49th Heckerling Institute on Estate Planning
Current Developments
By: Martin M. Shenkman, CPA, MBA, PFS, AEP, JD
1. Current Developments.
a. Practice has changed.
i. Tax law changes are not driving clients to practitioners. The future is different. Practitioners will have to be more proactive.
ii. Estate planning services will still be needed.
iii. The top 2/10ths of 1% of the wealthiest taxpayers will require extensive work. Consider the run-up in the stock market and the impact of that one change on wealthiest clients.
iv. The old days of focusing planning on moving assets via gift/transfer to irrevocable trusts to remove appreciation from an estate are no longer sufficient. Basis step-up is too important and must be considered in all gift planning.
v. For a zero basis asset it must appreciate more than 250% before the estate tax savings will offset the income tax result.
vi. Clients will often say that an asset won’t be sold. Some clients might even say they want to leave/create an income tax burden to make it harder for the client’s heirs to sell. If a client takes that perspective practitioners should confirm that decision it in writing. The reality is, contrary to what many/most clients say, most assets will be sold.
vii. Rule against perpetuities New York Times article illustrates how significant state law has become to practice.
b. Federal tax legislation.
i. ATRA is like any other legislation, some items were permanent but many were temporary and subject to extenders.
ii. Important extender provisions, including qualified charitable contributions of IRAs, expanded contributions of qualified conservation real property, etc.
iii. There could be new legislation, maybe.
1. While the risk is not significant there is a more likely chance then in the past to have estate tax repeal, etc.
iv. HEET Trusts.
1. Health Education Exclusion Trust use the gift tax exclusion 2503(e) and the GST exclusion 2611(b)(1).
2. President Obama wishes to modify HEETs since he views them as abusive.
3. Currently distributions for the benefit of skip persons are not subject to GST tax if direct payments for tuition or medical. IRC says GST transfer does not include these types of payments excluded under IRC Sec. 2503(e).
4. Are these trusts worth funding? If you create a trust for only grandchildren the trust will be a skip person triggering GST tax. Merely adding children to the trust in addition to grandchildren, may not suffice to avoid this. IRS can take position the interests of older children in such a trust are nominal and the transfer to the trust would trigger a GST.
v. Crummey powers.
1. Proposals may limit to $50,000.
2. Can you gift daughter interest in LLC not transferable and this may be OK under proposal.
c. New York.
i. Estate Tax.
1. Gifts within 3 years of death will increase estate by amount of gifts.
2. Significant trap.
3. New Yorker is generally not taxable on real estate and tangible property located outside New York but if the client gifts these within three years of death it will become subject to New York tax.
ii. Joan Rivers.
1. Said resident in New York but domiciled in California to save New York estate tax.
iii. New York Income Tax.
1. NY takes the position that all trust created by a NY resident is forever a NY resident trust. It can escape NY taxation if it doesn’t have NY assets, no NY Trustee, etc. NY viewed this as a means of permitting avoiding NY tax.
2. Throw back tax was enacted in 2014. There is a tax on accumulated income. If a NY resident receives a distribution will have to pay tax in NY on that distribution.
3. This won’t stop the export of trusts outside NY because tax is deferred, if beneficiary leaves NY it will be avoided, and tax on accumulated income doesn’t pick up capital gains since they are not part of DNI and do not produce an accumulation distribution.
d. Portability.
i. Rev. Proc. 2001-38 concerning a disregarded QTIP election.
1. The Rev. Proc. was intended to provide relief if an unnecessary QTIP election was made.
2. What happened was that an executor inadvertently made a QTIP election on a bypass trust. IRS said we would disregard it as a leniency to the taxpayer.
3. Now a QTIP trust is desirable to get a step up in basis. If left all in a bypass trust there is no step up but IRC Sec. 2044 requires step up and it is treated as property passing from the decedent under IRC Sec. 1014(b).
4. An issue was raised by some practitioners that the QTIP election if there is no estate tax due (e.g., on a portability return) the QTIP election was not necessary so IRS could ignore the QTIP election and the basis step up might be lost. This was not the intent.
5. There should be no issue of this with creating a trap for the unwary.
e. Completed gift and GRAT.
i. Scrivener error.
ii. Reformation in local court. Reformation relates back to date of creation of the document.
iii. PA has UTC and under Sec. 415 you can establish by clear and convincing evidence that it was an error.
iv. Reformation should be contrasted with modification.
v. UTC Sec. 415 modification does not require clear and convincing evidence but modification is prospective only.
f. General power of appointment.
i. PLRs 201444002-201444006.
ii. Issue is that the grantor created a trust for grandchild and permit the grandchild to appoint to grantor’s issue which means the grandchild could exercise in favor of the grandchild. Since the grandchild is included in grantor’s issue was this a general power of appointment causing trust property to be included in the grandchild’s estate? The IRS held that since it was a testamentary power the grandchild could not appoint to himself/herself during lifetime or to his/her creditors so it was not a general power.
g. Business Opportunity.
i. It is common to plan for goodwill in corporate transactions that are not estate planning motivated. Sellers want to allocate some consideration to personal goodwill rather than corporate goodwill. This will create only one layer of tax, a capital gains tax, since the proceeds will be received directly by the shareholder not by the corporation. If in contrast it is the corporation’s goodwill being sold you have two layers of taxation. Allocation of goodwill as between personal and corporate goodwill has long been an issue.
ii. These issues can be relevant to the business succession and estate planning areas.
iii. Boss Trucking Inc. v. Commr. TC Memo 2014-17.
