Tax Court Approves Georgia-Grown FLPs

Posted April 13, 2012 by Rose K. Wilson
Categories: Business Planning, Estate Planning, Estate Tax

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 By Rose Drupiewski

In a recent decision involving a Georgia family and Georgia family limited partnerships, the U.S. Tax Court upheld estate tax benefits claimed by the family.

A family limited partnership (“FLP”) is a form of business created by family members that, in addition to providing important business, asset protection and other non-tax benefits, may reduce a family’s total estate tax liability.  The estate tax benefit arises from the recognition that a partnership interest is less valuable than direct ownership of the partnership’s assets.  Thus, for estate tax purposes, certain valuation discounts may be available when determining the value of a partnership interest.

In attempting to defeat the tax benefits of FLPs, the IRS often relies on section 2036.  If successfully applied, section 2036 ignores the transfer of assets to a partnership, and therefore the decedent’s estate is taxed on the value of the partnership assets as if the decedent had never transferred such assets to the partnership.  In effect, all valuation discounts are ignored that would otherwise be available by virtue of the partnership structure.  Generally, section 2036 will not apply if a partner transfers assets to the partnership in a “bona fide sale for full and adequate consideration.”  A decedent’s estate may demonstrate that a transfer is bona fide if the decedent had valid nontax reasons for forming the partnership.

In Estate of Beatrice Kelly v. Commissioner, T.C. Memo 2012-73, the decedent was an elderly woman from Rabun County, Georgia.  The decedent was diagnosed with Alzheimer’s disease, and her four children were appointed to act as her co-guardians by reason of her mental disability.  Subsequent to their appointment as her co-guardians, the children discovered that the decedent’s will did not divide her estate equally among them, and they sought a way to provide for an equal division of the decedent’s assets.  The decedent owned 27 parcels of real estate, including two rock quarries, a subdivision with rental homes, a post office, and a rural property with public access.  The Tax Court found that the real estate properties raised liability concerns for the decedent, as evidenced by a previous accident occurring at one of the quarries that resulted in personal injuries, and public traffic through the post office, subdivision and rural property.

The children, as co-guardians, sought the advice of an attorney on how to achieve an equal division of the decedent’s assets.  The attorney advised the children that they could achieve this goal by acting on behalf of the decedent to create four separate FLPs, transferring the decedent’s assets to such FLPs, and transferring the partnership interests to themselves prior to the decedent’s death, such that the decedent’s will would not control the division of such assets.

The Tax Court found that there were valid nontax reasons for formation of the FLPs.  These nontax reasons included effective management of the decedent’s real estate and equal distribution of assets among the children.  As a result, the Tax Court held that the transfer of assets to the FLPs was bona fide and section 2036 did not apply.  The holding of this case is an important reminder that FLPs can provide significant estate tax benefits to families when there are legitimate nontax reasons for forming them.

Fractional Interests in Real Estate: The Unintentional But Effective Partnership

Posted March 14, 2012 by Jeff Waddell
Categories: Asset Protection, Charitable Giving, Estate Planning, Gift Taxes

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 by Jeff Waddell

A gift of a small interest in real estate can have a greater benefit than intended.  So you decided to transfer a one percent interest in the family farm to your daughter last year.  The values were such that the 1% worked out to about $13,000 so you were within your annual exclusion and that was the plan.  You may have done a lot better than you thought from an estate tax perspective.

By creating a fractional interest situation, the farm is now effectively owned by a partnership between you and your daughter.  No third party is going to buy your 99% interest without the ability to obtain her separate 1% interest so effectively you have created a non-marketable interest in real estate.  Additionally, you cannot independently obtain financing on the property or enter into agreements affecting the property without your daughter’s consent. That means you also have a lack of control over the property.  Both of these factors, lack of marketability and lack of control, are recognized discounts which, at present, can be taken for estate and gift tax return purposes.  The amount of the discount depends on a number of factors; but, even with a discount as low as 20%, the effect of your 1% gift can be dramatic, as illustrated below.

Property Value: $1,300,000 prior to gift.  Transfer 1% for $13,000.  Undiscounted remaining value in estate $1,287,000.

Property Value: $1,300,000 prior to gift. Transfer 1% for $13,000. Discount for lack of control and marketability 20%. Remaining value in estate $1,029,600.

