Category Archives: Gift Tax

Tax Like its 1972?

Posted on by under Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Financial Powers of Attorney, Gift Tax, Gifts to Minors, Illiquid Assets, Kansas, Living Wills, LLCs, Missouri, Probate, Small Business, Trusts, Wills

Bloomberg provides this interesting article on Summer Redstone’s appeal of the IRS arguing his 1972 transaction was a gift. Some might think that 41 years is a bit late (!) to be challenging a transaction (or collecting tax on it), and many of the lawyers quoted were surprised by the IRS’ claims. It will be fascinating to watch how this case plays out. If the IRS’ argument turns out to be merited (albeit 41 years late), this has ripple potential in the estate planning and tax communities, as attorneys, accountants, and advisors grapple with how to insulate clients (and themselves) from liability decades after the fact.

Stay tuned for updates from the recent 2013 KC Estate Planning Symposium, which I attended last week (25-26 April 2013). This year’s program featured a host of top speakers on topics ranging from grantor trust tax, FLP and other case law updates to special needs trusts, IRAs, asset protection, and Social Security planning.

If my office, Johnson Law KC LLC, can help you or your family with gift tax or other estate planning issues, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com) for a convenient free consultation.

(c) 2013, Stephen M. Johnson, Esq.

Intent, Trusts, and No Contest Clauses

Posted on by under BDITs, Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Family Limited Partnerships, Gift Tax, Gifts to Minors, Kansas, LLCs, Missouri, Probate, Small Business, Trusts, Wills

The Kansas Supreme Court recently issued an interesting decision in Hamel v. Hamel, arising from Rooks County, Kansas (north central Kansas). Hamel teaches us 3 lessons: as you contemplate estate planning, business succession, and your wealth management goals, be sure (1) your estate planning documents clearly communicate your intent , (2) others (family members and professional advisors) understand your intent, and (3) your estate planning documents provide broad discretion and the necessary powers to handle various transactions. Intent matters and clearly communicating your intent makes all the difference.

Hamel involved Lawrence Hamel, a trust beneficiary and child of the decedent, Arthur Hamel, challenging his father’s trust, specifically whether the trustee had authority to sell farmland owned by the trust. Arthur’s trust said another son (who was a trustee of the trust), Dennis,  had priority (or first refusal rights) to buy the land owned by the trust, and that Dennis had 3 years to buy the land from the trust. Dennis signed an installment sale contract to buy the land over 6 years, paying 5% interest (no interest during the 6th year), funding the purchase with money from the trust with a mere $10,000 down payment, and for Dennis to get all the income and profit the land generated during the 6 years. So Dennis wanted to self deal with the trust on very favorable terms (he was a trustee in his fiduciary capacity and the buyer in his individual capacity, a conflict of interest which the trust waived), have a year of payments interest fee, minimal down payment, and get the land’s revenue before he owned the land. Not surprisingly, Dennis’ brother Lawrence objected. Lawrence pointed out that while their father had wanted Dennis to have the land and permitted favorable inter-family sale terms, the deal had to be done within 3 years, not 6. Enter the trust’s no contest clause, which said if you object to the sale or other trust administration aspects, you lose your inheritance.

This family’s trust dispute wound up at the Kansas Supreme Court. The Justices, in an 8-1 opinion, agreed with Lawrence that the 6 year installment sale to Dennis was too long, since the trust only allowed for 3 years. Instead of enforcing the no contest clause (and disinherit Lawrence for his objections to the farm sale), the Court found that Lawrence had probable cause to challenge the sale of the farm from the trust to his brother. The Court found probable cause in the 3 year sale provision: “while the Trustees [Dennis and a sister] possessed broad authority to sell the Trust real estate, they were not authorized to enter into a contract for the sale of the farmland that extended beyond the 3-year period specifically provided by the Trust.” (Hamel, pg. 24) The installment sale could go far, but not that far. As the Court saw it, Lawrence was just looking out for the Trust’s best interests (the Trustee’s job and fiduciary duty), when the Trustees were cutting corners, so of course he could object and make the Trustees follow the Trust’s rules. The Court didn’t address it, but there may also have been tax traps lurking beneath the surface of this installment sale. The IRS looks closely at inter-family sale and transactions and asks: (1) was the farm properly valued (or did the family take too many discounts)? (2) is the buyer paying the seller a fair market rate of interest for the entire installment sale period? (interest free loans are gifts) (3) is the buyer a bona fide purchaser, or is the “sale” really just a gift wrapped in different paper?

