Well, here it is Fall in North Idaho - beautiful leaves, rain, river is rising, and - finally, in several weeks, the National Presidential Election will be over - for 4 more years!
Mary Ann and I enjoyed Hawaii (Island of Kauai) for several weeks in September, and we have trips planned to CA and FL, the first around Thanksgiving, and the other at Christmas time, visiting family - especially grandkids!
My last Newsletter, posted June 18, 2016,included a review of the final chapter in the Estate of Natale Giustina - a great taxpayer victory in estate tax valuation of a non-controlling, limited partnership interest in an FLP. But now, as outlined below, the Treasury Department and IRS want to mount a big attack on family entity valuation discounts for estate, gift and GST purposes. This is in spite of the fact that, with the high transfer tax exemptions now (2016, per person, $5,450,000), less than 1% of American families have to be concerned with the Federal transfer tax! Note, however, there still are about 20 States with their own death tax, some with much less in the way of exemptions than for Federal purposes.
But first, a bit on my upcoming end-of-year and 2017 CPE events on the internet, via webcasts/webinars for two sponsors.
WesternCPE - This past Spring I filmed for WesternCPE 4 CPE courses geared to educate CPAs and other tax professionals on estate and succession planning - "Estate & Succession Planning for the 99%", "Buy-Sell & Deferred Compensation Agreements", "Entities and Succession Planning", and "Valuation and Discount Planning" - These courses are scheduled by WesternCPE, so check our its website - www.westerncpe.com. As always, I am available to answer questions attendees may have, at firstname.lastname@example.org.
CPECredit - For this organization, check www.cpecredit.com, I have 5 courses - including the ones listed about, plus a special course "Estate & Succession Planning Developments - 2012-2016 (soon to be updated for 2017 also), all of which are "live" - thus, I can update each course when I present it. There are about 10 presentations of these courses left for 2016, so check them out!
VALUATION - ITS ROLE IN ESTATE & SUCCESSION PLANNING
The term "Valuation" involves both legal and factual issues - as found in a Tax Court case several years ago, the Estate of Virginia Lockett, you cannot expect any valuation discounts on partnership interests if the law and facts show there really is no entity at all! Here Mrs. Locket, prior to her death, ended up with all the partnership interests in an AZ FLP - thus, the law of Arizona as well as the partnership agreement itself (why didn't her advisors read it?!) read that there was no partnership. So the 50% claimed estate tax discount was determined by the court to be a big ZERO!
Valuation involves the trier of fact, whether initially the taxpayer and his appraiser, or the IRS agent, or IRS Appeals, or, if need be, the U.S. Tax Court Judge, determining what is "Fair Market Value" for transfer tax purposes - not defined in the IRC, but rather set forth as the "hypothetical willing buyer-willing seller" standard of value in the Treasury Regulations, Rev. Rul. 59-60, and many court cases. Valuation is the most common dispute to go to Tax Court involving IRS and taxpayers. Clearly, picking and working closely with a good, well-experienced appraiser is the key to success.
Way back in the 1970s-1980s, imaginative arrangements were set up by tax and estate planning attorneys to depress transfer tax value while ensuring family control over entities, such as C and S corporations, FLPs, etc. Congress acted in October, 1990 to set out "Special Valuation Rules", IRC Secs. 2701-2704, inclusive, seeking to control perceived excesses in valuation strategies adopted by taxpayers. Therefore, the use of preferred stock recaps were dealt with in Sec. 2701, now requiring a guaranteed 10% minimum return each year be paid out. Then, with the Grantor Retained Annuity Trust (GRAT) and the Qualified Personal Residence Trust (QPRT), Section 2702 laid out gift tax "safe harbors" for certain specialized lifetime transfers. Section 2703, an estate and gift tax section, states that Buy-Sell Agreements and other restrictive arrangements (e.g. leases) involving family-control, shall be disregarded UNLESS the 3-part "safe harbor" of Sec.2703(b) is fully met - an important consideration in setting up buy-sell agreements for family business and investment entities.
Finally, the subject of family-controlled entities, where there may be lapsing voting rights and/or restrictions on liquidation, involve the fourth rule - IRC Sec. 2704. Since 1990, with the assistance of many State legislatures, 2704 was seen as somewhat of a "paper tiger", i.e. easily avoidable as any adverse impact on valuation discounts. But Treasury released proposed new 2704 Regulations on August 2, 2016, with the public hearing scheduled for December 1, 2016. You can be sure there will be numerous filed comments and many tax professional and family business group witnesses present at the public hearing. Treasury technical person Cathy Hughes has made clear that finalizing these proposed regs may take quite awhile. So why should we care? The answer is in the complexity of the 50 pages of proposed regs and the varying opinions already published by many advisors - Treasury may be overstepping its bounds and perhaps should be proposed legislation to be dealt with by Congress. Further, the proposed regs seem to establish a new 3-year "bright line" test in some cases, i.e. a gift that changes voting power, etc. might be disregarded and an estate tax imposed should the donor die within 3 years after making the gift!
Tax professionals should take advantage of online courses, conferences and tax publication articles on this important 2016 development relating to valuation. Certainly, our appraiser friends will be asking about the impact of the proposals when they are given valuation assignments for family businesses. Here is a tip on an excellent, quite easily readable, summary of the new proposed regs for Sec. 2704, authored by Mark Parthemer, Senior Fiduciary Counsel, Bessemer Trust Co. Check it out and read it - www.bessemertrust.com.
CHECK OUT YOUR CLIENTS - IS THE ESTATE PLAN UP-TO-DATE, IS THE AMERICAN TAXPAYER RELIEF ACT OF 2012 TAKEN INTO ACCOUNT, AND IS THERE A TRUE EQUITY AND MANAGEMENT SUCCESSION PLAN IN EFFECT NOW? The CPA is an especially important person in this area, who can be a catalyst to action by him or her and other professionals, including, of course, the estate planning attorney.
Enjoy the Fall, and have a wonderful Holiday Season coming up - plus watch for more Newsletters soon!