What Makes Estate Planning Important?
Decades again, when first being a faculty member at the NYU Insitute on Federal Taxation (1978), I suggested the following: "It is the challenge of meeting client expectations and assisting clients to achieve their family goals that makes estate planning an important area of law, not the mere focus on saving taxes." This is especially true today, and is significant in part due to the much higher estate tax exemption level presently in effect, i.e. $3.5 million per estate. "Wealth Planning is More Than Money Planning" is the title of an excellent article by Charlie Douglas, Esq., CFP, in the CCH Journal of Practical Estate Planning, Dec. 2005-Jan. 2006.
"The Estate Planner's Toolbox"
In my recent educational seminar presentations, both at conferences and via webcasts, I have found that referring to a very practical and useful booklet, "The Estate Planner's Toolbox", is very helpful in considering the current state of estate planning (Family Wealth Planning) and what today's uncertainty and economic problems require of planners in advising clients. This publication, now in its 5th edition for 2009, is co-authored by Richard B. Covey and Dan T. Hastings, published by U.S. Trust (Bank of America Wealth Management), 114 West 47th St., New York, NY 10036-1532.
There are several "estate planning alternatives" we must consider, namely, (1) the current down economy and resulting depressed values for client assets, including marketable securities, real estate, closely-held business interests, (2) low interest rates, including the AFR rates published monthly which, per IRC Sec. 7872, can be used for both income and gift tax purposes, and (3) the potential adverse changes to long-established valuation rules, including at least partial elimination of valuation discounts and the beefing up of IRC Sec. 2704.
Still Congress has not acted with respect to the Federal estate tax, i.e. at least continuing for 2010 the 2009 status, namely, a 45% flat estate tax and the current $3.5 million per estate exemption. Chairman Rangel, Chair of the House Ways & Means Committee, recently stated that "estate tax reform" will occur by the end of 2009, and several members of his committee recently introduced HR 3905 which lays out a number of changes for consideration. Of course, there are a number of other bills, including those introduced in the Senate, but none of the proposals in bill form yet have resulting in action. Thus, certainly, flexibility in estate plans is extremely important at this time.
Year-End Educational Presentations.
I recently presented two (2) 6-CPE credit hour courses in New Orleans on behalf of WesternCPE (www.westerncpe.com), one on "Hot Topics in Estate Planning" and the other titled "Tax, Financial & Estate Planning for Family Business & Investment Entities". These courses again will be presented in Las Vegas next week, on December 2nd and 3rd, for WesternCPE, and thereafter, on December 21, 2009, I present the "Hot Topics in Estate Planning" via a live webcast on behalf of CPELink (www.cpelink.com).
Also, in the next issue of the CCH Business Valuation Alert bi-monthly publication, I will have published an article on the late-breaking FLP/LLC developments, including the Malkin and Murphy judicial decisions which are quite instructive for practitioners. See my last Newsletter, published October 18th, for a discussion of both these cases.
Now to Christiansen & Value Adjustment Clauses.
The Eighth Circuit Court of Appeals affirmed the Tax Court in Estate of Helen Christiansen, Deceased, v. Commissioner, on November 13, 2009 (Case No. 08-3844), thus confirming, under the facts of this case, the viability of Value Adjustment Clauses. It would seem, that while appraisals will continue to be important, planners and their clients should use, in many instances, a value adjustment clause at least as a backstop to the appraisal supporting valuation of non-public entity equity interests within a family context.
"Value adjustment clauses" generally can be one of two types. In the first situation, the clause provides that if it is finally determined for transfer tax purposes the property interest transferred exceeds in value a specified dollar amount, then the transferred property interest is reduced, such as in terms of partnership or LLC units or shares of stock. The other type of clause, under the same situation, requires the transferee to give the transferor additional consideration measured by the same value determination difference. IRS traditionally has asserted such clauses are violative of public policy, and in years past the courts have appeared to agree with the Service. See, for e.g., Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944); Ward v. Commissioner, 87 TC 78 (1986). On the other hand, in King v. U.S., 545 F.2d 700 (10th Cir. 1976), the adjustment clause was upheld on the basis that the nature of the transaction was not changed, only the computation of purchase price of the corporate stock involved.
