Archive for August, 2015

This week’s guest blogger is Susan Murphy, CPA, a tax manager in the Boston office of WithumSmith+Brown.

At his State of the Union Address earlier this year, President Obama identified the “Angel of Death” tax loophole as one of his major agenda items for 2015.  “Angel of Death” – very ominous sounding!  What does it mean for you?  Has any progress been made toward President Obama’s goal of eliminating this loophole?  Murphy Pic - 2015

Internal Revenue Code (IRC) § 1014 or the “step up in basis” as it is more commonly known, is our President’s vilified Angel of Death tax loophole.  In general, this code section allows for the passage of property from a decedent to his/her intended heir with a basis equal to the fair market value of the property on the date of death of the decedent.  Therefore, low basis assets remaining in an estate are transferred to the heir(s) at current market value.  What a boon for the beneficiary (hence the targeting by the President!)  If later sold by the heir, there is no long term capital gain assessed for the period of appreciation that occurred during the decedent’s life time.  Post death taxable consequences arise only for the period of appreciation that occurred while in the hands of the heir.

In late 2012, the tax law was significantly altered with respect to transfer taxes, incorporating (among other changes) a permanent increase in the top tax rate to 40%, an increase in the lifetime exemption to an inflation-adjusted $5,000,000[1] and the introduction of portability[2] to the estate planning arena.  These are all game changers and, except for the increase in the top tax rate, fairly taxpayer-friendly, especially for smaller estates.   If you have not reviewed your existing estate plan and will since the law changes, now is a good time to do so.

Unfortunately, these game-changers also make the already-existing “Angel of Death loophole” more pronounced and subject to criticism which, in all likelihood, will not go away.

However, it is now nearly September.  Has President Obama’s tax proposal to increase capital gains tax in this area seen any significant progress?  According to political pundits (of which I am not one), the answer is a resounding no.  Nor will it be likely, due to our currently Republican controlled Congress.  Stay tuned….

[1] 2015 exemption is $5,430,000.

[2] Portability is defined as the amount of unified credit NOT used in the decedent spouse’s estate and therefore available for use for gift or estate tax purposes by the surviving spouse.  (IRC § 2010). More on this nifty feature in future blogs.

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This week’s guest blogger is Al LaRosa, CPA, a trust and estate specialist in the New York Office of WithumSmith+Brown.

A common and effective technique for transferring wealth to the younger generation is the use of Family Limited Partnerships (“FLP”) or Limited Liability Companies (“LLC”). These entities are a great way to consolidate and manage family assets. They provide for a more orderly transition and, as an added benefit, enable the grantor to benefit from valuation discounts when determining the fair market value of the assets being transferred for estate and gift tax purposes.  As you can imagine, discounting taxable value is not something the IRS is particularly keen on and has resulted in litigation over the years as well as legislative and administrative proposals to limit or eliminate it.  Valuation discounts are threatened again (read on….) so, now may be the time to consider using this technique if it makes sense for your overall estate plan.Alfred LaRosa

How it Works: When assets are transferred, the taxable value is the “fair market value,” a somewhat nebulous amount defined by law as the price at which the property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or to sell and both reasonably knowledgeable of the facts.  Sometimes, that value is obvious – if you give away marketable securities with no strings attached, the gift tax value would be the exchange value of the securities on the date of transfer.  Other times, like with FLPs and LLCs, the valuation is a bit murky.  A whole industry exists to determine, as objectively as possible (without an actual sale), what that value is.  There is, let’s say, some wiggle room.

Ownership of an interest in an entity such as an LLC or a FLP that holds assets will generally result in a lower valuation for transfer tax purposes than the outright ownership of those same assets outside the entity.  Lower valuations result because minority interest and lack of marketability discounts are allowed when valuing these transfers.  Here’s the wiggle room – if you give an interest in a properly structured LLC or FLP to your child, you will continue to control the entity and s/he will be along for the ride.  If s/he can’t control the internal investments or sell the LLC or FLP units, are they really worth as much?  And how much will this save the family?

Turns out, it can be plenty.  For example, an effective valuation discount of 35% would allow a senior family member to transfer a 30% interest in a $25,000,000 controlled entity to younger family members at a reduced gift tax value of $4,875,000, rather than $7,500,000.  If available, the value of the transfer will be sheltered from any gift or estate taxes to the extent of the taxpayer’s remaining lifetime gift/estate tax exemption.

As noted, there have been numerous proposals and continued discussions to eliminate or reduce the benefits associated with valuation discounts for FLPs and LLCs.  Recently, these talks have become quite concerning.  At a recent American Bar Association’s Tax Section meeting, Cathy Hughes, from the Department of Treasury’s Office of Tax Policy, hinted that proposed regulations might be released real soon (possibly in September 2015) that would limit the availability of valuation discounts for FLPs, LLCs and other family entities.

Given the increased likelihood that the window of opportunity to utilize valuation discounts may be coming to a close, it may be prudent for those individuals who intend on utilizing valuation discounts to transfer assets take action now (prior to the release of any future regulation that restricts their benefits).

Remember, obtaining a professional valuation appraisal is critical to substantiate these discounts that are being used to adjust the value of the transfers.

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You are reading (and I hope you will continue reading) the first post in Withum’s new blog series, Private Wealth Matter$.  You may be familiar with its predecessor, Charitable Nation, a blog more focused on all things charitable.  We decided to expand our coverage to many more topics of interest to those with wealth because…

Private Wealth Matters!

Many years ago, a client’s son got married.  Back then, his family was on the Forbes 400 list but lived a relatively modest lifestyle.  The children knew they were rich but had no idea how rich, although one would think the Forbes 400 list would have been a dead giveaway.   Anyway, prior to the wedding, Mom and Pop wanted to educate Son and future Daughter-in-Law about their wealth.  They weren’t concerned about the risk of a greedy Daughter-in-Law getting ideas because the family had a long history of tying up their money in trust.  The trusts were of the “sprinkling” variety with distributions at the discretion of the trustee(s), so it made sense for Son and Daughter-in-Law to understand and plan accordingly.  I will never forget both kids’ eyes getting as wide as saucers as they saw the assets, sorry, income available to them because…

Private Wealth Matters!

At the other extreme, I recall a family office consultant telling a story about a billionaire client who essentially had no use for his children or succession of ex-wives.  He hadn’t done any financial/tax/estate planning and did not intend to because he really didn’t care.  In fact, he wanted his family to end up with as little as possible.  I guess this is the exception that proves the rule because…

Private Wealth Matters!

Private wealth can help and it can hurt.  Some go to inordinate lengths to keep as much of it out of Uncle Sam’s hands as possible.  Some want to give it all away.  There are those like Warren Buffett who once famously said that he wants to give his kids enough “so, that they could feel that they could do anything, but not so much that they could do nothing.”  There is no boiler plate plan that will enable you to enjoy your lifetime wealth, minimize its taxation, support your favorite charities and enrich future generations.  There are, however, building blocks that can be efficiently integrated in ways that make sense for you.  Exploring some of these building blocks is the purpose of this blog.  Over the coming weeks, we will bring you thoughts from experts internal to Withum as well as external money managers, attorneys and other specialists.  We’ll keep it short; we’ll keep it fun.  We encourage you to participate in the dialogue by posting comments and calling us if you need more in-depth assistance.  We do all this because…

Private Wealth Matters!

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