Dedon on Estate Planning

Properly Reporting Gifts

As 2013 approaches, there will be a flurry of activity by wealthy individuals seeking to take advantage of a gift tax exemption of $5,120,000, that will decrease to only $1 million in 2013.  Taxpayers often gift closely held business interests or real estate.  The gift value of this type of non-marketable property needs to be adequately disclosed on a gift tax return.

If the gift tax return is not filed or if the gift is not properly reported, the IRS can adjust the value, even upon the taxpayer’s death on the estate tax return.  On the other hand, if the gift tax return is filed properly, then the Statute of Limitations starts to run.  The IRS would only have three years from later of the gift tax return filing date or return due date to question the value.  If the IRS does not audit the return within the statutory period, then it is too late and the gift value cannot subsequently be challenged.

The Statute of Limitations commences only if the gift tax return is filed reporting the gift, and the gift is reported with adequate disclosure.  The heart of the issue is what constitutes adequate disclosure?  The applicable Internal Revenue Code section is 6501(c)(9), and Treasury Regulation section 301.6501(c)-1(f).  The law applies to all gift tax returns filed after December 3, 1999.  The "adequate disclosure" standard is satisfied if the gift is reported in a manner that adequately apprises the IRS of the gift and how the gift value was determined.　

There are two primary methods described in the IRS regulations that taxpayers can utilize to meet this standard.  The preferred method, and the method recommended by virtually all advisors, is to obtain a "qualified appraisal."  A qualified appraisal would include the following:　

1.  The appraiser's qualifications to make appraisals of the type of property involved, the date on which the property was appraised, and the purpose of the appraisal. The appraiser must hold himself out to the public or perform appraisals on a regular basis and must not be the donor, the donee, a member of the family of either, or an employee of any of such persons.

2.  A description of the property and the date of the gift.

3.  A description of the appraisal process employed.

4.  A description of the assumptions, conditions, etc. that affect the analyses, opinions, and conclusions.

5.  The information considered (and if a business is involved, all financial data used sufficiently detailed so another can replicate the process).

6.  The appraisal procedures followed and the reasoning supporting the analyses, opinions, and conclusions.

7.  The valuation method used, the rationale for the valuation method, and the procedure for determining the fair market value of the property.

8.  The specific basis for the valuation, such as comparable sales, asset-based approaches, and merger-acquisition transactions, etc.

The second method does not involve a qualified appraisal.  Often taxpayers balk at the cost of an appraisal, particularly for operating businesses or several properties.  In lieu of an appraisal, this second method requires a detailed description of the manner used to determine the gifted property’s value.  This detailed description method would include:

1.  The financial data (for example, balance sheets) used.

2.  Any restrictions on stock transfers that were considered, such as would be found in a shareholders agreement.

3.  A description of any discounts claimed, such as discounts for lack of a market or control.

4.  Assuming there were discounts claimed, a statement regarding the fair market value of 100 percent of the entity.

5.  If the entity being valued owns an interest in a nonactively traded entity, all information regarding that other entity must also be provided if that information is relevant and material in determining the value of the interest in that other entity.

Thus, with or without an appraisal, much information is necessary.  To complete the necessary valuation during 2012, time is running out.

The “JOBS” Act: Help For Business

On May 11, Virginia Business Magazine published an article I wrote, with input from my corporate and securities law colleague, Daniel Ingersoll, regarding the Jumpstart Our Business Startups Act, which was signed into law in April.  I have attached it below.  It is not directly related to estate planning, except as it will help business owners and investors raise funds for ongoing and start-up businesses.  Much of what estate planners do is find ways to preserve business owners’ wealth for their families and protect it from death taxes.  It is refreshing to see a law enacted to facilitate business growth.

Download John-Dedon-Estate-Planning-May-2012-Law-Businesses-Raise-Cash

The Trust that Keeps Living

Planning for estate planning clients who intend to be cryonically preserved continues to be a narrow, but challenging and creative, niche for an estate planning attorney. Over the last several months, many articles have appeared naming celebrities, such as Simon Cowell and Larry King, who are interested in cryonic preservation. Attached is one of those articles where I am quoted on the subject. It appeared in The Trust Advisor, a newsletter for wealth management.

Download The Trust Advisor 9-4-11

Virginia Self-Settled Asset Protection Trusts

Effective July 1, 2012, Virginia will be the 13 state to allow self-settled Asset Protection Trusts. Self-settled Trusts allow an individual to transfer assets to a Trust, protect the transferred assets from lawsuit and the transferor’s creditors, and yet receive assets from the Trust as a beneficiary under various conditions. This assumes that the asset transfer is not a "fraudulent conveyance," meaning the transfer did not render the transferor insolvent nor was it done with an intent to delay, hinder or defraud creditors. Thus, if the asset transfer is before a claim or the event leading to the claim, the assets are protected. Absent this legislation, you cannot protect assets from your creditors by transferring assets to a Trust where you are a beneficiary or Trustee.

Virginia residents can now avoid Delaware, Alaska, Nevada and other states that already allow self-settled Trust. There was uncertainty whether a Virginia resident with Virginia assets (or for that matter a resident of any state seeking to employ a Trust out of state) would receive asset protection from a self-settled Trust created in another state.

