Report No. 9 (Wed. 1/16)
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 Section 2053 Proposed Regs, Planning When The S Corp
Hits The Fan, Optional Funding of 529 Savings Accounts, Auction
Consignments, and Family Offices from the Wednesday sessions. The next
Report will cover the Fundamentals Program from the Wednesday sessions.
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Deductive Reasoning: Section 2053 Proposed Regs - Take the Guess Work out
of Deductible Claims
Wednesday, January 16, 2008
Presenter: Ann Burns
Reporter: Gene Zuspann
Ann Burns presentation summarized the changes in the proposed 2053 regs
published in April, 2007. She stated that the regs turn the principle that
the estate is valued at the date of death on its head.
Treasury's position is that there are a long line of conflicting cases in
this area and that the proposed regs will provide certainty. The regs are
proposed - they are not yet final. The current regs regarding claims are
five sentences long.
Although 2031 is very clear that assets are to be valued at the date of
death, 2053 contains no such provision.
2053 limits the deduction for a claim to the extent that it is "a bona fide
debt incurred for full and adequate consideration." The problem that
exists in this area is the valuation of contingent claims or those that are
uncertain.
Ann discussed some of the cases regarding the issue of the date-of-death
valuation of claims.
Ithaca Trust Co. involved a situation where the husband created a trust for
his wife for her lifetime with the remainder passing to charity at her
death. This case was decided in 1929, before the unlimited marital
deduction enacted in 1981. His wife passed away after him, but before the
filing of the estate tax return. The issue is the value of the life estate
on the return - should the tables be used to determine the value of the
life estate, or should they be calculated based upon the actual time she
survived?
The Supreme Court decided that the wife's life estate must be calculated
using the mortality tables, citing cases that held that the value is
determined at the date of death. Ithaca Trust was cited as authority in
section 2053 cases even though it involved the marital and charitable
deduction.
In Propstra (1982 9th Cir), after citing Ithaca Trust, and discussing the
changes in 2053 in the 1954 Code, the Court allowed a deduction for the
amount of a claim made against the estate, even though the claim was later
settled for substantially less. The court held that post death events
should be ignored.
In Smith v Comm'r (1999), the 5th Circuit reversed a Tax Court holding that
the amount of a claim settled after death for approximately one-third of
the claim made against the estate was limited to the amount paid. The 5th
Circuit adopted the 9th Circuit reasoning in Propstra and allowed the
deduction for the value of the amount of the claim filed. However, the
Court remanded for a determination of the value of the claim.
The result was followed in O'Neal v U.S. (2001) in the 11th Circuit. The
court, following Ithaca Trust, remanded the case to the trial court with
instructions to ignore post-death events and to provide evidence of
pre-death facts and circumstances to support the date-of-death value.
The 8th Circuit held in Jacobs v. Comm'r (1929), that Congress intended
that claims to be deducted were the actual amount paid, not theoretical
amounts determined at the time of death. The Court applied what it called
a practical approach. It compared the claims to those for funeral and
administrative expenses which did not occur until after the death of the
decedent. The Supreme Court denied cert. in this case.
In 1988, the 8th Circuit followed the Jacobs case, notwithstanding the
intervening cases holding that post death events were not to be considered
in determining the value of a claim.
Cases from trial courts have held that post death events should be
considered (Hagmann, T.C. 1973), and that a valid claim not paid because no
claim was filed were not deductible (Hester, W.D. Va., 2007).
Proposed Regs published
In 2007, the Treasury published the proposed regs adopting the 8th Circuit
position.
The regs require a protective election be filed for the unpaid portion of
claims not yet paid.
There are a number of changes in the proposed regs. Some are
- post-death events will be considered
- a court decree will be respected if there is a bona fide issue in an
active and genuine contest
- a settlement will also be accepted if it is reached in bona fide
negotiations between adverse parties
Estimated amounts may be used if the amount is ascertainable with
reasonable certainty. Executor fees and attorney fees may be estimated
No deduction will be allowed until the claim is paid - the executor must
file a protective election.
One of the more controversial changes involves claims by family
members. The IRS has gone beyond the "strict scrutiny" test to create a
rebuttable presumption that all claims by a family member or related entity
are not legitimate and not deductible. The estate now has the burden of
proof to rebut the presumption.
No deduction will be allowed for settlement of a non-enforceable claim
(i.e. because the statute of limitations has run or a claim is not filed),
even if the claim is paid. Ann said that the executor must be very careful
in this area.
