ESTATE TAX REPEAL? LET’S KEEP PLANNING!

michael w. hoffmanDonald Trump’s surprise election gives us a tremendous amount of hope that the federal estate tax might finally be repealed. This concept runs in the face of candidate Clinton’s proposal to reduce the estate and gift tax exemption amounts and increase the tax rates from 40% to 65%.

While we do not want to celebrate too early, a critical message is that estate planning should continue with fervor! The Donald Trump phenomenon, which results in a Republican Presidency and a Republican Congress, gives us a great deal of confidence that tax reform will be among the items addressed early in Trump’s administration. Tax reform could and should include the repeal of the federal estate and gift taxes, and the elimination of the generation skipping transfer tax that has been hanging over our heads since 1976.

However, this will take some time, and the reality is that the U.S. still has huge deficits that must be serviced with tax revenue. Granted, the percentage of the federal revenue coming from death taxes is minimal, but there is also the argument that the tax on the transfer of wealth is “fair” in a system that allowed the accumulation of such wealth. This theory is combined with the tempering affect that the death tax has on the growth of family dynasty wealth (taking from the rich to provide for the poor).

It is likely that the current federal estate and gift tax laws will be replaced by a system more popular in other parts of the world, such as the capital gains calculation that takes place in Canada, Great Britain and other western civilizations. In those countries, at death, the difference between the tax basis of property and its fair market value will be subject to a tax similar to the capital gains tax that would have occurred had the decedent sold the appreciated assets. This accomplishes the practical role of allowing tax basis to be stepped up to fair market value at the death of an owner, and replaces the estate and gift tax revenue with a fair method of taxing growth as it is done in the income tax arena. Of course, there will have to be exemptions and exceptions made for family farms and businesses so these types of assets would not have to be leveraged or sold in order to pay Uncle Sam. All of these details, and many more, will have to be worked out by Congress and the U.S. Treasury Department (IRS).

In the meantime, it appears that some of the more popular techniques that we have been implementing over the last 20 or so years will become even more popular. The use of trusts has long been an important aspect of estate planning. Trusts can own property outside of a taxable estate, trusts can allow an orderly transition of control through the naming and choice of trustees, trusts can protect property from creditors and divorce, trusts avoid probate, and trusts provide significant income tax savings flexibility for current and future beneficiaries.

An important trust that we use in estate planning is the Family Trust, where parents set up trusts for their kids while they are alive, as opposed to waiting until both parents are deceased, and begin funding those trusts with assets by way of gift and otherwise, to remove property from the parents’ taxable estates.

One type of Family Trust that we often use is to make the trust a grantor trust for federal income tax purposes. That means for income tax purposes the IRS ignores the existence of the trust and all the taxable income and deductions associated with the Family Trust continue to be reported on the grantor’s individual income tax return. In our practice, we refer to these Family Trusts as “Defective Grantor Trusts”, or DGTs.

One of the features that allows a trust to be a grantor trust during the grantor’s lifetime is the ability to substitute property in the trust with other property from the grantor. This has been a popular benefit of using DGTs because the trust can hold appreciating assets, removing the appreciation from the grantor’s estate, but those appreciated assets can be swapped for cash or other assets, allowing the low-basis, highly-appreciated assets to come back into the grantor’s estate before death, in order to allow a step-up in tax basis at death for income tax purposes. This has always been kind of “have your cake and eat it too”, removing appreciating assets out of your estate, but retaining the ability to get those assets back in order to achieve an increase in tax basis at death. So, one of the things that we have tried to accomplish with our estate planning clients is to assist them in monitoring the assets in their Family Trusts, to determine if and when it would be desirable to substitute those highly appreciated assets for other assets out of our clients’ taxable estates. Of course, timing is everything, and there is always the risk that the substitution might not occur timely, but at least our clients have retained that flexibility.

Now, with the chance of repeal of our federal estate tax, the strategy with these same grantor trusts might change. In other words, since only appreciated assets would be subject to a capital gains tax at death, it may become more important than ever to remove these appreciated assets from the estate, put them in a grantor trust, and leave liquid, high basis assets in the parents’ taxable estates. Then, if the next President and/or Congress were to reinstate a federal estate tax, we can easily shift strategy and look to exercise the substitution power that exists with the DGTs.

Remember that we still have the evil overhang of the proposed 2704 regulations (see prior articles) which will eliminate much of the discounting that we have enjoyed for valuation purposes when gifting or selling hard to value assets to Family Trusts. These proposed rules will become effective, according to the IRS, 30 days after they become final. While we don’t know when these proposed regs will become final, it does take typically 12 to 18 months for these regulation projects to become completed. The regs were proposed in early August, so we are still “under the gun” for those clients who have situations that warrant this type of estate planning.