Installment sales are an important technique for asset protection, estate planning, and business succession planning. But they have to be carefully structured and done right, or the result is a long, expensive, contentious, public mess. Installment sales are frequently used by serial entrepreneurs trying to transition a business; farmers, ranchers and landowners trying to pass the family farm on to the next generation, or business owners who are ready to retire from the day-to-day grind. When coupled with a Missouri inheritor’s trust (a beneficiary defective inheritor’s trust), grantor trust (an intentionally defective grantor trust), a FLP (family limited partnership), or a family LLC (family limited liability company), an installment sale can be an efficient, effective, and integral part of a complex estate plan. A good installment sale will freeze an asset’s value for tax purposes, get it off your balance sheet (for tax and asset protection purposes), and add value to the asset’s legacy for generations.

If my law firm, Johnson Law KC LLC, can serve you or your family’s legal needs, call (913-707-9220) or email me (steve@johnsonlawkc.com) for a free, convenient consultation.

(c) 2013, Stephen M. Johnson, Esq.

Marriage and Taxes

Posted on by under Estate Planning, Estate Tax, Financial Powers of Attorney, Generation Skipping Tax, Gift Tax, Kansas, Living Wills, Medical Powers of Attorney, Missouri, Trusts, Wills

You’ve probably seen news stories about the Supreme Court arguments this Tuesday and Wednesday in the gay marriage cases, Hollingsworth v. Perry and Windsor v. United States. This blog doesn’t take political positions, but the Windsor case presents an interesting marriage and tax question. Windsor involves a lesbian couple who were legally married in New York, where one of the spouses died, and the surviving spouse tried to claim a marital deduction for estate tax purposes. One of the federal tax benefits to being married is that the surviving spouse can claim a marital deduction on the estate tax. The government denied the marriage tax benefit in Windsor because under federal law (the Defense of Marriage Act (1996) (“DOMA”)), marriage is defined as between 1 man and 1 woman, so a lesbian couple isn’t married under federal law. So Ms. Windsor, the elderly widow from New York, doesn’t get the marriage tax benefit, even though she was legally married under New York law (marriage is a state law issue, and New York allows same-sex marriage). Ms. Windsor sued the government, arguing that DOMA is unconstitutional, because it prevents her from receiving the tax benefit she would get if federal law recognized her as legally married (like New York’s law did).

So does Ms. Windsor get her tax benefit, does DOMA’s marriage definition fall, or will something else happen? We will know by the end of June, when the Court issues its opinions. Ms. Windsor’s case may well join the annals of tax law stories.

If my office, Johnson Law KC LLC, can help you navigate the complex labyrinth of tax law and estate planning, give me a call (913-707-9220) or email (steve@johnsonlawkc.com) for a convenient free consult.

(c), 2013, Stephen M. Johnson, Esq.

Inheriting personal property

Posted on by under Estate Planning, Financial Powers of Attorney, Gift Tax, Gifts to Minors, Illiquid Assets, Kansas, Missouri, Probate, Small Business, Trusts, Wills

This Daily Mail article talks about Delta Airlines’ new policy prohibiting transfer of frequent flier miles to family members or friends upon death. Frequent flier miles are a form of personal property – you accumulate them and then trade them for a ticket or two on a flight of your choice – and this is another limitation on transferring (or alienation, as lawyers like to say) of personal property. Is it legal? Sure – if you’re issuing personal property to others, you can specify the conditions (e.g. only this airline, these flights, this time of year, these destinations, etc). Like many licenses, airline tickets (or movie, theater, or sporting game tickets) have restrictions on use, re-use, and transfer. The moral of this story is don’t count on being able to pass your frequent flier miles on to your family.

