Report No. 5 (Tue. 1/15)
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 Estate Planning for Retirement Plans and S Corporations
from the Tuesday sessions and the 2nd Report from the Exhibit Hall by Jason
Havens. The next Report will cover even more of the Tuesday sessions.
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Estate Planning for Retirement Plans of the Rich and Famous
Tuesday, January 15, 2008
Presenter: Steven Trytten
Reporter: Kimon Karas
The presenter commenced discussion with a summary of a couple case studies.
Based on certain assumptions including that the income and estate tax laws
are assumed to reflect what would happen if the provisions of EGTRRA sunset
as scheduled and no other changes are enacted.
The first case summarized a stretch-out between parent and child. Parent's
assets include IRA of $1,000,000, liquid investments of $1,500,000 and
residence of $500,000. Second case same facts except parent's assets
included IRA of $5,000,000, liquid investments of $50,000,000 and residence
of $10,000,000.
The strategies examined included:
Distribute entire plan currently;
Distribute entire plan immediately prior to death;
Distribute plan immediately after death;
Stretch-out with plan bearing its share of death tax;
Stretch-out with plan bearing minimum death tax;
Stretch-out to accumulation trust -not a conduit trust;
Roth IRA conversion stretch-out with plan bearing minimum death tax.
In both examples the stretch-out provided approximately double the amount
of additional cash after tax compared to the immediate payout and the Roth
IRA almost four times.
The presenter then with the assistance of Bernstein Monte Carlo analysis
arrived at the same conclusions where the Roth conversion was the best and
the stretch-out second best for deferral.
The presenter then discussed consideration for this client of a trusteed
IRA rather than the standard custodial IRA. A trusteed IRA would permit
the IRA to hold unique assets other than cash, marketable securities, bonds
such as real estate or partnership assets.
Trusteed IRA still requires a bank or financial institution as trustee and
the same rules apply, minimum distribution rules. A trusteed IRA would
allow for a more complex dispositive scheme for the IRA rather than trying
to custom design a beneficiary designation form.
The presenter suggested probably should not use a trusteed IRA with a
marital trust because of the required minimum distribution rules would
deplete the IRA to the detriment of the remainder beneficiary which is the
opposite result from what is intended.
The presenter then discussed possible concerns with alternative investments
for the IRA. If the IRA has business activity that income is ordinary
income taxed to the IRA at ordinary income rates or debt financed or
leveraged assets, such as partnership interests with underlying debt. In
effect a tax-exempt entity is paying income tax.
The presenter discussed another consideration with unique assets of the
prohibited transaction rules. This includes transactions with disqualified
persons who among others includes the IRA owner, spouse or controlled
entities. If the IRA engages in a prohibited transaction with the IRA such
act causes the disqualification of the IRA resulting in an immediate
distribution of the IRA to the owner and taxed at that time.
The presenter suggested that IRA not invest in an FLP. Finally presenter
cautioned that a prohibited transaction has a possible unlimited statute of
limitations.
The presenter discussed Rev.Rule 2008-5, that was just issued whereby the
IRS concluded the wash sales rules apply to sale at a loss by an individual
and the reacquisition of such security by individual's IRA within the
proscribed period of Section 1091.
The presenter then discussed the PPA enactment of the allowance of
non-spouse rollovers, but the current status of the law where IRS will not
require plans to include provision.
The presenter reviewed the IRA conversion rules and the law that will apply
in calendar year 2010 that will allow conversions without an income
limitation and coupled with the income being spread over two
years. Because of this favorable legislation presenter suggested that
individuals fund as much as possible one's IRA including non-deductible IRAs.
The presenter summarized another case study with IRA benefits and
charity. Question is whether IRA assets or non-IRA assets should be given
to charity. With the same fact pattern of parent with a child,
interestingly giving charity non-IRA assets and using stretch-out for
daughter produced a better result.
Next the presenter examined a case study with a parent, a child and a
grandchild. The strategies examined included among others allocating
non-IRA assets to grandchild versus IRA to grandchild. Better result was
obtained with assets allocated to grandchild stretch-out even with the IRA
share bearing the GST tax. As with prior example stretch-out with IRA to
Roth IRA produced best result.
The presenter then concluded presentation with a summary of a dispositive
plan considerations for the high net worth individual.
* Designate spouse as beneficiary with heirs as alternates. Although
this produces an estate tax deferral the stretch-out benefit is limited to
the assets remaining at spouse's death.
* Skip spouse and designate young heirs as beneficiaries. Even though
this approach generates estate tax the stretch-out may be more
valuable. Consider whether there are any spousal rights that may need to
be waived or consented to.
* Spouse as beneficiary with a right to disclaim.
* If there are retirement plan assets in considering other resources
available to the surviving spouse, limit the right to plan assets to an
amount that does not exceed the minimum distribution amount.
Considerations when the children or other younger non-skip beneficiaries.
* Confirm plan permits stretch-out.