1. Dad had trucking company. Regulatory issues arose. Three sons started their own business and used some of equipment used in Dad’s business and some of the same suppliers and customers. [Comment: was it Steve Douglas?] Dad was not involved in the new business started by the sons. IRS said the creation of the new business by the sons was a distribution of goodwill by Boss Trucking to Dad, and then followed by a gift of that goodwill by dad to the 3 son.
2. The Tax Court said that the IRS was not correct only because the goodwill belonged to the Dad as a shareholder, not the corporation. There was never an employment agreement or non-compete agreement that would have formalized this. Does this suggest not having those documents in place? Tax Court also held that there was no gift by Dad to sons (or sons’ business) because the new company had a different name, etc.
3. Planning ideas – if transition business to younger generation have them form their own business and build their relationships. As long as senior generation is not involved there may be no gift transfer. This might provide a gift tax free succession strategy.
iv. Estate of Adell v. Commr. TC memo 2014-155.
1. C Corporation was engaged in uplink broadcasting business.
2. The only customer was a charity formed by decedent and son. The decedent’s son who had created all the relationships and created goodwill. On decedent’s death what was the value of the stock if the goodwill belonged to the son and not to the company?
3. IRS appraised company and came up with a value that was ten times greater than the taxpayer.
4. Tax Court held that the value of the company should not reflect the son’s goodwill.
5. Note that on son’s death goodwill would die with him and not be included in the estate.
v. Cavallaro v. Comr. TC Memo 2014-189
1. Case held the opposite as the Adell and Boss cases finding that a merger transaction was a gift.
vi. General planning ideas.
1. Have new ventures started in an irrevocable trust so outside the estates.
2. If the company would have a claim against the child for taking the corporate opportunity then it would be a taxable gift. So be careful with employment agreements and shareholders agreements not to provide for such a restriction.
i. Comment: Employment and other agreements may be useful to support compensation etc. but perhaps provide the opposite of a typical corporate opportunity clause by stating that there will be no such restrictions. Consider the impact on other siblings. This was discussed by another speaker in a different context at this year’s Institute who pointed out the intra-family issue of a child in the business secures an incredible investment opportunity and does not share it with other siblings. In that context a seemingly opposite recommendation was made. So caution is in order.
h. Valuation cases.
i. Richmond v. Commr. TC Memo 2014-26.
1. In one case the appraisal was not completed which worked to the taxpayer’s detriment.
2. Built in capital gain. Two circuits give dollar for dollar deduction. IRS expert gave nominal expert. Judge used about ½ of net asset value with a discount for built in capital gain. Used time value of money and assumed gain would be realized over time.
ii. Gustina.
1. 12-717-47 December 5, 2014.
2. Appeal from Tax Court decision.
3. 41% LP interest in timber.
4. Taxpayer did not have ability to liquidate or remove GP. Tax Court judge said there as a 25% chance LP could find another LP to join him and liquidate. 9th Circuit said that was contrary to evidence and hypothetical buyer would have to get GP approval, etc. Viewed it as clear error to assign the 25% probability.
5. This is analogous to Simplot case.
iii. Elkins Case.
1. Elkins
2. When James Elkin died he owned fractional interests in 64 works of art comprising a $35M art collection. The value of the art was agreed to.
3. Issue was discount.
4. IRS position was no discount should be permitted.
5. Testimony of art appraiser testified no market for partial interests in art. Estate argued for 70-80% discounts. Tax Court limited discount to 10% (better than 5% in Stone case). Tax Court reasoned that potential buyer would be able to convince other owners to buy the minority interest.
6. Tax Court agreed that there should be some discount and that IRS was wrong. Tax Court agreed with estate’s discounts.
7. Burden of proof is not always on the taxpayer. IRC 7491 provides that if the taxpayer can present credible evidence as to evidence the burden shifts to the IRS. In this case the Elkins estate produced three expert witnesses whose testimony supported the discounts. The IRS testimony was week. The Court felt that if the IRS position was correct that there was no market that would support discounts taxpayers wanted.
8. The cotenant agreement used may not provide a great benefit if used in future planning/cases. IRC Sec. 2703.
i. Alternate Valuation Date.
i. PLR 201431017. AVD must be elected within one year window (i.e., within one year of the return due date) to obtain Sec. 9100 relief.
ii. PLR 201441001. AVD could not be elected as the return was filed more than one year after the deadline.
j. Same Sex Marriages.
i. Florida August 21, 2014 become the 35th state to recognize same-sex marriages. Court held the ban against it was unconstitutional. Stay expired in January 2015.
ii. DeBoer v. Snyder 6th Circuit has overturned decisions in four states that allowed same-sex marriages. 6th Circuit says that it is determined by the states.
k. Premarital Agreement.
i. PLR 201410011 spouse’s right to elect under a revocable trust did not disqualify it for the marital deduction.
ii. The Code gives preferential treatment to certain payments made pursuant to divorce. If a premarital agreement requires alimony treatment for future post-divorce payments that may not be the result if only a premarital agreement requires this. Consider including a provision in the premarital agreement requiring parties to incorporate the provisions into a marital settlement agreement or divorce decree.
l. FATCA.
i. Applies to foreign trust unless an exemption applies.
ii. Beginning in 2014 payments of dividends, etc. withholding will apply to gross proceeds. This withholding is independent of other withholding provisions under the Code.
iii. A foreign entity must comply with requirements that different depending on the entity’s status.
m. 2701 Gift.
i. Donor/mother funded an LLC and gave gifts to two children. Operating agreement provided for distributions of all profits to the children.