Notes from the Clearwater - FioreWealthPlanningConsulting

2016 -A BIG YEAR FOR ESTATE AND SUCCESSION PLANNING!

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 ([email protected]) 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)

NEW DEVELOPMENTS, CPE AND MORE

Well, Fall has arrived, and hopefully with it, the fire danger in the Western U.S. will be over, until next year! Of course, the rain along the East Coast has been dangerous and amazing. This Newsletter covers some Gift Tax and other developments, reminding us that tax outcomes largely depend on careful transactional documentation and tax reporting by taxpayers and their advisors.

 

Estate and Succession Planning Memo Available

The readers of this Newsletter will remember my discussion in the August 6, 2015 Newsletter of the importance of estate and succession planning, even though most U.S. families no longer will be facing any Federal estate tax liability. Having no estate tax exposure merely means that there are more assets to be passed down to successive generations, for better or for worse! I have a short, 3-page memo about the imperative of estate and succession planning for all of our clients - if you would like a copy, just email me to [email protected], and I will send a copy of the memo promptly.

 

Section 2704 Valuation Treasury Regulations

The long-awaited new Regs on IRC Sec. 2704, one of the 1990-enacted "Special Valuation Rules", were not issued after all in September, but are still expected. It seems the IRS and Treasury are adamant in trying to cut back long available valuation discounts via the regulatory process - we must wait and see!

 

Income Tax Basis Reminder

Steve Leimberg, in his LISI Estate Planning Email Newsletter #2333 (8/13/15), reminds us of the importance of income tax basis changes per IRC Sec. 1014, and the need to report estate tax values and income tax basis following the owner's death on a consistent basis. See this LISI article, co-authored by Andy Katzenstein and Michael Rosenblum - "Drive Carefully, the Highway Bill Enacts New Consistent Basis Reporting Rules". The Highway Bill (short name) actually is the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (signed into law by President Obama on July 31, 2015). Essentially, this new law states taxpayers acquiring property from a decedent to use the value as finally determined for Federal estate tax purposes as their new basis for income tax purposes. This long has been on the Treasury Department's "hit list"!

The decedent's executor now must notify the IRS and the estate beneficiaries as to the property's estate tax return (Form 706) value AND the beneficiaries must use that value for purposes of reporting gain or loss (or depreciating/amortizing asset values) on the beneficiaries' income tax returns. See Highway Bill Sec. 2004(d) amending Code Sec. 1014(f). If there is no "finally determined value", the value per the required statement to beneficiaries and the Treasury (IRC Sec. 6035(a)) is to be used. A sample form is provided by Treasury, but a number of open issues remain - such as, to which beneficiaries must the notification be given, and, of course, note the new rules on notification do not apply where no 706 is required to be filed.

But remember that the proper FMV at death of a decedent where hard-to-value assets are involved always is important (including appropriate discounts), since generally income tax basis used by estate beneficiaries must conform to the FMV at death.

 

Now to Gift Tax Developments

Again, LISI gives us good information on new developments - In LISI Estate Planning Email Newsletter #2350 (10/1/15), commentator Paul Hood reviews an IRS Field Attorney Advice, 20152201F - reminding us that to run the 3-year Gift Tax Statute of Limitations upon filing the Form 709, there must be "adequate disclosure" on the Gift Tax Return both of the nature of the property gifted and the Fair Market Value determination thereof, usually by appraisal. Tax return preparers should review this IRS advice to see that failure to properly identify partnerships on which interests were gifted and failure to provide a complete and adequate appraisal report will leave the Statute of Limitations perpetually open - and this may allow IRS to challenge gift tax values even in the estate of the donor!

Then I call your attention to my recent commentary posted as LISI Estate Planning Email Newsletter #2349, namely, "Owen Fiore on Steinberg v. Commissioner: Agreement to Assume Potential Estate Tax Liability Considered in Determining Fair Market Value of a Gift" - posted September 29, 2015. Jean Steinberg, at age 89, in 2007 entered into an enforceable, binding "net, net gift" agreement with her four daughters. This meant that first, the donees agreed to pay the gift tax liability due upon the gift, and, second, also agreed to pay the potential estate tax liability under IRC Sec. 2035(b) in the event the donor died within 3 years after making the gift transfers (she did not die within 3 years as it turned out). IRS failed to successfully argue its motion for summary judgment in "Steinberg I" (141 T.C. 258 (2013)), and following the trial of the case the Tax Court issued its opinion on September 16, 2015, agreeing with the donor taxpayer that both the gift tax liability assumed and paid by the donees and appraiser-determined "discount" for the potential 2035(b) estate tax liability (which never was triggered!) reduced the net value of the gift. This is an excellent case opinion reviewing the required gift tax analysis of net gifts, and also the opinion analogizes to the potential built-in capital gains tax liability discount decisions of the courts. Nationally known and quite effective tax litigator John Porter was lead counsel in the Steinberg case. Of note is the IRS error in failing to provide at trial in Steinberg II any appraisal evidence of its own!

 

More of Owen's CPE Webcasts Coming

I will be finishing out this year's CPE webcasts for CPAs and other tax professionals with October 9, October 16, October 30, and November 6 webinars for CPE Credit (www.cprecredit.com); for CPE Link (www.cpelink.com) I have webcasts on October 14, November 4, November 11, and December 22; and, finally, my "Estate & Succession Planning for the 99%" 2-hour webcast is being presented later this month by Western CPE (www.westerncpe.com). Tax practitioners are invited to check out these webcasting events.

I hope you enjoy this Newsletter!  Owen Fiore, JD

 

 

 

SUCCESSION PLANNING, CPE AND NEW DEVELOPMENTS

My last Newsletter was posted on April 23, 2015, and time has gone by with lots of new developments and information on estate and succession planning. In this Newsletter, I summarize the imperative of updating and improving our own and our clients' estate and succession planning. Then I set out some of the CPE events, involving webcasting, in which I am participating this year. Finally, I will outline briefly some of the new developments in succession planning, including various judicial decisions of interest.

 

Estate and Succession Planning Imperative - Now is the Time!

After enactment of the American Taxpayer Relief Act of 2012 (ATRA), many clients and even some practitioners concluded that "estate planning" no longer was important. This was primarily due to the effectively permanent large Federal unified gift and estate tax exemption per person of $5 million and more. For example, this year that exemption, due to annual inflation indexing, is $5.43 million - this effectively eliminates any Federal estate tax concern for over 99% of American families. Yet, estate and succession planning is more important than ever, for both tax and non-tax reasons!