Claims founded on a gratuitous promise are not deductible. There must be
consideration. An example given is that the decedent's guarantee of a
grandchild's debt is not a deductible claim until paid. An exception is
for a charitable pledge.
Recurring payments that are contingent are subject to a special rule. The
estate can either file a protective election and deduct the amounts as paid
or purchase a commercial annuity to satisfy the obligation and deduct the
cost of the annuity. A common example is the recurring payments under a
support obligation that terminates at the death or remarriage of the former
spouse.
Both ACTEC and RPPT filed comments. ACTEC's comments noted that the
existing regs had worked well for 50 years and that if regs are needed,
that Treasury adopt the majority opinion. It urged the Service to retain
the date-of-death valuation approach, especially considering that the
statute of limitations for an estate tax return cannot be
extended. ACTEC's comments expressed concern about the protective claim
process and that the rebuttable presumption applying to family members is
burdensome.
Finally, the College expressed concern in cases involving claims and
counterclaims. The example given involved a claim by the estate for
$1,000,000 (asset) and a counterclaim (debt) for $1,000,000. Under the
proposed regs, the asset would be included but the counterclaim would not
be an offset until it was paid or settled.
RPPT's comments also concerned the claims/counterclaims issues and the
claims by family members. The Section also provided practical suggestions
about the filing of protective elections.
There are possible challenges to the validity of the proposed regs. These
include: the regs are contrary to the language of 2053, the claims are not
valued at the date of death, and they conflict with the burden of proof
rules under IRC 7491.
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Special Session 1-B - Planning When The S Corp Hits The Fan
Wednesday, January 16, 2008
Presenter: Samuel Donaldson
Reporter: Mike Stiff
Samuel A. Donaldson presented a special session workshop to follow up on
his general presentation from Tuesday morning.
Mr. Donaldson began by covering three topics he was unable to cover in his
general session.
1. Two-Percent Shareholder-Employees: Often an S corporation may wish to
reward certain key employees with gifts of stock. However, this may cause
the employee to forfeit some important benefits. If an employee of an S
corporation owns more than 2% of the corporation's stock, the employee is
no longer eligible to receive some "employee fringe benefits" on a tax free
basis. Examples of the fringe benefits forfeited by a 2% shareholder
include: (1) the cost of accident and health insurance plans; (2) meals and
lodging furnished on the business premises for the convenience of the
employer; (3) the cost of group-term life insurance coverage; and (4)
cafeteria plans. Not all fringe benefits are forfeited. 2%
shareholder-employees may continue to exclude: (1) dependant care
assistance; (2) educational assistance programs; and (3) several other
fringe benefits listed in IRC Section 132, including no additional cost
services, qualified employee discounts, de miminis fringes, working
condition fringes and on-premises athletic facilities.
2 Employment Tax Loop Hole for Single Shareholder S Corporations: While
all profits of a single member LLC or sole proprietorship are subject to
employment taxes, only the salary of the single shareholder of an S
corporation is considered wages subject to employment taxes. Distributions
of operating profits to the shareholder-employee in excess of the paid
salary are not deemed self employment income and is not subject to
employment taxes. As a result there is an incentive to minimize salary and
maximize distributions to the extent reasonable. Of course if the S
corporation pays no salary to its sole shareholder, the IRS may
recharacterize a portion or all of the distributions as wages subject to
employment taxes. However, it appears the IRS is not policing this area as
carefully as it could. A recent report from the government estimated that
there are some 36,000 single shareholder-employees that received no
salaries from their S corporations. The report also indicated that the
percentage of S corporation profits paid as wages to single
shareholder-employees in 1994 was 47.1%. This percentage has declined to
41.5% in 2001. The shareholder-employee should be paid a salary equal to
what would be paid to an unrelated third party performing the same
services. More aggressive clients may choose to adopt a lemming
approach and keep salaries in the 41-47% range of net profits.
3. S Corporations as Partners of Family Limited Partnerships: Often a
corporation is used as the general partner of a family limited
partnership. This provides liability protection for the general partner
and often an S election is made to reduce the federal income tax
bite. However, if the S election has not been made care should be taken in
evaluating whether the conversion may trigger the potential application of
tax on the built-in-gains under IRC Section 1374. There is a de miminis
exception if the S corporation owns less than 10% of the partnership and
its interest in the partnership is valued at less than $100,000.
