office, you’ve seen one family office.” There is no standard legal structure for family offices. The types and number of legal entities used in a family office differs depending on each family’s vision and goals, the family’s investment strategy, and the scope of services to be provided by the family office. There are, however, several types of family offices commonly seen in practice.

In some cases, a family office (by design or default) may begin functioning inside of a family’s operating business. In this scenario, a non-family member CFO or other trusted executive may begin handling the founder’s personal investments and financial affairs, in addition to managing the day-to-day affairs of the business. Gradually, the personal services provided by the executive may expand to other family members. There are some pitfalls associated with this approach, but in our experience, family offices often develop in this manner. If the operating business is sold or if company resources available for managing the family’s business and personal affairs are stretched too thin, the family may establish a more formal family office structure outside of the business.

The single family office (or SFO) is a family office that provides one or more services (such as investing, estate planning, tax, and philanthropy) for one family. The family members served by the family office may consist of one immediate family or several generations and multiple branches of an extended family. To the extent that the family has a shared vision and common goals for its family office, the SFO necessarily operates in complete alignment with the family—its only client.

The multiple family office (or MFO) is a business that provides family office services to multiple unrelated families. Each family pays fees to the MFO. Pricing models may include a mixture of hourly fees, fixed fees and asset-based fees, or a flat annual fee, depending on the services provided and the MFO involved. While each family must share the MFO’s resources with other unrelated families, the fixed costs for operating the MFO are spread across multiple family clients, which may result in lower expenses compared to operating an SFO. In some cases, MFOs started as SFOs and over time began managing assets for other families. Examples of SFOs that transformed into MFOs include Bessemer Trust and Rockefeller & Co.

When it comes to family offices, no one size fits all. The structure of each family office is determined by the family’s wealth and objectives, the number of family members participating in the family office, and the scope of services provided by the family office.

In our next blog post, we will examine current trends in the world of family offices.

Family Office Series, Part II: The Pros and Cons of Forming a Family Office

Family Office Series, Part II: The Pros and Cons of Forming a Family OfficeA family with sufficient net worth, a shared vision for how to invest the family’s wealth, and the ability to communicate openly and resolve differences may be a good candidate to form a family office. There are a number of factors that a family should consider when deciding whether to form a family office. Here are a few of the pros and cons:


  • The family controls how the family office is structured and operated.
  • The family has flexibility and the ability to make quick decisions on investments.
  • The family office can be operated with discretion and confidentiality. Family offices are lightly regulated. Typically, family offices are not required to register with the SEC or disclose the amounts they manage and invest (as money managers with outside investors are often required to do).
  • Family members (including different branches of the family) can aggregate and leverage their wealth. This may result in more looks at better deals, the ability to attract better outside talent to help manage and invest the family’s assets, and, ultimately, higher returns.
  • The family has the ability to invest directly in deals, without investing through private equity funds and hedge funds.


  • Different family members (or branches of the family) sacrifice autonomy and independence in order to invest collectively.
  • Structuring and operating a family office can be a complicated, time consuming and expensive process.
  • There is potential for scope creep. The expectations of some family members for increasing returns and services rendered by the family office may grow over time.
  • As the family grows, there is more likelihood for disputes and imbalances of wealth between family members and different branches of the family.

While forming a family office is not the right approach for everyone, using a family office to manage and invest the family’s assets has proven to be good option for many wealthy families.

In our next blog post, we will look at how family offices are structured.

Family Office Series, Part I: What Is a Family Office?

Family Office Series, Part I: What Is a Family Office?

I have a home office in my basement that I refer to as the “Smith Family Office.” Fortunately, this blog post is not about my home office.

A family office is an entity (or multiple entities) established by a wealthy family to manage its wealth and, in some cases, to provide family members with services such as tax and estate planning services, legal services and various “concierge” services. Family offices may also include a philanthropic arm for supporting the family’s charitable, social and educational interests. Family offices have existed in the United States for more than a century to manage the investments and personal affairs of wealthy families. Some family offices are established while the family still owns and manages its operating business. In other cases, a family office is established after the family sells its operating business or experiences another liquidity event.

There is a saying that “if you’ve seen one family office, you’ve seen one family office.” The structures and scopes of family offices are as different as the families they serve. Few experts can agree on a single definition of a family office, and there is no cookie cutter structure. A family office may consist of a single legal entity that invests and manages the wealth of a small group of immediate family members. Another family office may consist of multiple legal entities and trusts that invest and manage assets, provide legal, tax and estate planning services, and make charitable contributions on behalf of multiple branches and generations of a wealthy family.

