Report No. 20 (Thur. SS 3-D & Fri. 1/18 Wrap Up)
As we have done in January for the last eleven years, and again with the
permission of the University of Miami School of Law Center for Continuing
Legal Education, we will be posting daily Reports to this list containing
highlights of the proceedings of the 42nd Annual Philip E. Heckerling
Institute on Estate Planning that is being held January 14-18, 2008 at the
Orlando World Center Marriott Resort and Convention Center in Orlando,
Florida, a new venue for the Institute starting in 2007. A complete listing
of the proceedings will be published here and is also available on the
Institute's Web site at http://www.law.miami.edu/heckerling.
We also will be posting the full text of each of these Reports on the ABA
RPPT Section's Web site, as we have since the 2000 Institute. Those Reports
can be found at URL http://www.abanet.org/rppt/meetings_cle/heckerling. In
addition, each Report can also be accessed at any time from the ABA-PTL
Discussion List's Web-based Archive at URL
http://mail.abanet.org/archives/aba-ptl.html.
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This Report covers the Thursday afternoon Special Session 3-D entitled
Engineering a Succession Plan that Keeps the Family Business On Track plus
the final Friday morning Wrap Up session entitled Wrap-Up: Blue Plate
Specials - A Menu of the Best Dishes Served Up at the Institute's
Proceedings served up by none other that Roy Adams and Charles (Clary)
Redd. The next and final Report will include a compiled version of all of
the Technology Reports and related information to make it easier for those
who are interested in this sort of stuff to find it all in one place.
For the record, we missed reporting on only two sessions this year. Those
are Special Session 2-D on Reverse and Lateral Estate Planning by Read
Moore and Nancy Henderson [see Read's main session entitled Transferring
Wealth to Parents and Siblings for related information] and the Special
Session 3-A Mock Trial (always difficult to cover in a meaningful way).
Next year the 43rd Institute will be in Orlando again. The dates are
Monday, January 12, through Friday, January 16, again at the Orlando World
Center Marriott Resort and Convention Center. Mark your calendars now.
If any of our readers have any suggestions for improving these Reports that
they would like us to consider for next year, please send them privately to
your Editor at jghodges@jghlaw.com and to Reporter Gene Zuspann at
ezuspann@zuspann.com. In addition, if any of our readers would like to be
considered for a position as one of our reporters for 2009, please let us
know, realizing that we try to give difference to our past reporters first.
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Special Session 3-D - Engineering a Succession Plan that Keeps the family
Business On Track
Thursday, January 17, 2008
Presenter: Charles (Clary) Redd
Reporter: Craig Dreyer
Mr. Redd began the special session through discussion topics, which he
first introduced in the general session. He emphasized that while tax
issues are often determinative of a strategy of planning, the non-tax
issues are often at least equally as important.
He noted the impact of the Hackl v. Commissioner, 335 F.3d 664, which held
that a gift of an FLP interest (with some very bad facts) does not qualify
for the annual exclusion. This case requires the estate-planning attorney
to take additional steps to ensure that gifts of closely held entities
qualify as present interest gifts. He provided three ideas to help avoid
the result in Hackl and create a present interest gift. First, one can
confer a put option on the donee and give a right of first refusal to other
shareholders and/or the corporation at the amount of the valued gift.
Second, one should be sure the entity could not unreasonably withhold a
cash distribution under the terms of the formation agreement. He noted some
documents give the managing partner uncontrolled discretion on
distributions. Third, one can employ crummey rights in the buy-sell
agreement as an amount equal to the appraisal value of the shares
transferred. He also mentioned one can use one or more of these tactics to
help ensure the gift of an FLP interest qualifies for the annual exclusion
amount.
He also discussed the marital deduction issues related to including the
family business in a trust. This issue can be avoided by providing the wife
a general power of appointment in the marital and/or QTIP trusts. However,
if this option is not desired, the other option is to add language noting
the trustee shall be obligated to distribute the entire net income and to
whatever extent necessary, principal to qualify for the marital deduction.
This should ensure qualification for the marital deduction with a trust
containing closely held business interests.
Another point of emphasis for Mr. Redd was the power of the trustee to hold
family business equity without diversifying. Simple language that the
trustee has the power to retain assets is no longer sufficient to protect
the trustee. See Fifth Third Bank v. Firstar Bank, No. C-050518, 2006 WL
2520329 (Ohio App., 1st Dist., Sept 1, 2006); and Wood v. U.S. Bank, N.A.
828 N.E.2d 1072 (Ohio App. 2005). Under the Uniform Prudent Investor Act,
retention language does not abrogate the duty to diversify unless it is
clear it supercedes the UPIA or it can be proven by special circumstances.
