Focus on Gift and Estate Tax
Editor for This Issue: James G. Rabe
Gift and Estate Tax Valuation Insights
Thought Leadership Article:
Estate Planning in Uncertain Times
John H. Draneas, Esq.
Although the changes made to the gift and estate tax laws were intended to simplify estate planning for the vast majority of Americans, we now have a more complex system than ever before. As a result, estate planners should develop flexible and more advanced techniques in order to respond to the constantly changing legal environment. This discussion provides an overview of the current estate planning environment. And, this discussion provides an outline of several techniques that may be useful to the estate planner.
Best Practices Article:
“Reallocating” Wealth after Christiansen: A Fresh Look at Formula Clauses
Michael E. Morden, Esq.
There seems to be a trend in the courts toward recognizing defined value clauses for gift and estate tax valuation purposes. This judicial trend allows taxpayers to make transfers with a limit on the amount of the taxable transfer. This discussion summarizes the two recent judicial decisions, McCord and Christiansen. And, this discussion offers practical estate planning suggestions for crafting the defined value clause.
Analysis and Observations Regarding the Keller v. United States Decision
Steve R. Akers, Esq.
The Keller v. United States District Court decision represents a significant taxpayer victory in a case regarding the formation and the valuation of a family limited partnership (FLP). In this judicial decision, the decedent died before all of the FLP documents were completed and all of the trust provisions were fully funded. Nonetheless, the District Court considered the intent of the decedent and the Court upheld the FLP provisions. In addition, the District Court allowed the 47.5 percent total valuation discount (including a discount for lack of control and for lack of marketability) claimed in the taxpayer’s estate tax valuation.
The Application of a
Multi-Level Valuation Discount in the Gift or Estate Valuation of a Tiered Entity—A
Review of Relevant Judicial Precedent
James G. Rabe
Many high net worth individuals own equity interests in multi-tier entities. These multi- tier entities are created for various asset protection, equity owner protection, family business optimization, and other business purposes. Multi-level valuation discounts are valuation adjustments (e.g., for lack of control and for lack of marketability) that are applied to conclude the value of both entities (e.g., the upper tier entity and the lower tier entity) of the multi-tiered entity. The Internal Revenue Service typically disallows multi-tier valuation discounts that are applied in gift tax or estate tax valuations. This discussion summarizes the judicial factors that the courts have considered in eleven decisions that involve the application of multi-tier valuation discounts.
Robert P. Schweihs
For a variety of reasons, the value of an ownership interest in a closely-held business enterprise may be subject to the application of a valuation discount. Valuation analysts often apply a “combined discount” to reflect one total value decrement related to both of two common valuation adjustments: (1) the discount for lack of ownership control (2) and the discount for lack of marketability. This discussion describes the theory and the rationale for the combined discount. And, this discussion points to recent empirical data that suggest that the combined discount may be larger than previously indicated.
“Tune Up” Your Estate Plan in Anticipation of Sweeping Changes to Estate
Domingo P. Such III, Esq., and Tina Davis Milligan
There is a strong indication that the Congressional log-jam that has plagued the estate tax since 2002 will be cleared temporarily and then, hopefully, permanently. Let’s couple this expected Congressional action with the recent turbulent economic environment and an increased urgency to seek preservation of family wealth and the need for an estate plan “tune up” is clear. A current estate plan update and review should increase the expected planning benefits.
Recent Developments in Valuation Issues Related to Fair Value Accounting
Robert F. Reilly
Fair value accounting disclosures continue to become more common in the financial statements of American companies. The Financial Accounting Standards Board (FASB) continues to promulgate accounting guidance that expands the application of fair value accounting for both asset and liability accounts. Nonetheless, many valuation analysts continue to seek professional guidance regarding the application of fair value valuation procedures. This discussion summarizes some of the recent FASB pronouncements related to fair value accounting disclosures and fair value valuation issues. Valuation analysts who perform fair value valuations should be familiar with these fair value accounting issues.
Income Tax Implications of Industrial and Commercial Property Mortgage Debt
Robert F. Reilly
Many commercial and industrial real estate owners have experienced a decrease in the market value of their owned real estate. Many real estate industry analysts expect that this downward trend in commercial real estate market values will continue for the next year or two. In many cases, the market value of the commercial real estate is (or will be) less than the associated commercial mortgage. Also in many cases, the property owners will renegotiate or restructure the terms of these commercial mortgages. In such instances, the commercial and industrial property owners should carefully consider the federal income tax implications associated with the restructuring of such mortgage debt.
Partnership Debt Restructuring or Renegotiation—Income Tax Planning
Robert F. Reilly
In the current economic environment, many companies operating in many industries have had to restructure or renegotiate their long-term debts. For federal income tax purposes, such debt restructuring often results in the recognition of cancellation of debt (COD) income for the debtor company. If the debtor company is a C corporation (or even an S corporation), that COD income is recognized (or excluded from recognition) at the company level—and not at the shareholder level. However, if the debtor company is a partnership (or an LLC taxed as a partnership), then that COD income (or the income exclusion) may have income tax consequences to the individual partners. Therefore, debtor partnerships (and debtor LLCs) should carefully consider these income tax consequences when they restructure or renegotiate their long-term debt.
Intangible Asset Identification and Valuation in the Bank and Thrift Industries
Robert F. Reilly
Financial institution participants in the commercial banking and thrift industries typically own and operate several categories of intangible assets. Some of these intangible assets are specific to financial institutions (such as core depositor relationships, credit card portfolios, and mortgage servicing rights), and some of these intangible assets are common to most types of commercial business entities (such as trademarks and trade names, computer software, and a trained and assembled workforce). First, this discussion will introduce the various types of intangible assets that may be encountered in the banking and thrift industries. Second, this discussion will describe the various types of analyses (e.g., valuation, transfer price, economic damages) that may be applied to these financial institutions intangible assets. And, third, this discussion will explain the various reasons (or the client motivations) why financial institutions industry participants may need to perform these intangible asset analyses.
Assets and the Sale of the Closely Held C Corporations
Robert F. Reilly
When many service-oriented businesses are sold, two “bundles” of intangible assets are often included in the transfer. The first bundle includes company- owned commercial intangible assets (e.g., contracts, patents, trademarks). The second bundle includes individually owned personal intangible assets (e.g., the business owners’ customer/client relationships, personal goodwill and reputation). If the subject business is structured as a C corporation, the gain on the sale of the company intangible assets (and tangible assets) is typically taxed twice. First, the gain is taxed on the C corporation when the assets are sold to the business acquiror. Second, the gain is taxed again when it is distributed from the corporation to the individual owner/operator(s). However, typically, the gain on the sale of separately transferred personal intangible assets is only taxed once—to the individual business/owner operator(s). This discussion summarizes what business owners should consider regarding the identification and the documentation of personal intangible assets with respect to structuring the sale of the closely held C corporation.
Forethoughts/About the Editor
Christine Baker Joins the Washington, DC, Office