North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was please to read about the U.S. Tax Court's decision in Mirowski v. Commissioner, T.C. Memo 2008-74.  March 26, 2008.

Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses.  Then, in 2001, she formed a single member LLC, transferring substantial assets to it.  Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts.  A mere four days later, she died unexpectedly.

The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate.  The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.

The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable.  The Court stated that Mrs. Mirowski had "legitimate and significant  non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.

Some key points for Family LLCs to hold up for gift and estate tax purposes:

• Strictly follow the terms of the Operating Agreement
• State the reasons for the LLC in the Operating Agreement
• Have the Agreement reviewed by separate counsel for all initial members
• Leave enough assets outside the LLC to live on and pay taxes
• Don't mingle LLC assets with personal assets
• File the proper tax returns each year
• File the necessary documents with the Secretary of State each year
• Don't put your personal residence in a Family LLC
• Make sure the senior generation does not have the power to allocate profits and losses
• Require annual distributions
• Have the junior family members (or their trusts) make initial contributions to the LLC to provide for the pooling of assets
• Don't wait until the senior family member is near death

 The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages.  Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions. 

• Print
• Comments
• Trackbacks

Yesterday a public hearing on possible gift and estate tax reform was scheduled before the Senate Finance Committee.  Click "Continue Reading" for the full text of the report by the staff of the Joint Committee on Taxation.  I could not get the proper formatting to reproduce, so it's a bit difficult to read.

Of primary concern are potential limitations on Dynasty Trusts, discounts for Gifts of Interests in Family Limited Partnerships (and LLCs), and use of Crummy Withdrawal Powers in trusts (which allow use of the $12,000 annual gift tax exclusion for transfers to trusts).

Items for Immediate Consideration: 

1. Dynasty Trusts (page 33) - take action now to create or fully fund Dynasty Trusts.
2. Family Limited Partnerships (page 37) - those considering creating a Family Limited Partnership or  Limited Liability Company should do so now.  Those with existing entities should not delay making contemplated gifts of ownership interests. 
3. Crummy Powers (page 46) - fund Crummy trusts early in 2008 - review the three options.

By the way, the report references the "$11,000" annual gift tax exclusion, which is an error.  The exclusion was increased to $12,000 last year.

• Print
• Comments
• Trackbacks

As reported in the TaxProf Blog, Citizens for Tax Justice has released a state-by-state ranking of the number of estates owing federal estate tax in 2006.  North Carolina ranked 13th, with 523 estates paying estate tax that year.  Not exactly a large number!  The estate tax exemption in 2006 was $2 million, as it is this year, so only estates valued over that amount owed tax.  Assets passing to a surviving spouse or charity are tax-free regardless of the amount.

With proper planning, married couples can pass on up to $4 million to their heirs without tax.

• Print
• Comments (1)
• Trackbacks

From this article in the New York Times yesterday: 

Beginning next year, the federal estate tax exemption will increase to $3.5 million. This means that the tax would apply to only about 0.3 percent of people who die each year.  Not exactly the average American.

However, as part of the 2009 budget resolution, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, has proposed to keep the tax at those levels, with annual adjustments for inflation. The proposal is expected to pass.

Under current law, the estate tax will be eliminated in 2010 for that year only.  In 2011 the exemption would drop down to $1 million. Republican senators,, however, feel that Baucus’s proposal is not sufficient. After it passes, Senator Jon Kyl, Republican of Arizona, is expected to propose further cutting the estate taxes.

The government would have to borrow to make up for the $200 billion tax loss, worsening the deficit and adding about $100 billion in interest to the nation’s tab.

The Kyl proposal needs a simple majority to pass. So if every Republican votes yes, just one Democrat would have to join them for the proposal to pass.

I personally feel that a $3.5 million exemption is quite generous, particularly given that married couples who do proper estate planning can pass double that amount to their heirs.  If persons with estates over the exemption amount don't want to pay taxes, a good estate planning attorney can certainly help!

• Print
• Comments (1)
• Trackbacks

This week I'm in Orlando at the University of Miami School of Law's Heckerling Estate Planning Institute.  Yesterday there was a discussion of what may be coming down the pike as to the federal estate tax (death tax):

Date of New Legislation:  It's unlikely there will be any action until after the November 2008 election.  There are 35 seats open in the Senate, 23 of which are currently occupied by Republicans.  The democrats will probably end up with the majority.  In any event, we will probably see no movement until 2009.

Chance of Outright Repeal: No way, even if the Republicans are in charge.

