...Estate Planning a Hot Topic in 2009!
...Congress and the Administration Consider an "Estate Tax Fix"
...Jorgensen v. Commissioner (3/26/09) - Another FLP case
I. Three Converging Reasons for Estate Planning Now!
These three (3) reasons supporting moving ahead now with new and updated estate planning (Family Wealth Planning, my preferred term) are (1) depressed asset values, especially securities portfolios and real estate (which indicates that intra-family transfers make sense), (2) quite low interest rates (and thus the AFR rates used for income and gift tax purposes as minimum rates - e.g. 2.05% per annum on a mid-term, 3-9 years, promissory note), and (3) possible adverse changes in law relating to valuation discounts (see my 2/10/09 newsletter discussion of H.R. 436, the Pomeroy bill).
In addition, with the 2009 $3.5 million per estate exemption from estate tax (note: lifetime gift tax exemption remains at $1 million), many formula type provisions in existing plans should be reconsidered. Flexibility in documentation of estate plans is the key issue.
II. Estate Planning is a Hot Topic - See below my upcoming CPE presentations:
A. Western CPE Resort Conferences (www.westerncpe.com) - These conferences run usually 5-6 days and are held at various resort locations, often providing family-oriented activities and fun. Each presentation by the faculty runs from 7:30 am - 1:00 pm, leaving the afternoons for independent activities of participants.
My two (2) courses this year, being presented at six (6) of the conferences, are (1) Hot Topics in Estate Planning (HTEP) and (2) Tax, Financial and Estate Planning for Family Business and Investment Entities (FB). Over the next several months, the presentations are as follows:
1 - Jackson Hole, WY (Spring Creek Ranch), 5/25 - 5/29 - FB course on May 27th, and HTEP course on May 29th.
2 - Whitefish, MT (Grouse Mtn Lodge, near Glacier National Park), 7/6 - 7/10 - FB course on July 8th, and HTEP course on July 9th.
3 - SunRiver, OR (Sunriver Lodge), near Bend, OR, 7/13 - 7/17 - FB course on July 13th, and HTEP course on July 14th.
4 - San Diego, CA (Hyatt Regency LaJolla), 7/13 - 7/18 - HTEP course on July 17th, and FB course on July 18th.
If any of my readers has a question on these presentations or the resort conference format, email me at owen@owenfiore.com. In the Fall, I am at conferences being held in New Orleans and Las Vegas.
Each course manual has about 100 pages of text materials, in addition to the power point slides used during the presentations, which are intended to be proactive and to involve the participants actively.
B. CPELink (www.cpelink.com) - This cpe provider is experienced in interactive, live webcasting format for educational presentations, and has arrangements with some 15 state CPA societies across the country - in just a couple of years of operation! From my home office here in Idaho, upstairs in my barn and looking over the Middle Fork of the wild and scenic designated Clearwater River (Hwy 12, at Syringa, for GoogleEarth fans), I present 2 - 4 hour webcasts. The materials are all emailed to participants for downloading, as are the many power point slides used during my webcast. Both I and the participants can provide each other with input, make comments, ask questions.
The CPELink website has a list of all the webcasts, self-study courses, etc. My upcoming presentations are as follows:
1 - "CPA Practice Development Opportunities in Estate Planning" (2 hours) - 5/7/09
2 - "Playing the Valuation Game: Family Wealth Planning and Valuation" (4 hours) - 6/18/09
3 - "Hot Topics in Estate Planning" (4 hours) - 6/23/09
4 - "Tax, Financial and Estate Planning for Family Business and Investment Entities" (4 hours) -
6/30/09
5 - "Efficient Uses of FLPs, LLCs and S Corporations to Preserve Family Business and Investment
Wealth" (4 hours) - 8/6/09
Try out one of these webcasts, and you may find it enjoyable and worthwhile - as well as low cost!
III. The "Estate Tax Fix" - Uncertainty Reigns!
The Obama Administration proposed for the estate tax - to head off the 2001 Act 1-year repeal of the estate tax in 2010 with pre-2001 law to come back in 2011 - $1 million exemption, 55% top rate, etc. - making permanent the $3.5 million estate tax exemption and the 45% top rate which are in place for this year 2009.
Several bills have been introduced in Congress already, such as H.R. 498 and H.R. 436. I reviewed H.R. 436 in the last Newsletter -2/10/09. It repeals the upcoming carryover income tax basis rules, makes permanent the $3.5 million estate tax exemption, fixes a 45% top rate (but adds back the prior law 5% surtax on certain large estates), and then provides severe restrictions on valuation discounts on passive asset holding entities and limits on "minority discounts" using a broad attribution rule. These valuation changes, if enacted, would be effective as of date of enactment.
H.R. 498 goes somewhat further in estate tax relief - restoration of the unified credit against gift tax liability, gradually from 2010-2015 increases the exemption equivalent from $3.5 million to $5 million, and thereafter adjusts it for inflation, and also provides for a marital deduction "portability" provision between a married couple's estates.
In early April, as part of the Congressional budget deliberations, the Senate passed a couple of amendments to its budget resolution, perhaps only aspirational in nature - the thrust of these amendments was to propose an estate tax exemption of $5 million and a maximum estate tax rate of 35%; but also to somewhat tie this in with more relief for "Americans earning less than $100,000 per year in addition to amounts assumed in the budget resolution"! - how is this all possible?