First of all, 19 States still have an estate or inheritance tax regime, and some of these jurisdictions have much lower exemption levels than that for the Federal estate tax. So tax practitioners must know your own State law, and in some cases this will dictate planning for domicile purposes including for pass-through entities such as FLPs and FLLCs. Second, for numerous reasons, including changes in marital status, family make-up and other factors, many estate plans are out-of-date. And certainly, with the recent Supreme Court decision (mentioned below) on same-sex marriage, planning must be reviewed for such couples and State laws still are not in sync fully with the U.S. Supreme Court.

Next, we should remember that the IRC Sec. 1014 step-up in income tax basis on appreciated value property at death of the owner can be quite valuable. In the Federal scheme of things, the now permanent "Portability Election" (only made by filing of a Federal estate tax return (Form 706) even if only for that purpose) allows for step-up at the death of the surviving spouse which could be many years after the death of the first spouse to die. And if a "bypass trust" still should be used, can it be drafted so as to still allow for step-up on the death of the surviving spouse?

Beyond these issues, there are many reasons for continuing to be involved in estate and succession planning. After all, the old saying "You Can't Take It (Property) With You" still is quite true! Some of the non-tax and yet still quite important issues include: planning for blended families with children of different relationships, issues involving same-sex couples whether married or not, post-marital dissolution planning including title to property and beneficiary designations, retirement plan and IRA beneficiary designation planning, various types of asset protection trusts and picking the right trust jurisdiction, and structuring management and equity succession plans for non-public family-owned business entities. 

 

Owen's CPE Activities

Currently, I am actively involved in live webcasts for two (2) CPE providers, namely, CPE Link (www.cpelink.com) and CPE Credit (www.cpecredit.com), having scheduled from now until the end of 2015 some 20 or so live webcasts, with 4 courses all related to estate and succession planning - CPE Link courses include August 11 and 24 2-hour courses (one on Valuation, the other on Buy-Sell and Deferred Compensation Agreements), plus 6 more course presentations in succeeding months. CPE Credit courses will run from September through December this year - I encourage you to check out the websites for details! Also, there are filmed CPE courses, including a 2-hour course titled "Estate & Succession Planning for the 99%", scheduled by www.westerncpe.com; as well as several on demand filmed webcasts provided by the Clear Law Institute (www.cleinstitute.com)

 

Now Some New Developments - Brief Comments

ESTATE OF JOHN A. PULLING, SR. V. COMMISSIONER OF INTERNAL REVENUE, T.C. Memo. 2015-134 (7/23/15) - here a taxpayer valuation case victory, confirming that, absent evidence to the contrary, the Tax Court will NOT conclude that parcels of land owned by an estate (here a Florida resident) will be "assembled" or combined with contiguous parcels owned by a land trust for valuation purposes, even if the decedent's family members and decedent himself together (if attribution of ownership) had control of the land trust. Only such a combination of all the properties would produce a package worthy of residential development, but the IRS failed to provide evidence of any "agreement" or "understanding" of such a combination of owners to develop the various parcels as a single unit.

The Family Business Consulting Group newsletter (June, 2015) contains a worthwhile article on "Embracing Change and Honoring the Past: The Challenge of Family Business" - this is "must reading" for practitioners with closely-held family business clients - succession planning is an important area!

LIKELY PROPOSED TREASURY REGULATIONS ON IRC Sec. 2704 - to lay out a broader area of "applicable restrictions" that might impinge on our ability to develop valuation discount strategies - see the KPMG Report of 7/12/2015 about these regulations that could be issued as early as next month. We need to watch this issue for sure!  See www.kmpgcom for additional information. Also, see the June 4, 2015 article as part of the Trusts & Estates "www.wealthmanagement.com" series.

DETROIT PISTONS OWNER AND BILLIONAIRE BILL DAVIDSON'S ESTATE SETTLES WITH IRS - a case settling the docketed Tax Court dispute for under $400 million when IRS was seeking $12.7 billion (Yes, Billion!). The issues included corporate stock valuation and issues involving valuation of Self-Cancelling Installment Notes (SCINs). As usual THE source for great new developments info is www.leimbergservices.com - which includes regular informative newsletters for subscribers on estate planning and other areas. On July 15, 2015, Steve Leimberg published an excellent and comprehensive article on the Davidson case in the LISI Estate Planning Email Newsletter #2322 - get it and read it!

SAME-SEX MARRIAGE ISSUE - Again the Supreme Court has dealt with same-sex marriage, and in the LISI Estate Planning E-Mail Newsletter #2326 (7/23/15), commentator on the U.S. Supreme Court case of Obergefell, et al. v. Hodges, et al. (George Karibjanian) stated, in part, "While Obergefell lays to rest the question of whether same-sex marriage is legal and recognized in all 50 states, practitioners now must review the various aspects of property and probate law (in the respective States) and see the degree to which retroactivity would apply." That is, have new rights been created and what should be done for a same-sex couple in a State that previously refused to recognize same-sex marriage?

One final item - THE CRUMMEY/CRISTOFANI CASE LAW-BASED IRC Sec. 2503(b) based annual exclusions once again have been recognized (even though Treasury now wants some changes!), in ISRAEL MIKEL V. COMMISSIONER OF INTERNAL REVENUE, T.C. Memo. 2015-64 (4/6/2015) - in a year when the 2503(b) exclusion for gift tax purposes was $12,000 per donor, per donee, the donor husband and wife in these consolidated cases gifted to an irrevocable family trust an aggregate of $1,440,000 in property value - there were 60 beneficiaries - and the Tax Court granted taxpayers' motion for summary judgment in their favor - read this one for the latest on this issue. I was privileged to be lead taxpayer counsel way back in 1991 in the case of Estate of Maria Cristofani, 97 T.C. 74 (1991) - extending the Crummey Trust setup to contingent remainder beneficiaries having a lapsing legal power of withdrawal.

 

So all of you have a great rest of the summer and fall!

 

Owen Fiore

VALUATION, CPE AND MORE!

This Newsletter discusses some important issues relating to Valuation - especially involving the tax valuation standard - The Hypothetical Party Fair Market Value Standard used in income, gift and estate tax valuation controversies. Essentially, the focus is on the importance of the lawyer and CPA being directly involved in valuation strategies and planning, including in selecting and working with business valuation appraisers. In addition, I am nearing the start of my 2015 Webcasts on estate and succession planning, which this year involve working with three(3) outstanding CPE providers on a variety of courses.