Exemption Amount: The current amount exempt from federal estate taxes is $2 million, and it is scheduled to rise to $3.5 million in 2009. With a Democrat in the White house and a Democrat controlled Senate, the exemption would probably stay at $3.5 million for a number of years.  If the Republicans are in control, the exemption will most likely be increased to $5 million.  Any increases in the exemption as part of the 2009 legislation over $3.5 million per person would not be available in that year, but would instead be phased in over several years. The phase-in could be similar to what was proposed in HR 5970 in July 2006.

Rate:  We will probably see the top rate decrease from the current 45% to 35%, although very large estates may face a higher rate.

"Portability" of Exemption Between Spouses:  Very likely that the new legislation would provide that the surviving spouse could utilize both exemptions, in a manner similar to that proposed in HR 5970 and HR 5638. 

• Print
• Comments
• Trackbacks

This article discusses in brief the history of the federal estate tax and its effect on the U.S. budget. Also examined are the ways in which the economic behavior of the population affected by the estate tax has changed over time due to market, technological, and political stimuli.

• Print
• Comments
• Trackbacks

The IRS recently announced that the total number of estate tax returns filed fell by 58 percent to about 45,000 in 2005 from about 108,000 in 2001. The total amount of assets represented by these returns also fell, although by a lesser percentage. The total gross estate (assets) on these returns fell by 14 percent to $185 billion in 2005 from $216 billion in 2001. Net estate taxes reported on these returns declined by even less, only 8 percent.  Click here for the IRS Estate Tax Facts.

With the estate tax exemption now at $2 million, I am doing fewer estate tax returns as part of my estate administration practice.  Since, strangely enough, I enjoy preparing tax returns, that's disappointing.  Death may be certain, and taxes may be certain, but death taxes are becoming a relative rarity.

• Print
• Comments
• Trackbacks

Having just ridden a motorcycle through the endless farms of Iowa on my way to and from Sturgis, South Dakota, this news item caught my attention.  Last month a bill was introduced to defer federal estate taxes on family farms as long as the land is used for farming or conservation purposes.  See this article on the Save the Family Farm and Ranch Act of 2007.

While proper estate planning, including the use of life insurance trusts and family limited liability companies, could avoid much of the impact of estate taxes on family farms, I think this bill is a good move to help protect our nation's farmers and their contributions to our food supply.

• Print
• Comments
• Trackbacks

A recent U.S. Tax Court case held executors liable for the penalty for the late filing estate tax return despite their attempt to blame their lawyer for the untimely return.  Decedent, a U.S. citizen domiciled in Germany, died on September 10, 1999. She had two wills - U.S. and  German. Two individuals, Roisen and Helman, were nominated as executors. They hired an attorney, who sought an extension of time for filing the estate tax return. The return was eventually filed on September 19, 2001, although the last date is could be timely filed was December 10, 2000. The IRS imposed a $233,359 penalty for late filing the return. The surviving executor argued the penalty should not be imposed because the return was late filed as a result of reasonable cause, not willful neglect. He argued that his attorney failed to advise him the return was due. The court found that the executor’s expectation that an attorney will file a return does not relieve the executor from his statutory duty to timely file the return. An executor might be excused if he reasonably relied on incorrect advice, such as no return was required, but here there was no evidence the executors even knew the filing deadline had passed, much less any evidence that they received errant advice.

Estate of Zlotowski v. Commissioner, T.C. Memo 2007-203 (July 24, 2007)

Lesson learned:  You can't always blame the lawyer!  Executors need to keep themselves informed about estate matters, including tax and other deadlines.

• Print
• Comments
• Trackbacks

While non-citizens who reside in the U.S. are subject to U.S. income tax on their worldwide income, and U.S. estate tax for worldwide assets, they do not receive the same treatment as citizens when it comes to U.S. gift and estate taxes.  Thus, when one or both spouses in a married couple are not U.S. citizens, special planning may be required to avoid adverse tax consequences for transfers during lifetime or at death.

• Print
• Comments
• Trackbacks

North Carolina is not known for its attractive estate planning and asset protection laws, but NC residents can avail themselves of certain out-of-state planning strategies that can provide significant estate tax savings and creditor protection.  One state that has some of the most favorable laws is Nevada.

As a write this, I'm sitting in a hotel room in Las Vegas, having just finished up a meeting with nationally known estate planning and asset protection attorney Steve Oshins, whose office is located here.  Mr. Oshins, who is published frequently in Trust & Estates magazine and Estate Planning magazine, has developed several innovative trusts and trust-related strategies, such as the Megatrust, the Inheritors Trust and the Opportunity Shifting Trust. 

