Entries Tagged 'Trusts, estates, gifts' ↓

The House of Representatives passed a bill a few weeks ago (H.R. 8 is the bill number) which would permanently repeal the estate tax. It ain’t gonna happen, folks, as long as Democrats roam the earth.

Proof of that came yesterday. Rep. Bill Thomas (R-CA), Chairman of the Ways & Means Committee, signalled his willingness to compromise on something short of full repeal of the estate tax.

Currently the estate tax rules are slowly modified through 2009, fully repealed in 2010, then come back to their pre-modification status in 2011. What a sausage! Rep. Thomas apparently sees the reality–compromise is necessary–and sees the insanity of the present law. Speaking to a reporter for Tax Analysts, he said: “If in fact you’re not able to repeal [the estate tax], the next best thing is certainty.” News item here from the Tax Analysts website. Lexis subscribers go find 2005 TNT 86-2. [$]. (Lexis non-subscribers–you aren’t missing much by reading the public version).

He’s absolutely right. Many of my clients are frozen in their tracks, wondering what to do given the current uncertainty about how the law will go. And I’ll bet he’s right about the Republican inability to force a repeal. He should know–he’s in Congress. (Me, on the other hand? I’m not a politician, but I play one on TV.)

For the do-it-yourselfers out there, or those of you who Really Need To Know, here’s a link to a website that lists many, many resources for same-sex couples and estate planning. Hat tip to Tax Prof Blog.

Estate tax is imposed on the value of what a person owns at the time of death. Where one of the assets is a family business, you have the task of computing value. But of course for a business, the value is a matter of opinion. If your opinion places a high value on the business, the family pays a lot of estate tax. On the other hand, if (in your opinion) the business is worth peanuts, then the estate tax is also peanuts. You see the incentives for the heirs — lowball the values.

Family businesses frequently have buy-sell agreements. These are contracts among the shareholders that control the sale of stock. The purpose is to keep ownership of the business in the family. Typically, if you want to sell out to a non-family member, you can’t. You have to sell to the current shareholders, or sell the stock back to the company. Buy-sell agreements usually have a provision that says that when a shareholder dies, his/her stock must be sold to other shareholders or back to the company.

Buy-sell agreements have a mechanism built in for determining the price of the sale. This might be by some formula based on a financial metric (gross sales, net profit, whatever). Or it might be as simple as “call in an outside appraiser and get an opinion as to value.”

So. Let’s see. If we can get a low value, we can get a low estate tax. And we have a contract that sets a value for mandatory sale at the time of death. “Teacher, teacher! Pick me! I know the answer! Let’s use this buy-sell agreement to set a reeediculously low value for the business so we don’t have any estate tax!”

But the IRS didn’t fall off the turnip truck yesterday. They’re hip to this stuff.

Here’s a recent case, Estate of H. A. True, et al (link to the opinion at Washburn University’s website). The Tenth Circuit Court of Appeals reviewed a Tax Court ruling and decided the taxpayers had overreached. In a nutshell, the buy-sell agreement’s method for setting values was way out of whack with reality.

The moral of the story? Cut through the tax technicalities. It’s the old adage, “Pigs get fat, hogs get slaughtered.”

Here’s the full opinion.
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The Wall Street Journal’s online edition is having a week of open season–you don’t have to be a subscriber to read it.

With that, I found an article from July about Jack Kent Cooke, the late owner of the Washington Redskins. It notes that Mr. Cooke’s $1.3 billion estate has been a giant mess since he died. There are seven (!) co-executors seeking over $37 million in fees.

The moral of the story is found in the lament about the decline in the teaching of estate planning in law schools.

As a parallel, a trend in the law business that is now visible is that many large law firms are tossing their trust and estates practices overboard. (Sorry. The partners are choosing to leave. I got it wrong.) Estate planning is boring for students. It doesn’t generate big income for the law firms.

But everyone dies. Even people with a lot of money and really badly-crafted estate plans.

Aha. We have data from the IRS for estate tax returns filed in 2003. (Warning: Excel).

Here’s a link to data for estates above $1 million.

Hat tip: TaxProf Blog.

I have resumed publication of a newsletter. Here is Estate Planning Update for the 4th quarter of 2004.

The last newsletter stopped when I had my third kid; she’s now coming up on 4 years old and I finally feel like I’m coming up for air.

I’ll be doing another newsletter, strictly on international estate planning. In a moment of creative genius, I’ve named it “International Estate Planning Update.” I do a lot of international tax and international estate planning.

The format for both newsletters: one topic, one side of one sheet of paper. Easy to understand. Useful.

If you want to receive either of these newsletters, email me at phil - at - hodgen - dot - com. Paper or email. Your choice.