If my office, Johnson Law KC LLC, can help you or your family with estate planning questions, please call me (913-707-9220) or email me (steve@johnsonlawkc.com) to schedule a free, convenient consultation.

(c) 2013, Stephen M. Johnson, Esq.

Gift Tax Traps

Posted on by under Business Succession Planning, Business Transitions, Estate Planning, Estate Tax, Family Business, Family Limited Partnerships, Generation Skipping Tax, Gift Tax, Kansas, Missouri, Trusts, Wills

The WSJ has this helpful article, entitled “Gift Taxes: What Your CPA Doesn’t Know” about potential gift tax traps. The article helpfully recommends having your CPA and your attorney collaborate on gift tax returns. Specifically, the article zeroes in on reporting large gifts of real estate, business interests, or other non-routine gifts of stocks and bonds.

The gift tax and generation-skipping transfer (GST) tax are complex estate planning issues. If my office, Johnson Law KC LLC, can help you or your family navigate these challenges this tax season, or work with your CPA to review returns, call (913-707-9220) or email me (steve@johnsonlawkc.com) for a convenient free consult.

(c) 2013, Stephen M. Johnson, Esq.

Surviving IRS Audits

Posted on by under Estate Planning, Estate Tax, Gift Tax, Income Tax, Kansas, Missouri, Small Business, Trusts, Wills

CNBC has this interesting article about how best to handle an IRS audit. While no one wants to be audited by the IRS, Ms. Washington’s article provides some helpful tips for surviving an IRS audit.

If my firm, Johnson Law KC LLC, can help you with tax or other estate planning issues, call (913-707-9220) or email (steve@johnsonlawkc.com) for a convenient free consult.

(c) 2013, Stephen M. Johnson, Esq.

Preparing Your Kids for an Inheritance

Posted on by under BDITs, Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Financial Powers of Attorney, Generation Skipping Tax, Gift Tax, Gifts to Minors, Illiquid Assets, Kansas, LLCs, Missouri, Probate, Small Business, Trusts, Wills

The WSJ/Barron’s has this fascinating article about the new $5.25 million per person lifetime gift tax exemption that Congress passed as part of the deal to avert the fiscal cliff. But the question that arises, especially as some young, wealthy heirs and heiresses’ antics grace the tabloid and Internet headlines: can a child properly handle their inheritance? If you give your child $5 million, will they save and invest it wisely, or will they spend it frivolously and waste your hard-earned wealth and financial legacy to them? This age-old issue is nothing new – there’s a non-tax reason that custodian bank accounts exist for minors, that trusts are popular, that savings bonds, CDs, and 529 college savings accounts exist – parents and grandparents need to be able to shepherd the money their children and grandchildren will receive. Yes, a gift is giving away money without formal strings attached – not reserving some right to take it back if a financial rainy day comes along, if your child wastes the money on things you don’t approve of, or if the child turns out not to have any financial or investing sense. But legal techniques exist to help protect the gift while your child learns how to work with their inheritance.

If the economic downtown hit your portfolio like high tide hitting a beautifully crafted sand castle on the beach (as it impacted most people’s hard-earned investments, savings, and home equity), or if you’re still working to build up wealth as the economy slowly recovers, you may be looking at smaller gifts for family members. Maybe  you anticipate giving tens or hundreds of thousands to loved ones, not millions. The same principle still applies – can you child or grandchild handle getting a check for $5,000, $10,000, $100,000?

Parents and grandparents need to talk with their children and grandchildren about money, investing, saving, and inheritances. It may not be an easy or fun talk and it might be awkward at first, but it’s a lot easier to discuss now than when you’re gravely ill or when your family is trying to clean up a messy estate after you’ve died. Look for some tips on how to inherit and handling an inheritance soon on this blog. In the meantime, if I can help you or your family with your estate planning, small business, or asset protection needs, give me a call (913-707-9220) or email me (steve@johnsonlawkc.com). At Johnson Law KC LLC, we’re here to serve your needs – now and for many years to come.