* Simplest is an outright distribution. If there is a possibility of a
minor or incompetent receiving assets consider a trust. Alternatively
consider an UTMA account if do not want to use trust, but caution if
state's UTMA statute allows funds to be maintained in account beyond age 21.
* Trust, ie non-conduit dynasty trust. Presenter will discuss more in
detail in workshop session.
Considerations when grandchildren and skip persons are beneficiaries.
* Coordinate with GST exemption and possible GST tax.
* Designate grandchildren directly if assets will not exceed GST
exemption amount.
* If assets exceed GST exemption amount consider a formula giftalso
integrated with a trusteed IRA.
* Disclaimer with amount disclaimed passing to children not to a trust
if grandchild has any beneficial interest in trust that receives disclaimed
assets.
Finally the presenter concluded with some clients wish to make modest gifts
from estate to their grandchildren. Consider use of retirement assets with
a longer deferral period as the assets to use to make the gift to
grandchildren.
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Covering Your Client's S (Corporation)
Tuesday, January 15, 2008
Presenter: Samuel Donaldson
Reporter: Gene Zuspann
The materials start with a quote from Donald C. Alexander, a former
commissioner of the IRS:
"No rational, reasonably well-informed tax professional would deliberately
choose subchapter S status over an LLC when there is a choice, and 99
percent of the time there is a choice. The LLC is clearly the choice of
the future if you are dealing with rational people and most of the time we
are dealing with rational people."
Donaldson also referred to this quote in his program and pointed out that
in 2004, there were about 1.8 million C-corp returns filed, 2.4 million
partnership returns filed (partnerships, LLC's, LLP's and the like) and 3.5
million S-corp returns filed. From this perspective, he proceeded to
discus many of the rules dealing with s corporations.
The price of an S-Corp: An S-corp must qualify for S-Corp status; it must
maintain its status after its initial election; and it must follow
pass-through rules that are in many cases different from those applicable
to partnerships in subchapter K.
Although a taxpayer can also elect s-corporation status for a partnership
type entity, he pointed out that this is rarely done for domestic entities.
To qualify as an s-corp, the entity must be a domestic
corporation. However, a corporation can incorporate in two countries (the
US and a foreign country) and still qualify to elect to be an s-corp.
He discussed the history of the number of shareholders and the current
maximum (100). However, he pointed out that the rules now treat all
members of a family as one shareholder so this number is illusory. A
spouse and the decedent's estate are counted as one shareholder and all
descendants, their spouses and former spouses are treated as one family.
No non-resident alien (NRA) can be a shareholder of an s-corporation. A
person with a green card or one that meets the substantial presence test
can be a shareholder. However, if two people with an s-corporation want to
admit an NRA, the s-corp can form a limited liability entity with the NRA
as one of the partners/members and get similar benefits as having an s-corp.
Sam pointed out that the s-corp must be careful in a community property
state. If a shareholder receives stock and is married to an NRA, the
s-corp election is blown.
No entity may be a shareholder but an s-corp can form a partnership entity
with another entity and accomplish many of the s-corp objectives.
There are also limits on trusts that can be shareholders. He discussed the
five most significant trusts that can be shareholders. These are:
qualified subchapter S trusts (QSST), electing small business trusts
(ESBT), grantor trusts, former grantor trusts and testamentary
trusts. Charitable trusts do not qualify and transferring s-corp stock to
a charitable trust would result in the loss of the s-election.
To be an ESBT, certain requirements that it must meet. One of these is
that each "potential current beneficiary" must be an eligible shareholder
of s-corp stock. New regs have been proposed addressing the term
"potential current beneficiary" and these are discussed in the current
event materials presented on Monday.
An s-corp may only have one class of stock, but a difference in voting
rights does not create a second class of stock for s-corp purposes. When
starting an estate plan, one of the first things that should be done is to
consider a reorganization under the IRC to create two classes of stock -
one voting and one non-voting.
Even if the provisions of the s-corp indicate that there is only one class
of stock, the s-corp election can still be blown in the operation of the
s-corp. Sam gave several examples of activities that can be determined to
indicate a second class of stock. These are disproportionate distributions
and constructive distributions. He did point out that the Service has
ruled that no second class of stock exists when a disproportionate
distribution is followed by an equalizing distribution.
A constructive distribution may occur when a shareholder has unreasonably
high compensation which is reclassified as a distribution, or when the
s-corp makes a below-market loan to the shareholder. The regulations
involving excessive compensation are lenient. Loans to the s-corp by the
shareholder can be a problem because of the lack of debt-equity
guidance. The regs have three safe harbors that should be considered in
these cases.
Sam briefly discussed the pass-through rules. He also discussed the rules
applicable when stock ownership changes. Generally, each item reported is
allocated to the shareholder on a per share-per day basis. However, if all
of the shareholders consent, a taxable termination can occur on the date of
the termination and the corporation will have two short years.
He also discussed the limits on deducting losses when the shareholder has a
zero basis. He said that "There is no greater gift that you can give
someone other than the gift of basis."