Fractional ownership of real estate can be burdensome, but when used effectively can have significant transfer tax benefit as illustrated above.  Consideration of this technique in a fully developed estate and business plan is certainly appropriate for those who have significant real estate holdings.

Do I Need Estate Tax or Asset Protection Planning?

Posted March 2, 2012 by James M. Kane
Categories: Asset Protection, Estate Planning

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 By James M. Kane

A difficulty for clients is how to decide what estate tax / asset protection techniques are realistically suitable or cost-beneficial, compared particularly to the super-wealthy who likely need virtually every technique available.

In other words, a client should gauge whether someone is merely trying to sell them a technique they really don’t need.   This is a legitimate question worthy of serious consideration.

Here are some key points to consider:

(1)    Don’t end up in a situation where the courts have to get involved because you became incapacitated or died without adequate documents in place. Simple examples are dying without a Will, failing to have named guardians for your minor children, ending up with a court-managed guardianship if you later become incapacitated (trusts can help eliminate these threats);

(2)   Keep an eye on your estate tax exposure. The federal tax law exempts a certain portion of your estate from estate tax. This is called the estate exemption amount. (Georgia presently has no death tax).  If your death occurs in 2012 the federal exemption is $5.12 million ($10.24 million combined exemption during 2012 for a married couple). This exemption drops to $1.0 million beginning for deaths in 2013 ($2.0 million combined for a married couple).

The tax law in most cases – combined with proper planning — allows a married couple to delay the day of reckoning for paying the estate tax until the surviving spouse’s death, regardless of the size of the couple’s estates. However, even with this postponement, the above exemptions for each spouse may require a level of estate planning in order to coordinate and make sure both exemptions are (or can be) fully used.

(3)   Asset protection is more subjective than items (1) and (2) above.  Whether you need asset protection depends on your exposure (particularly your occupation) and whether you will sleep better knowing you have in place techniques that better protect you and your family from lawsuits, judgments, creditors, and in some cases bankruptcy.  Thus, in this subjective situation an important cost-benefit factor is how much peace and repose you will experience if you put into place asset protection techniques for insulating you and your family from these types of potential threats and claims.

In reviewing whether items (2) and (3) above may warrant further action, my view is that the portion of assets a client expects to hold for the long-term, exceeding what the client likely will  spend during lifetime for food, shelter, necessities, school, vacations, medical, etc., should at least fall under consideration for potential estate tax and asset protection planning.

By contrast, for younger clients who are spending most of their income currently on raising young children, and so forth, the need for complex estate tax and asset protection planning may not be as important.  In these situations, if one spouse dies with young children the likelihood is much greater that most of the assets will be ultimately spent-down for the care of the surviving spouse and for the children while they continue to grow up and attend school, etc.   The assets ultimately may not be large enough when the surviving spouse dies to trigger estate tax exposure.  In this situation the planning might need to be minimal so as to prevent the courts from having to get involved in dealing with a spouse’s death or incapacity (such as dying with no Will).   Asset protection can also be minimal and directed at making sure a surviving spouse does not remarry and divert the assets to another spouse or children from someone else’s marriage (again, trusts can help eliminate these threats).

Intentionally Defective Budget Proposal: President Obama’s Attack on Grantor Trusts

Posted February 21, 2012 by Erica Opitz
Categories: Estate Planning, Gift Taxes, Tax

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 By Erica Opitz

On February 13, 2012, President Obama proposed the budget for 2013.  The budget proposal has been reported to be dead on arrival.  Notably, however, President Obama’s budget proposal went after intentionally defective grantor trusts, which is not a proposal that we have seen previously.  If this were to pass, the results would wreak havoc on a top estate planning tool. With the sun setting of the current estate tax code provisions at the end of this year, it is possible that President Obama’s grantor trust proposal will be used as a bargaining chip and could potentially reappear in future legislation.

Under the proposal, the legislation would only be effective for transfers on or after the date of enactment.  As a result, transfers to a grantor trust prior to enactment would remain outside of the grantor’s estate.  For this reason, it is important to take advantage of the grantor trust while the benefits remain available.

