Hello to all! It has been awhile since I posted a Newsletter, not due to lack of new tax and estate planning developments; but rather, it has been a busy few months with family and getting through a big winter here in North Idaho. But now Spring, 2011 is upon us, and, of course, estate planners are concentrating on the 2011-2012 "gap planning" by reason of the 2010 Tax Relief Act.
So here are my thoughts, including discussing some recent co-tenancy estate tax cases involving IRC Sec. 2036 issues - and showing the way for successful planning.
Tax Relief Act of 2010
December 17, 2010 was a big legislative day - with President Obama signing into law the last minute tax legislation to avoid big tax increases for many individuals, as well as to somewhat capitulate in a fight with the Republicans over the estate tax.
TRA 2010, in the transfer tax (gift, estate and GST taxes) area, gives a 2-year window for planning. Note that the transfer tax law returns to pre-2001 law, unless and if Congress and the Administration do another "estate tax fix". Estates of wealthy persons who died in 2010 have it made! The estate tax was retroactively reinstated January 1, 2010, but estates of 2010 decedents can "opt out" of the estate tax, but thus get to deal with modified carryover income tax basis. There is lots of work to be done on 2010 decedents' estates!
Then we have under the new law, just for years 2011 and 2012, a $5 million lifetime exemption equivalent for taxable gifts - what planning is possible is virtually unlimited with gifts of FLP/LLC and corporate interests at substantial valuation discounts, as well as the use of GRATs and QPRTs.
So the opportunities are present, and there may be adverse legislation regarding GRATs and valuation discounts during this 2-year window - so planners and their clients should not delay.
I have been privileged to be a faculty member over the years for Lonnie McGee and his popular Souther California Tax & Estate Planning Forum (this year's Form in San Diego is October 26-29, 2011). I bring to my readers' attention what will be a great 1-day conference (Saturday, May 7th) at the LAX Sheraton Gateway Hotel. The title of this seminar is "The Estate, Gift, Jonathan Blattmachr and Diana Zeydel. They will do a wonderful job of reviewing the 2010 TRA in practical terms, taking into account the best thinking of top professionals to date. I plan to be there, and hope my readers will consider this a good bet for CPE that will help you help your clients. To check this seminar out, contact the Forum at 1-800-332-3755, or send an inquiry to "sct@clenet.com".
Fiore CPE Presentations
My CPE presentations continue this year, especially with WesternCPE (www.westerncpe.com) and CPELink(www.cpelink.com). For WesternCPE I am involved in a number of resort conferences, including presenting my 6-hour Valuation Strategies course and my 6-hour FLP/LLC/S Corps course in Las Vegas and in Coeur d' Alene in May, and at Sunriver Resort near Bend Oregon.
Then, I am coordinating a new theme conference for WesternCPE, to be presented at the Omni Tucson National Resort, in Tucson, Arizona, November 14-18, 2011 - - This conference will concentrate on "Family Business and Investments Succession Planning". For all the WesternCPE resort conferences, just check the WesternCPE website.
My live webinars for CPELink this year will include presentations on the 2010 Tax Relief Act, FLP/LLC and S Corp Planning, Buy-Sell Agreements, and Estate Planning 2011-2012 - check them out as, both for the instructor and the participant, web-based presentations are an attractive way to get CPE credit!
Great Book - A Must for your Tax Library!
A great friend of mine and an outstanding tax and estate planning lawyer, Keith Schiller, Esq., of Northern California, published last summer a wonderful desk book on estate tax issues and compliance, namely, "The Art of the Estate Tax Return" - "Must-know strategies and great movies combine in the ultimate guide to Form 706 preparation and estate tax savings." Over 800 pages of wonderful compliance and planning stuff, LISI's Steve Leimberg several months ago gave the book a real "thumbs up"! Keith now is working on a TRA 2010 supplement that will be free for subscribers. Check online at www.EstatePlanningAtTheMovies.com. The "movies" reference is to Keith's amazing ability to entertain us while teaching us all there is to know about the 706 and IRS compliance efforts regarding estate tax reporting.
Co-Tenancies and IRC Sec. 2036
Remember that IRC Sec. 2036 (as well as its companion provision, IRC Sec. 2038) is designed to cause inter-vivos transfers of property to be brought back into the transferor's estate when the lifetime transfers were essentially testamentary in nature. This really means that the transfer - under the broad statutory reach of Secs. 2036 and 2038 - was not complete in that prohibited "strings" were kept by the transferor for his or her remaining lifetime. Examples are retained economic interest in transferred property, undue control over the distribution of income or principal, and often an implied agreement to keep all the same (i.e. transferor in charge and benefiting from the property) so long as the transferor lived.