Mr. Redd emphasizes that one should not rely on the special circumstances
exception. To be sure the rules are covered he recommends adding language
similar to the following: I intend the trustee, in the trustee's judgment,
to retain X stock and I am aware of the Uniform Prudent Investors Act's
requirement of specific language to overcome the presumption to diversify
and I intend this above language to qualify as such.
Mr. Redd then spent the second portion of the special session discussing
primary provisions that business succession plans should consider. He
discussed the following issues that can be drafted into agreements:
* To preserve control of the company for as long as children are alive
or are willing to work in the business.
* The desire to often keep the business within the bloodlines of the
original family owner and keep spouses out of the management of the company.
* To restrict the ownership of the company to the children and their
descendants or trusts established for the benefit of those family members.
* To position the company to be managed by grandchildren who show a
willingness to work, and have the aptitude to succeed operating the company.
* To include provisions to allow grandchildren who are willing to work
to obtain shares of the company while also allowing the shares held in
trust to be distributed per stirpes to the grandchildren.
* To make possible and encourage dispositions of the company's stock to
keep it out of the hands of creditors and disgruntled spouse's of descendants.
* To confer a put right on the co-owners of the companies stock, to be
triggered by a bona fide offer from a third party to purchase the stock, to
be at 90% of the third party's offer price.
* Provide a requirement for the sale of stock at fair market value upon
the death or incapacity of an owner with the purchaser being the company.
The purchase price could be determined by appraisal.
* A provision providing that upon the sale of substantially all the
assets of the company to a third party, which occurs within two years of a
mandated sale as a result of a child's death or disability, would confer
tag along rights on the sellers in that mandated the sale.
* If a sale of substantially all the stock or assets of the company to
a third party were to be approved by a majority of the stockholders, to
confer call rights, exercisable for a limited time, on the non-approving
minority stockholders of the company.
* If a sale of substantially all the stock or assets of the company to
a third party were to be approved by a majority of stockholders, and if the
call rights held by non-approving minority owners of the company were not
exercised, to confer drag along rights enabling the majority of the owners
to sell and deliver to the third party all or substantially all of the
ownership or assets of the company.
* To confer put rights on a child with no descendants at 90% of the
appraised value of the company so they can enjoy there wealth as they may
not have the same desire to tie wealth up in the company as other siblings
with children.
After discussion of these possible provisions Mr. Redd went through and
noted where these various provisions were incorporated into a sample
shareholders agreement in the materials. He also included a sample note and
various will and trust provisions in the special session materials relating
to family business succession. He concluded by noting that business
succession planning involves complex and intertwined legal, financial and
emotional issues and it is the job of the advisor to help sort through
these issues to deliver a successful transition strategy.
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Wrap-Up: Blue Plate Special - A Menu of the Best Dishes Served Up at the
Institute's Proceedings
Friday morning, January 18, 2008
Presenters: Roy Adams and Charles (Clary) Redd
Reporter: Kimon Karas
The presenters used a fictional fact pattern to discuss and incorporate the
concepts addressed during the institute. Basic facts consisted of a
husband and wife with substantial means, including a valuable closely held
business owned by the husband subject to a buy-sell agreement. The husband
was previously married and has two adult children from that marriage (one
of whom has a substance abuse problem). There are two minor children from
the current marriage. Prior to their marriage the couple entered into a
prenuptial agreement.
The couple owned valuable personal property and real estate. The first
topic addressed whether there was a benefit to discounting these assets
through fictionalization of the assets. As to the valuable tangible
personal property under the rationale of Stone there is probably a small
chance of obtaining a valuation discount for fractional interests in
tangible personal property. On the other hand, real estate fractional
interest discounts are available and should be considered.
Roy and Clary discussed valuation and valuation penalties. Although the
new Code valuation penalties are new so there has not been sufficient time
to analyze its effect, both agreed they believe the new valuation penalties
on appraisers will have a chilling effect of appraisals.
Next discussion topic was that of representation because of the multiple
generations. The attorney represents the husband and wife. Depending on
how the estate plan is crafted under most state laws neither presenter felt
there an obligation on the attorney to advise the adult daughters of the
estate plan under some third party beneficiary theory. Roy cautioned
however some states do recognize third-party beneficiary's rights.
Next topic addressed related to dividing the estate. Is there an equal
division for the children? Whatever the allocation that is made, certainly
for the daughter with a substance abuse problem some form of incentive
trust must be considered. In such event the drafter must include
flexibility provisions in the document. Also practical considerations such
as who is to be the trustee, whether individual or
corporate. Consideration should be given in bifurcating the trustee
handling the "money" and a "special trustee" to administer the incentive
trust provisions. Incentive trusts are not solely for young beneficiaries
consider that for any beneficiary regardless of age when one desires to
encourage or discourage certain behaviors.
