Estate Planning Awareness Month

by  /  Estate Planning, News

Alright…November is National Election Month and that is pretty cool, but OCTOBER IS NATIONAL ESTATE PLANNING AWARENESS MONTH, and that is AWESOME! According to LexisNexis, 55% of American adults do not have effective estate plans [Wills] in place. This jumps to 68% of Afro-American adults and 74% of Hispanic adults. Clearly these numbers, together with a general lack of financial awareness among our adult populace, is a major socioeconomic issue worthy of our attention. October is, conveniently, six months distant from April, Financial Literacy Month, so we can apportion our attention to this vital issue equally throughout the year.

You may have seen George S. Kaufman’s play or Frank Kapra’s movie (starring Jimmy Stuart, Jean Arthur and Lionel Barrymore), You Can’t Take It with You, but do not confuse the title’s sentiment with a truism. When we pass away, our life’s accumulated assets go in one or more of three directions:

  1. Our Descendants, Relatives, Friends or other Designees
  2. Our Chosen Charities
  3. According to the Laws and Regulations of Our Federal and State Governments

We cannot take our assets with us. Either we pick from columns A or B, or we default to column C. If we are given the opportunity to control the disposition of our assets and our affairs after our lives, why would we ever fail to develop an estate plan, no matter how simple? We all have estate plans… either we develop them or the state has them written into their statutes, to apply if we fail to form our own.

Hopefully you have never experienced it personally and can rely on your humble scrivener’s assertion that you do an incredible disservice to your heirs when you “shuffle off this mortal coil” without an effective estate plan in place. You make the lives of those you leave behind miserable for a protracted period while they deal with your state and county’s intestate succession rules. If you feel no need to do it for yourself, do it instead for those you love, but do prepare at least a Will.

Lack of financial awareness is an even larger issue. We have previously discussed this in the area of retirement planning. That the last twenty years’ shift from defined contribution “pensions” to defined contribution “401(k) plans” has transferred the responsibility for our retirement security from our employers to us, is an unfortunate reality and a huge risk, given the relative lack of financial sophistication in our wage-earning and retirement-saving population. Previous submissions have discussed the woeful percentage of impending retirees who have adequate balances in their defined contribution plans as they approach the red zone before and after retirement.

Having taught Financial Planning to senior Finance majors at a nearby university, your scrivener has given this matter a good bit of thought. If graduating Finance major seniors, venturing out into the workplace, have not been taught the fundamentals of personal tax and finance prior to taking a class in their final semester, it is fair to assume that their peers in the humanities, or community colleges, or the malls or mills, have somewhat less financial expertise with which to manage their affairs. This could prove catastrophic when a generation of baby boomers retire with only $50,000 in retirement assets, forcing them to rely on social security for their main support throughout their ever-lengthening life expectancies.

The answer lies in educating our youth as to financial basics and then carrying this education through secondary and advanced education.

  • Every freshman in every college, university and community college should take a basic personal finance class [even if they are journalism majors].
  • The process should start in middle school and continue throughout our adult life.
  • The FDIC sponsors Money Smart, a comprehensive financial education curriculum designed to help low- and moderate-income individuals outside the financial mainstream enhance their financial skills. [].
  • Participants in defined contribution plans must receive meaningful education on what they will need in retirement and what they will need to do before retirement in order to save that amount of money.
  • We should quit debating whether we owe a fiduciary duty to plan participants not to steal their money, and, instead, debate the best way to avoid a generation of destitute retirees.

But I digress… celebrate Estate Planning Awareness Month by reviewing your Will. If you do not have one, write one today, before the unexpected happens…


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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End of Family Business Discount Transfers

by  /  Estate Planning, Estate Tax, News

We take a brief respite today from our retirement planning discussions to focus on BREAKING NEWS from the estate tax world.

  • On August 2, 2016 the IRS proposed new regulations under IRC Sec. 2704 (the “Regs”) that would, in most situations, prohibit the use of certain discounts customarily applied when valuing transfers of interests in family-owned corporations, partnerships and limited liability companies (“LLCs”).
  • A challenge faced by owners of closely-held businesses is how to transfer ownership to succeeding generations in a tax efficient manner (avoiding estate tax of 40%).
  • Taxpayers have traditionally taken valuation discounts for transfers of such interests of 25% to 40%, reflecting the fact that an interest in a family-owned business is restricted and not readily convertible into cash.
    • Owners of minority interests in a family business have been able to discount the value of the interest to reflect the reality that they do not have the voting power to control the entity and compel a dividend or a redemption of their interests.
    • Similarly, an owner of a minority interest in a family business has been able to claim a further discount for lack of marketability, reflecting that outsiders are reluctant to purchase an interest in another’s family business or the formation documents may limit any such transfer.
    • Discounting the value of the interest transferred by gift or inheritance, lowers the value that is subject to gift or estate tax, often referred to as discount or leveraged gifting.
  • Many estate planning techniques utilize valuation discounts to increase the amount of property that may be gifted or otherwise transferred to or in trust for family members. For example, Grantor Retained Annuity Trusts (“GRATs”) rely on discount gifting for much of their tax benefits.
  • Often these family limited partnerships (“FLPs”) and family limited liability companies (“FLLCs”) hold business, real estate or other commercial operations that are actually operated by multiple generations of the family, but sometimes FLLCs or FLPs are simply used as wrappers to hold marketable assets, such as publicly traded securities, in order to generate a discount value for transfer purposes. The IRS has long viewed such strategies as abusive, but has been unable to convince Congress to legislate the discounting away. Similarly, many court cases have focused on the reasonableness of the discounting, but still have permitted the practice. The Regs represent the IRS’s attempt to unilaterally end the discounts, without the help of Congress or the courts, similar to the effect of an executive order.
  • The Regs are very technical, but generally would treat the above restrictions to voting and transfers as if they would not be enforced by the family on its own members and, thus, would be disregarded when valuing the interest for transfer tax purposes.
    • The Regs would generally value an entity owned by family members by disregarding these discounts and valuing the owner’s interest as a pro-rata share of the total fair market value of the entity.
    • The Regs would also treat transfers made within three years of the transferor’s death as a date of death transfer, thereby increasing the estate value for transfer tax purposes.
  • After a ninety-day comment period, public hearings will be held on December 1st. The Regs may be effective as early as January 1, 2017.
  • This is yet another step in the limiting of estate tax planning techniques. Remember our earlier discussion of President Obama’s Budget Proposal provisions regarding:
    • reducing the unified credit from $5.4 to $3.5 million,
    • eliminating step-up in cost basis to date-of-death fair market value,
    • eliminating short-term GRATs and
    • eliminating dynasty trusts.