So, let’s be happy with the potential repeal of the estate tax but be realistic in what that means. If anything, as new rules evolve, we should be focusing on flexible estate planning now, more than ever, as future tax reform will create new tax regimes. For instance, if the new tax rules no longer encompass the concept of a $5,500,000 exemption per person, will all that exemption that was not used before the estate tax is repealed be lost forever? So, while President-Elect Trump goes about changing our tax system to make us more competitive in the world, and he is ”draining the swamp”, let us pay attention to details and reap the benefits of continuous planning.

For more information about this or any other estate planning topic, please contact us directly at 404-255-7400 or email us at info@hoffmanestatelaw.com.

Estate Planning Is in a Pressure Cooker!

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Not only has the IRS threatened to change the rules of valuing gifts, which will have a significant impact on many estate planning techniques used over the last several decades, the presidential elections will have a huge impact over whether the estate and gift tax law survives, or becomes extremely more expensive and complicated.

After an agonizing wait, the IRS issued Proposed Regulations on August 4th that will eliminate many of the valuation discounts applicable for family-owned businesses and wealth in general. These new rules will become effective thirty days after publication of final regulations, which are expected in the next 12 months.

That means gifts prior to the effective date of the regulations may continue taking into account all applicable valuation discounts and used over the last several decades, and those family business owners who postpone these estate planning techniques of transferring wealth to trusts for future generations will be hurt economically under the new rules. While we do not know for sure what the final regulations will say, the question is obvious, is any further postponement worth the risk?

Additionally, there is a substantial difference between the two presidential candidates’ tax policy proposals, particularly relating to the estate and gift tax. Donald Trump proposes to eliminate the estate and gift tax. Mrs. Clinton, however, proposes to reduce the estate tax exemption (which will be $5,490,000 in 2017) to $3,500,000 (per person) with no adjustment for inflation. She proposes to reduce the lifetime gift tax exemption from $5,490,000 (2017) to $1,000,000, with no adjustment for inflation.

This situation is reminiscent of the concern in 2012 when we feared the exemptions may go from $3,500,000 to $1,000,000. Many clients scurried to take advantage of estate and gift tax advantages before year-end. Those clients, by the way, are generally laughing all the way to the bank as not only have they moved significant wealth out of the gift tax system, but the statute of limitations on the IRS’ ability to review the substance of those transactions has just about expired.

Mrs. Clinton is not done there! She proposes to raise the current estate tax rate from a flat 40% to 45% on estates under $10,000,000, 50% for estates from $10,000,000 to $50,000,000, 55% for estates from $50,000,000 to $500,000,000, and 65% for estates for over $500,000,000. While this seems shocking, the maximum estate tax margin rates when I began practicing in 1976 was technically 77%!

Obviously, the double attack from the IRS and the potential Clinton Administration will raise havoc in the estate planning circles. Be ready to react relatively quickly as these proposals threaten to become reality.

For more information regarding this or any other estate planning concern, please contact us at 404-255-7400 or email us at info@hoffmanestatelaw.com.

Update On The IRS Regulations Project

michael w. hoffmanLast July, I wrote in my column that the IRS made it known that it would issue proposed regulations as early as September (2015) which would severely restrict valuation discounts for transfers among related entities (such as transfers of limited partnership or LLC interests to other family members or trusts).  Not surprisingly, here we are in the spring of 2016 and there are no regulations.

Early this month, an IRS representative spoke at the ABA Tax Section meeting and spoke about upcoming IRS guidance.  She predicted that in the next couple of months the IRS would issue 5 or 6 new regulations, the first of these being the proposed regulations under Section 2704, which would place further restrictions on valuation discounts.  While we don’t know what the scope of these new restrictions will be, we are certain that they will have a significant impact on valuing property transferred between related family entities.  As I expressed last year, our concern is exacerbated by the fact that the IRS will likely make these rules effective retroactively to the date of the proposed regulations.

The judicious use of valuation discounts has long been a responsible tenant in estate planning.  Whether it’s getting the “biggest bang for the buck” out of annual gift tax exclusions, use of your one-time lifetime applicable exclusion amount (currently $5,450,000 in 2016), or reducing actual estate or gift taxes, applying appropriate discounts has always been pertinent to accurately determine the fair market value of the property being transferred.

For instance, if Father owned a piece of property worth $100 and gifted 50% of that property to Daughter, the valuation of the undivided one-half interest might only be $40, as opposed to the mathematical value of $50.  In a similar vein, if gifts of limited partnership interest or non-voting LLC membership interests in family enterprises are gifted, appropriate valuation discounts for things like lack of control and lack of marketability are applicable.