(c) 2013, Stephen M. Johnson, Esq.

Happy New Year: The “Fiscal Cliff,” Your Taxes and Estate Planning

Posted on by under BDITs, Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Generation Skipping Tax, Gift Tax, Gifts to Minors, Income Tax, Kansas, Missouri, Small Business, Trusts, Wills

Happy New Year! While the nation technically went over the “fiscal cliff” at 12:01 am Tuesday morning, the U.S. Congress has reached a deal to retroactively avert the fiscal cliff crisis and the bill has passed the House and Senate. Here’s the scoop:

  • Portability survives – you can use your deceased spouse’s unused estate tax exemption. Using portability requires filing an federal estate tax return (even if no estate tax is owed) and careful tax planning with your attorney.
  • Estate and gift tax exemptions are $5.25 million per person (inflated adjusted). Using portability, a married couple can give their children $10.50 million. The maximum estate tax rate is 40% on estates over $5.25 million. See Sec. 101 (c)(2) (page 11) of the Senate bill for exact estate tax rates. See Sec. 101(c)(3)(A) (estate and gift transfers after 12/31/2012).
  • Annual gift tax exclusion is now $14,000 per person/year ($28,000 per couple/year), as the IRS announced an inflation adjustment in November 2012.
  • Generation skipping tax exemption is $5.25 million per person. See Sec. 101(c)(3)(A) (generation skipping transfers after 12/31/2012).
  • Grantor income tax trust rules the same. So intentionally defective grantor and beneficiary defective trusts (IDGTs and BDITs) are legal wealth transfer techniques for estate and business planning. These trusts allow parents to transfer wealth, businesses, farms, and other assets to their families without the assets being included in the parents’ estates, while being income taxable to the grantor or the beneficiary, depending on the trust’s design.

The fiscal cliff deal also includes new income tax rates, capital gain tax rates, and other tax provisions of interest to individuals, couples, small business owners, farmers, and ranchers. Individuals earning more than $400,000 per year, or couples earning more than $450,000 per year, should contact their accountant immediately on these issues. Forbes has this helpful article on how the fiscal cliff deal affects various taxes, IRAs, charitable deductions, and other planning considerations.

If I can help you or your family with estate planning or small business or family farm transfer planning, please contact our office, Johnson Law KC LLC – call us at (913) 707-9220 or email us at steve@johnsonlawkc.com.

In reaching the fiscal cliff deal, Congress delayed until March dealing with the massive spending cuts that are required by law as part of the last budget deal (the sequestration cuts). While it seems unlikely, it’s possible that Congress will revisit some of these rules in March or add additional restrictions to existing estate planning techniques. If Congress did change these rules in March, there’s a small probability of having 2 estate tax regimes (as we did in 2010, where an estate could elect a stepped-up basis and pay estate tax, or use a carryover basis without owing estate tax).

(c) 2013, Stephen M. Johnson, Esq.

To Plan or Not to Plan: Rip Van Taxes

Posted on by under Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Generation Skipping Tax, Gift Tax, Illiquid Assets, Kansas, Missouri, Probate, Small Business, Trusts, Wills

Happy Thanksgiving! Yahoo Finance has this article about the coming “fiscal cliff” and some people’s race to do year-end estate and tax planning, while others are brushing off the tax planning opportunity and waiting to see what, if anything, Congress will do.  While the estate, gift, and generation-skipping tax exemptions are likely to be at the highest point in our lifetimes and the rates are probably at historic lows, the article  points out that maxing out your exemptions may only really matter if you’ve got $10 million of spare assets to give away in trusts. Anecdotally, many estate planning attorneys are seeing clients with $5 million+ estates setting up irrevocable trusts this year, but many middle class clients aren’t as concerned about looming tax increases. The article correctly notes that the estate tax “is not a tax on everyone, it’s a tax on people [with substantial assets] who aren’t paying attention.” Whatever you’re stance on the fiscal cliff and taxes, don’t be caught unprepared for the changes ahead like Rip Van Winkle.