Experts also disagree on how much money it takes a family to establish a family office. Many estimates range from $100 million to $1 billion of investable assets. Similarly, there is no rule on the expenses associated with running a family office. Annual operating expenses may generally range from 1.5 to 2.5 percent of assets under management. However, in smaller family offices, expenses can be higher.

The amount of the family’s investable assets, and the family’s goals and objectives, will determine, among other things:

  • how the family office is structured;
  • what services the family office provides;
  • what services are performed “in-house” (and whether those services are performed by family members or by non-family member employees); and
  • what services are outsourced to third-party investment managers, accountants and attorneys.
  • Overall, a “family office” means different things to different families based on their business, financial, investment, charitable and personal circumstances and objectives.

In our next blog post, we will explore the pros and cons of forming a family office.

Introduction to Our Family Office Series

Many wealthy families form or consider forming a “family office” to manage their wealth and provide services to family members. Whether forming a family office is feasible and whether it will be successful depends on a number of factors, including:

  • the amount of the family’s net investable assets;
  • the family’s shared vision and objectives;
  • the family’s ability to establish and maintain effective governance and management policies and practices; and
  • the family’s ability to communicate frankly and constructively in order to resolve differences of opinion.

Introduction to Our Family Office SeriesFamily offices are proliferating and becoming increasingly influential. In an article published earlier this year titled “New Force on Wall Street: The Family Office,” the Wall Street Journal reported that there may be more than 10,000 family offices globally, about half of which have been formed in the last 15 years. Research indicates that family offices hold assets of more than $4 trillion, which approaches the cumulative assets held by private equity funds and hedge funds. There are an estimated 3,000 family offices in the U.S. with more than $1.2 trillion in assets.

In our four-part series, we will focus on the family office and address the following topics:

Part 1:  What Is a Family Office?

Part 2: The Pros and Cons of Forming a Family Office

Part 3: How Are Family Offices Structured?

Part 4: Family Office Trends

We hope that you will find our Family Office Series to be informative, and we welcome your feedback.

Diving into Family Philanthropy (Segment IV): Family Philanthropy – Where to Begin?

Diving into Family Philanthropy (Segment IV): Family Philanthropy – Where to Begin?In our previous posts on family philanthropy, we addressed the benefits of family philanthropy, choosing the right giving vehicle, and investing for impact. In this final post in our four-part series, we discuss how to get started with your family philanthropy. While there is no right or wrong way to “do” family philanthropy, we find it helps to begin with a clear idea of your goals and objectives. We’ve designed the questions below to help you start thinking about what you might like to accomplish for your community and your family through your philanthropy.

1. What do you want to achieve with your family’s philanthropy?

  • Is there a particular cause or issue area that ignites your passion to give?
  • Do you want to be able to deploy your charitable dollars wherever the need is greatest as needs change over time?
  • Are you seeking a mechanism to make annual giving to the charities you already support easier?

2. What value do you place on philanthropy?

  • Does philanthropy play an important role in your life now?
  • How much time would you like to spend engaging in philanthropic pursuits?
  • Do you anticipate that your charitable giving will increase, decrease or stay the same over time?

3. How do you want to involve your family?  

  • How much control do you want other family members to have over where money is donated?
  • Are you interested in using your philanthropy as a way to teach future generations about stewardship and leadership?
  • Which family members do you want to include?

4. How much control do you want to retain?

  • Do you want to have the final say on where funds are distributed?
  • Do you want future generations to have the flexibility to change the way the funds are used?
  • Do you want to ensure that your wishes are carried out in perpetuity?

5. What amount of administrative responsibility do you wish to maintain?

  • Do you like the idea of handling the details associated with regulatory compliance, due diligence and grantmaking?
  • Do you anticipate hiring staff or others to help with administration?
  • Would you be willing to give up some control in order to decrease the number of administrative tasks you are responsible for handling?

6. How will you fund your philanthropy?

  • Are you planning to use an ownership interest in your family-owned business?
  • Are you anticipating a liquidity event?
  • Will you use an asset that you ultimately want to leave to your children?
  • Will the assets used to fund your philanthropy change from year to year?

These are just a few of the common questions we explore with our clients. In our experience, each family’s path to meaningful family philanthropy is different. If you want to brainstorm ways to take your family’s giving to new heights, we are available to discuss these and other topics related to charitable giving at your convenience.