The year 2013, rather than seeing a downturn in estate and succession planning, has evidenced a true renewal in the importance of an integrated approach to this area of planning for our clients. True, ATRA 2012 made "permanent" (at least for now!) large $5.25 million per person unified gift and estate tax exemptions, even with added increases annually for inflation adjustments. But the permanency provided for the new Portability Election, more emphasis on income tax issues (including ensuring basis step-up at death for each spousal estate), and the myriad of non-tax succession planning issues requiring attention, all have brought estate planners back to basics - again!
In addition, in April, 2013, the Treasury Department released the Obama Administration's Revenue Proposals for the Fiscal Year 2014 (beginning October, 2013) - these include prior years' proposals for reducing the usefulness of GRATs, limiting Dynasty Trusts, etc. But what was left out this year were changes in IRC Sec. 2704, which likely would seriously curtail intra-family transaction valuation discounts. Why was this? I believe it simply is that Treasury has ready for publication new Regs under Section 2704, adding and expanding on "applicable restrictions" reducing discount planning opportunities. Such Regs likely will be effective when proposed and as of the October 8, 1990 effective date of 2704! So planners beware, there may be significant changes coming in the valuation area.
My April 6th Newsletter outlined where we go from here by reason of ATRA 2012; and, also, I set out "10 Steps in Successful Succession Planning" for my readers. The key seems now, which we should have done all along, is to Fit the Plan to the Client - thus, develop planning based on Levels of Net Worth of the client(s).
In the balance of this Newsletter, I first announce a special seminar on Valuation after ATRA 2012, including issues regarding the preparation and filing of 2012 Gift Tax Returns. I also mention some other CPE opportunities in which I am involved. Then I discuss several interesting cases, including Estate of Kite, Estate of Koons and Estate of Elkins - all worthy of your consideration (and note that the full case opinions in these Tax Court cases are able to be viewed and downloaded at www.ustaxcourt.gov).
One-Day Valuation Seminar June 28, 2013, Los Angeles -
Many of my readers are well familiar with the Southern California Tax & Estate Planning Forum, which in its 3-day plus version will be held in San Diego October 22-24, 2013 (check the details at www.clenet.com). In addition, Lonnie McGee puts on several additional one-day seminars each year. San Jose attorney John Prokey, Esq., Business Valuation Appraiser Mark Higgins, and I are presenting a one-day Valuation Seminar entitled Valuation - The Core Concept in Succession Planning at the LAX Sheraton Gateway Hotel in Los Angeles on Friday, June 28, 2013. Many topics are included in this proactive, up-to-date seminar, including how to select and work with appraisers, preparation of 2012 Gift Tax Returns where on extension, ensuring the availability of the 3-yr Gift Tax Statute of Limitations on Assessment of Gift Tax, recent tax cases providing guidelines in valuation cases, how to deal with IRS on valuation at various levels, including audit, Appeals and in court. The interchange among the speakers will be especially interesting to attendees, so I hope some of you elect to attend this important seminar!
Other CPE Opportunities -
I am beginning my webasting of various courses for WesternCPE (www.westerncpe.com), CPELink (www.cpelink.com), and CPECredit (www.cpecredit.com). In addition, for WesternCPE, I am on the faculty of several live resort and precision conferences - including ones in Whitefish, MT, Seattle, WN, Atlantic City, NJ, and Las Vegas, NV - these conferences run from July - December, so check them out.
One of my areas of emphasis, especially presented this coming December in Las Vegas (12/3-6/13) is the conference I designed and will present for the third year on "Family Wealth & Business Succession Planning" - We have some great speakers, including Jon and Eileen Gallo, Mark Higgins, Keith Schiller, Dick and Steve Oshins, and Howie Pearson - - all stars in their respective areas, who will focus on succession planning.This conference is wonderfully suited for senior CPAs, attorneys, CFPs, as well as persons who lead their own companies, especially privately held entities.
Tax Court Decisions of Interest!
