Well, we now have a Republican controlled Congress and President Obama is in his last two years as President - so will the Federal estate tax be fully repealed, i.e. for everyone, not just the 99+%? And recently the President proposed certain tax increases to help pay for the new Budget, including (with exceptions) gain recognition on lifetime gifts and transfers at death. Likely, as with most law changes being considered during the coming two years, nothing will happen! Yet clearly these events underscore the importance of estate and succession planning for families (especially those with closely-held businesses) during the year 2015. It should not be acceptable to families with significant wealth that new or updated planning will be held up to wait for future developments in the tax law!
Many of my Newsletter readers are tax professionals who are quite familiar with the current state of the Federal transfer tax law, especially as to the high 2015 $5.43 million unified exemption equivalent level that results in no gift or estate tax worries for most families. Yet developments continue to occur in determining Fair Market Value, in dealing with nontraditional or same-sex married couples, in developing trusts that allow for "decanting" (transferring assets to another trust with different dispositive provisions), and in ensuring maximum "asset protection" from trusts, including DAPTs(domestic asset protection trusts), even where the grantor is a potential trust beneficiary. My good friend, Steve Leimberg, founder of LeimbergInforationServices,Inc. (LISI) recently published as one of his regular Email Newsletters "Ron Aucutt's Top Ten Estate Planning and Estate Tax Developments of 2014" (LISI Estate Planning Email Newsletter #2266, 1/6/15). Nationally recognized tax lawyer Ron Aucutt, Past President of the American College of Trust & Estate Counsel, pointed out in his review that the political landscape after the 2014 Mid-Term Election has to be considered.
However, Ron Aucutt lists important issues that should be considered, based on recent developments, including a cloud over the use of Trust Protectors, the ongoing watch on State tax legislation affecting families, continued increase in DAPT State statutes, IRS focus on gift tax return audits where large 2012 gifts were made, and ongoing appellate court review of Tax Court determinations of Fair Market Value, especially in the Estate of Elkins and the Estate of Giustina valuation cases. See my Newsletter archives for review of these cases. What is indicated here, as I have seen in several cases in which I am a non-lawyer consultant, is a complete review, analysis and updating of the family wealth succession plan. The human element of such planning is so important and issues also are resolved based on the indicated development in law. I suggest to my readers that Northern California tax attorney Keith Schiller's excellent, regularly supplemented book (now published by Bloomberg Tax Management), The Art of the Estate Tax Return (2nd Ed, 2014) provides in-depth background and planning recommendations for all significant estate and succession planning issues facing families with significant wealth (whether or not any Federal estate tax might be involved).
My 2015 CPE Activities - 20 Upcoming Webcasts
During the period of May - December, 2015, thanks to the sponsorship by two outstanding CPE providers, namely, CPECredit (www.cpecredit.com) and CPELink (www.cpelink.com), I will present four (4) 2-4 hour succession planning courses that will be updated for all new developments and each will offer practical tips and suggestions for family wealth planning. These courses are titled "Family Wealth & Business Succession Planning", "Buy-Sell & Deferred Compensation Planning", "Entities, Valuation & Family Wealth Planning", and "Valuation Discount Strategies and Planning" - each course will include my live audio presentation, power point slides guiding the course presentation, a detailed outline from 60-100 pages for each course and other attachments as needed. Tax practitioners are invited to check each of the above-referenced websites for the webcasting titles and dates. Your participation online would be appreciated.
Now Back to Valuation!
First, let's look again at the case of Estate of Elkins v. Commissioner, 140 T.C. 86 (2013), which was affirmed in part and reversed in part by the 5th Circuit Court of Appeals in 767 F.3d 443 (2014. The case involved over 60 valuable family-owned artworks in which the decedent had but a co-tenancy fractional interest. In Tax Court, the estate claimed nearly a 67% overall valuation discount. This was up from the 44.75% discount claimed on the Estate Tax Return (Form 706). There was a cotenancy agreement requiring unanimous consent of all fractional interest owners on any sale and under which each cotenant waived his or her unilateral right of partition.
Tax Court Judge Halpern applied IRC Sec. 2703 to disregard the agreement restrictions, rejected the IRS assertion there should be no discount at all, and ultimately determined (without any specific evidence) a 10% discount reflecting reduced marketability for the artwork in cotenancy form. The 5th Circuit reversed the Tax Court (while agreeing that the IRS "no discount" position was without merit) essentially due to the trial court's clear failure to follow the "hypothetical party" standard of value in tax cases. The appellate court stated that the Tax Court "inexplicably veers off course" focusing its attention on the Elkins children as potential buyers of the artwork. Concluding there should be an estate tax refund of $14.4 million due the estate, the 5th Circuit stated that the "uncontradicted, unimpeached, and eminently credible evidence" on value is the only evidence on value and the court must accept it! Perhaps the real mistake was the IRS failure to offer any evidence of value of the cotenancy interests?
And now to Estate of Giustina v. Commissioner, T.C. Memo. 2011-141, which was reversed and remanded to the Tax Court on December 5, 2014 (9th Cir. No. 12-71747) - an especially interesting FLP fractional interest estate ownership case in that attorney John Thornton of Boise, ID was tax counsel to the Giustina Estate. He also was the attorney who successfully handled Estate of Simplot v. Commissioner, 249 F.3d 1191 (9th Cir. 2001) - The Tax Court should not be engaged in "imaginary scenarios as to who a purchaser might be." The hypothetical willing party FMV standard of value in tax cases does not permit that!
The Giustina estate owned a 41+% limited partner interest at date of decedent's death and the evidence at trial clearly showed the intent of the family, including the other partners, was to continue to operate as a managed timberland business the over 48,000 acres of Oregon timber owned by the FLP. Thus, Tax Court Judge Morrison's allocation of a 25% weighting of Net Asset Value (i.e. as if there might be a liquidation of the FLP in the future) was improper in the appellate court's view. It should be noted that the income approach would produce a value of only 1/3 of the NAV value! Noting that nearly 10 years has past since the decedent's death, we can see how time-consuming and expensive valuation litigation with the IRS can be - so a tip: get the best possible appraiser at the outset and stick with him or her!
I hope you, as a reader of this Newsletters, will find valuable information that will help you or your clients in estate and succession planning this year!
Enjoy! On the beautiful MiddleFork of the ID wild & scenic Clearwater River. Owen Fiore