So if you don’t have $5 million+ in assets, why bother with estate planning? Well, if you’re a high risk professional (accountant, architect, attorney, doctor, executive), asset protection is an issue. Maybe you’ve recently gotten married, divorced, or had a child. Or maybe you’re like most clients we work with who want to ensure their family’s taken care of and a surviving spouse and children don’t have to deal with a legal and financial mess after a loved one’s passing.

Whatever your estate planning motivations or needs, we can help. Our office, Johnson Law KC LLC, has years of collective experience doing estate planning, ranging from simple wills for individuals and young couples to complex dynasty trusts and advising on how best to transition the farm or family business. Give us a call (913-707-9220) or email (steve@johnsonlawkc.com) and we’ll schedule a convenient appointment to serve your estate planning needs.

(c) 2012, Stephen M. Johnson, Esq.

“It’s Beginning to Look a Lot Like Christmas”: Give $10.24 Million to Your Family, Tax Free

Posted on by under BDITs, Business Succession Planning, Business Transitions, Dynasty Trusts, Estate Planning, Estate Tax, Family Business, Family Limited Partnerships, Financial Powers of Attorney, Generation Skipping Tax, Gift Tax, Gifts to Minors, Kansas, Missouri, Small Business, Trusts, Wills

The NYT has this interesting article profiling Jonathan Blattmachr and his wife, Betsy, and their estate planning strategy. Blattmachr is one of the nation’s most preeminent estate planning attorneys and a tax law expert than many attorneys, accountants, and others read for advice on navigating the complex labyrinth that is the IRS Code. He’s a classic example of the Type A personality who immerses himself in the materials of a particular topic and then declares with certainty (often to others’ bemusement) that he’s absolutely certain if you do X, Y will occur. Most attorneys, accountants, and other estate planning professionals are smart, analytical, and risk averse; Blattmachr is the proverbial smartest guy in the room who believes (and often convinces others) that he’s devised a solution so ingenious that despite the critics’ howls and groans, it’s flawless and incontrovertible. And he’s usually right: his work holds up well under IRS attack.

Estate planning attorneys across America have been encouraging affluent clients to max out their $5.12 million lifetime gift tax exemptions before Dec 31, 2012 (since the exemption falls back to $1 million on Jan 1, 2013) (pardon the cheesy title, but clients are well-advised to take advantage of these historically high exemptions). And because of a(n IRS approved) technique called “split gifting,” if you’re married, your $5.12 million individual exemption is actually $10.24 million. So far so good, right? Well, as the article mentions, there’s an old tax law ghoul called the reciprocal trust doctrine. And the reciprocal trust doctrine says if a husband and wife set up trusts with identical terms that make each other beneficiaries and trustees, the IRS can step in and pull the plug, and tell the couple that their clever estate planning is undone and the $10.24 million gift (designed to remove assets from their estates) is now back in their estates (and taxable at the 45%+ estate tax rate). The reciprocal trust doctrine prohibits the wink wink nod nod, quid pro quo, I’ll scratch your back if you scratch mine estate planning strategy in irrevocable trusts. But there are ways around the reciprocal trust doctrine.

To avoid the reciprocal trust doctrine, attorneys vary the terms of the trusts. We (1) set them up at different times, (2) name different beneficiaries, (3) name different trustees, and otherwise vary the terms to make them materially different.

If you’re looking to set up trusts for your family and descendants, sell or transition your small business, or do other estate planning before 2013, time’s running out. Our firm, Johnson Law KC LLC, has experience advising individuals, families, small business owners, and entrepreneurs in all facets of estate planning – whether simple or complex – and we can handle your other legal needs as well. Give us a call (913-707-9220) or email (steve@johnsonlawkc.com) if we can be of service to you.

(c) 2012, Stephen M. Johnson, Esq.