After discussing the above three topics, Mr. Donaldson presented three
hypothetical fact patterns. The first fact pattern addressed stock and
debt basis issues with an S corporation and the various ways to increase a
shareholder's stock basis. The second fact pattern illustrated charitable
contributions by S corporations and the tax consequences. It also
illustrated the point that charitable remainder trusts are not permitted S
corporation shareholders, but charitable lead trusts may make the ESBT
election and hold S corporation stock. The third fact pattern addressed
estate planning for S corporations. It demonstrated what to look for on a
balance sheet and some common traps for the unwary.
You know you have a great presenter when you are constantly laughing while
learning about the taxation of S corporations.
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Special Session 1-E - Optional Funding of 529 Savings Accounts
Wednesday, January 16, 2008
Presenters: Susan Bart and Sandy Baum
Reporter: Ronda Martinez
This was a panel discussion regarding the types of higher education
expenses and how to best prepare or fund for those, and reviewing how
affordable college may be or not.
Qualified Higher Education Expenses are "tuition, books, supplies and
equipment required for the enrollment or attendance of a designated
beneficiary at an eligible educational institution." Tuition and fees are
treated separately, as fees are what the college requires apart from
tuition. The trend is that fees are rising more rapidly than tuition.
Room and board on campus constitutes as a qualified expense, but there are
limits on expenses for living off campus. For example, transportation
costs are not covered. Books not required by school are not covered, and
the cost of a computer is not covered.
Sources of Funding. Anyone can pay for tuition, and the expense does not
have to be reported up to the annual exclusion amount for gifts. Don't
want to build up a 529 plan if tuition will be paid from another source,
such as from a large UTMA.
UTMA funds might be considered if the account has built up, and the
beneficiary is not ready to handle a large sum of money outright at age 21.
A Coverdell Education Savings account can be established for a beneficiary
at a financial institution. This type of account can be used also for
elementary and secondary schools. Contributions to the Coverdell are not
tax deductible, but the income earned is not taxable. Distributions are
tax free when used exclusively for the beneficiary's qualified higher
education expenses.
There are income and contribution limits. Income limits: up to $110,000
of adjusted gross income for a single taxpayer, and up to $120,000 of
adjusted gross income for a married couple. The maximum amount of annual
contribution for the same beneficiary is $2,000.
A Roth IRA may also be a good source for educational expenses for an older
parent with younger kids. Funds may be withdrawn without incurring income
tax or penalty if the owner is older than age 50 ½. Distributions are not
limited to higher education and there is no penalty for excess build up.
It may be best to fund the 529 plan somewhat conservatively because there
is a big penalty should it be overfunded. On the other hand, beneficiaries
can be changed or the money can be used for school expenses for another
generation.
An overview of the price of college was presented. The distinction between
tuition and fees was discussed, and fees are increasing faster than the
rate of inflation. As schools attempt to avoid negative publicity about
rising tuition, fees are increased instead. Also, state funding has
declined due to state budget problems. Pricing varies significantly
depending on the part of the country, private vs. public, endowments,
etc. The comparison by percentages is very misleading, while the actual
dollar increases may not be that great especially if the dollar amount was
low to begin with.
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Special Session 2-C - Negotiating and Understanding the Auction Consignment
Wednesday, January 16, 2008
Presenters: Ralph Lerner, Judith Bresler and Steven Thomas
Reporter: Ronda Martinez
This session was a role- play by the 3 presenters illustrating the
relationship between the auctioneer and the consignor. It is a fiduciary
relationship with the auction house acting as the seller's agent. The
agent has obligations of good faith for the safe custody of the property,
and to advise the seller of the property's auctionability. Contracts can
be modified.
I. Auctioneer's discretion. The auctioneer has complete discretion over:
a. catalogue description
b. framing
c. conservation
d. lot number
e. estimates
f. other
II. Commission
a. seller's commission may be waived
b. buyer's premium is never waived.
III. Marketing
a. travel arrangements and extras for the seller will reduce the
amount of premium paid to the seller.
IV. Settlement of account
a. extended payment terms allow for a bigger pool of bidders, and
bidding may be higher.
b. auctioneer may guarantee payment to the seller. The auctioneer
then takes title to the property and sets the reserve. Any overage is
split between auctioneer and seller. The guarantee disappears if the sale
is postponed because the price is based on current market conditions.
