Happy Birthday to It

It doesn’t look a day over . . . : The estate tax turns 100.

Estate Planning? I Don’t Have Time . . .

Why doves cry. Half of Prince’s estate to go to government.

Gonna Be a Prince of a Mess

Well, I guess since Prince didn’t have one, you don’t need one either . . .

Prince’s sister has said the superstar musician had no known will and that she has filed paperwork asking a Minneapolis court appoint a special administrator to oversee his estate.

Something tells me this will neither go smoothly nor end well.

When Dave Ramsey’s Wrong, He’s Really Wrong

Zander_2016-04-15_1200I’ve listened to Dave Ramsey. My wife owns a couple of his books. I get what he does, and I think he probably does a some good–in the debt area, at least. But he’s not always right. For example, I don’t care for some of his opinions about life insurance and much of his investment advice is off the mark as well. Further, his one-size-fits-all approach and his dismissive attitude towards insurance agents and other financial advisors are a real turn off for me. Seems that everybody’s out to get you but Dave and those he recommends. (I have more to say on this point, but I won’t.)

In short, I’m basically not a fan.

So you will not be surprised that I’m posting this link to a blog post by attorney Richard Chamberlain in response to a wildly uniformed excerpt about living/revocable trusts from one of Dave’s books. Make sure to read the entire post and the links in the post.

I must add my two cents on living/revocable trusts: Though they are just one part of a well-executed estate plan, they are an important part. Among many good reasons to establish a living/revocable trust, there’s this: setting one up and funding it will help you and yours get your minds around what you own, how you own it, and how you want it distributed or handled upon your death or incapacity. Mind you, I could add more than two cents to this conversation, but I’ll stop here.

Estate Administration in 25 Essential But Not Always Easy Steps

For your reading pleasure, an excellent but brief article titled, “Estate Planning and Administration – Be Prepared for the Year That Follows the Death of a Loved One.” Worthy of a read if only to put you on notice that there’s a lot to do following the death of a loved one.

Here’s the middle paragraph:

Estate Administration is a Process. The estate administration process generally takes one to three years to complete and is supervised by attorneys. There are numerous steps in the estate administration process, including the following: (1) get the executor appointed by the Surrogate’s Court, (2) open an estate checking account, (3) gather assets, consolidate and retitle them in the name of the estate, (4) address claims and expenses, (5) obtain date of death values for all assets, including appraisals for hard to value assets, (6) prepare estate tax returns (federal and state), (7) prepare income tax returns (including decedent’s final life income tax return and the estate’s income tax return, (8) obtain a closing letter and appropriate tax waivers from the IRS and state tax authorities, (9) distribution of the estate and funding of trusts, including allocation of assets among various beneficiaries, and (10) prepare accounting (formal or informal) and obtain receipt and releases from the estate beneficiaries.

Some of these steps may not come into play depending on the size of the deceased’s estate and how it’s set up. Nevertheless, lots to do.

A “True” Story Retold

IMG_0968As anyone who’s read my profile knows, I once wrote for Bloomberg–for three Bloomberg magazines, in fact. One of them was Bloomberg Wealth Manager, which was later sold and then sold again. I continued to write for the magazine in all its iterations. The other day, I stumbled upon a list of some of my articles for one of the later iterations. Since most of the articles are still (mostly) timely, I’m going to start posting them here. Here’s the first, called “A ‘True’ Story” about Casper, Wyoming’s Dave True and the family business. Enjoy, but with this one caveat: As I said, these stories are still (mostly) timely; the basic law underlying them is still (mostly) valid.

I’ll be posting a number of them. If one of them discusses a subject near and dear to your legal problems, don’t rely on the story as legal advice. Use it instead to prompt you to talk to an attorney about the problem to get more current insight on the subject.

Quote for the Day

Actually, this is not a quote but a paraphrase of some information I found the other day on the Internet. Can’t remember the source–I think I may have found it on Farm Bureau website and repeated in a variety of other places, including a Nationwide Insurance brochure I discovered online. With that, this:

Almost 97% of farms in the U.S. are owned by families, and only 11% of those families have succession or transitions plans in place to ensure that the farm stays in family hands after the current owner dies.

Some Things I Learned Answering Questions on a Forum for Asking Legal Questions

Yikes_2016-03-07_0843So I sometimes forget that everybody’s smart, just on different subjects. For example, I don’t know much about physics. My teachers tried, but my head could only hold so much gravity and speed of light and such. Well, today I was online in an online forum where non-lawyers posed legal questions to attorneys. These were real life people experiencing real life problems that involved the law in some way or the other.

Now let me be crystal clear: I don’t think these people are dumb. To repeat: we are all “smart,” just on different things. I happen to know a lot about the law, but boy am I at a loss about some other subjects (heck, even about some legal subjects). With that, here are a few things I learned while answering questions:

  1. Many, if not most people, don’t realize that estate taxes are no longer a concern for most of us. Did you know that you and your spouse must be worth almost $11 million before the tax man comes knocking? Yes, you may need to do some planning to make sure you take full advantage of that $11 million threshold, but still.
  2. Many people don’t realize that the First Amendment doesn’t protect them from employers, friends, parents, and the like from infringing on their free speech rights. No, the First Amendment protects us from the government infringing on our rights. And even then the right is not absolute.
  3. More than a few people confuse a living will with a plain old will, also known as a last will and testament. A living will is a document that tells your family and doctor whether you want life support and such should you become incapacity and unable to speak for yourself. A will or last will and testament is what you use to appoint guardians for your children and to give your property away when you die. You can read more here.
  4. A lot of people–especially people down on their luck financially–aren’t aware of the legal resources available to them that are free or at a reduced cost, nor are they aware of the state agencies that might be of help to them–child protective or family services, for example. For the record, in Wyoming you can go to the Wyoming State Bar to find free or reduced-rate legal services. In Utah, you should go here.  In Wyoming, you can find child and family services here.  In Utah, you’ll find them here.
  5. Finally, too many people are way too quick to pull the trigger; that is, they get angry and immediately shout “Medic!!!” I mean, “Lawyer!!!” To those I say, try to work out your problems by yourself and amicably first, especially if it’s family, then resort to the law. But the corollary to that is, if the proper response is legal, then hire an attorney. Trust me on that one.

