Winter Has Arrived and the Holiday Season is Coming
I am speaking at and coordinating a week long Western CPE conference in Tucson this week. The title is "Family Business & Investments Succession Planning". Truly succession planning for family wealth is key to structuring entities and techniques that insure wealth preservation and management on a multi-generation basis. With winter upon us, there will be time for family as well as time for writing new materials for webcasts and live conferences on Family Wealth Planning set for 2012.
Recently, I participated as a panelist on Valuation Planning at the 31st Southern California Tax & Estate Planning Forum. The emphasis throughout the conference was on wealth protection and preservation in uncertain economic times. The 32nd Forum is set for San Diego October 17 - 20, 2012, and, as always, will be a great educational opportunity for tax practitioners.
Estate Tax Uncertainty Continues!
As I stated in my last Newsletter (10/04/11), the Tax Relief Act of 2010 only provided a two-year "fix" on the estate tax beyond the retroactive restoration of the estate tax back to January 1, 2010. We are nearly at the end of the first year of the $5 million unified gift and estate tax exemption equivalent. And, since this is indexed for inflation beginning in 2012, it has been announced that the exemption will be $5,120,000 for 2012.
But then once again uncertainty and confusion reign - the "sunset provision" of TRA 2010 takes place January 1, 2013 - and once again all goes back to the pre-Busch 2001 tax cut days - 55% top estate tax rate, only a $1 million exemption, and on and on. Will this happen? Of course not, most practitioners say, but when will there be certainty in the transfer tax system? No one really knows, but certainly clients should review and update their wealth transfer plans now rather than merely wait out Congress and the Administration. With a national election day less than a year away, it appears unlikely there will be significant tax legislation until 2013.
Pass-Through Entity Planning and 2036
In the October 4th Newsletter I reported on two recent FLP cases, namely Giustina and Turner. Now we have seen just recently, on November 2nd, the Tax Court opinion issued (Judge Haines) in Estate of Liljestrand v. Commissioner, T.C. Memo. 2011-259. I stated, in my LISI commentary on this opinion (www.leimbergservices.com), the following: "From Schauerhamer in 1997 (the case I tried in Tax Court on 2036) to this most recent Liljestrand case, we have seen that 'bad facts' cannot be overcome, due to the broad reach of Section 2036(a) in ignoring for estate tax purposes lifetime transfers of property with significant testamentary motives. Yet tax practitioners can develop, from the nearly 35 court decisions on 2036(a) since 1997, certain 'key factors for success'."
Dr. Liljestrand (decedent in this estate tax case) retired as a physician in Hawaii at nearly 70 years of age. By entering into a large Section 1031 tax-deferred exchange of his Hawaii hospital property for a number of income-producing properties in California, Florida, and Oregon, he entered into the real estate ownership and management business. He had four children, and one of them, Robert, became his real estate manager, co-trustee of his revocable trust, and the "go to" person in handling the doctor's financial affair. In addition to being the trust co-trustee (and sole successor trustee upon his father's death), Robert had a management agreement to run the real estate business.
The Paul H. Liljestrand Partners Limited Partnership ("PLP") was created in 1997 and after a few months all the living trust's real estate holdings were in the partnership. Decedent was the only person to contribute property, and his son received or was "granted" 1 limited partnership unit. Then in 1998 and 1999 gifts of limited partnership units were gifted to all four children. But this FLP plan using PLP unravelled from the beginning: (1) partnership formalities were not followed, (2) PLP was not even recognized for income tax reporting purposes until after all the gifts were made, (3) personal expenses of decedent were paid out of PLP and there were non-pro rata distributions in his favor, (4) most of his assets were held in PLP so he had to rely on PLP distributions for living expenses. As to the use of the "bona fide sale" exception to application of 2036(a), the estate was unable to establish by evidence any real and significant non-tax purpose for PLP. Another "bad fact" was that the Moss-Adams accounting firm prepared a valuation report on PLP and its several classes of units, but this report was not used by the decedent!
Therefore, the result was that the Tax Court ignored PLP and the gifts of units thereof, thus bringing into decedent's gross estate for estate tax purposes all the real estate properties at date of death value. This truly was a disaster of an estate tax case from the taxpayer estate's perspective. What seems clear from cases such as this is that planning and use of a pass-through entity, such as an FLP or LLC, must be accompanied by careful analysis, clear documentation, and "following the plan" in its operation.
I hope my readers enjoy this Newsletter. Have a great Thanksgiving holiday!
Owen Fiore