So, on estate tax reform or relief, stay tuned! It seems highly unlikely that the estate tax exemption level will go above the $3.5 million or that the maximum rate will go below 45%. Nevertheless, very few estates will be subject to the tax in any event, as statistics have shown with the 2001 Act changes as they have cycled into effect.
Some of the best information on tax legislative developments can be obtained on the American College of Trust and Estate Counsel website, www.ACTEC.org, especially the "Capital Letters" authored by tax lawyer Ron Aucutt, Esq.
IV. Estate of Erma V. Jorgensen v. Commissioner of Internal Revenue, T.C. Memo. 2009-66
This decision was handed down by Tax Court Judge Haines on March 26, 2009, a case involving two (2) FLPs, each of which held substantial marketable securities. There were some "bad facts" involved, but also some good ones indicating the commitment to use of the FLPs for valid wealth management and preservation purposes and not just to claim valuation discounts. In fact, initially the family was not even interested in "discounts". There is some indication, after reviewing the case with estate litigation counsel and reading the trial transcript and the post-trial briefs, that the court in Jorgensen went overboard in its concentration on the FLP as merely a discounting device. See the following quote from the opinion, in which Judge Haines stated that it was "...especially significant that the transactions were not at arms-length and that the partnerships held a largely untraded portfolio of marketable securities."
On the passive asset issue, note that IRC Sec. 704(e), the income tax "safe harbor" for family partnerships, merely requires (1) capital to be a material income-producing factor in the entity, and (2) the donee partners be treated as "real partners". Further, the common and the Treasury Regulations definitions of a "partnership" relate to "business or financial assets".
Generally, it appears that the court in reality is taking IRC Sec. 2036(a) to the extreme, making it virtually impossible to have a passive investment asset holding FLP or LLC qualify as having the prerequisite real and significant non-tax purpose(s) to avoid treating transfer of assets into the entity followed by gifts, etc. as testamentary in nature and to be ignored for estate tax purposes! It will be interesting to see what other judges will say. In fact, in Estate of Anna Mirowski, T.C. Memo. 2008-74, Tax Court Judge Chiechi took a more fact-centered, complete approach, concluding the LLC there was valid for estate tax purposes and that the gifts of non-managing interests should be respected.
For a recent, detailed article on the past 12 years of litigation on FLPs/LLCs used in estate planning see my article in CCH Business Valuation Alert, April, 2009: The Good, the Bad, and the Ugly - FLP and FLLC Wealth Shifting Opportunities and Challenges." A reader wishing a copy of this article should email me with the request for same. Another case, with extremely poor facts and inept lawyering, is Estate of Thelma G. Hurford, T.C. Memo. 2008-378, reviewed in my December 18, 2009 Newsletter.
In the Jorgensen case, the husband, a lawyer and career Air Force pilot, directed the family's financial affairs, gradually and carefully building over a $2 million marketable securities portfolio. Gerald Jorgensen and his wife, Erma, were residents of Virginia and had two (2) children and six (6) grandchildren. The thrust of the first of two FLPs, established in 1995, was to develop a plan that would allow for gift transfers of interests in the portfolio to children and grandchildren (and in fact in the early years, "discounting" was not given a thought!). After Col. Jorgensen died in November, 1996, not one, but two, estate planning lawyers (one in Virginia, and the other in California) emphasized discounts - and their letters, which left much to be desired, were obtained through discovery. Judge Haines seemed to imput to the Jorgensen Family the suggestions of the lawyers, rather than to concentrate on facts involving the family members and their own actions.
Also, the court said that the second partnership, formed after the husband's death by Erma, his widow, was not needed as she could have used the living trust to manage the assets. Query - does not the taxpayer have the freedom to select among various, legal alternatives in managing his or her affairs? The two partnerships were considered needed to track income tax basis in an acceptable way for the securities.
Another disturbing issue is that refusal of the court to grant taxpayer estate's motion to shift the burden of proof on fact issues in the litigation to the IRS (respondent) under IRC Sec. 7491(c). While there are several requirements for shifting the burden of proof, the court merely discarded 7491(c), indicating that it would look at the burden of persuasion - - yet, it appears the court did not take into account evidence (including testimony) as to the bona fide nature of the FLPs, the emphasis on sharing within the family in the assets involved, and the lack of concern about "discounts" as to the first FLP.
Judge Haines went through the litany of non-tax reasons as suggested by the estate, but found none of then to be legitimate and significant under the bona fide sale exception to 2036(a). See my detailed commentary on Jorgensen appearing in Steve Leimberg's email newsletter service - www.leimbergservices.com - Archive Estate Planning Newsletter #1442 (4/8/09), as well as another article, Gassman/Hall, #1443.
What comes out of this latest case, where many of the facts were positively in the decedent's favor, is that there is an uphill battle, unfortunately, in obtaining the benefits for estate tax purposes of FLPs/FLLCs, where passive investment assets are involved, even though there may be many good reasons for use of such an entity.
It seems that Judge Haines failed to apply the proper and traditional standard of value and somewhat second-guessed the family that owned the assets and appeared to be properly developing a partnership format for wealth management and transfer. That failure coupled with denying the 7491(c) motion by the estate may form the basis for appeal to the 9th Circuit Court of Appeals (which in several cases has reversed the Tax Court for failure to follow proper valuation standards and principles).
Enjoy the Spring and Summer of 2009 - here in Idaho the river is up, the birds are nesting, and finally warm weather has returned. Time to plant flowers, mow the lawn, and enjoy the beauty of nature!
Owen Fiore
