Sunday, September 26, 2010
SFTI
Sorry guys that I haven't posted in a few days. I will be in Atlanta for the Southern Federal Tax Institute most of the week and I should learn about quite a few worthy topics to post about.
Friday, September 10, 2010
Valuation, Valuation, Valuation - Part 1
Not unlike the famous question, "What are the three most important things in real estate?", one could easily argue that the three most important things in estate planning are valuation, valuation and valuation. The estate and gift taxes are taxes on the transfer of property. Accordingly, it doesn't take a rocket scientist (or an overeducated lawyer) to see that the lower the value of the property being transferred, the less tax that will be paid.
Based on this simple idea, estate planning lawyers spend a lot of time trying to lower the value of property for transfer tax purposes without actually lowering the value. As you might expect, the IRS doesn't like this very much, and many (and maybe most) of the tax cases in the estate and gift area over the past several years have involved valuation, and primarily a technique called family limited partnerships (FLPs).
It's actually a misnomer to call FLPs a technique. An FLP is just a partnership like any other partnership, which just happens to be owned by members of the same family. Many FLPs are operating businesses, like the family restaurant, hardware store or beauty salon. Where FLPs got their (bad?) name, though, is where they do not hold operating businesses, but instead hold investments assets or other family assets that might not be typically held in a partnership.
The idea (and some might say abuse) goes like this - I will take my brokerage account that has a quantifiable value (and recently has been sinking like brick) of let's say $100. I then form a partnership and contribute the account to the partnership. Now, I don't own a brokerage account anymore. Instead, I own an interest in a partnership that owns a brokerage account. I have placed lots restrictions on this interest that I now own. For example, I cannot get my money back without consent of the other partners and I can't sell the interest without consent of the other partners. By placing these restrictions and others on my interest, such interest is now worth something less than $100. So, when I make a gift of this interest to my daughters, I pay tax on the discounted value of the interest and not $100. As these things typically go, a long time passes and the FLP makes a distribution or is dissolved, and then my daughters receive my original $100, but I paid tax on the lower amount.
So, now that you have the technique down, in Part 2 I will discuss some of the abuses and the IRS attacks on those abuses.
Based on this simple idea, estate planning lawyers spend a lot of time trying to lower the value of property for transfer tax purposes without actually lowering the value. As you might expect, the IRS doesn't like this very much, and many (and maybe most) of the tax cases in the estate and gift area over the past several years have involved valuation, and primarily a technique called family limited partnerships (FLPs).
It's actually a misnomer to call FLPs a technique. An FLP is just a partnership like any other partnership, which just happens to be owned by members of the same family. Many FLPs are operating businesses, like the family restaurant, hardware store or beauty salon. Where FLPs got their (bad?) name, though, is where they do not hold operating businesses, but instead hold investments assets or other family assets that might not be typically held in a partnership.
The idea (and some might say abuse) goes like this - I will take my brokerage account that has a quantifiable value (and recently has been sinking like brick) of let's say $100. I then form a partnership and contribute the account to the partnership. Now, I don't own a brokerage account anymore. Instead, I own an interest in a partnership that owns a brokerage account. I have placed lots restrictions on this interest that I now own. For example, I cannot get my money back without consent of the other partners and I can't sell the interest without consent of the other partners. By placing these restrictions and others on my interest, such interest is now worth something less than $100. So, when I make a gift of this interest to my daughters, I pay tax on the discounted value of the interest and not $100. As these things typically go, a long time passes and the FLP makes a distribution or is dissolved, and then my daughters receive my original $100, but I paid tax on the lower amount.
So, now that you have the technique down, in Part 2 I will discuss some of the abuses and the IRS attacks on those abuses.
Wednesday, September 1, 2010
Mickey Mouse is in Support of the Estate Tax!
Read Abigail Disney's Op-Ed in the USA Today in support of the estate tax here.
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