Section 1377 gives an s-corp an opportunity to shift income to low bracket
taxpayers. This occurs when one shareholder contributes low basis property
to the s-corp which is later sold as a gain. Unlike subchapter K, this
gain is not allocated to the contributing shareholder, but rather is
allocated to all of the shareholders based upon their percentage of ownership.
He summarized the rules for determining basis and methods to increase basis
to free a suspended loss. The best solution is for the shareholder to
contribute cash or property to increase basis. As of now, guaranteeing the
s-corp's debt does not create basis until the shareholder has to make good
on the guarantee. As such, the bank should loan the money to the
shareholder who in turn loans it to the corporation.
Finally he discussed the issues when converting a c-corporation to an
s-corporation. These include the recognition of gain due to a LIFO
election, the BIG tax on the sale of appreciated assets within 10 years
after the election (section 1374) and the tax and possible loss of the
election caused by passive income (section 1375).
Possible alternatives to avoid the BIG tax include a 1031 exchange to avoid
gain and increasing compensation and expenses to reduce or zero out
income. The s-corp could also make a charitable contribution of the
built-in gain property.
As always, Sam Donaldson's presentation was humorous and entertaining.
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The Vendors - Report #2
Reporter: Jason Havens
This year, we are trying to present topical compilations to report
interesting developments in the technology/vendor area. The second topic in
our coverage of interesting developments in the technology/vendor area this
year is calculation and illustration software programs.
Before we move to that, however, please add the following to the first
report:
DRAFTING SYSTEMS
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(5) Drafting Wills and Trust Agreements (DWTA)
(http://west.thomson.com/dwta/default.aspx) by Michael L.M. Jordan (the
ACTEC fellow from Hilton Head Island, SC -- not the NBA star!):
This reporter has not reviewed DWTA, but has worked and written articles
with others who have. Bob Wilkins (another ACTEC fellow from SC), the
creator of the system, was a strong supporter of using technology in an
estate planning practice. The system was eventually sold to Thomson/West,
and was completely redesigned in terms of the substantive language and the
engine on which the system runs. Now on GhostFill, DWTA is considered to be
another good option when considering these systems.
The newest version (v. 5) includes a new IDIT/IDGT, new QDOT provisions, and
other miscellaneous clauses that have been added or updated. There is a
demo available on the website (above) and at the Thompson area of the vendor
hall.
Now, moving to the main event of this second technology/vendor report:
CALCULATION AND ILLUSTRATION PROGRAMS
(1) Crescendo (http://www.crescendointeractive.com):
Almost everyone who works or practices in the charitable gift planning arena
knows Crescendo well. They offer excellent, user-friendly applications to
calculate charitable techniques and illustrate them in a way that clients
can readily understand. Because of Crescendo's strong presence within the
charitable arena, many larger charities (and some smaller ones) will freely
create these illustrations for you if you ask. Those charities also often
give you access to GiftLaw Pro, which includes substantive commentary and
explanations of most techniques and issues that arise in this area.
Crescendo offers continuing education courses as well, and is now even
offering an online, interactive program called GiftCollege
(http://www.giftcollege.com). There are several live sessions across the
country, which you can see on their website or in the brochure available at
their booth.
(2) Intuitive Estate Planner (IEP)
(http://west.thomson.com/product/17215017/product.asp):
This reporter has reviewed the IEP for a number of years. It is one of the
most sophisticated, comprehensive calculation and illustration programs
available in the estate planning area. The IEP, which has a newly-designed
interface that is easier to use, allows you to create various planning
scenarios. You may either compare among various planning techniques or
layer one technique upon another to illustrate the potential effects of
additional layers of planning. The output includes empirical/numerical
data, flowcharts, and more. At a subscription price of $900 for the first
year (and stepping down from there if renewed), the IEP is a powerful,
cost-effective tool.
(3) Lackner/Leimberg: DecoupleCruncher and Life Settlement NumberCruncher:
The former was reviewed last year
(http://www.abanet.org/rppt/meetings_cle/heckerling/2007/vendorswednesday.ht
ml) and does not seem to have changed much. The latter, however, is brand
new and will calculate whether a client should retain or sell an existing
life insurance policy. Life Settlement NumberCruncher helps to evaluate the
economic viability of selling an existing policy. The program also
specifically illustrates the potential tax consequences to the insured if
the policy is sold.
Besides another calculation/illustration program or two, we will cover tax
preparation/return software in our next (third) technology/vendor report.
Stay tuned for more....
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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.
_________________________________________
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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8701 World Center Drive
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Telephone (407) 239-4200, FAX (407) 238-8777
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NOTICE: Although audio tapes of all of the substantive session at the Miami
Institute currently are only made available to Institute registrants for
purchase, the entire proceeding of the Institute are published annually by
Lexis/Nexis. For further information, go to their Web site at
http://www.lexisnexis.com/productsandservices. The text of these
proceedings is also available on CD ROM from Authority On-Demand by
LexisNexis Matthew Bender. For further information, contact your sales
representative, or call (800) 833-9844, or fax (518) 487-3584, or go to
http://www.bender.com, or write to Matthew Bender & Co., Inc., Attn: Order
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