I have joined Mr. Oshins' Advanced Planning Legal Network to be able to bring these same types of techniques to my clients.

Click  "Continue Reading" for a brief description of the advantages of using Nevada laws for estate planning.

• Print
• Comments
• Trackbacks

Yesterday the U.S. Senate approved an amendment to the Budget Resolution that would extend the 2009 estate tax rate (45%) and exemption ($3.5 million) through 2012.  Under current law the estate tax would be "repealed" in 2010, but would return in 2011 with an exemption of only $1 million.

Click "Continue Reading" to view a report from Marshall Jones of West Palm Beach.

• Print
• Comments
• Trackbacks

An article in the February 24-25 issue of The Wall Street Journal describes how 529 College Savings plans can be used to reduce estate taxes.  Earnings on the funds invested in such plans are tax-free if used for qualified college educational expenses.  North Carolina residents also get a small tax deduction for contributions to North Carolina sponsored plans (Click "Continue Reading" for more information).

The plans allow the owner to maintain control over how the funds are used, and even change the beneficiary to another relative or the owner himself.  If the funds are not used for educational expenses, taxes are due on the gains, along with a 10% penalty.

Gift tax rules allow using up to five years of the $12,000 annual gift tax exclusion at once, so that one person can put $60,000 into a plan in one year.  For wealthy grandparents with multiple granchildren, this can add up to substantial estate tax savings.  The current estate tax exemption is $2 million, so persons with estates over this amount may want to consider this technique.  Before establishing the accounts, however, be sure to check with a qualified tax and investment advisor.  There are fees associated with 529 Plans, and investment performance in many types of plans have been lackluster of the last several years.

Check out www.savingforcollege.com for a plethora of information on 529 Plans.

• Print
• Comments
• Trackbacks

Jeffrey Pennell, a professor at Emory Law School, was one of the featured speakers today at the Mid-South Forum ( meeting of estate planning attorneys) in Atlanta.  In January I reported on his comments on the future of the estate tax at the Heckerling Estate Planning Institute in Orlando.

Professor Pennell believes that Congress will not act until late in 2009, and then will extend the $3.5 million estate tax exemption and reduce the rate to about 35%.  He pointed out that for the country's extremely wealthy families - the ones that can influence Congress - the rate is much more important than a difference of a million dollars or two in the exemption amount.

• Print
• Comments
• Trackbacks

An article by Robert Frank in yesterday's Wall Street Journal describes the recent  dramatic drop in taxable estate tax returns.  The rising estate tax exemption (currently $2 million), decreases in the tax rate, effective tax planning, increasing charitable giving by the super-wealthy and the advent of young dot.com millionaires all seem to be contributing to the reduction in returns and revenues. 

In 2005 only 18,431 taxable estate tax returns were filed, one-third less than the year before, despite the fact that the number of millionaire households in the U.S. has increased more than twofold between 1995 and 2004.

• Print
• Comments
• Trackbacks

This  week I'm attending the 41st Annual Heckerling Institute on Estate Planning in Orlando.  The Institute, sponsored by the University of Miami School of Law, is the nation's leading conference on estate planning.  The first speaker (and my former professor), Jeff Pennell of Emory Law School, stated that he thinks that estate tax repeal is now a dead issue.  We'll see what some of the other commentators have to say as the week goes on.

• Print
• Comments
• Trackbacks

The following  news is from Stephanie Heilborn of the Milbank, Tweed law firm in New York City:

Russ Sullivan, Democratic Staff Director of the Senate Finance Committee, spoke at the joint meeting of the Estate & Gift Tax Committee and Trusts, Estates & Surrogate's Courts Committee of the NYC Bar Association last night. He provided some good insight into the current thinking on estate & gift tax reform.

Congress expects to address the estate tax in the second half of 2007. The bottom line is that for any bill to pass both houses, it cannot reduce the revenues raised by estate/gift tax by more than 50% (apparently the reason last year's proposal didn't pass is that it cost just a little too much (it reduced revenues by 60%) for some key Democratic senators to support it). Any new estate tax law is highly likely to contain the following provisions:

Finally, they do expect to issue technical corrections to the Pension Protection Act of 2006 sometime next year.

This is good news for most, but any new limitations on discounts available for family limited partnerships and limited liability companies could restrict planning for some wealthier taxpayers.