 

Valuation - a Core Concept in Estate and Succession Planning.

In spite of attempts, including via Federal Tax Regulations, to measure Fair Market Value objectively, the concept is the subject of much subjectivity, misunderstanding, manipulation and therefore clearly is identified as a compliance issue by IRS. Essentially, when dealing with gift and estate transfers of fractional interests in property (e.g. family-owned company stock, FLP and LLC interest, co-tenancy interests in real estate and even art objects), a proxy for FMV is needed, and is provided by expert testimony and reports of qualified business valuation appraisers. Because of the 1993 U.S. Supreme Court opinion in the Daubert case, Federal trial courts (including the U.S. Tax Court where only "bench trials"-i.e. no jury are conducted) are the "gatekeepers" of the relevance and reliability of expert testimony.

Does this mean that lawyers and CPAs are not to be involved, that is, should they sit idly by and allow appraisers to "do their thing" - NO, and far from it, as my remaining comments and citations will make clear. Further, one of my upcoming webcast courses is specifically on Valuation and will go into this area in detail.

I am going to reach way back here - prior to the Tax Court making available, beginning in 1995, its opinions online (www.ustaxcourt.gov). This relates to the interesting Northern CA sited case of Estate of Evelyn Wildman v. Commissioner of Internal Revenue, T.C. Memo. 1989-667 - a case involving decedent's co-tenancy interest in a family farm. Two appraisers were presented by the taxpayer (legal counsel was well-known San Jose, CA tax attorney Bud Ferrari), with a then young Curtis Kimball of Willamette Management Associates, Inc., appraisers, providing testimony to bolster the taxpayer's other appraiser. To eliminate any concern, Bud Ferrari ultimately was quite successful in the case as the court allowed a 40% overall co-tenancy real estate discount from FMV of the whole farm. But the issue here focuses us on why lawyers and other tax professionals must be involved - Here is what Tax Court Judge Joel Gerber stated in a footnote explaining why he rejected Mr. Kimball's report and testimony: "Although Mr. Kimball's report was received into evidence, it is of no assistance to our consideration of this case because the conclusions contained therein are either legal conclusions, which the parties agreed Mr. Kimball (not a lawyer) was incompetent to render, or the conclusions did not have relevance and comparability to the subject property so as to be of assistance in our factual consideration of this case."

Among the key points in Valuation are that it is both a factual and legal issue, the court as ultimate trier of fact has broad latitude in its determination of value, and the legal and financial assumptions or premises of value are quite important to be provided the appraiser, especially where legal opinions are called for - e.g. is the FLP or LLC a valid entity, were the interests transferred partnership interests or mere assignee interests, are certain special Code rules, e.g. IRC Sec. 2703, applicable and, if so, are restrictions on transfer to be considered.

 

Continuing Professional Education (CPE) - Webinars Available in Estate & Succession Planning

I am honored to be able to present webcasts or webinars for three(3) outstanding CPE providers who each make CPE available to lawyers and to CPAs. These providers are Clear Law Institute (www.clearlawinstitute.com), CPE Credit (www.cpecredit.com), and CPE Link (www.cpelink.com). The CPE Link webcasts begin in August and run through December, involving 4 separate estate and succession planning courses I have authored. The other two providers have a presentation schedule beginning in just a few weeks, and so I list the provider, dates and courses for your information and perhaps becoming a registrant for one or more of them:

Clear Law Institute -

June 11, 2015 - 1-1/2 hours - "Estate & Succession Planning for the 99%"

July 1, 2015 - 1-1/2 hours - "Entities, Valuation & Family Wealth Planning"

July 9, 2015 - 1-1/2 hours - "Valuation, Discount Strategies & Tax Savings"

CPE Credit - 

May 8, 2015 - 2 hours - "Buy-Sell & Deferred Compensation Agreements"

May 11, 2015 - 2 hours - "Entities, Valuation & Family Wealth Planning"

May 27, 2015 - 3 hours - "Family Wealth & Business Succession Planning"

June 3, 2015 - 2 hours - "Valuation, Discount Strategies & Tax Savings"

 

You should note that each of these courses will be presented live by me, using power point slides to guide the presentation, and that each presentation is interactive, allowing participants to ask questions and make comments online. In addition, for each course, downloadable by participants, there is a detailed outline and other educational materials for review and use in advising clients.

I hope some of my readers will be online with me in these courses!

From the Wild & Scenic Clearwater Riever in the Idaho Central Panhandle - Owen Fiore, JD

ESTATE & SUCCESSION PLANNING - 2015 IMPERATIVES

Well, we now have a Republican controlled Congress and President Obama is in his last two years as President - so will the Federal estate tax be fully repealed, i.e. for everyone, not just the 99+%? And recently the President proposed certain tax increases to help pay for the new Budget, including (with exceptions) gain recognition on lifetime gifts and transfers at death. Likely, as with most law changes being considered during the coming two years, nothing will happen! Yet clearly these events underscore the importance of estate and succession planning for families (especially those with closely-held businesses) during the year 2015. It should not be acceptable to families with significant wealth that new or updated planning will be held up to wait for future developments in the tax law!

 

Many of my Newsletter readers are tax professionals who are quite familiar with the current state of the Federal transfer tax law, especially as to the high 2015 $5.43 million unified exemption equivalent level that results in no gift or estate tax worries for most families. Yet developments continue to occur in determining Fair Market Value, in dealing with nontraditional or same-sex married couples, in developing trusts that allow for "decanting" (transferring assets to another trust with different dispositive provisions), and in ensuring maximum "asset protection" from trusts, including DAPTs(domestic asset protection trusts), even where the grantor is a potential trust beneficiary. My good friend, Steve Leimberg, founder of LeimbergInforationServices,Inc. (LISI) recently published as one of his regular Email Newsletters "Ron Aucutt's Top Ten Estate Planning and Estate Tax Developments of 2014" (LISI Estate Planning Email Newsletter #2266, 1/6/15). Nationally recognized tax lawyer Ron Aucutt, Past President of the American College of Trust & Estate Counsel, pointed out in his review that the political landscape after the 2014 Mid-Term Election has to be considered. 