V. Consignor's representations and warranties - do what you can on these
matters before the consignment negotiations begin.
a. title
b. authenticity - seller has no knowledge or reason to believe
property is fake
c. free and clear of liens - marketable title
d. compliance with export and import laws - seller warrants that the
property has not been the subject of investigation or inquiries
e. right to reproduce photographs of the work - seller does not have
the right to grant copyright rights, and auction houses no longer ask for this
VI. Indemnification - against breach of seller's warranties
VII. Expenses
a. insurance - seller pays a percentage of the policy obtained by the
auctioneer's blanket policy
b. shipping - seller usually pays
c. other
VIII. Reserve price - the lowest price the property will be sold for and
kept secret between the auctioneer and seller
IX. Bidding by consignor - NO!! Must be disclosed, which would create a
cloud over any sale
X. Rescission - the sale can be rescinded by the auctioneer and look to the
seller for reimbursement even years afterward. The UCC allows 4 years, but
this differs from state to state.
XI. Withdrawal - prohibited to withdraw the property once the agreement is
signed, otherwise seller is subjected to a heft withdrawal fee of 20% of
the mean presale price.
XII. Advances/loans - endless variations and interest may be charged.
XIII. Taxes - recognition of the sale depends on each agreement and when
delivery or title passes.
XIV. Auction regulations - differ from state to state.
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Special Session 2-F - Everyone Has a Family Business - Everyone Needs a
Family Office
Wednesday, January 16, 2008
Presenters: Lynn Wintriss, Tim Chase and Kathryn McCarthy
Reporter: Mike Stiff
The presenters materials included a 9 page outline and each presenter
brought a slightly different background and perspective to the
conversation. Ms. Wintriss operates a single family office, Mr. Chase
operates a multi-family office and Ms. McCarthy is a consultant to wealthy
families and their family offices.
Ms. McCarthy began with an overview of five topics she wished to address.
1. What is a Family Office: Family offices are multifaceted organizations
that support and enhance the wealth and standard of living of families of
significant wealth and their individual members. No precise definition
exists. Families come in all different shapes and sizes, and so do their
family offices.
2. Evolutionary Pattern of Family Offices: Ms McCarthy described the 4
phases of a family office.
1st Phase = Founder's Phase (family office may be embedded in
family business)
2nd Phase = Sibling Phase (family office becomes more independent)
3rd Phase = Fully Integrated Family Office (central hub for
communication/ 3rd-5th generations)
4th Phase = 5th+ Generation Family Office (usually measured by
households not by members/ serves branches of the family)
3. Strategic Pattern: Family offices' main job is managing change for the
family. One of the challenges described was confronting the family's
relentless inertia in the face of constant change. The other
responsibilities of family offices is to develop leaders within the family
and to foster the growth and development of the family's human capital.
4. Common Family Office Models:
a. Single person
b. Small financial management office (CFO office) [2-5 people]
c. Small to medium size focused office (CIO office) [staff
varies]
d. Trustee support office [staff varies]
5. Two Most Common Questions:
a. What level of wealth is required?
* For a multi-family office = $25 million to $500
million
* For single family office = $250 million and up
b. How much does it cost?
* Depends on the needs and the size of the
family. Estimated $1 million dollars for a fully integrated family office
with professional staff. Also mentioned 50 basis
points for multi-family office as a starting point.
Some family's offices are run very lean while
others require special services and special
compensation arrangements.
Ms. Wintriss then discussed her experiences, duties and challenges of
running a single family office for a wealthy 3rd-5th generation
family. This was then contrasted by Mr. Chase's discussions of running a
multi-family office for several predominately 1st generation families.
Thereafter, the panel of presenters opened the discussion up to questions.
The advice given to families considering a family office was to first
identify the needs of the family. The family also should identify the
objective of the family office and what the family's expectations are for
the present, as well as the future. This involves asking tough questions,
including does the family really want to stay together. What are the
common needs of the family members? A common problem is that families tend
to hire technicians but forget the soft issues which are equally important.
One of the questions posed to the panel was what was on their wish
list. The universal answer from the three presenters was in-house software
that will enable consolidated reporting of assets for their families.
It was a very interesting session that emphasized that each family office
is as unique as its respective family or families.
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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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Headquarters Hotel - Orlando World Center Marriott
8701 World Center Drive
Orlando, FL 32821
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
Fulfillment Dept.,1275 Broadway, Albany, NY 12204.
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