• Print
• Comments
• Trackbacks

From EstatePlanningLawFirms.com on November 6, 2006:

Washington D.C. – Congressman Ted Poe (TX-02) announced that the House of Representatives passed H.R. 5638, the Permanent Estate Tax Relief Act of 2006. This bill will make certain provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) permanent. Without the passage of H.R. 5638, the estate tax repeal and all other provisions of EGTRRA would sunset on December 31, 2010. This would cause taxes placed on estates to revert back to their previous rates which were significantly higher. The current lower tax rate allows citizens who die to leave more to their beneficiaries, and less to the government. This is important to family owned businesses of all sizes, many were forced to sell their business because they couldn’t pay the taxes when the owner died.

“The old saying goes that the only two certainties in life are death and taxes. Under an estate or death tax, small farmers and family minded individuals who saved their whole lives to leave something to their children have to pay taxes, die, and then pay taxes again. It is unconscionable that the government punishes people by taxing them in life and in death. I urge the Senate to pass this bill quickly so that President Bush can sign it in to law,” Poe said.

Important Provisions of H.R. 5638:

1-Reunifies the estate, gift and generation-skipping transfer taxes - giving individuals greater flexibility to make estate planning decisions during life.

2-Increases the exemption amount to $5 million per person effective January 1, 2010.

3-Reduces the rate of tax on estates up to $25 million to the capital gains tax rate (15 percent).

4-Reduces the rate of tax on estates of $25 million or more to twice the capital gains rate (currently 30 percent).

5-Simplifies estate tax planning by allowing married couples to take full advantage of the $5 million exemption by carrying over any unused exemption to the surviving spouse.

Due to #5, advance estate tax planning would not be as important, and would obviate the need for credit-shelter (bypass) trusts in many cases.  Effectively, only couples with a net worth in excess of of $10 million would need to worry about estate taxes. 

Since the Senate appears to be Democrat-controlled now, the chances of this bill passing is somewhat less now that than before the election.  Prior estate tax relief has passed in the House, only to fail in the Senate. 

• Print
• Comments
• Trackbacks

When the Estate Tax is repealed (albiet for one year) in 2010, some heirs will face capital gains tax instead, with complicated and burdensome record keeping necessary.  Check out this article at Bankrate.com, from which the chart below was taken...

Tax cost of selling inherited assets:

Year of death Amount of property exempt from the estate tax Basis of inherited property used to calculate capital gains tax 2002 and 2003 $1 million Full step-up in basis 2004 and 2005 $1.5 million Full step-up in basis 2006, 2007, 2008 $2 million Full step-up in basis 2009 $3.5 million Full step-up in basis 2010 Tax repealed Carry-over basis, with additional step-up basis of up to $1.3 million for nonspousal heirs; property left to husband or wife allowed additional $3 million step-up (total basis of $4.3 million). 2011 $1 million Full step-up in basis

• Print
• Comments
• Trackbacks

From EstatePlanningLawFirms.com:

WASHINGTON - United States Senator Mary Landrieu, D-La., announced that she is introducing a bill to bring relief and reform to the federal estate tax system. Under Sen. Landrieu's proposal, 99.99 percent of Louisiana residents would no longer be subject to any federal estate tax whatsoever and there would be a rate cut for those who would still have a tax liability.

"This is a plan that has a chance to pass Congress," said Sen. Landrieu, who added that she hopes the plan will serve as the blueprint for future Congressional debate and compromise on the issue.

"Unlike the current law, my plan is clear, simple and fair," she said. "It gives most opponents of the estate tax what they want: a significant tax cut. It gives most reformers what they want: a stable and predictable system that enables long-term estate planning. It gives most small business people and farmers what they want: a chance to keep what they have built up in their families over a lifetime of hard work. And it does all of this in a way that is fiscally responsible."

"How can people do wise and informed estate planning under the current system, which is unstable, uncertain and unfair?" Sen. Landrieu asked. "We need certainty. We need reform. And we need relief. I think my proposal lays a clear, balanced path to each."

Under Sen. Landrieu's Estate Tax Relief and Reform Act of 2006, the federal estate tax exemption level would be set at $5 million per person and $10 million per couple. The current exemption is $2 million per person but falls to $1 million in 2011.

"By dramatically raising the exemption, we will effectively get most people of Louisiana out of the tax altogether and forever," Sen. Landrieu said. "This is especially beneficial for many small business owners and family farmers."

The current estate tax only applies to about two percent of estates nationwide, so the "relief" only helps a very small percentage of the population.  With the Democrats likely to regain control of Congress, I don't think Senator Landrieu can count on her proposal passing.  It's ironic that she feels the citizens of her state should be freed from the burden of the estate tax after she requested $250 billion in Hurricane Katrina relief last year.

• Print
• Comments
• Trackbacks