 

However, Ron Aucutt lists important issues that should be considered, based on recent developments, including a cloud over the use of Trust Protectors, the ongoing watch on State tax legislation affecting families, continued increase in DAPT State statutes, IRS focus on gift tax return audits where large 2012 gifts were made, and ongoing appellate court review of Tax Court determinations of Fair Market Value, especially in the Estate of Elkins and the Estate of Giustina valuation cases. See my Newsletter archives for review of these cases. What is indicated here, as I have seen in several cases in which I am a non-lawyer consultant, is a complete review, analysis and updating of the family wealth succession plan. The human element of such planning is so important and issues also are resolved based on the indicated development in law. I suggest to my readers that Northern California tax attorney Keith Schiller's excellent, regularly supplemented book (now published by Bloomberg Tax Management), The Art of the Estate Tax Return (2nd Ed, 2014) provides in-depth background and planning recommendations for all significant estate and succession planning issues facing families with significant wealth (whether or not any Federal estate tax might be involved).

 

My 2015 CPE Activities - 20 Upcoming Webcasts

During the period of May - December, 2015, thanks to the sponsorship by two outstanding CPE providers, namely, CPECredit (www.cpecredit.com) and CPELink (www.cpelink.com), I will present four (4) 2-4 hour succession planning courses that will be updated for all new developments and each will offer practical tips and suggestions for family wealth planning. These courses are titled "Family Wealth & Business Succession Planning", "Buy-Sell & Deferred Compensation Planning", "Entities, Valuation & Family Wealth Planning", and "Valuation Discount Strategies and Planning" - each course will include my live audio presentation, power point slides guiding the course presentation, a detailed outline from 60-100 pages for each course and other attachments as needed. Tax practitioners are invited to check each of the above-referenced websites for the webcasting titles and dates. Your participation online would be appreciated.

 

Now Back to Valuation!

First, let's look again at the case of Estate of Elkins v. Commissioner, 140 T.C. 86 (2013), which was affirmed in part and reversed in part by the 5th Circuit Court of Appeals in 767 F.3d 443 (2014. The case involved over 60 valuable family-owned artworks in which the decedent had but a co-tenancy fractional interest. In Tax Court, the estate claimed nearly a 67% overall valuation discount. This was up from the 44.75% discount claimed on the Estate Tax Return (Form 706). There was a cotenancy agreement requiring unanimous consent of all fractional interest owners on any sale and under which each cotenant waived his or her unilateral right of partition.

Tax Court Judge Halpern applied IRC Sec. 2703 to disregard the agreement restrictions, rejected the IRS assertion there should be no discount at all, and ultimately determined (without any specific evidence) a 10% discount reflecting reduced marketability for the artwork in cotenancy form. The 5th Circuit reversed the Tax Court (while agreeing that the IRS "no discount" position was without merit) essentially due to the trial court's clear failure to follow the "hypothetical party" standard of value in tax cases. The appellate court stated that the Tax Court "inexplicably veers off course" focusing its attention on the Elkins children as potential buyers of the artwork. Concluding there should be an estate tax refund of $14.4 million due the estate, the 5th Circuit stated that the "uncontradicted, unimpeached, and eminently credible evidence" on value is the only evidence on value and the court must accept it! Perhaps the real mistake was the IRS failure to offer any evidence of value of the cotenancy interests?

 

And now to Estate of Giustina v. Commissioner, T.C. Memo. 2011-141, which was reversed and remanded to the Tax Court on December 5, 2014 (9th Cir. No. 12-71747) - an especially interesting FLP fractional interest estate ownership case in that attorney John Thornton of Boise, ID was tax counsel to the Giustina Estate. He also was the attorney who successfully handled Estate of Simplot v. Commissioner, 249 F.3d 1191 (9th Cir. 2001) - The Tax Court should not be engaged in "imaginary scenarios as to who a purchaser might be." The hypothetical willing party FMV standard of value in tax cases does not permit that!

The Giustina estate owned a 41+% limited partner interest at date of decedent's death and the evidence at trial clearly showed the intent of the family, including the other partners, was to continue to operate as a managed timberland business the over 48,000 acres of Oregon timber owned by the FLP. Thus, Tax Court Judge Morrison's allocation of a 25% weighting of Net Asset Value (i.e. as if there might be a liquidation of the FLP in the future) was improper in the appellate court's view. It should be noted that the income approach would produce a value of only 1/3 of the NAV value! Noting that nearly 10 years has past since the decedent's death, we can see how time-consuming and expensive valuation litigation with the IRS can be - so a tip: get the best possible appraiser at the outset and stick with him or her!

 

I hope you, as a reader of this Newsletters, will find valuable information that will help you or your clients in estate and succession planning this year!

Enjoy!  On the beautiful MiddleFork of the ID wild & scenic Clearwater River.     Owen Fiore

ESTATE & SUCCESSION PLANNING BACK IN BUSINESS!

After enactment of ATRA 2012 in early January, 2013, there was much confusion in estate and succession planning, including whether such planning was even relevant any longer!  The high transfer tax (gift, estate and GST taxes) exemption level (in 2014, $5.34 million per person) in effect exempts over 99% of all U.S. families from any Federal estate tax worries. But then the reality of succession planning set in, i.e. that even no having any death tax liability just meant there were more assets to deal with within the family.

 

The past couple of years there have been significant developments in Valuation for transfer tax purposes (see cases discussed below), the debate has continued over the use of bypass and marital deduction trusts compared to the new Portability Election, same-sex couples saw the U.S. Supreme Court find in their favor for Federal law purposes, but State laws still vary greatly, The Domestic Asset Protection Trust, with "self-settled" trusts allowed in more jurisdictions has become a reality, and "Decanting" an irrevocable trust (i.e. the trustee transferring assets to another trust for the same beneficiaries, but in different fashion) is allowed by many jurisdictions now as a matter of State law. So there is much to consider in estate and succession planning.

 

Coming CPE Events

I continue to be involved in continuing education for tax professionals, principally CPAs. For WesternCPE (see www.westerncpe.com) I have about a dozen webcasts scheduled between October and December, 2014, and I am leading a succession planning conference, November 10-12, 2014 for WesternCPE, namely, The 4th Annual Family Wealth & Business Succession Planning Conference - check it out and join us! Also, as detailed in the WesternCPE website, I am presenting courses on succession planning in Hawaii and New Orleans in November, and in Las Vegas in early December.