Self-settled Trusts do come with limitations, even for Virginia residents. Regardless, they should be considered in analyzing estate planning strategies. Self-settled Trusts can be structured so that the transfer constitutes a completed gift and removes the assets from the estate for federal estate tax purposes, or as an incomplete gift with the assets remaining in the transferor’s estate. Once the law is enacted and these Trusts are utilized, Virginia residents can expect to see much discussion regarding self-settled Trusts.

The Future of the Estate Tax?

In the last couple of weeks there has been a flurry of activity in the estate tax world. However, it simply has added to the continuing uncertainty regarding the future law. Absent new law, the $5 million exemption amount protecting taxpayers from gift and estate tax will expire at the end of 2012 and only a $1 million exemption will be in place in 2013 forward.

On March 28^th, 21 Republican Senators proposed legislation to permanently repeal the estate tax. The legislation is similar to that introduced in the House in 2011. However, because of the current political environment, even the Bill’s sponsors acknowledged passage is "an uphill battle."

Conversely, on March 29^th, a group called the "Americans for a fair estate tax," wrote all members of Congress, proposing an exemption amount of $1.3 million and a marginal tax rate of 55%.

Finally, on April 4^th, the American Bar Association asked Congress to enact a number of technical changes to existing law, but the ABA did not suggest what the proper exemption amount should be. The ABA did propose that Congress address the uncertainty caused by lapsing laws and political posturing, and once and for all adopt long term, sensible legislation, to address lifetime and death asset transfers.

Gift Tax and the Statute of Limitations

A U.S. Tax Court decision filed March 6^th, Dickerson v. Commissioner, regarding a waitress who won $10 million in a lottery, is extremely relevant for gift tax law.  The waitress tried to shift the winnings to family members without incurring a taxable gift.  The IRS disagreed, claiming there was a gift, and the Tax Court concurred.

The relevance is not so much the facts of the case, since few of us win lotteries, but rather the procedural aspects of the case.  The waitress won the lottery in 1999 but did not file a gift tax return until 2007.  In 2008, the IRS asserted that gift tax was owed.  The Tax Court heard the case in 2010, which resulted in its decision last week.

The legal importance is that there is no statute of limitations on gifts if a gift tax return is not filed.  Further, the gift tax return needs to provide the necessary information, such as asset appraisals, to put the IRS on notice of the substance of the gift.  Absent filing a gift tax return, or filing the proper return, the statute remains open and transactions that taxpayers may think have been closed remain vulnerable to IRS challenge.

In 2011 and 2012, when numerous taxpayers are taking advantage of the $5 million exemption amount (now $5,120,000) while it exists, Dickerson highlights the importance of properly making the gift and documenting it.

Income Deduction of Estate Planning Fees

With April 15^th approaching, it reminds us of the need to file our income tax returns. When preparing estate planning documents, clients often ask, "are these estate planning fees deductible?"

The cost to do a simple Will, Power of Attorney and Medical Directive are personal expenses and not deductible. However, a portion of the cost to prepare a comprehensive estate plan, involving a revocable trust to avoid probate and a marital and credit trust to reduce or eliminate estate taxes, is deductible.

How do you distinguish between the personal expense allocable to the non-deductible planning and the deductible expense attributable to the tax planning and the property preservation? It depends on each case and the fee charged, but it is likely 60% to 75% of the total fee is deductible. These fees are analogous to advisory fees paid to a financial planner. Of course, how this applies to your own tax return and the 2% miscellaneous deduction rule, is for you and your CPA to sort out.

Planning to Use Exemption Amounts

Set forth below is an article published last week in VA Business Magazine pertaining to how a married couple can each use their $5,120,000 gift exemption while the opportunity lasts, and yet still benefit from the assets.

Download Va bus mag art 2-16-12

 

 

Let the Games Begin

President Obama’s 2013 Budget proposal was released this week. As expected, there are restrictions on estate and gift tax strategies that have been useful during 2011 and 2012. A couple of the proposals are repeats from his prior recommendations. These include eliminating 2-year rolling GRATS and valuation discounts between family members.

Most significantly, the President desires a $3.5 million estate tax exemption and a $1 million gift and generation skipping tax exemption. Thus, for 2013, as during 2009, a married couple can protect $7 million upon death, and can gift $2 million during their lifetimes. The estate tax rate would be 45%. These proposed limits would dramatically reduce the current advantages available to wealthy taxpayers, which allow for a $5 million exemption amount upon death or for lifetime gifts. As relatively bad as the Obama proposal is for estate planning purposes, if Obama and Congress fail to agree on estate legislation in 2012, in 2013 the death and tax exemption amounts will be only $1 million per person and a 55% tax rate.

What does it all mean? A lot of uncertainty, but for wealthy taxpayers considering asset transfers, act this year.

Substantiating Charitable Deductions

Taxpayers who claim income tax deductions for charitable contributions must request and obtain the written acknowledgement from the charity that the contribution was made. It is due by April 17, 2012, the time the income tax return is filed. Failure to have the required substantiation from the charity can void the tax deduction. Below is a sample letter.

　

CHARITY NAME

____[Date]_______

　

[Name of Donor]

[address]

 

Dear ____________:

Thank you very much for donating $_________ to Charity during 2011. This letter acknowledges your generous donation. No goods or services were received by you in consideration of this gift. Therefore, the full amount is deductible to the extent allowed by the Internal Revenue Service regulations.

Thank you for your support.

Sincerely,

 

___________________________________

_____________________, [Title]

Charity