Current Law:

In an intentionally defective grantor trust, the grantor retains certain rights and powers over the property held by the trust.  For income tax purposes, a grantor trust is not a separate entity from the grantor, and as a result, the grantor pays all income taxes on the trust earnings.  Under the current regime, the assets placed in the grantor trust are held outside of the grantor’s estate.  The transfer of property into the trust is treated as a completed gift for estate and gift tax purposes.  As a result, future appreciation on the assets placed in the trust is not subject to estate or gift tax.  Furthermore, a sale from the grantor to the grantor trust is ignored for income tax purposes.

Proposed Law:

President Obama’s budget proposal would include the assets of the grantor trust in the grantor’s gross estate.  Additionally, any distributions from a grantor trust would be subject to gift tax as would the assets of the trust if the grantor ceased to be the owner of the trust.  President Obama’s proposal would apply income tax to a sale from the grantor to the grantor trust if the sale would be subject to capital gains tax if the sale was made by someone other than the grantor.  The Department of Treasury’s green book states the reasoning behind the proposal.  “Taxpayers should be required to take consistent positions in dealing with the Internal Revenue Service.  The basis of property acquired from a decedent generally is the fair market value of the property on the decedent’s date of death.”

Now is the Time for All Good Estate Planners to Come to the Aid of Their Clients!: Estate Planning Opportunities in 2012

Posted February 7, 2012 by Ashley Alderman
Categories: Estate Planning, Presentations, Tax

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 By Ashley Alderman

On January 25, 2012, Scot Kirkpatrick and I spoke about how clients can utilize the current gift, estate, and generation-skipping transfer tax laws and $5.12 million exclusion amount in 2012 to their advantage, particularly given the increasing likelihood that as of January 1, 2013, we will again be back to a $1 million gift and estate tax exemption with a 55% tax rate and a 5% surcharge on estates in excess of $10 million.  After reviewing the current state of the law, we also discussed the lingering questions surrounding the estate tax law, primarily dealing with the concept of portability of the unused spousal exclusion amount and the potential for “claw back” if an individual makes gifts in 2012 utilizing the current $5.12 million exclusion amount, but then the individual dies in a year when the exclusion amount is less than the amount the individual already gave away.  There is the potential that when the individual dies, his estate will owe estate taxes on those prior gifts.  Despite the uncertainty and this claw back risk, maximizing use of the $5.12 million exclusion amount in 2012 is still a very attractive option for some clients.  One reason is that many practitioners believe that some form of administrative or legislative relief would be provided.  Although there is not unanimity among all commentators, another reason is that even if the claw back applies, the total amount of taxes paid by the client and his estate would be lower if the gifted assets appreciate in value because the assets, along with any appreciation on such assets, are removed from the gross estate.

Following the explanation of the current law, and the uncertainties in the current law, we discussed multiple estate planning opportunities for clients in 2012, in particular those to utilize their $5.12 million exclusion amounts.  Some of the strategies discussed include:

  1. Outright gifts;
  2. Decanting assets in existing trusts into new trusts;
  3. Grantor Retained Annuity Trusts;
  4. Business Restructuring, including the formation of Family Limited Partnerships and “Estate Freezes,” including gifts and sales to intentionally defective grantor trusts;
  5. Captive Insurance Companies;
  6. Forgiveness or refinancing of outstanding promissory notes or loans;
  7. Additional gifts to Irrevocable Life Insurance Trusts to facilitate the purchase of additional life insurance policies or increased death benefit on existing policies;
  8. Qualified Personal Residence Trusts; and
  9. Charitable Lead Annuity Trusts.

As we repeatedly emphasized to those in attendance, this is the year to “use it or lose it!”   Many of these strategies need to be implemented in the beginning of the year in order to be completed by the end of 2012.  If you or a client may benefit from some of these estate planning opportunities, we will be glad to discuss them in more detail with you.

IRS Guidance Anticipated for Tax Effects of Trust Decanting

Posted January 25, 2012 by Rose K. Wilson
Categories: Estate Planning, Gift Taxes, Income Tax, Tax, Tax Returns

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 By Rose Drupiewski

The IRS announced that it would place the issue of trust “decanting” on its priority list of items to focus on in 2011 and 2012 for purposes of providing taxpayer guidance.   Decanting occurs when a trustee, pursuant to authority provided in the trust agreement or under state law, transfers property from one trust to another.  Decanting powers have recently become popular with trust drafters as a way to provide additional flexibility to trustees when managing trust assets on behalf of beneficiaries.