I continue to work with Steve Leimberg of LISI on commentaries regarding FLP, valuation and other estate planning cases. This year there have been several valuation cases decided by the courts that are quite interesting, and are outlined briefly below.

 

Valuation - A Core Concept Constantly the Subject of Tax Litigation!

First, we lead off with Estate of Helen Richmond v. Commissioner, T.C. Memo. 2014-26 (2/11/14), which already was reviewed in my March 5, 2014 Newsletter (check for it in my website archives). Here the decedent estate, in an estate tax case, was owner of a 23+% interest in an IRC Sec. 541 personal holding company which owned highly appreciated, dividend paying marketable securities. The Tax Court reviewed the valuation issue carefully, dealing with differences among the appraisers as to the valuation methodology. A "BIG" Discount (built-in capital gains tax liability potential) was allowed, on a present value computed approach by the court, and it was confirmed that the proper valuation methodology was the NAV (net asset value) method for an investment company. Reading the case (check it out at www.ustaxcourt.gov), you will see that the values proposed by the estate and the IRS were all over the place, and the Tax Court came down somewhat in the middle in its own determination.

Next, we have the case of Estate of Franklin Adell v. Commissioner, T.C. Memo. 2014-155 (8/4/14), and I have written and had published an LISI commentary on this case as well. Father owned STN.Com, a taxable C corporation providing satellite linkup and facilities for a related 501(c)(3) corporate entity, "The Word" which broadcast, including through Direct TV, religious programming. The contract between the entities called for (1) 95% of The Word revenues to be paid to STN.Com, BUT (2) subject to the limitation (never followed by the parties!) of actual cost of providing the satellite uplink and facilities. In effect, the profit-making corporation siphoned off most of the revenues, and thus profits included, from The Word. The Tax Court pointed out it was not dealing here (no doubt IRS will!) with the "private inurement" issue that could lose the tax exempt status of The Word. The profits of STN.Com were considered by the court, even though they legally were way overstated, to be the basis for valuation of Mr. Adell's stock in his estate!

Third, I commented back in 2013 for LISI on the next case, an estate tax case involving the value of decedent's co-tenancy interests in art work. Estate of James Elkins, Jr. v. Commissioner, 140 T.C. 86 (2013) - here the court, without any real evidence and with the Service firmly positing there should be NO co-tenancy discount at all, came up with a 10% overall discount for some 60+ works of art.Then in weighed the 5th Circuit Court of Appeals, Case #13-60472, deciding on September 15, 2014 that the Tax Court was out of line and thus should be reversed. Further, the 3-Judge panel of the 5th Circuit determined that the only evidence of value was that presented by the taxpayer estate, that it was relevant, reliable and credible, and so the appellate court went totally with the estate on its trial evidence of value, with substantial co-tenancy discounts allowed on a per art work analysis. So what was the final result now - an over $14 million refund due the taxpayer estate!

Finally, I have just submitted to LISI my commentary on a gift tax case, decided by the Tax Court on September 17, 2014, namely, William and Patricia Cavallaro v. Commissioner, T.C. Memo. 2014-189. This is a "must read" case opinion, especially as it involves indirect or constructive gifts on a merger based on IRC Sec. 2511, and the obviously way "over the top" advice of accountants and lawyers to the donors that had no real foundation in the true facts! The advisors were a tax partner at the well-respected Boston-based law firm of Hale & Dorr, and the accountant was the firm of Ernst & Young! The parents, William and Patricia Cavallaro, owned Knight Tool Co., a contract tool and machine manufacturing company, incorporated after being run as a sole propretorship. In 1987, after experimenting with a proprietary product ("CAM/ALOT") without much success, but having developed the technology with Knight engineering expertise, the 3 sons formed Camelot Systems, Inc., which the facts showed really was but a sales corporation for the eventually quite successful proprietary product line. Yet the Hale & Dorr attorney, in 1994 created "out of whole cloth", it seemed, affidavits and a "Confirming Bill of Sale" to the effect that in 1987 the product technology was "transferred" to the sons' corporation, Camelot Systems, Inc. There really was no true factual support for this, as you can see in reading the 70+ page opinion of Tax Court Judge Gustafson. So, in 1995, when the two companies were merged with Camelot the surviving entity, the parents received only 18% of the stock while the sons got the over 80% balance - - as the court said, there clearly was a substantial overallocation of stock to the sons and underallocation of stock to the parents - - a perfect place for IRS to raise the issue of Sec. 2511 indirect or constructive gift (note: for a taxable gift, "intent to gift" is NOT required!). The date of the gifts was 12/31/95, and yet this Tax Court opinion was only issued last month here in 2014! - - think of the compound interest on the total detrmined gifts of $29.6 million from 1995-2014 and beyond! As to the failure to file gift tax returns and the understatement of gift tax penalties, the court let the donors off the hook, finding they reasonably relied on professional (even though quite misguided) tax advice. The parents were not well-educated, and the professionals, especially Louis Hamel of Hale & Dorr, were quite insistent, even though there were disagreements among professionals along the way. So watch out for indirect or constructive gifts in family business transactions.

 

I hope you have enjoyed the discussion in this Newsletter, and send me any comments or questions you might have after reviewing the Newsletter, to [email protected]

 

Have a great coming holiday season in 2014, and a healthy and prosperous 2015!

 

owen fiore  "On the Wild & Scenic Designated Middle Fork of the Clearwater River, North Idaho"

SUCCESSION PLANNING - NEW CHALLENGES & OPPORTUNITIES

Hello to all reading this Newsletter, as we now are in the middle of summer here in North Central Idaho - on the wild and scenic Middle Fork of the Clearwater River.

This Newsletter focuses on "Succession Planning", not just on any estate or death tax savings alternatives, but rather on the holistic, total approach to estate and succession planning for families. A multi-generational approach to succession planning not only is necessary, but it provides a practice development opportunity for CPAs and other tax practitioners interested in serving clients in a total, integrated way.

 

I have partnered with WesternCPE, a nationally known CPE provider headquartered in Bozeman, MT, in developing a precision conference titled "Family Wealth and Business Succession Planning Conference". This is the 4th year for this conference, which is being offered at the famed Omni National Resort in Tucson, AZ, November 10-12, 2014 (to be followed by Western CPE's updated Federal Tax Update courses on November 13-14). Check out the details for registration and courses offered at www.westerncpe.com, clicking on "precision conferences".