If the new regulations change the rules and re-define how property is valued for gift and estate tax purposes, the impact will be huge.

As one of my colleagues recently wrote, “The first (regulation project issued this spring) will be new proposed regulations under Section 2704, with time estimates of ‘very, very shortly’ and ‘this spring, before summer’.”  If you have put off any estate planning concerning freezing or gifting, time is of the essence.  If you are planning to include the many benefits of family limited partnerships and family limited liability companies, or merely gifts of fractional interests, as illustrated in the example above, you may want to get with your advisor immediately.

For further information regarding this or any other estate planning concern, please visit Hoffman & Associates at www.hoffmanestatelaw.com, call us at 404-255-7400, or send us an email.

The IRS is at it Again

michael w. hoffmanFamily Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs) have long been used for a variety of purposes, including centralized asset management, creditor protection, efficient legacy planning, and implementing legitimate discounting and freezing techniques for estate planning purposes. Our estate and gift tax system relies on accurately determining the fair market value of the property being transferred. Fair market value is to be determined objectively considering hypothetical buyers and sellers. Appraisers must take into account valuation discounts for lack of control and lack of marketability. When property is transferred to descendants or trusts, the value of the particular property being transferred is what is reported for gift tax purposes, and then the property with all future appreciation is excluded from the grantor’s estate.

The IRS began a campaign of attacking FLPs back in 1997. Court decisions have generally rebuffed various tactics and positions taken by the IRS in the family limited partnership area.

The IRS publishes its priority guidance plan each year to emphasize areas of the tax law that the IRS may issue additional regulations. Additional regulations affecting valuations in an intra-family transfer context has been on the IRS’ priority guidance plan for the last 11 years. Now, it has been elevated to a proposal set forth in President Obama’s Administration’s 2013 Green Book. The IRS recently announced that it could issue proposed regulations as early as September, which would severely restrict valuation discounts for interests in FLPs and other family entities.

Articles are now appearing which are encouraging estate planners and clients to get ahead of these likely new rules. It is likely that the IRS position will be that any new rules will be effective upon the publication of the proposed regulations, even though they will not become “final” regulations until a much later date.

Earlier this summer, we sent messages to clients who are in the midst of their estate planning that they may want to expedite the process, before the IRS can issue proposed regulations which greatly curtail the legitimate discounting and freezing techniques that we’ve implemented with countless clients. One would think that only Congress can change the law with respect to re-defining the value of property for gift and estate tax purposes, but the Obama Administration has an historical edict of affecting change by more government regulation. The IRS, no doubt, is feeling very confident in their power to limit valuation discounts by way of their regulatory authority.

If you have put off further estate planning, time may be of the essence. If your planning should include the many benefits of FLPs and FLLCs, or if you have an FLP or FLLC and gifting may be appropriate, you may want to get with your advisor sooner, rather than later. If we can help, give us a call.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Term Insurance or Permanent Insurance?

Hoffman19Many of our clients wrestle with the decision to purchase term insurance or permanent insurance.  The premiums for term insurance are cheap, particularly when you’re young, while permanent insurance generally provides a level premium with more certainty that a death benefit will be paid.

Term insurance seldom pays a death benefit.  The reasons for this are simple.  Most people live to, or close to their life expectancy.  By the time they have reached their life expectancy, the premiums on term insurance have increased to the point where the insurance is dropped, or the individual has reached an age or health condition that is deemed uninsurable by the insurance company.

For this reason, term life insurance is best for temporary needs such as support for a surviving family (particularly when you are young), funding a buy/sell arrangement for a closely held business, providing cash (key man insurance) for transition of business, and for the repayment of debts.

I often tell clients to load up on term insurance when they are young, partly because it’s so cheap, and partly because their financial “security” needs are so great when their families are young.  Of course, the premiums for term insurance are lower because it seldom pays a death benefit.  The only usual financial “winners” for term insurance are the insurance agent and the insurance company.

As we get older, financial obligations (except retirement) tend to decrease.  Many of us begin to look at permanent insurance as a permanent feature or category of assets that we are accumulating during our lifetime.  Most of us want to have a certain portion of our insurance that is ongoing.  The insurance can provide liquidity to our heirs, cash to pay estate taxes, a fund to provide for the maintenance of a second home, or a mechanism to equalize the estate where certain hard assets (such as farm, business or vacation home) is necessarily directed to one particular heir, while the other child receives cash.

Permanent insurance generally falls into three categories: whole life, universal life (including universal blends and indexed products) and variable life.  Whole life is the most expensive, while universal life is generally the most inexpensive permanent insurance policy.  Variable life has more stock market investment features inside an insurance policy wrapper.

