FOCUS ON ESTATE AND GIFT TAXEditor for This Issue: Timothy J. Meinhart
Estate Planning Insights
Thought Leadership Article:
Doing Good While Doing Well: Charitable Planning with the Closely Held Business
Turney P. Berry, Esq., and C. Carter Ruml, Esq.
Closely held business owners often arrive in the office of their advisers with a puzzle, a challenge, and an opportunity. The puzzle is nontax business succession planning. The challenge is planning to reduce income and transfer taxes. And, the opportunity is the client's philanthropic plans. An estate plan incorporating charitable gifts of the closely held business ownership interest can solve the puzzle, meet the challenge, and seize the opportunity-maximizing valuation discounts, minimizing taxes, and effecting the client's succession and charitable goals. To create a successful plan, advisers should anticipate the unique tax and nontax implications of the charitable gift for the donor, the charity, and the business. This discussion provides an overview of the issues underlying charitable giving, closely held businesses, and estate planning. This discussion also summarizes some interesting applications of an integrated approach to estate, business succession, and charitable planning.
Best Practices Article:
Income Tax Traps in Estate Planning and Administration
Andrea C. Chomakos, Esq.
Closely held business owners face challenges in transitioning ownership of the business to family (or non-family) members. Estate planners help closely held business owners to navigate these challenges, often suggesting and implementing sophisticated estate planning techniques. However, income tax considerations may not be the central focus in structuring the estate plan. This discussion highlights the complex income tax issues that can arise in both estate planning and administration involving closely held business interests. In addition, this discussion presents potential solutions to the income tax issues that could otherwise derail a successful estate plan.
The "Slow Evolution" of the Estate Planning Profession
Alan F. Rothschild Jr., Esq.
As a history major in college, I was taught that, to make sense of the present, you first have to understand the past. Stepping back to get some historical perspective on our profession will help us better understand where the estate planning profession is today and where the profession may be going in the future. Hopefully, this information will not only help practitioners address current matters more effectively, but will also get us thinking, and taking action, to ensure that our practices remain viable, whether the estate tax exemption is $1 million, $3.5 or $5 million, or for that matter, whether there is an estate tax at all.
The Consideration of Projected Income in the Valuation of Noncontrolling Ownership
Timothy J. Meinhart
Most valuations of nonmarketable, noncontrolling ownership interests in family holding entities are prepared using only one valuation approach-the asset-based approach. The projected income associated with the subject noncontrolling ownership interest is often ignored in the valuation process. This discussion summarizes how projected income and required holding period can be incorporated in the valuation analysis through the use of an income approach valuation method. This discussion also illustrates how a properly applied income approach method can provide additional support for the asset-based approach value conclusion
in Estate Property Acquired from Decedent Who Died in 2010
Robert F. Reilly
Prior to 2010, property transferred from the estate of a decedent received a new tax basis. The new tax basis was the fair market value of the transferred property, determined either on the date of death or on the alternative valuation date. For decedents who died in 2010, there is a new estate property transfer procedure. Generally, for decedents who died in 2010, the transferee's basis in the acquired property is the lessor of the decedent's basis in the property or the fair market value of the property on the date of death.
Pierre v. Commissioner: The Aggregation of Interests in Estate and Gift Tax
Kevin M. Zanni
In Pierre v. Commissioner, the Service prevailed in its argument to apply the step transaction doctrine. However, the Service did not contest the use of a 10 percent lack of control discount and a 30 percent lack of marketability discount, which resulted in a combined valuation discount of 36.55 percent. However, in Pierre, the application of the step transaction doctrine to aggregate two separate transactions (one gift transaction and one sale transaction per trust) into one transaction led to a decrease in the effective valuation discount from 36.55 percent to 35.6 percent. The reason for this change was not due to the application of the step transaction doctrine, but to the trial testimony of the taxpayer's valuation expert. In this review of the Pierre decision, and more specifically in this review of the application of the step transaction doctrine, we consider two questions: (1) what is the step transaction doctrine and (2) if the step transaction is invoked, what types of transfers could trigger a difference in valuation discounts greater than the results in Pierre?
Holman v. Commissioner and the Discount for Lack of Marketability
Michael J. McGinley
This discussion reviews both the Holman v. Commissioner Tax Court case and the April 7, 2010, Eighth Circuit Court of Appeals affirmation of the Holman Tax Court decision. Collectively, the Holman decisions provide insight as to how partnership-specific factors affect the valuation discount for lack of marketability. This discussion also summarizes the empirical studies that were used by the valuation analysts in the Holman case to support their concluded discounts for lack of marketability.
and Multi-Level Valuation Discounts-Ringgold Telephone Company v. Commissioner
James G. Rabe
This discussion summarizes (1) business valuation professional standards guidance regarding subsequent events, (2) judicial precedents regarding subsequent events, (3) judicial precedents regarding multi-level discounts, and (4) the judicial factors that the U.S. Tax Court considered in a recent decision that involved both a subsequent event- that is, the sale of the subject interest-and the appropriateness of the application of multi-level valuation discounts.
An Examination of IRC Section 2703
Internal Revenue Code Section 2703(a) provides guidance on how valuation analysts should consider provisions of shareholder agreements and other restrictive agreements when valuing certain ownership interests for gift or estate tax purposes. The Internal Revenue Service has used Section 2703 in its attack of taxpayer-submitted valuations of business interests. This discussion summarizes the components of Section 2703 and examines several judicial decisions where the Internal Revenue Service has used the Code Section to rebut the taxpayer's valuation of transferred ownership interests in the context of a family limited partnership.
Trusts & Estates Guest-Expert
Timothy J. Meinhart
A Formula for Avoiding Transfer Tax Litigation?
John Porter, Esq.
Taxpayers and their professional advisers sometimes worry about "valuation risk"-that their transfer plan could be upset if the value estimates used in a wealth transfer plan are later determined to be wrong. This is a discussion that is useful to taxpayers, to their advisers, and to valuation analysts. Several gift tax decisions that examine the taxpayer's use of formula clauses to avoid the valuation risk are discussed.