Now where do I go to find out how fast the speed of light was back in the days of horse and buggy?

Estate & Business Planning: Facts Matter. If They’re Not on Your Side, You’re in Trouble.

Just Facts_2016-03-14_1519I’ve just finished reading the Estate of Purdue case, a tax court case decided in December. The case is interesting as an introduction to sophisticated tax planning strategies–FLLC, trusts, and all that. However, the real lesson from this case–and others like it–is that facts matter to courts.

In this case, the IRS was contending that the Purdue family used various strategies solely to avoid taxes. And the tax court disagreed with the IRS each time it threw a theory against the wall, hoping it would stick and support its argument. More importantly, in each and every case, the reason the IRS’s theory didn’t stick was the facts. The facts did not support the theory–and let me tell you, the tax court looked very closely at those facts.

Take just one example. The IRS argued that the Decedent’s transfer of some property to the Purdue Family LLC was not a “bona fide sale for adequate consideration” or value. The court first stated the rule:

In the context of family limited partnerships [and LLCs], the bona fide sale for adequate and full consideration exception is met where the record establishes the existence of a legitimate and significant nontax reason for creating the family limited partnership and the transferors received partnership interests proportional to the value of the property transferred. (emphasis supplied)

It then stated that “the objective evidence [ie, facts] must indicate that a nontax reason was a significant factor that motivated the partnership’s [LLC’s] creation” and that reason must be “an actual  motivation, not a theoretical justification.”

Having laid out the rule, the court proceeded to examine whether in their planning, the Purdue family satisfied a list of factors that would suggest the family was motivated by nontax reasons, including did the taxpayer

  • Stand on both sides of the transaction?
  • Depend financially on distributions from the partnership?
  • Commingle partnership funds with their own?
  • Fail to transfer the property to the partnership?
  • Discount the value of the partnership interests relative to the value of the property contributed?
  • Create the partnership  because of their old age or poor health?

But before addressing these six factors, the court looked at the evidence and agreed with the taxpayer that there were actually seven nontax motives for doing what they had done. For example, before the transfer to the FLLC, the taxpayer had five different brokerage accounts at three management firms. The Purdue Family LLC would enable them to consolidate accounts. Now her accounts had been consolidated with just one firm, “subject to an overall, well-coordinated . . . investment strategy.” Importantly, that strategy was in writing and acted upon.

One after the other, the court looked at the taxpayer’s seven motives and found that each reason was supported by actual evidence that the reason was not a mere sham. The taxpayer said she had wanted to simplify management. The evidence showed that management was simpler. The taxpayer wanted a mechanism to resolve disputes. The evidence showed that the family had used the dispute resolution mechanism in the plan. Etc. Etc.

Having approved each of the taxpayer’s seven motives, the court began its factor analysis:

  • Yes, the taxpayers stood on both sides of the transaction, but, the court said, “we have also stated that an arm’s-length transaction occurs when mutual legitimate and significant nontax reasons exist for the transaction and the transaction is carried out in a way in which unrelated parties to a business transaction would deal with each other.” Since the court had already agreed that legitimate nontax motives existed and because the decedent had received an interest in the FLLC “proportional to the property she contributed,” the “both sides now” argument carried no weight.
  • No, the decedent was not financially dependent on the distributions from the FLLC.
  • No, the decedent had not commingled funds.
  • Yes, the formalities of the FLLC had been respected–the FLLC maintained its own bank accounts, held at least annual meetings with written agendas, minutes, and summaries.
  • Yes, the decedent and her husband had transferred the property to the FLLC.
  • Yes, both dependent and her husband were in good health when they did the deal.

Do you get the picture? The court sided with the taxpayer because she and her family not only had a plan, they executed the plan in detail.

Imagine the result had the taxpayer set up the plan but 1. commingled funds, 2. didn’t observe business formalities, 3. hadn’t consolidated accounts, 4. etc.

My point: It’s great to have a plan that will save you taxes, BUT (and notice that’s a big but) if you don’t have good nontax reasons for doing what you want to do AND if you don’t execute your plan in most every detail, the tax court will see through you like a thin glass window. And the court will slap you down.

 

 

It’s Always Fun to Read About Uncle Sam Losing In Tax Court

United States Tax CourtThat happened in the Estate of Purdue case decided on December 28, 2015–less than three months ago. And you can read a brief summary of why in the instructively titled article Attention to How Your Farm Business is Organized Pays Off for the Heirs at Tax Time.

Bottom line, a family limited liability company formed with 1. important non-tax purposes in mind and 2. appropriate attention to the legal niceties of of running such a company paid off in big tax savings for the Purdue family. As the court’s opinion demonstrates, it’s not easy, but it can be done. Families whose net worth is tied up largely in small, closely held business or family farms or ranches should take note.

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