10/ Tax Law Update
David A. Handler, partner in the Chicago office of Kirkland & Ellis LLP, and Alison E. Lothes, associate in the Boston office of Sullivan & Worcester LLP, report on:
• Private Letter Ruling 200942020 (Oct. 16, 2009)—A beneficiary’s “hanging” withdrawal right does not interfere with grantor status.
• PLR 200944002 (Oct. 30, 2009)—A self-settled asset protection trust is still vulnerable to inclusion under Internal Revenue Code Section 2036.
• Estate of Malkin v. Commissioner—The Tax Court rules against a taxpayer, holding that transfers of two family limited partnership (FLP) interests were indirect gifts of the assets transferred to the partnerships and the assets of the partnerships were includible in the taxpayer’s gross estate under IRC Section 2036, T.C. Memo. 2009-212, 2009 WL 2958661 (Sept. 16, 2009).
14/ Christiansen Is a Boon to Charities
David T. Leibell and Daniel L. Daniels, partners in the Stamford, Conn., office of Wiggin and Dana LLP, explain how a recent federal appeals court decision has thrown open the door to charitable lid planning. Christiansen v. Comm’r is a huge win for charities and for the taxpayers who want to give to them.
Estate Planning & Taxation
16/ The FLP Quadrilogy
By N. Todd Angkatavanich
& Edward A. Vergara
Taxpayers have at long last established a significant beachhead in the war with the Internal Revenue Service over FLPs. Four decisions in the last two years have upheld and provided meaningful guidance to the bona fide sale exception to IRC Section 2036, the section that says transfers with retained life estates will be included in a decedent’s gross estate. These four rulings show what you need to do when structuring an FLP for clients.
N. Todd Angkatavanich is a partner in the New York, Greenwich and New Haven, Conn., offices of Withers Bergman LLP.
Edward A. Vergara is an associate in the New York, Greenwich and New Haven, Conn. offices of Withers Bergman LLP.
24/ Clean House
By Thayer J. Herte & Suzanne L. Shier
After this year’s revelations about the once-revered Bernie Madoff and the near collapse of the U.S. economy, clients and their attorneys are acutely aware that fiduciary responsibilities must be handled properly. Clients are feeling vulnerable, and any advisors’ conduct that seems even to hint at a conflict of interest hits a raw nerve. As the year-end approaches, re-examine how you can avoid conflicts and ensure that appropriate oversight and risk management controls are not only in place—but also monitored frequently.
Thayer J. Herte is a managing director at J.P. Morgan Chase & Co. in Chicago.
Suzanne L. Shier is a partner in the Chicago office of Chapman and Cutler LLP.
28/ Valuations of Private Promissory Notes
By Suzanne Daggert & Gary Ringel
At first blush, you may think the fair market value of a promissory note, secured or unsecured, is easily determined. But that’s not so. You can establish that the value is lower or even worthless—and reduce the transfer taxes attributable to the value of the note. The resulting tax savings almost always exceed the cost of an appraisal. Of course, the challenge is how to substantiate an alternate value so that the IRS is convinced. With recent declines in the real estate and credit markets, don’t miss this unique opportunity in valuations of promissory notes.
Suzanne Daggert is a senior valuation analyst at Ringel Kotzin Valuation Services in Phoenix.
Gary Ringel is the managing partner at Ringel Kotzin Valuation Services in Phoenix.
33/ A Buy-Sell Innovation
By Lawrence L. Bell
You devise a traditional buy-sell agreement for your client, but the possibility of death, retirement, withdrawal or disability still will create problems with taxes, step-up in basis, and transfer-for-value issues. Author Lawrence L. Bell discusses a strategy to mitigate these issues—and let your client retain policy cash-value control. In essence: have your client endorse a life insurance death benefit to other shareholders (or a trusteed cross-purchase arrangement) so that each shareholder owns his own policy, fund a buy-sell agreement with the life insurance, and use corporate dollars to pay the majority of the costs.
Lawrence L. Bell is counsel for special projects for Lynchval Systems Worldwide in Washington and the principal of Advisors, LLC in Chevy Chase, Md.
40/ Kill the CRTs
By Robert T. Napier
Once upon a time, the charitable remainder trust (CRT) was beloved. But that was long ago. In today’s harsh economic times, most everyone who’s a party to a CRT would be happy to see it terminated. Charities would like to have the funds sooner rather than later. Many grantors want to end their CRTs before income and federal gains taxes rise. Even the IRS would rather get the tax revenue now than risk the grantor dying prematurely and not collecting any tax revenue. All good things must come to an end. Your clients’ CRTs may be no exception.
Robert T. Napier is a partner at Robert T. Napier & Associates, P.C., in Chicago.
44/ The Unraveling of Donor Intent
By Kathryn W. Miree
& Winton C. Smith, Jr.
Donor gift restrictions are not new. What’s new are the number of lawsuits filed by donors and their families to enforce gift intent. Five high profile cases have emerged to serve as cautionary tales highlighting the issues and to show us how to stem the tide of gift purpose litigation. A guide for charities and advisors.
Kathryn W. Miree is president of the Birmingham, Ala.-based non-profit advisory firm of Kathryn W. Miree & Associates, Inc.
Winton C. Smith, Jr. is a lawyer in the Memphis, Tenn. firm of Winton Smith & Associates.
54/ Not SO Bad
By Gerald B. Treacy, Jr.
On Sept. 24, 2009, the IRS published proposed regulations that, although not ideal for supporting organizations (SOs), were not as harsh as expected. But one new payout requirement—that Type IIIs distribute at least 5 percent of the value of their non-exempt-use assets annually—may prove to be a substantial burden, particularly in a market that makes earning a 5 percent rate of return unlikely. This requirement alone could drive Type III SOs to convert to Type I or II status, or to terminate altogether. That would be a significant loss. In an era when fundraising and making ends meet is increasingly impossible, public charities are depending more heavily on the support of Type III SOs. Meanwhile, individuals and families are depending more heavily on these public charities—and they would be the ultimate losers.
Gerald B. Treacy, Jr. is a partner in Poulsbo, Wash.’s Treacy Law Group, PLLC and of counsel to Seattle’s MPBA.