(1) Estate of Virginia V. Kite v. Commissioner, T.C. Memo. 2013-43 (see my commentary in Leimberg Information Services, Inc. (LISI), Estate Planning Newsletter #2066 (2/9/13) - this is a great victory for the taxpayer estate, essentially showing the advantage of carefully planning a family estate over a number of years. Even the selection of situs for entities was an issue in the planning process, with Texas law being more favorable than the home state law of the decedent in Oklahoma. This case involved several marital deduction trusts, installment sales, private annuity transactions and even the IRC Sec. 2519 issue of possible "disqualifying dispositions of otherwise qualifying marital deduction income interests.
The overall outcome was very favorable for the decedent's estate on the issues in the case. First, the issue was whether the transfer of partnership interests to Mrs. Kite's children in exchage for 10-year deferred payment annuity transactions was a "disguised gift subject to gift tax" - NO concluded the Tax Court. Another issue was whether there was lack of economic substance in that Mrs. Kite failed to sign amended partnership agreements at one point - NO concluded the Tax Court, looking at Texas law that makes clear "evidenced intention" is sufficent! In addition, the court rejected the "illusory argument" that prevailed for IRS in the earlier (and to be compared with this case) Estate of Hurford v. Comm'r, T.C. Memo. 2008-278.
Even though Mrs. Kite was elderly and her medical expenses rising, the court's use of Estate of McLendon v. Comm'r, 135 F.3d 1017 (5th Cir. 1998), a Texas situs case, resulted in the approval of use of the valuation tables - even though decedent was in declining health and the annuity payments were deferred for 10 years!
This case and the earlier Hurford case are well worth a read - showing the importance of careful and long-term planning.
(2) Also, in April, I commented for Steve Leimberg in his LISI Estate Planning Newsletter on the case of Estate of John F. Koons, III v. Comm'r, T.C. Memo. 2013-94 (April 8, 2013). This case deals with the Graegin note type of accrued interest 2053 deduction and the valuation of decedent's LLC member interests. As to both issues, the after-death (valuation date) increased in member interests to a control position resulted in a taxpayer defeat! Even though well-known tax litigator came in just before trial to try and save the day, the facts supporting a "reasonably foreseeable" fact of increase to control of the entity were too strong to overcome. Yes, there were some uncertainties involved at date of Mr. Koons' death; however, as IRS contended successfully, petitioner's suggestions the control change would not occur were merely attempts "to creat a smokescreen of uncertainty around the (children's documented agreements of redemption) which did not in fact exist as of the (date of death) valuation date.
This case warns advisors, including appriasers, that you must look a bit beyond the exact valuation date, to see if the hypothetical buyer would reasonably anticipate another event or fact taking place that would allow for a higher price to be offered under the usual standard of value. The reasonable anticipation was that Mr. Koons' percentage ownership would increase very soon from 47% to over 70%, and thus the court concluded the valuation discounts should be reduced from 31.7% claimed down to 7.5% per the court! Also, the "cash cow" LLC situation, coupled with the control increase to majority control, made "unnecessary" the Graegin loan, according to the court.
(3) Now we go to the Estate of James A. Elkins, Jr., et al v. Comm'r, 140 T.C.___No. 5 (3/18/130), which is a case involving the level of discounts appropriate for undivided co-tenancy interests in art work. See the LISI Estate Planning Newsletter, authored by Mitch Gans and Jonathan Blattmachr, LISI #2079 (3/18/13). The issue here was whether the apparent (and evidenced) fact that Mr. Elkins' family members would pay almost anything to keep the art in the family reduces the otherwise possible discounts - the court's answer was a resounding YES. This has brought cries from some practitioners that the Tax Court violated the "hypothetical willing buyer-willing seller" standard of value in tax cases.
However, there was strong evidence (which may have been a mistake by the estate's counsel) that the children would do whatever was necessary to buy out the hypothetical buyer: "One of the estate's experts had indicated that the children had a 'psychic' attachment to the artwork and that they, therefore, would be willing to act contrary to their self-interest in order to avoid a sale." (LISI commentary cited above). So only a 10% discount was allowed - it seems to me that the taxpayer estate's own testimony is the problem! Note that the courts often have reversed the Tax Court for departing from the hypothetical party standard - see for e.g., Morrissey v. Commissioner, 243 F.3d 1145 (9th Cir. 2001).
Well, I hope this Newsletter has been of interest to you, my reader. I hope to have you on a webcast of mine in the future, or at the live June 28th seminar in Los Angeles on Valuation Planning!
Regards, Owen Fiore