 

What is succession planning? "You can't take it with you" is the old saw and remains true as ever! Therefore, where wealth in terms of property is involved, the senior generation that presumably created the wealth must deal with succession both as to the property involved as well as to the management of property - There is no getting around it, and actually failing to have a plan merely is likely to cause unintended, adverse results, family disputes and even protracted litigation.

 

With the very high Federal estate tax exemptions brought into permanent status by the American Taxpayer Relief Act of 2012 (ATRA 2012), enacted 1/2/13, more than 99% of families have no Federal estate tax worry (although in some States, there still are State inheritance or death taxes with lower exemptions). Many, many reasons exist for estate and succession planning without there being the possibility of an estate tax - think, for example, of the successful (say a value of $5 million) family business with some younger family members working in the business and others not. How do the senior family members allocate family business equity interests, who manages the business, how does the senior generation also take care of family members not active in the business? These and many other questions are key for consideration in succession planning.

 

In Tucson, November 10-12, 2014, we will consider many issues involving the creation, management, and distribution of family wealth, especially as relates to family businesses. Outstanding speakers, nationally recognized for their knowledge and experience in this area, will present practical, family friendly courses. For example, financial planner Jeff Rattiner will present courses on (1) Life Insurance Planning for the Family, and (2) Financial Planning Wealth Building & Preservation. I will present courses on "Estate & Succession Planning for the 99%" and "The Keys to Ensuring Trusts & Wealth Succession Plans Work". Jeff and I also will discuss in a Roundtable how to coordinate various advisors in wealth succession planning.

 

In addition, former ACTEC President and tax lawyer Lou Mezzullo will present two (2) courses, including (1) Succession Planning at Various Wealth Levels, and (2) Family Business Succession Alternatives and Planning" (including Choice of Entity, development of entity plans separating equity ownership and management continuity). Then we have the privilege of having Leslie Dashew of the Aspen Family Business Group, LLC, co-author of the book "The Keys to Family Business Success", who will discuss in two courses difficult issues that must be discussed regarding estates as well as a comprehensive approach to succession planning in the closely-held business.

 

Finally, a 3-hour panel on November 12th involving tax professor and WCPE presenter Joe Walloch, Lou Mezzullo, and myself, will review actual case studies in Making Succession Planning Work in the Real World. This will cap off the 3-day program the morning of Wednesday, November 12th.

 

This precision conference provides CPAs, other tax practitioners, family business CEOs, CFOs and owners with an excellent opportunity to learn what is needed in succession planning, what alternatives are available, and how to get the job done! Check out the Western CPE website, www.westerncpe.com, and register for real and practical education that will help advisors and their clients alike - in today's complicated world as financial and tax issues continue to be important issues.

 

If you have any questions about the program in Tucson, do not hesitate to email them to me: [email protected]

 

Have a great day and the rest of the summer!

 

Owen Fiore

WINNING - OR LOSING - THE VALUATION GAME!

A New Year - and the Impact of the American Taxpayer Relief Act of 2012 (ATRA 2012) is Huge!

My last Newsletter, 9/29/13, was titled "Succession Planning 101 - A New and Better Era!" Indeed, it is clear that, while the "permanent" (until changed by legislation) high transfer tax exemptions - $5.34 million per person in 2014 - and the lower 40% flat gift, estate and GST tax rate, means 99%+ of estates will have no Federal estate tax, there is much to do in estate and succession planning. And now income tax planning, especially as to step-up in tax basis at death and shifting income tax to younger generations, is more important than ever. The non-tax reasons for succession planning remain and are in the spotlight now. 

Even though it is unlikely much in the way of tax legislation will be passed at the Federal level this year (especially given the mid-term elections in the Fall of 2014), the year 2015 may well see significant tax legislation, even as to the Federal transfer tax (see below the outline of Fiscal Year 2014 Administration Revenue Proposals).

This Newsletter includes reviewing recent cases in the Valuation area - The Tax Court makes clear its intention to be active in valuation cases, often to make its own determination of value.

Also, on the CPE front, I continue to work productively with Western CPE (see www. westerncpe.com) on its webcasting, self study and resort conferences. I have two new webcast courses to be added to my present three webcast courses in estate and succession planning. The two new courses are "Estate and Succession Planning for the 99%" and "Winning the Valuation Game" - each a 3-CPE course to be filmed in May and offered beginning in June or July. In addition, for Western CPE, Paul Larson, CEO, and I are working on the 4th Annual Western CPE Family Wealth & Business Succession Planning Conference, to be presented November 10-12, 2014, inclusive, in Tucson, AZ - More will be in the Western CPE resort and precision conference lineup online soon. 

Administration Revenue Proposals - F/Y 2014 (10/1/13-9/30/14).

As detailed in the Treasury's "Green Book", General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals, there are a number of proposals related to the Federal transfer tax (gift, estate and GST taxes) -

First, it is proposed that transfer tax exemptions and rates will revert back to the 2009 levels - $3.5 million exemption per person for estate and GST taxes, and only $1 million for gift tax exemption - watch this proposal But probably all is well, in that the proposal itself would be effective only beginning in 2018 (when then former President Obama is busily working on his Presidential Library).

Second, and adversely affecting the now somewhat popular use of Grantor Trusts in estate planning, such as the IDIT (Installment sale to an intentionaly defective grantor trust), is that where there is a "sale, exchange or comparable transaction" (whatever that means!) involving a grantor trust (per IRC Secs. 671-679) there would be an estate tax (payable by the trust!) in the estate of the grantor on death, or a gift tax when the trusts ceases to be a grantor trust. However, contrary to the prior year's revenue proposal package, this proposal excludes irrevocable life insurance trusts, such as where a grantor trust due to IRC Sec. 677(a)(3), allowing use of trust income to pay life insurance premiums. Also, GRATs and QPRTs under Sec. 2702 are excluded as well.

Third, additional restrictions on GRATs are proposed, including requiring a minimum term of 10 years, a maximum term of the annuitant's life expectancy plus 10 years, minimum taxable gift requirement, and prohibition of "front-loaded" GRATs.

Finally, there is more (not including any valuation discount restrictions, since most probably Treasury soon will issue Prop. Regs. under IRC Sec. 2704, regarding lapsing voting and liquidation rights retroactive back to 1990!), as follows:

1. Sec. 101 - "buyers of insurance policies" will be subject to the "transfer for value" exception to exclusing life insurance proceeds for income tax purposes.

