EXPLAINING WHY CLIENTS HAVE TO PAY FOR VALUATION REPORTS – Including a Sample Letter
LINDA SUZZANNE GRIFFIN BRINGS US IMPORTANT UPDATES TO FLORIDA LEGISLATION FOR 2012
We welcome contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer please email Janine Ruggiero at Janine@gassmanpa.com.
This week’s contributing writer is Clearwater attorney Linda Suzzanne Griffin. Linda’s practice concentrates in the areas of estate planning, wills revocable and irrevocable trusts, estate tax planning, charitable trusts, probate, and trust administration. Linda can be reached at 727-449-9800 or via email: Linda@lawyergriffin.com. Linda’s website is www.lawyergriffin.com.
This report and other Thursday Reports can be found on our website
EXPLAINING WHY CLIENTS HAVE TO PAY FOR VALUATION REPORTS
Over and over again we have clients tell us that they should not have to have a valuation report prepared when they transfer an ownership interest in a closely held business or other activity.
Besides explaining the obvious benefit of ensuring that assets are properly valued for gift and estate tax purposes, we also share with them Treasury Regulation, Subchapter B, Sec. 25.2512-3:
(a) Care should be taken to arrive at an accurate valuation of any interest in a business which the donor transfers without an adequate and full consideration in money or money’s worth. The fair market value of any interest in a business, whether a partnership or a proprietorship, is the net amount which a willing purchaser, whether an individual or a corporation, would pay for the interest to a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. The net value is determined on the basis of all relevant factors including—
- A fair appraisal as of the date of the gift of all the assets of the business, tangible and intangible, including goodwill;
- The demonstrated earning capacity of the business; and
- The other factors set forth in paragraph (f) of §25.2512–2 relating to the valuation of corporate stock, to the extent applicable.
Special attention should be given to determining an adequate value of the goodwill of the business. Complete financial and other data upon which the valuation is based should be submitted with the return, including copies of reports of examinations of the business made by accountants, engineers, or any technical experts as of or near the date of the gift.
Just warning your client of the potential penalties for an inaccurate valuation alone should be enough to motivate them to order an updated valuation report when transferring, selling, or gifting a business interest. If the valuation claimed is less than 65% of the actual, a 20% penalty will be imposed on the amount of the understated value. If the valuation is less than 40% of the actual value, a 40% penalty will be imposed on the amount of the understated value.
If the client is still not convinced, we have found the following letter, including the referenced materials, can be very helpful in making clear how important valuation reports are:
I am enclosing the applicable Treasury Regulation and resource materials which describe the requirement that the value of an ownership interest in a business for gifting purposes must be supported by a valuation of the interest and complete financial and other data on which the valuation was based.
Specifically, Treasury Regulation Section 25.2512-3 provides that transfers of any interest in a business without adequate and full consideration in exchange for the interest requires that the value of the interest be based upon a fair appraisal as of the date of the gift of all assets of the business, including all tangible and intangible assets and goodwill. Additionally, the Regulation also provides that complete financial and other data upon which the valuation is based must be submitted with a gift tax return that is filed with respect to the gifted interest.
The attached resource materials also describe the understatement penalties that could apply if the value of the interest in the business is ultimately determined to be substantially more than what is reported on the gift tax return. An understatement is substantial if the value of any property claimed on a gift tax return is 65% or less of the amount that is ultimately determined to be the correct valuation.
The penalty for substantial understatement is imposed at 20% of the portion of the underpayment that is attributable to the undervaluation. This penalty doubles to 40% in situations where the gift tax return value is 40% or less than the amount that is ultimately determined to be correct.
To assure that there are no issues relating to the claimed value of ownership in _______ on a gift tax return, it is important to have an interest in _________ appropriately valued by a reputable, qualified appraiser. This might also allow the value of _______ to be discounted based upon lack of control and lack of marketability factors that are inherent in a minority ownership in the company.
If a valuation discount is to be reflected on the gift tax return with respect to any interest in the company that is gifted, then we will have to enclose an appraisal report with the gift tax return in order to have the statute of limitations relating to an IRS challenge begin to run. If an appraisal report is not attached to the gift tax return, then the IRS has an indefinite amount of time to come back and challenge the value of ________, which could be especially problematic if _______ significantly increases in value in the future.
Click HERE for copies of all of the supporting materials referenced in our letter. We welcome any suggestions about how to improve our valuation warning letter.
LINDA SUZZANNE GRIFFIN BRINGS US IMPORTANT UPDATES TO FLORIDA LEGISLATION IN 2012
Our friend and colleague, Linda Suzzanne Griffin, J.D., LL.M., CPA, of Clearwater was kind enough to share her recent outline of pertinent changes made to the Florida Statutes and the Florida Constitution in 2012 in the areas of homestead, estate planning, tax, and other Florida law. Linda can be reached at 727-449-9800 or via email: Linda@lawyergriffin.com
Linda thanks her associate, Nicholas J. Grimaudo, Esquire, for his help in preparing the outline that serves as a basis for this week’s report.
