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«Aggregated Summary of Reports Provided by ABA-PTL and ACTEC-Prac List serves 2015 Heckerling Estate Planning INSTITUTE Edited, Aggregation of On-Site ...»

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Use of Section 7520 table issues are avoided so long as individual does not have an incurable illness or other deteriorating physical condition and greater than 50% probability of living for greater than one year. See Estate of Kite, where decedent sold asset to her children for a deferred, and she died prior to receipt of any annuity payments. Wife had a 12 and ½ year life expectancy at time of sale. Court held using IRS actuarial tables was appropriate even though annuity payments would not commence for 10-years, as wife was not terminally ill at time of sale and had a greater than 50% chance of living more than 1-year. Side note, Steve recommends using commercial software to determine actuarial factors.

The rationale for the exhaustion test is the annuity valuation tables are based on lives of individuals considering the actuarial likelihood of surviving up to age 110. Even if annuity is structured with grantor trust exhaustion test still applies. Failure to satisfy exhaustion test results in a gift. Ways to defend against the exhaustion test include challenging the regulation relating to exhaustion, enter into transaction with existing funded trust, or enter into personal guarantees, which did not work in Trombetta. A possible alternative to satisfy the exhaustion test without having a preexisting funded trust is to use a term annuity, for a stated term or annuitant’s life expectancy, whichever is shorter.

Steve concluded the presentation by discussing considering the use of a deferred annuity where the effect is to increase the likelihood that the annuitant receives no or few payments prior to death. Also consider sale of assets from a QTIP for a private annuity, reference to Estate of Kite.

2:50 - 3:40 Oh, What a Relief It Is: Curing Estate Plans that No Longer Make Sense in Light of the American Taxpayer Relief Act of 2012 (Focus Series) John F. Bergner As a result of ATRA, the federal wealth transfer tax system is no longer relevant to most taxpayers and less relevant to the rest. For most taxpayers it will be more important to plan for reducing income tax than for reducing transfer tax. Typical estate planning transactions that may have once been appropriate for a client may be less so in the post-ATRA world. This presentation explores how clients can escape from the no-longer-useful (or perhaps harmful) estate planning transaction or more efficiently administer those they cannot escape from.

Reporter: Michael Sneeringer Esq.

Mr. Bergner methodically described nine strategies that estate planning practitioners should review and recommend as needed to their clients post-ATRA. Mr. Bergner’s remarks are thoroughly described in the written materials so those wanting an in-depth discussion, with endnotes, should consult those materials.

Mr. Bergner began his presentation with an overview of pre ATRA planning and how estate tax savings were more important to clients than today whereby income taxes are more of an immediate concern. He described the frenzy of 2012 planning and the aftermath that is ATRA.

Mr. Bergner outlined the nine strategies that clients should pursue post-ATRA, including: (i) avoiding valuation discounts for client-owned assets; (ii) causing inclusion of trust assets in the settlor’s estate; (iii) causing inclusion of trust assets in a beneficiary’s estate; (iv) causing inclusion of trust assets in a third party’s estate; (v) causing inclusion of gifted assets (not in trust) in the donor’s estate; (vi) changing ownership of spousal assets to achieve a new income tax basis for appreciated assets and to preserve the income tax basis of “loss assets”; (vii) avoiding imposition of the 3.8% net investment income tax (“NIIT”); (viii) addressing life insurance policies and life insurance trusts that are no longer needed; and (ix) turning off grantor trust status to avoid unnecessary wealth shifts and to facilitate income tax planning.

Mr. Bergner noted that there are common issues in implementing these strategies, including, but not limited to:

planning for the future; ethical issues; state and local tax issues; state law regarding fiduciary duties; and governing documents.

Mr. Bergner first discussed avoiding valuation discounts for client-owned assets. He pointed out the example on page 6-7 of the materials in noting that after ATRA, although valuation discounts will still produce an income tax cost, because of reduced rates and increased exclusions and exemptions, valuation discounts may not yield as many estate tax benefits.

Next, Mr. Bergner discussed the strategy of causing inclusion of trust assets in the settlor’s estate. Within this strategy, he described the use of the “swap power” and noted the Estate of Halpern case as references.

Mr. Bergner then discussed causing inclusion of trust assets in a beneficiary’s estate. Some of the subtopics highlighted were the intentional triggering of the Delaware tax trap and avoiding funding the bypass trust upon a death of a spouse with an outdated estate plan. Mr. Bergner described the concept of using a family settlement agreement and the problems that can transpire there.

Next, Mr. Bergner discussed causing inclusion of trust assets in a third party’s estate. He noted that estate planning practitioners need to help their clients avoid Code Section 2014(e) and the one year transfer prior to death rule.





Mr. Bergner followed up that discussion with the strategy of causing inclusion of gifted assets (not in trust) in the donor’s estate.

In discussing changing ownership of spousal assets to achieve a new income tax basis for appreciated assets (and to preserve the income tax basis of “loss assets”), Mr. Bergner highlighted the discussion on page 6-56 in the materials. He highlighted in this strategy’s discussion how couples can live in a common-law state but still cause appreciated assets to be considered community property using an Alaska Community Property Trust or a Tennessee Community Property Trust.

Mr. Bergner only briefly described avoiding imposition of the 3.8% NIIT and addressing life insurance policies and trusts that are no longer needed. However, he noted that the ABA booth at this year’s Heckerling Institute had a wonderful PowerPoint presentation that it was giving out on NIIT.