2. As to the unlimited gift tax exclusions for direct payment of tuition and medical expenses, the proposal is to limit this exclusion to "living donors" payments (so would not apply to trust distributions).

3. The often included proposal for "consistency" in income tax basis reporting again is presented, namely, that FMV reported on the 706 estate tax return must be followed later by an estate beneficiary in reporting step-up in income tax basis for income tax purposes.

4. Limiting the term of a dynasty trust for purposes of the GST exemption to 90 years.

5. Extension of the 10 year estate tax lien, per IRC Sec. 6324(a)(1), to the full Sec. 6166 estate tax installment payment provision of 14 years, 9 months.

6. Restrictions on deductions and harmonizing the rules for charitable contributions of conservation easements and easements for historic preservation.

 

The U.S. Tax Court Once Again Confirms Its Role in Valuation.

1. First of all, on February 11, 2014, Tax Court Judge Gustafson released his opinion in Estate of Helen P. Richmond v. Comm'r, T.C. Memo. 2014-26 (see the full opinion at www.ustaxcourt.gov) - stating therein "Because valuation involves an approximation, the figure at which we arrive need not be directly traceable to specific testimony if it is within therage of values that may be properly derived from consideration of all the evidence." By reason of the hypothetical party FMV tax standard of value, expert testimony usually forms the principal support for either the taxpayer or the IRS valuation position in litigation. And the U.S. Supreme Court made clear, in Daubert v. Merrell Dow Pharm., Inc., 509 U.S.579 (1993), that the Federal trial courts (including the Tax Court with its "bench trials" - one judge, no jury) are the "gatekeepers" of the credibility, relevance and reliability of expert testimony of all types.

    At issue in Richmond was the estate FMV of decedent's 23.44% stock interest in a C corporation owning dividend paying marketable securities. Since the C corporation ("PHC") was an IRC Sec. 541 personal holding company, regular, substantial dividend distributions to shareholders were made to avoid the personal holding company penalty tax. The issues involved here were (i) valuation methodology, i.e. income method used by taxpayer's trial expert versus a net asset value (NAV) method as used by the IRS appraiser at trial, (ii) the existence and extent of discounts for potential built-in capital gains at the corporate level, as well as lack of control and lack of marketability discounts, and (iii) whether the IRS-proposed 20% substantial understatement of valuation penalty should be upheld.

    This 51-page opinion is an excellent review of how the Tax Court views valuation in general, and deals specifically with valuation methodology disputes and disagreements over discounts. At the end of the day, the court determined the easily valued marketable securities portfolio of PHC made the NAV methodology appropriate for use as opposed to the "dividend model", an income approach. Then launching into discounts, Judge Gustafson criticized the 100% discount for potential built-in gain, and settled on the IRS expert's proposed discount equivalent to 43% of the built-in gain, involving projection of future appreciation in the securities and discount back to present value - of course there remains a dispute in the appellate courts as to the right approach, so tune in for a possible appeal here to the 3rd Circuit.

Then on other discounts, the court determined a 7.75% discount for lack of control (near the 8% per the estate appraiser), and a 32.1% marketability discount, the mid-point between the estate appraiser's high end discount and the IRS appraiser's low end discount.

Finally, as to the valuation penalty,first note the court's overall valuation conclusion was $6.5 million, as compared to the IRS trial proposed value of $7.3 million and the estate's proposed value of $5 million - each of which were about $2 million down and up, respectively, from initial positions! But the statute regarding penalties here, IRC Sec. 6662(g)(1), requires the comparison to be between the estate's 706-reported value, $3.1 million, and the finally determined (by the court) value. Since the 706 reporting was based on a CPA's draft report, the CPA not being a qualified appraiser, etc., and there was no explanation for the large difference in the trial position supported by a qualified appraiser, and one of the executor's of the estate himself was a CPA, the court concluded the penalty applied here. This obviously is a warning as to the importance of proper and complete appraisal work when the transfer, gift or estate, is reported!

 

2. Another case awhile back is instructive regarding the premises or assumptions of value, here whether an FLP-based valuation discount is grounded in there being an FLP entity for tax purposes per local law and the FLP agreement. See Estate of Lois Lockett v. Comm'r, T.C. Memo. 2012-143. An Arizona case, due to Mrs. Lockett's termination of the irrevocable trust (established by her husband on his death), there ended up being only 1 "partner" at the date of her death - therefore, no AZ FLP per State law and the partnership agreement itself. Thus, the court disallowed the entire claimed 50% estate tax discount!

 

3. Finally, again underscoring the Tax Court's gatekeeper role in valuation, see Estate of Diane Tanenblatt v. Comm'r, T.C. Memo. 2013-263.Here we find an LLC interest case heard by Tax Court Judge Halpern, a "regular" now on valuation cases in this court. But the estate's counsel not folloowing the Tax Court's Rules of Practice and Procedure, the Federal Rules of Evidence or even plain common sense, proved to be a tax disaster for the estate. When the case ended up in a dispute between IRS and the taxpayer, a new appraiser was hired by the estate and came in with a much lower valuation position than was used in the 706. But a fee dispute between the new appraiser and the estate resulted in that appraiser refusing to testify at trial. Yet, in spite of the referenced Tax Court Rula and the FRE, counsel to the estate attempted to "bootstrap" into evidence the new appraisal. Judge Halpern patiently went through all the rules, found that the estate had no appraisal evidence at trial, and found for IRS. So following the rules of procedure, admissibility of evidence, etc. is very important!

 

Well, I sincerely hope this Newsletter is of interest to those reading it, and welcome any comments anyone may have as we continue to proceed with estate and succession planning during this year 2014.

Regards to all!  Owen Fiore

 

 

 

 

 

 

 

 

 

 

SUCCESSION PLANNING 101 - A NEW AND BETTER ERA!.

Summer is over, and it is raining here in North Idaho - good as no more forest fire danger. My last Newsletter was May 27th, only a month prior to the U.S. Supreme Court decisions in Windsor (Defense of Marriage Act unconstitutional) and Perry (CA Prop 8 left as being unconstitutional per the U.S. District Court). And now we have the need for review and changing of estate and succession plans for non-traditional (same-sex) couples. Obviously, that is a "new development" this past summer, but there is much, much more - and here in this Newsletter I focus first on the non-tax reasons for succession planning, and then bring to my readers and subscribers information about an upcoming (December, 2013 in Las Vegas) Western CPE precision conference on succession planning - a great opportunity for CPAs, lawyers and other tax professionals to build a new area of professional practice!