The reason for the popularity of decanting powers is that such powers can provide flexibility to otherwise inflexible irrevocable trust agreements.  For example, if a trust agreement provides for an outright distribution of assets to a trust beneficiary at age 25 and the trustee has determined that the beneficiary lacks enough maturity at that age to handle a large distribution, the trustee could (if permitted under the trust agreement or state law) transfer the assets to another trust for the benefit of such beneficiary that will not terminate at age 25 but at a later date.

Although decanting can be extremely useful from the standpoint of flexibility, such flexibility may come with undesirable tax consequences.  The gift, estate, GST and income tax consequences of decanting are less than clear.  For example, there has been some concern that the presence of a decanting power may transform an otherwise irrevocable trust into a revocable trust for estate tax purposes, thus causing the assets in the trust to be included in the grantor’s gross estate.  This is obviously an undesirable consequence because many irrevocable trusts are created for the purpose of enabling a grantor to make gifts to family members in trust without causing estate tax inclusion.  There is also some concern as to whether, if the trustee is a beneficiary of the trust, the trustee’s decanting power might be deemed a general power of appointment for estate tax purposes, which might cause unwanted estate tax consequences for the trustee.  These are just a few examples of multiple unresolved gift, estate, GST and income tax issues relating to trust decanting powers.  Because of the lack of clarity regarding the tax effects of decanting and the hope for favorable guidance, the IRS’s announcement is welcome news for many tax planners and their clients.

In connection with the IRS priority plan, the IRS has recently requested comments from the general public regarding the tax implications of decanting powers.  Comments should be submitted to the IRS by April 25, 2012.

Resolving to Succeed

Posted January 12, 2012 by Jeff Waddell
Categories: Asset Protection, Estate Planning, Gift Taxes, Tax

 by Jeff Waddell

The end of the year and beginning of the new year is a time when many of us reflect on that which has passed and that which is to come.  Resolutions are made regarding exercise, fiscal responsibility and other personal items.  Personal health is a primary theme in this introspective endeavor, but for the business owner, what about the long-term health of your business?

An often quoted and almost equally often overlooked adage says that “failing to plan is planning to fail.”  While that sentiment is true during our lifetimes, just stop for a moment and consider what happens when a small business owner does not have a business succession plan in place.  More often than not, the next generation was either not involved in the business or not ready to “take command.”  If proper planning has not occurred, the estate tax burden on the estate of the deceased business owner could cripple the business moving forward.  Do not let this happen to your business.

Take the time to review the health of your business and determine your goals for the business after you retire, in one form or another.  Once you have a general plan, visit with your accountant and estate/business planning attorney to refine your goals through a variety of available vehicles including trusts, corporate restructuring, stock sales, and many others, to achieve a clear cohesive plan of action and begin to implement it.  Hopefully you will “tone those abs” in 2012, but also take the time to resolve to succeed for your business this year.

Karen Kurtz in the November Journal of Taxation

Posted December 21, 2011 by TrustandEstateBlawg
Categories: Uncategorized

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.

Jingle Bells or Ringing Out the Year Gone By – Time Is Short to Complete Annual Planning

Posted November 14, 2011 by Jeff Waddell
Categories: Asset Protection, Charitable Giving, Estate Administration, Estate Planning, Gift Taxes, Income Tax, Presentations, Tax, Tax Returns

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 by Jeff Waddell

Each year at this time our section of the office begins to get really busy.  Clients we have reached out to all year but who have not responded suddenly begin appearing.  Yes, its year end annual gifting time.  Pay heed to the sounds of the approaching holiday season, for in all the merriment those sounds signal the last days to take advantage of annual exclusion gifting or the last opportunity to capture a loss to offset a gain in the same tax year.

Take the opportunity to be proactive.  Review what you have done and what can, or should, be done before year-end.  Be aware that the annual gifting exclusion for each individual is currently $13,000.  Consider consulting your accountant (now is a relatively quiet period for them) to determine whether you are likely to experience an unpleasant April surprise on your tax bill and if so what might help offset that unwanted occurrence.  Then give your estate planning attorney a call to discuss what needs to occur before year end.

