ESTATE & SUCCESSION PLANNING - 2016 A BIG YEAR - With the Presidential Election Year in full swing, now in primary season and candidates constantly before us, we should help our clients get the job of integrated, new and updated estate and succession planning done! Tax legislation is rather unlikely until at least mid-2017. But Treasury and the IRS continue to focus on perceived "tax loopholes" and compliance issues. And, of course, the courts always have cases of interest related to estate and succession planning (see several items below).
ATRA 2012 now has settled in, especially with the June, 2015 Final Treas. Regs. on the Portability Election. With the high, per person gift, estate and GST exemption level for this year of $5.45 million ($10.9 million for a married couple), we must focus on client goals, aspirations, needs and fears in dealing with the preservation of wealth and its succession either during lifetime or at the death of the estate owner. One of my most popular webinars is "Estate & Succession Planning for the 99%" (that is, the 99% plus percent of families not having to face any Federal estate tax now). People are who we as tax advisors serve, Property and its Value is key in computing Net Worth, and the Process of Estate and Succession Planning is how we work with other advisors in effectively and proactively advising our clients. The reader of this Newsletter is welcome to email me (firstname.lastname@example.org) for a copy of my 2016 updated 2016 24 page memo on estate and succession planning - the process, the new developments and how to successfully assist clients.
OWEN'S WEBINARS IN 2016 - EXCLUSIVELY AVAILABLE LIVE ON CPE CREDIT - www.cpecredit.com - This year I will present 5 different courses, most 4 dates, providing 2-3 CPE hours of education regarding estate and succession planning. This month my courses sponsored by CPE Credit include (1) February 12 - "Family Succession Planning Developments - 2016", and (2) February 19 - "Estate & Succession Planning for the 99%". Then in May, I present the other 3 courses, namely, (1)"Trusts, Pass-Through Entities & Family Wealth Planning" (May 6), (2) "Family Wealth Valuation Issues" (May 20), and (3) "Buy-Sell & Non-Qualified Deferred Compensation Agreements (May 27). Anyone is welcome to sign up as a participant, and you can email me questions both during and after the course presentation each time. Then, as you can see from reviewing the webinar schedule at www.cpecredit.com, I repeat my courses in June, October, November and December this year.
SOME DEVELOPMENTS OF INTEREST -
One More Partnership Taxpayer Victory: Family LLC Works Against IRS Attacks: In Estate of Purdue v. Commissioner, T.C. Memo. 2015-249, husband and wife owned 5 investment accounts managed by several investment firms, and an undivided interest in triple-net leased commercial real estate. The taxpayers wanted to consolidate asset management of all these investment assets in one place, and thus set up an LLC. This is just one more of over 35 tax cases over the past nearly 20 years (I was legal counsel for the first such case - Estate of Dorothy Schauerhamer v. Commissioner, T.C. Memo. 1997-242), and in Purdue, the developed body of law served the taxpayers well - a taxpayer victory, and an opinion well worth reading for its recitation of real and significant non-tax reasons for establishing the LLC. The court found that the transfers of property into the LLC, properly recorded as transferors' capital at Fair Market Value, were made for legitimate and significant non-tax reasons, and thus satisfied the "bona fide transfer for adequate and full consideration in money or money's worth" exception to the estate inclusion section of the Code, IRC Sec. 2036(b). Note the litany of reasons noted and approved by the Tax Court: (1) consolidation for investment purposes, (2) no commingling of decedent's funds with those of the entity, (3) respect given to the entity formalities, (4) assets actually transferred to the entity, (5) taxpayer(s) not financially dependent on income from the LLC since sufficient assets held outside the entity for support of the transferors, and (6) taxpayers were in good health when the LLC was created and funded. So, as my webinar on Pass-Through Entities and Trusts (noted above) will review, development of the facts supporting using entities is critical for taxpayer success.
But Treasury and IRS Still Want to Attack Entities, Especially FLPs and LLCs: The courts continually deal with valuation issues, and where especially passive investment assets are held in entity form, such as an FLP or an LLC, with resulting valuation discounts usually involved, Treasury and the Service perceive there is a "tax loophole" waiting to be closed. Actually way back in 1990, Chapter 14 ("Special Valuation Rules") was enacted by Congress and signed into law as of October 9, 1990 - with four (4) special valuation rules modifying in important respects the traditional "hypothetical party" FMV standard. Section 2701 dealt with the perceived abuses of entity equity recaps, such as using common and preferred equity to shift at very low gift value future growth of a company or of investment assets. Then Section 2702 provided "safe harbors" for gift tax valuation for Grantor Retained Annuity Trusts (GRATs) and Qualified Personal Residence Trusts (QPRTs) - and by the way, GRATs are on the revenue raising proposals agenda for Treasury now. Third, as to "restrictive arrangements", most typically Buy-Sell Agreements, specific rules for recognition of restrictions for valuation purposes were added to the Code. Finally, and discussed below, was Section 2704, which set out rules under which liquidation restrictions for entity equity interests would be ignored for valuation.
Estate planners, as to Section 2704, jumped on an exception to the statutory disregard of stated liquidation restrictions, namely, that Section 2704 would not apply if the liquidation restrictions were no more restrictive than the default provisions or requirements of applicable State law. In other words, many States now have default provisions (i.e. if the Buy-Sell Agreement doesn't provide otherwise) that an equity owner has no right of liquidation of the entity and thus no ability to get to the "inside the entity" assets. In certain Administration Revenue Raising Proposals, broad changes in IRC Sec. 2704(b) were proposed that raised a question of the viability of such regulatory changes, but, if proposed, would have severely restricted valuation discounts under Sec. 2704! A nationally known tax attorney, Richard Dees, of the Chicago-based law firm of McDermott Will & Emery, sent Treasury and IRS Counsel a 29-page detailed letter pointing out the improprieties involved in what was expected to be published as Proposed Regs. as early as September, 2015 - - This halted, it seems, the Prop. Regs. in their tracks, and now it appears that Prop. Regs much less draconian may come out in the near future. This little story merely reminds us of the importance of keeping in touch with what is going on in Washington, D.C., as confusing at times as it may be!
Present Interest Annual Gift Tax Exclusions Upheld in Mikel v. Commissioner - Lots of Them! - Mikel v. Commissioner, T.C. Memo. 2015-64, was a gift tax case in which husband and wife donors took property worth over $3 million and contributed it via gift in an irrevocable trust with 60 separate beneficiaries, so 120 donees total! The then $12,000 per donor, per donee annual exclusions claimed reduced the actual taxable gifts to under $1 million for each of the donors. Because of several cases, most especially the 9th Circuit decision in Crummey (1968) and the case I successfully argued in Tax Court in 1991, Estate of Maria Cristofani v. Comm'r, 97 T.C. 74 (1991) (which extended available short-term powers of withdrawal as being present interest gifts to contingent remainder beneficiaries), the Mikels won - much to the continued chagrin of Treasury and the IRS. But note that the Administration's Revenue Raising Proposals now include proposed restrictions on the annual exclusion gift planning - perhaps less important an issue now with the high exemption level from the Federal transfer taxes.
I sincerely hope my readers, including those who have opted to have an "alert email" sent when a Newsletter is posted for you, enjoy this first of several 2016 Newsletters. I intend to continue to use the Newsletter approach as a means of providing you with new developments and a way to update my webinar course materials.
Owen G. Fiore, JD (On the "Wild & Scenic" Middle Fork of the Clearwater River in the Idaho Panhandle)