In the case of co-tenancy transfers, there is a conflict between this issue and Secs. 2036/2038. For example, if a parent transfers a 1/2 interest in a ranch to her son and sole heir, now the parties are co-tenants. Under state law, each co-tenant has an equal right of use and possession of the co-tenancy property. In addition, whether a co-tenancy interest transfer or transfer of a fee interest, the continued possession of the senior person (ultimately the decedent) is evidence of a prohibited "retained interest", at least absent a co-tenancy agreement carefully crafted or, in the case of a fee interest transfer, absent a fair market value rental agreement for continued possession and use of the transferred property.
There are several recent cases of note to consider, and they are listed below and briefly described:
(1) Estate of Sylvia Riese v. Comm'r, T.C. Memo. 2011-10 (3/15/11) - this case reflects the use of a QPRT (Qualified Personal Residence Trust), which was 3 years in term, for a valuable principal residence of the decedent. She outlived the QPRT by 6 months, but there was no lease agreement or rent paid regarding the mother's continued occupancy of the home. IRS claimed there was an "implied agreement" for the decedent to continue to occupy the residence until she died. However, with testimony from the decedent's daughters and the family estate planning attorney, plus some letters and notes provided as evidence, the Tax Court concluded there was an agreement to pay fair market value rent - so 2036 was not applied here.
Note how much time and expense likely would have been saved had the lease agreement and payment of rent been structured and set up as of the date of termination of the QPRT period when the residence was required to go to the two daughters of the decedent. The lesson here is that planners should not only set up the plan, but monitor its operation to insure minimizing IRS attack.
(2) Estate of Adelina Cheng Van v. Comm'r, T.C. Memo. 2011-22 (1/27/11) - while a bit complicated set of facts, essentially the mother continued to live in her residence after conveying title to her daughter and granddaughters. The daughter alleged she and her husband actually provided the funds to the mother to acquire the house. Yet Ms. Van actually took title to the house. The Tax Court cited California law on the presumption that the title owner is the true owner, refused to accept the argument that Ms. Van was the agent for the daughter and the husband, and also refused a somewhat far out "resulting trust" argument. Given the finding of the court that Ms. Van had a beneficial interest in the house, it did not take much for the court then to conclude that the broad scope of 2036(a) swept the house into the decedent's gross estate.
(3) Ludwick v. Comm'r, T.C. Memo. 2010-104 (5/10/10) - an excellent opinion of Tax Court Judge Halpern to read about co-tenancy valuation issues in a gift tax case; and also this is a case involving the combination, by a married couple, of transfers of co-tenancy interests to QPRTs with the gifts to children, net of the subtraction of "qualified retained interests" represented by the QPRTs. The plan worked well, except that the court determined only a 17% co-tenancy discount rather than the claimed 35%. See my detailed discussion in my May 17, 2010 Newsletter online.
(4) The ultimate example of a 2036 retention of an interest causing estate tax inclusion is found in the case of Estate of Axel O. Adler v. Comm'r, T.C. Memo. 2011-28 (1/31/11) - here a father with 5 children owned and managed a Carmel, CA ranch along the California coast, the Palo Colorado Road ranch known as "Rancho Aguila" - 1100 acres of property. Way back in 1965 Axel Adler by grant deed transferred undivided 1/5th interests in each of his 5 children, without consideration and expressly reserving a life estate! What more 2036 facts do we need? Needless to say, 2036 was applied and the entire property, without any discounts, was brought back into the father's estate at the date of death, much higher value since he died in 2004. Read the opinion to see the somewhat lame arguments raised on the Estate's behalf. Certainly, more careful planning could have accomplished what the father perhaps was intending here!
(5) The last case presented here, and perhaps the most important in a sense, is Estate of Margot Stewart v. Comm'r, 106 AFTR 2d 2010-____(2d Cir., 8/9/10), reversing Judge Foley of the Tax Court, T.C. Memo. 2006-225. Margot Stewart, having been diagnosed with terminal pancreatic cancer, deed a 49% interest in her 5-story NYC Brownstone apartment building to her son, who was living with her in the lower 2 floors of the building. The top 3 floors were leased out to a commercial tenant. Six(6) months later Ms. Stewart died. First of all, note that the parties in this litigation stipulated that, but for the 2036 issue, the combination of valuation discounts would be 42.5%! However, Judge Foley determined that 2036 applied to the 49% interest of the son in all 5 floors, noting that on the top 3 floors the mother continued to pay expenses and receive all the income. The trial court did not believe the son's testimony that there was agreed to be a "reconciliation" of income and expenses, including taking into account another building. So then the appellate court majority reversed and remanded, stating that the trial court should have bifurcated the 49% analysis between the lower 2 floors (co-tenants have equal right of occupancy and possession) and the leased out top 3 floors. The appellate opinion includes an interesting and detailed analysis of prior co-tenancy cases in the estate tax area. Again here, as in many litigated tax cases, the planning and monitoring of the plan perhaps could have avoided the litigation.
Thanks to you all for reading this Newsletter - I promise there will be another one soon! By the way, remember, if you have not signed up for an email Alert whenever I post a new Newsletter, to do so as provided on my site.
Owen Fiore
On the Wild & Scenic Middle Fork of the Clearwater River!