Just as with holiday giving, estate planning gifts come in all shapes and sizes.  Annual gifting is something, as the name implies, to consider every year.  This year and next, unless and until the law changes, larger opportunities exist than ever before in the gifting arena (with lifetime $5 million dollar gifting exemptions) so, if your current financial situation allows, consider making it a truly memorable holiday season for yourself and your loved ones.

Tweeting from the Grave: The Benefits of Virtual Asset Instruction Letters

Posted November 10, 2011 by Erica Opitz
Categories: Asset Protection, Estate Planning

Tags: , ,

 By Erica Opitz

In a world that is increasingly virtual, assets that exist solely on a person’s computer or the internet can be just as important as the tangible assets in a decedent’s estate.  In a 2007 research study,[1] it was determined that internet use in the age group over 71 was a mere 29%, while internet use for Baby Boomers was almost 80%, and for people 30 and younger, internet use exceeded 90%.

Your virtual assets are the “electronic information stored on a computer or through computer-related technology.”[2]  Think about bank account statements and other electronic account statements, your email accounts, social media accounts, or even photographs and home videos that you store on your computer or an internet site.  What happens to this virtual identity upon your death?  At death, each of these accounts and the information stored within them are an asset that must be dealt with by your personal representative and/or trustee.  Arguably, in our virtual world, in order to meet the prudent person standard, personal representatives and trustees must deal with these virtual assets or hire an agent whom is capable of dealing with them.[3]

So how do decedents make it easier for their fiduciaries to handle these virtual assets in the way the decedent would prefer?  A Virtual Asset Instruction Letter allows the decedent to identify all virtual assets by listing all online accounts and other virtual assets and provides web addresses, user names, and passwords as well as instructions on what to do with and who to give access to these assets upon the decedent’s death.  For example, these instructions could specify that the testator would like all of the photographs on his/her computer to be copied and given to multiple beneficiaries.  The Virtual Asset Instruction Letter could also instruct the fiduciary to close an account after a certain amount of time or to delete personal and credit card information that may be stored on different websites.  These types of instructions can help prevent the theft of the decedent’s identity.  This instruction letter could also be used upon the incompetency of an individual by referencing the letter in a power of attorney document.

In order to grant specific authority to a fiduciary to manage the testator’s virtual assets, a provision in the testator’s will, such as the following, could be used.

I may leave with this Will a letter signed by me and prepared in accordance with ________ law designating those certain Virtual Assets (as hereinafter defined) I may own at the time of my death be given to the persons named therein, and I direct my Executor to distribute such property at the time of my death in accordance with the terms and provisions of that letter.  For purposes of this Will, a “Virtual Asset” shall mean any intangible personal property which is stored and/or accessed by any electronic means whatsoever, whether on a personal computer, computer network, portable electronic storage device or media, or through and/or over the internet.

Upon my death, my Executor may take such actions as are reasonably necessary and prudent to locate, administer, transfer, and distribute any Virtual Asset which I may own or otherwise possess rights to at the time of my death.  Without limiting the generality of the foregoing, my Executor is authorized: (a) to hire and reasonably compensate computer or other technical experts to assist my Executor with respect to any Virtual Asset; (b) to change passwords or other means to access and/or control any Virtual Asset; (c) to take such actions as my Executor shall deem necessary to protect the security and continued accessibility of any Virtual Asset; and (d) to communicate with any software licensor, internet service provider, or other third party in connection with the location, administration, transfer, or distribution of any Virtual Asset.

In a day and age where our lives are leaving less and less of a paper trail and are increasingly lived online, it is important to protect our virtual assets upon death.  Not only will a Virtual Asset Instruction Letter ensure that the fiduciary has the information to access necessary accounts making the fiduciary’s job easier, but it will also ensure that the decedent’s intentions are carried out with respect to his/her virtual assets while protecting the virtual identity of the decedent.


[1] Estabrook, Pew Internet & Am. Life Project and Graduate Sch. of Libr. & Info. Science, U. of Ill. At Urbana-Chapman, “Information Searches That Solve Problems: How People Use the Internet, Libraries and Government Agencies When They Need Help” (2007).

[2] Walker, Michael and Victoria Blackly, “Virtual Assets”, 36 Estates, Gifts and Trusts Journal 253 (2011).

[3] See id.