Mr. Bergner finished up with the strategy of turning off grantor trust status to avoid unnecessary wealth shifts and to facilitate income tax planning. He noted that this strategy was of particular importance in the new income tax world whereby paying income tax when the client could get a step-up in basis is a bad move. He referred the audience to the seven alternatives on pages 6-77 through 6-89 of his materials.

In conclusion, as Mr. Bergner stated at the outset, even if the Estate Tax was repealed, everything in his outline would still be relevant!

3:55 - 4:45 Cain v. Abel: How to Prevent Sibling and Cousin Rivalry When a Family Owns a Business Louis A. Mezzullo The discussion will describe strategies to deal with disputes among siblings and/or cousins over business and family issues that are detrimental to the success of the business and a congenial family, taking into account trust, corporate, tax, and estate planning issues. In addition, it will cover ways of dealing with such conflicts once they occur.

Reporter: Joanne Hindel Esq.

Lou Mezzullo used Cain versus Abel as his theme story; he read a children’s version of the biblical story.

While most businesses in the U.S. are family owned it is estimated that only 30% survive to the second generation and only 12% to the third generation.

The most prevalent cause for the failure of family businesses is conflicts among brothers and sisters and/or cousins.

Some of the factors that cause sibling and cousin rivalries are:

1. Not all the siblings are active in the business and the inactive members would rather sell the business.

2. The siblings are in unequal financial conditions and those with less financial resources outside the business want more dividends or distributions.

3. Those family members who are not in the business may feel left out and not in control of the board of directors.

4. The family members without descendants will be likely to agree to the sale of the business.

5. If only one or some of the family members are named as trustees of the family trusts, the others will resent their control.

6. Similarly, if one of the family members is elected as president or CEO by the parent with control, the other siblings may resent that child.

For the lawyer representing the family business and the family there are ethical issues involving conflicts of interest in representing multiple clients with different interests and agenda. May also be difficult to represent active versus non-active family members or family members and non-family employees.

In the attempt to achieve a workable business succession plan the following factors may pose obstacles:

1. In-laws

2. Non-active family members

3. Owner’s unwillingness to give up control

4. Liquidity needs of the family and or/business

5. Divorce among the family members

6. Non-family key employees

7. Substance abuse Case studies In the majority of the cases Lou acted as an expert witness in the litigation. In some cases, he was able to make recommendations to avoid the problem, in others he could not.

He described the first case where the son was left as president of the family businesses and trustee of the family trusts – valued at about $4 Billion. Sisters became unhappy with his management and challenged their brother on a number of issues including his compensation and the return on the trust investments. A possible solution might have been to provide more specific terms in the trust authorizing the son/trustee to handle matters as he did.

In the second case one sibling was left as the president of the family business and trusts of the family trust and of a voting trust holding stock in the family business. The other siblings sued the brother because they wanted to sell the business but because the son/trustee had control of the voting trust they could not force the sale. The litigation revolved around the duties of the trustee of the voting trust.

In the third case non-active siblings were owners of interests in a pass-through entity. Since there was no provision in the partnership agreement to force distribution of cash, the owners could not access dividends to cover the taxes associated with the income allocated to them by the partnership return. A solution to the problem is to have a provision in the shareholders agreement that allows them to require the distribution of sufficient cash to cover the income tax liability.

In the fourth case, siblings asserted that one child exercised undue influence on the mother to leave the most valuable asset to that child in contradiction to the long- standing estate plan of the mother and father. One of the issues was the fact that the attorney who had represented the parents for years continued to represent the child who had allegedly committed undue influence.

Lou then described the George Halas Family dispute involving the Halas family and their ownership of the Chicago Bears. It revolved around the actions of the trustee of trusts that held interests in the company that owned the Chicago Bears. The lawsuit dealt with the trustee’s duty of notice to interested parties and the actions taken by the trustee and whether they were a violation of his fiduciary duty. The court addressed the language in the trust agreement and held that it authorized the trustee to engage in the conduct that he undertook.

Planning to avoid disputes With the founding owner a good approach is to encourage the owner to set policies while he is alive and set an example by being transparent about the business and the estate plan. The spouse of the owner plays a crucial role in ensuring that the next generation will function as a team.

When the second generation takes over the dynamics may change depending upon whether only one child or multiple children take control. If only one, this will be a lot like the original owner’s structure. If more than one child assumes control the possibility for conflict may increase.

By the third generation, the chances of having more remote family members in the business increases.

Management of the business may be more structured. The possibility of sale to a third party increases or the business could also go bankrupt.

A business should establish a mission statement and a strategic plan for the next five or ten years. These should be reviewed periodically and amended as the family changes.

The business should also adopt objectives and specific policies addressing compensation, standards for family employment, distributions of profits to the equity owners, retirement of family members, redemption of equity interests and other matters that create potential conflict.

The business should create communication guidelines that include regularly scheduled meetings of the family, perhaps the creation of an advisory board to add non-family members to the board of directors and eventually adding nonfamily members to the board.

A plan should be developed to address ownership of voting stock, the ability of active members to buy out inactive members and the use of premarital agreements to avoid dilution of ownership as a result of divorce.

4:45 - 5:35 Coping with Death and Incapacity: How the Uniform Fiduciary Access to Digital Assets Act will help Suzanne B. Walsh Our clients lead increasingly virtual lives. Unfortunately, both technology provider policies and federal and state laws lag far behind technology’s advances. The Uniform Fiduciary Access to Digital Assets Act (“UFADAA”), will give estate planners and fiduciaries the ability to plan for and manage digital assets, both before and after death.

Reporter: Tiffany L. Walker Esq.



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