Watch for such of these items as may be enacted via regulation or executive order to be effected. These represent “low hanging fruit” for tax revenue enhancement.

  • Accordingly, any taxpayer owning or managing a family business has a closing window of opportunity in which to use the discount for minority interest and lack of marketability, thereby significantly lowering the value for transfer tax purposes. This represents the voiding by year-end of fundamental estate and gift planning tactics used for a long time. IF YOU OWN A FAMILY BUSINESS AND HAVE CONSIDERED ESTABLISHING, OR TRANSFERRING BUSINESS INTERESTS TO, AN FLP OR FLLC IN THE PAST, NOW IS THE TIME TO ACT… PLEASE CONTACT YOUR TAX ADVISOR ASAP. Advisors may be rather busy completing these projects for their clients before year-end. If you have issues we can help solve, please contact us.

Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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President Obama’s Last Budget Proposal

by  /  Estate Planning, Retirement Planning, Tax Planning

Last month, the President proposed his FY2016-17 budget request for the Federal government. Congress often considers these provisions while developing its own budget resolution, and they are recorded in Treasury’s Greenbook.  Intermittently, Congress actually passes a budget, as it did for the first time in seven years in December 2015. It is unlikely that any material tax legislation will be passed during this 2016 election year, so the President’s proposals are not likely to be approved. Nevertheless, the President’s proposals indicate what is on Washington’s “radar screen,” in terms of “crackdowns” or “loophole closers,” such as the ending of the file-and-suspend and restricted Social Security claiming strategies last fall.  Because we are always predicting the future implications legislation might have on our planning process, it is worthwhile to discuss some of the impacts of such proposals before they are about to be approved.


We plan to investigate the changing retirement landscape in detail in future submissions, but some of the budget proposals deserve mention here. There seems to be an overriding goal of limiting the use of common retirement planning tools by affluent taxpayers.

  • Prevent new retirement plan contributions for taxpayers with more than $3.4 million in account balances. The government will determine what we need in retirement plans, versus what must be in taxable investment accounts.
  • Eliminate “backdoor” Roth IRA contributions. Roth IRAs are an essential piece of the retirement planning puzzle that we will discuss at length in the future. The “backdoor” approach is merely a tactic for taxpayers whose adjusted gross income (“AGI”) exceeds limits for a normal Roth IRA contribution, to convert after-tax dollars into a Roth IRA.
  • Required Minimum Distributions (“RMDs”) required for Roth IRAs at age 70 1/2. Currently required only for traditional IRAs.
  • Eliminate Stretch IRA which require non-spouse beneficiaries to use the 5-year distribution rule, rather than their life expectancy.
  • Eliminate the preferred treatment of Employer stock liquidated in a retirement plan after retirement.


  • Reduce estate tax exemption from current $5.4 million to $3.5 million (the 2009 level).
  • Eliminate Step-Up in Basis at Death and replace with deemed-sale-at-death, resulting in significant capital gains taxes for beneficiaries.
  • Establish 10-year minimum term for GRATs, gutting the common tactic of using multiple short term GRATs. Discussion of use of GRATs to freeze estates is beyond today’s topic.
  • Similarly, requiring property sold to an Intentionally Defective Grantor Trust (“IDGT”) to be included in the taxpayer’s estate guts the tactic, but is for discussion another day.
  • Prohibit Dynasty Trusts, limiting their duration to 90 years.
  • Replace unlimited present interest gifts with “crummy” notices to get them under the annual gift exclusion with a new class of future interest gifts that are permitted up to $50,000 per year to trusts or of pass-through entity interests.


  • Increase maximum capital gains tax rate from 20% to 24.2%, which becomes 28% when the 3.8% Medicare surtax on net investment income is added.
  • Limit annual 1031 Like-Kind Exchanges of Real Estate to $1 million per year. Anything over would be taxable capital gain.
  • Apply the 3.8% Net Investment Income Medicare Surtax to S corporation distributions, limiting the tax advantage of pass-through S corporation treatment.
  • Require average cost for all stock sales (as has been the case for mutual funds), rather than specific lot identification (“cherry-picking”) for tax-loss harvesting purposes.

The provisions discussed above are used in income tax planning to a similar extent that the voided “file-and-suspend” tactic was used in retirement planning prior to its termination. Passage of these proposals will have a material impact on tax planning.  The outcome of the Presidential election is likely to have a significant influence on the ultimate passage of these ideas into law. STAY TUNED!


Remember, it’s not what you make that matters…it’s what you keep!

The general information herein is not intended to be, nor should it be treated as tax, legal, or accounting advice, nor can it be used for the purposes of avoiding tax penalties.  Please seek advice from an independent tax advisor before acting on any information presented.

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