The wife's mother is living. If the wife wants to provide for her,
consider a Crummey trust with the mother and the living descendants of the
couple as beneficiaries of the trust. With mother being of advanced age,
probably do not want her to have unrestricted access to the trust
funds. Estate taxes for mother may or may not be a concern.
If creating any such trusts consider making trusts grantor trusts as to
either the wife or husband. With the substitution power of Section 674(5)
be alerted the IRS is reviewing whether such a power is a proscribed
Section 2036 power.
With the highly appreciating closely-held stock the husband owns
consideration should be made of the sale of the stock to a defective
grantor trust. Because of the issues regarding valuation consider whether
a formula clause is appropriate. However, the IRS most likely will contest
any formula clause as against public policy.
Because of the disparity in the children's ages and coupled with the fact
that both wife and husband each have significant assets, consider whether
an unlimited marital deduction plan is appropriate. Funds might be tied up
for an extensive period of time before husband's daughters would gain
access to the funds.
Because of the family's wealth consideration should be given of making
taxable gifts. It is certainly clear in most people's minds that there
will be no estate tax repeal. Strong consideration should be given to
making taxable gifts to start the 3-year period running on the payment of
the gift tax.
One of the facts in the hypothetical dealt with the husband's father who
had divorced and remarried. In that divorce decree the father was to leave
½ of his estate to his children, but after the divorce remarried and made
substantial gifts to his second wife. The father recently died and one of
the issues Roy and Clary discussed was what potential claim might the
family(children) have against the father's estate. In light of the
proposed Section 2053 regulations, claims by family members are subject to
a rebuttable presumption that the claim is not legitimate and hence non
deductible.
Roy and Clary also discussed the buy-sell agreement for the closely-held
stock and the rules of Section 2703. This raises the issue if the contract
price does not satisfy the Section 2703 requirements, then the contract
price will not be binding for estate tax purposes and the estate will be
bound by a contract to sell at the lower contract price. There will be a
disconnect between state law contract rights and federal estate tax
valuation such that depending on the facts the entire sales proceeds may
have to be used to pay the estate tax or worse yet the estate tax exceeds
the purchase price in the agreement.
Roy and Clary discussed adding a provision to a buy-sell that states
generally that if the estate tax values as finally determined exceed the
agreement's formula price the greater amount will be paid. They discussed
potential issues with such a clause. One, does that somehow create
inadvertently a "device" under Section 2703? Probably more of an issue is
the business practicalities of such a clause. Who would want to be a party
to an agreement where possibly it would not be known what the obligation is
of the purchasing party/parties.
The session concluded with a brief discussion of the husband's IRA. Since
the family has significant wealth outside of the IRA consideration should
be given to designating the family foundation as the beneficiary.
The program ended with Tina Portuondo's concluding remarks. The official
attendance at this year's Institute was 2,580 participants. She reminded
all that next year's Institute will be January 12-16, 2009.
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THE REPORTERS
Our on-site local reporters who are present in Orlando this year are Gene
Zuspann Esq. of Zuspann & Zuspann in Denver, Colorado; Joanne Hindel Esq.
of Fifth Third Bank in Cleveland, Ohio; Jason Havens Esq. of Howard, Mobley
& Havens PLLC in Florida and Tennessee; Kimon Karas Esq. of McCarthy,
Lebit, Crystal and Liffman Co., LPA in Cleveland, Ohio; Bruce Stone Esq. of
Goldman, Felcoski & Stone, PA in Coral Gables, Florida; Craig Dreyer Esq.
of McDonald Hopkins LLC in Cleveland, Ohio; Carol Sobczak Esq. of The Law
Offices of Carol A. Sobczak in St. Helena, California; Ronda Martinez Esq.
of Fifth Third Bank in Southfield, Michigan; and Mike Stiff Esq. of
Hutchins & Stiff LLC in Denver, Colorado. The editor again this year will
be Joseph G. Hodges Jr. Esq, a solo practitioner in Denver, Colorado, who
also is the Chief Moderator of the ABA-PTL List.
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GENERAL INFORMATION ABOUT INSTITUTE:
Inquiries/Registration:
Philip E. Heckerling Institute on Estate Planning
University of Miami School of Law
Center for Continuing Legal Education
P.O. Box 248087
Coral Gables, FL 33124-8087
Telephone: 305-284-4762 / FAX: 305-284-6752
Web site: www.law.miami.edu/heckerling
E-mail: heckerling@law.miami.edu
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