Universal life is popular among our clients as it provides guaranteed lifetime coverage at the lowest level of permanent insurance premiums, and generally level premiums can be pre-paid or lowered by lump-sum or higher premiums in early years.  Generally, with universal life policies, guaranteed cash accumulation for retirement income or other purposes is not a significant objective.  The goal is to lock in a death benefit while keeping premiums as low as possible.

By far, our estate planning clients buy mostly universal life products.  While there are many varieties, studies show that the internal rate of return on universal life products is generally positive, where as the internal rate return on any term policy, if clients live to or close to their life expectancy, is significantly negative.  In other words, with term insurance, we have thrown our money away unless we die prematurely.

Most term insurance lapses before death.  This is fine if the reason for the insurance no longer exists.  However, many policy owners want to extend the coverage of their insurance while their health is still good, because they know that the risk of their health changing increases with age and health changes can happen suddenly.

Be aware that term policies can carry a conversion right.  This is important, even though it might marginally increase the premium cost, because a client might otherwise become higher risk or uninsurable prior to the expiration of the term policy and be unable to get other insurance.

Generally, our clients are rarely content to allow their insurance policies to lapse when they reach the end of the coverage period.  The older we get, the more we see the value of “investing” in insurance as one of our many buckets of asset categories that we are accumulating and tending to during life.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Musings from the CEO – Summer 2014

Mike HoffmanI saw a headline the other day that declared “Why You Should Update Your Estate Plan”. Now, there is a topic that I could write a book about!

I have heard statistics that up to 80% of Americans either have no Will, or some attempt at a Last Will and Testament that is sorely inadequate. The basic core documents that everyone needs are a Will, a General Power of Attorney (that kicks-in upon disability or incapacity), and a Health Care Directive. Once these documents are in place, they need to be reviewed periodically. Obviously, tax laws and family circumstances change. Also, more and more people move because of job changes, they retire to another part of the country, or they move closer to their kids and grandchildren.

A little over two years ago, the $5,000,000 estate tax exemption became “permanent”. This does not mean that it won’t change, and in fact, it does change by going up a little bit each year. Going from $600,000 (the exemption in the ‘90’s) to $5,000,000 took most of us off the estate tax paying rolls and did change the focus of a lot of estate planners. We generally pay more attention to income tax matters than we did before. For instance, if a married couple has over $10,000,000 of exemption available, rather than trying to get everything out of their taxable estates, we would like for at least that much property to go to their heirs from their estates (after death), therefore, with a brand new income tax basis.

I read that one commentator expressed that an estate plan is not meant to be put in a time capsule and to be opened and dissected at death. An estate plan will change and evolve. There are many things that can be accomplished with a comprehensive estate plan. Not only are we saving estate taxes, income taxes, and probate costs, we are protecting assets, providing sound management of assets, and taking care of other responsibilities.

How are we leaving assets to our spouse and descendants? Can we be better stewards of our wealth by considering appropriate planning techniques, such as trusts?

It is important to periodically check the ownership and beneficiary designations of life insurance policies to make sure that these liquid assets will be handled appropriately. It is extremely important to review beneficiary designations on IRA accounts and other retirement plan assets. Not only do you want to make sure the assets go where you intend, but you want to maximize potential tax savings.

The ownership of all assets ought to be reviewed periodically. There are several types of joint ownership that have different consequences for estate planning and tax purposes. It is not just deeds for real property that should be checked, but it’s also important to understand how the titling of your investment accounts can affect the treatment of your assets at death.

If you own property in other jurisdictions, such as a house at the beach or in the mountains, this can complicate probate matters for the family. It is a relatively simple matter to use one of several techniques to remove that particular asset from your probate estate, potentially saving a great deal of time, money and aggravation for your spouse and descendants.

Most family/closely-held businesses do not have a succession plan or an exit strategy. This is particularly concerning when it is that family business that created the wealth. Will the business suffer a potential loss of value to the family when the patriarch or matriarch is no longer in the picture?

There are countless reasons why you should update your estate plan. First and foremost, make sure you have an estate plan. A failure to plan is a plan to fail.

 

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Can You Afford To Ignore Your Business Exit?

Mike HoffmanHere’s another excellent article written by Denis M. Brown from Pace Capital Resources, LLC.  It is from The Exit Planning Review newsletter, issue 282, dated June 8, 2014.  Can You Afford To Ignore Your Business Exit?

Sincerely,

Mike

 

For more information regarding this or any other business planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

No Regrets for These Former Owners

Mike1We bring you another excellent article written by Denis M. Brown from Pace Capital Resources, LLC.  It is from The Exit Planning Review newsletter, issue 281, dated May 20, 2014.  No Regrets for These Former Owners

Sincerely,

Mike

 

For more information regarding this or any other business planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

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