Karen Kurtz in the November Journal of Taxation

Tax attorney Karen S. Kurtz in the Atlanta Chamberlain Hrdlicka office recently co-authored “Using Closed-Ended Funds to Calculate the Lack-of-Control Discount for Closely Held Businesses” which was published in the Journal of Taxation, Nov 2011.  An expert from the article follows:

The discount (or, in some cases, premium) that the market has applied when valuing closed-end mutual funds has been used as part of the process of calculating lack-of-control discounts for closely held business interests having similar assets to those funds. Nevertheless, the differences between the two types of entities may undercut the reliability of the CEF discount as a benchmark and justify an adjustment.

 An important valuation issue is the trend of applying discounts (and premiums) applicable to closed-end mutual funds (CEFs) to measure lack-of-control discounts for unmarketable, noncontrolling interests in closely held businesses, especially investment partnerships. Many tax advisors are not aware of the ramifications of solely using discounts applicable to CEFs to determine such lack-of-control discounts. As analyzed below, advisors and appraisers should consider whether the managerial and financial differences between CEFs and closely held businesses owning similar assets should result in a higher lack-of-control discount for closely held businesses than for CEFs.

Charles E. Hodges II and Karen S. Kurtz, Using Closed-End Funds to Calculate the Lack-of-Control Discount for Closely Held Businesses, 115 Journal of Taxation No. 05 (Nov. 2011).  The full article can be viewed in the Journal of Taxation or on Checkpoint.

Updates on the 2010 Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act

 By Ashley Alderman

On October 20, 2011, the IRS announced in a news release (IR-2011-104) that the estate tax basic exclusion will increase from $5 million to $5.12 million in 2012 because of inflation adjustments that were included in the 2010 Tax Relief Act. The 2010 Tax Relief Act included these annual inflation adjustments, which was an addition to any prior estate tax laws that were not indexed to inflation. Although the estate tax basic exclusion is increased due to inflation, the annual exclusion forgifts will remain at $13,000.

In addition, IRS Notice 2011-82, released at the end of September 2011, had requested comments for the proposed regulations to section 2010(c).

On October 21, 2011, The New York State Society of Certified Public Accountants filed its comments on IRS Notice 2011-82. The New York CPAs stated that their “primary objective is to propose solutions to eliminate the significant degree of uncertainty that a surviving spouse would otherwise face concerning the use of the [Deceased Spousal Unused Exclusion Amount] if he or she were to remarry after the executor of the deceased spouse’s estate has made a portability election under section 2010(c)(5)(A)(a “portability election”).” In particular, the New York CPAs proposed four situations that required clarification in the proposed regulations:

1. Guidance is Required Where the Wife Remarries After the Death of Husband 1 (For Whom a Portability Election Has Been Made), and Husband 2 Then Dies Without a Portability Election Being Made for Husband 2

2. The Surviving Spouse Should Be Treated as Using Her Deceased Spousal Unused Exclusion Amount First Before Using Her Basic Exclusion Amount

3. Guidance is Needed to Clarify That Neither Estate Tax Nor Gift Tax Can Result Through a “Clawback” of the Deceased Spousal Unused Exclusion Amount

4. The Proposed Regulations Should Clarify that the Scope of the Service’s Examination of the Estate Tax Return of the First Spouse to Die Is Limited to Determining the Amount of the Deceased Spousal Unused Exclusion Amount

On October 21, the same day that the New York CPAs responded to IRS Notice 2011-82 with their comments for the proposed regulations to section 2010(c), Catherine Hughes, attorney-adviser in Treasury’s Office of Tax Legislative Counsel stated that Treasury would like to release proposed regulations on the portability of the estate tax exclusion under section 2010(c) in the 2010 Tax Relief Act by the end of 2011. Until the proposed regulations are released several areas remain uncertain, and executors of decedents dying in 2011 should seek advise when deciding whether and how to complete an estate tax return.

Executors Must Act Soon to Guarantee Spousal Portability of Gift and Estate Tax Exemptions for Estates of Decedents Dying in 2011

 By Rose Drupiewski

Beginning in 2011, there is portability of the gift and estate exemption amounts for spouses. The portability feature provides that if a spouse dies after 2010 without using all of his or her gift and estate tax exemption amount (currently $5 million), the unused gift and estate tax exemption amount may be carried over to the surviving spouse and used by the surviving spouse in addition to the surviving spouse’s available exemption amount. The unused exemption amount that can be carried over to the surviving spouse is limited to the basic exemption amount available at the time of the surviving spouse’s death. The purpose of the portability feature is to relieve spouses from the burden and expense of having to retitle assets or create trusts in order to obtain use of both spouses’ gift and estate tax exemptions.

In IRS Notice 2011-82, the Internal Revenue Service recently reminded taxpayers that in order to take advantage of the new portability feature, the executor of the deceased spouse must file Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Filing the return is the only requirement to make the portability election, as the Service does not require that any affirmative statement be made, box checked, or other special action be taken on the return to obtain portability. The estate tax return must be timely filed for the predeceased spouse for the election to be valid. Because estate tax returns are due nine months after the date of death, the first estate tax returns being filed for portability purposes are due beginning in October, though estates may request an automatic filing extension of six months by filing Form 4768.

Because of the uncertainty regarding future changes to estate and gift taxes and applicable exemption amounts, executors of decedents dying in 2011 will most likely want to file an estate tax return to allow portability even if there is otherwise no obligation to file an estate tax return. The portability feature may provide a substantial benefit to the surviving spouse’s estate in the event the estate tax exemption amount drops to $1 million, as it is currently scheduled to do in 2013.

Chamberlain Hrdlicka’s James Kane in Smart Money: The New Rules of Estate Planning

Tax attorney James Kane in the Atlanta Chamberlain Hrdlicka office was recently quoted in this Smart Money article discussing how to manage your estate following the Tax Relief Act of 2010.

 If the Tax Relief Act motivates you to review your estate plan and consider any of these strategies, great. Have a chat with your attorney. Ideally, though, he or she will tell you that estate planning, at its heart, isn’t about taxes; rather, it’s about providing for your family, safeguarding their futures, anticipating your own financial needs and offering peace of mind, says James Kane, a tax attorney in Atlanta. “That’s the real value, that level of comfort.” And that would be worth throwing a party for.

 – Smart Money, June 13^th

 To read the whole article on Smart Money, please click here.