 

WHY "SUCCESSION PLANNING" NOW?

Some clients say - "Why worry about estate planning, since the Federal gift and estate exemption level is over $5 million?" Sure, that would be a good statement if it were not for the following: (1) a number of States (check your State law!) have death taxes, and a couple of States even have a gift tax - and the exemptions generally are way lower than the Federal exemptions; and (2) there are many important non-tax reasons for estate and succession planning. So really we are "back to basics" - succession planning is about People and their goals, Property that will pass down the family line one way or the other, and the Process of how we as advisors can be creative and proactive in working with our clients.

What are some of the important non-tax issues in estate and succession planning? Well here is but a partial list:

1 - Where will the assets go at death of the owner, such as senior family members? The answer is that the owner of property is in charge - IF he or she or they determines goals and documents the "at death" succession plan for property. In fact, with the much higher Federal exemption levels, there is more property to dispose of, and for heirs to waste if careful planning is not done in advance.

2 - How should we insure Asset Protection planning for family assets and wealth? Here the effective uses of entities, e.g. FLPs, LLCs and S corporations, and irrevocable trusts is most important. The LLC has clear asset protection advantages over FLPs; but domestic asset protection trusts (DAPTs) may be the best alternative, at least with passive assets. The "Choice of Entity" decision at the outset is very important, and justifies careful analysis.

3 - Where an active family business is involved, how do we effectively advise clients regarding protection of the business in the future? The key here is that, whether a C or S corporation is involved or even an FLP or FLLC, equity ownership can be separated (and should be) from management control in various ways. This is where buy-sell agreements and compensation agreements are most important.

4 - Then there is disability, incompetency, substance abuse at either senior or younger generation levels, and how do we deal with that? Pre- and post-nuptial agreements may be helpful, especially in a split-family situation; and also special provisions in trusts are useful. The clear tracing of property ownership (not just record title) is very important. Essentially, here the family dynamics are key to either success or failure in planning.

5 - Marital dissolution is a fact that often is involved, and advance planning (as well as post-dissolution planning) must occur. How can this planning be successful? Certainly, separate legal counsel is a key to resolution of problems in marital dissolution. However, beyond that, planning must consider all assets and the future potential of assets, especially if involving a business interest.

6 - Perhaps the most difficult issue in planning is Management Succession - who is the successor manager, whether a CEO or a trustee or, in some cases, a "trust protector". Trust provisions giving clear direction for the future, but also being flexible enough to take into account changed circumstances. are critical to success in this area.

7 - What do we do in retirement plan distribution planning, not only about tax issues, but also about family dynamics? Successor generations, as well as a surviving spouse of the plan participant, can benefit from the income tax deferred nature of qualified retirement plans and IRAs - perhaps especially important in these times of potentially rising income tax rates.

8 - And what about State death taxes? In some situations, a succession plan might involve a client changing his or her or their State of domicile (permanent residence), taking advantage of a State law in which there are no death tax liabilities. For example, even if real estate is in a State in which there is a death tax with quite low exemption level, having the real estate in an entity (such as LLC) with a situs in the owner's domicle State results in converting otherwise ownership directly of real property into personal property, i.e. a non-public security - the interest in the LLC which is taxed only in the State of domicile, where there is no death tax.

9 - Is a child or grandchild a "spendthrift" incapable (at least now) of handling financial assets, especially cash? This is an area in which clearly the irrevocable trust is one answer; however, other answers involve financial education of the younger person. L.A. attorney Jon Gallo and his wife, Eileen, who is a clinical psychologist, have developed the "Financial Skills Trust" - which by its title, considers all human and financial issues in property and wealth distribution for children and grandchildren.

10 - And thus obviously this brings us to the area of education of heirs - how can senior family members be involved and be effective in assisting such heirs in developing good habits of handling financial issues and propery? Education planning for younger generations is important and is a fertile area for succession planning. Senior family members, in the right plan, can have controls over the timing, extent and quality of such education - always recognizing the importance of supporting responsibility and maturity in the younger person.

 

SO WHAT IS THE CPE OPPORTUNITY COMING UP?

I have been privileged to be an author-instructor for WesternCPE, a Montana-based nationally recognized provider of Continuing Professional Education for CPAs, Enrolled Agents, CFPs, attorneys and other professional advisors on wealth creation, management, protection and distribution during lifetime or at death. See the website at www.westerncpe.com for details on resort conferences, webcasts, self-study and other educational opportunities.

Beginning in Tucson, AZ in 2011, and then continuing in San Antonio, TX in 2012, I developed - in conjunction with WesternCPE CEO Paul Larson - the WCPE Family Wealth and Business Succession Planning Conference - 4-5 days of concentrated succession planning courses with outstanding speakers presenting a variety of topics.

This year, December 3-6, 2013, at the restored, historic and beautiful Tropicana Resort, we are presenting the Third Annual Family Wealth and Business Succession Planning Conference - with an outstanding lineup of topics and nationally recognized speakers. The topics range from Jon and Eileen Gallo discussing the "Financial Skills Trusts" to attorney Howard Pearson discussing Charitable Giving in Succession Planning (Howie is the top development office at Stanford University). Also, Dick Oshins and his son, Steve Oshins, will present courses on Grantor and other Trust Planning as well as Domestic Asset Protection Trusts. I will discuss the ins and outs of succession planning for the planning and, in addition, will present a course on Pass-Through Entities (principally FLPs, LLCs and S Corporations). Attorney Steve Siegel, who presents many courses for CCH and the AICPA, will discuss Family Business Succession Planning. Art Werner and I will have a panel course on the Pitfalls and Opportunities in Family Succession Planning. Finally, business valuation appraiser Mark Higgins, ASA will show attendees how to select and work with valuation appraisers; and attorney Keith Schiller will wrap up the program with "how to get the succession planning job done right!"

All in all, we have a great program lined up for December 3-6 in Las Vegas - - think about attending, whether you are an attorney, CPA, other tax professional, or even a family business owner or CEO/CFO manager type in a closely-held business. This program is for you!

 

I hope this Newsletter is of interest to you, and my intention is to post several additional Newsletters between now and the end of 2013!

 

From the beautiful Wild & Scenic designated Middle Fork of the Clearwater River in the Idaho Panhandle, I wish you well!

 

Owen Fiore, JD

Succession Planning and New Developments

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