In McCord v. Commissioner, 120 TC 358 (2003), reversed by the 5th Cir., 461 F.3d 614 (2006), the critical date for transfer tax valuation purposes was confirmed as being the date of gift in this gift tax case. The appellate court disagreed with what was described as the Tax Court majority's "inventive methodology" and determined that the gift assignment's plain wording (including a formula clause) should have been followed. Both the Tax Court and the 5th Circuit opinions are must reading.
And now we come to the Christiansen case, 130 TC No. 1 (2008), where the principal issue was whether the Procter case should apply to a Will's defined value formula disclaimer clause the resulted in certain charitable gifts in the decedent's estate. The Will provided that disclaimed assets, if any, would pass as follows: 75% to a CLAT (charitable lead annuity trust) and 25% to the decedent's private foundation. The principal assets in Helen Christiansen's estate, which totaled about $6.5 million in value, were 99% FLP interests in two family partnerships, which were engaged in farm and ranch activities. Under the Will's formula disclaimer clause, decedent's sole heir, her daughter, disclaimed a fractional share of the estate exceeding $6.35 million in value, defining fair market value as "such value is finally determined for federal estate tax purposes."
1. The Tax Court determined that, since the daughter was the disclaiming party and also was the remainder beneficiary of the CLAT, IRC Sec. 2518 regarding a "qualified disclaimer" was not satisfied as to the 75% disclaimer gift to the CLAT. On the other hand, the 25% thereof specified to go to the private foundation did satisfy Section 2518 by its terms. This set up the argument over the formula clause and its effectiveness.
2. First of all, IRS argued that any increased amount passing to the foundation was contingent on a condition subsequent. The Tax Court disagreed, applying Treas. Regs. Sec. 20.2055-2(c), i.e. that a disclaimer relates back to the decedent's death. Further, the Tax Court also disagreed that the increased bequest to the foundation was contingent as depended on IRS audit and challenge of the estate's asset values. And in so determining, the court stated: "Our Court is routinely called upon to decide the fair market value of property donated to charity - for income, or estate tax purposes."
3. The second IRS argument was the "public policy" argument, the the court rejected IRS reliance on Procter and similar cases, i.e. finding that these decisions do not apply to a formula disclaimer and thus that the foundation gift via the disclaimer qualified for an estate tax charitable deducion.
4. On appeal to the 8th Circuit by the Commissioner, the appellate court affirmed the Tax Court decision, specifically dealing with the IRS legal arguments on appeal - and rejecting them both.
a. First of all, the IRS argued again on appeal that the transfer to the foundation was dependent on the happening some event or performance of some act in the future as a condition precedent to the transfer. See Treas. Regs. Sec. 20.2055-2(b)(1) - referring to a "transfer at date of death", not a disclaimer. This first argument of the Service was rejected, as it was at the trial court level.
b. Then, secondly, the Service presented on appeal the "violation of public policy" argument, which related to "incentives and disincentives that exist regarding the decision to conduct audits" where a formula disclaimer clause is involved. The 8th Circuit panel agreed that the Tax Court's decision "may marginally detract from the incentive to audit estate returns." But the appellate court disagreed that it had any duty to "maximize receipts", stating instead that the Commissioner's duty is to enforce the tax laws. Further, the appellate court found no evidence of any clear Congressional intent suggesting any public policy of maximizing incentives for auditing tax returns. And finally, in rejecting the public policy argument, the appellate court stated that, even if there were such Congressional intent, there is "no corresponding rule of construction...necessary in the present context to promote accurate reporting of estate values." The 8th Circuit opinion pointed out that in a fixed-dollar-amount partial disclaimer, the contingent beneficiaries (here charities)...have an interest in ensuring that the executor or administrator does not under-report the estate's value." (described as a "watchdog function")
5. So it would appear that in the context of planning with intra-family transactions (and not limited to a disclaimer), practitioners and their clients would do well to consider valuation adjustment clauses written into the transfer documents, whether by gift, sale or otherwise.
Enjoy the upcoming holidays as we move toward the year 2010 beginning in just a few weeks.
Owen G. Fiore