We chose to expound upon the items discussed below, and you can contact Linda for a copy of her 17 page update explaining the recent changes to the law, by emailing her, or simply clicking HERE.
What’s new in 2012:
Sale of a Business—Transfer of Tax Liability
House Bill 103 consolidates and revises statutes governing the transfer of tax liabilities when businesses or business assets are transferred to successor owners. In general, a person who buys a business (transferee) assumes the tax liabilities of the seller (transferor), unless an exception applies. This bill allows the transferee to take the business without assuming the transferor’s liabilities under either of the following two circumstances:
1) The transferee receives a certificate of compliance from the transferor showing that the transferor has not received notice of audit, has filed all required tax returns, has paid the tax due from those returns, and there are no insiders in common between the transferor and the transferee; or
2) The Department of Revenue conducts an audit, at the request of the transferee or transferor, and finds that the transferor is not liable for any taxes.
The bill also repeals two tax-specific statutes relating to sales tax and communications services tax which are substantially similar to the provisions of the bill. As a result of the repeals, the misdemeanor penalty provisions for violations of these statutes are also eliminated. (Chapter 2012-55, Laws of Florida.)
Insurance and Designations–Divorce
CS/HB 401 generally nullifies the designation of a spouse as a beneficiary of non-probate assets such as life insurance policies, individual retirement accounts, and payable on death accounts upon divorce or annulment. Certain state-administered retirement plans are exempt from the bill. If the provisions of the bill apply, an asset will pass as if the former spouse predeceased the decedent. The bill also specifies criteria for a payor of a non-probate asset to use in identifying the appropriate beneficiary. The bill specifically provides that the payor is not liable in some circumstances for transferring an asset to the beneficiary identified through the bill’s criteria.
This law adds a new section to Florida Statute § 732.703 governs the effect of divorce, dissolution or invalidity of marriage on disposition of certain assets at death. A designation made by decedent is void: 1. As of time marriage is dissolved or declared invalid by court order; 2. If designation is made prior to dissolution or court order; and 3. Will pass as if former spouse predeceased decedent. (Chapter 2012-148, Laws of Florida.)
This law became effective July 1, 2012, and applies to all decedents dying on or after this date regardless of when the beneficiary designation was made. To see a chart of beneficiary designations prepared by Linda Griffin, click HERE.
Probate Bill – House Bill 733 – Ch. 2012-109
1. Clarification of Definition of Protected Homestead — Section 731.201(33), F.S.
The 2012 amendment to Section 731.201(33), F.S. is a corresponding change to clarify the definition of “protected homestead” in order that it is consistent with the 2010 amendment to Section 732.401(5), F.S. and specifically excludes property owned in joint tenancy with right of survivorship from the definition, “(33) “Protected homestead” means the property described in Section 4(a)(1), Art. X of the State Constitution on which at the death of the owner the exemption inures to the owner’s surviving spouse or heirs under 4(b), Art. X of the State Constitution. For purposes of the rules concerning devise within the Probate Code, real property owned in tenancy by the entireties or in joint tenancy with rights of survivorship is not protected homestead.”
(33) “Protected homestead” means the property described in s. 4(a)(1), Art. X of the State Constitution on which at the death of the owner the exemption inures to the owner’s surviving spouse or heirs under s. 4(b), Art. X of the State Constitution. For purposes of the code, real property owned in tenancy by the entireties or in joint tenancy with rights of survivorship is not protected homestead.
2. Clarification of the effective date of changes to intestate succession laws — Section 732.102, F.S. In 2011 the intestate laws were changed such that a spouse would inherit 100% of the intestate estate if the lineal descendants were common with the surviving spouse instead of the prior law which provided that the spouse received the first $60,000 plus ½ of the balance.
There was confusion as to whether this provision applied for decedents dying before the act or after the act. To avoid any confusion, the effective date of the 2011 amendments to the intestate succession laws was amended as follows: “Notwithstanding section 2 or section 14 of chapter 2011-183, Laws of Florida, the amendments to section 732.102, Florida Statutes, made by section 2 of that act apply only to the estates of decedents dying on or after October 1, 2011.”
3. Clarification of Homestead Life Estate Election by Attorney in Fact for Surviving Spouse — Section 732.401(2)(c), F.S. Beginning for spouse receiving life estates in homestead for decedents who died on or after July 1, 2012, the surviving spouse can make an election to own the homestead as an undivided ½ interest as tenant in common. Such election has to be filed within 6 months of the decedent’s death.
The 2012 amendment to Subsection (c) clarifies the tolling provisions to accurately reflect the intent of the legislature that the six-month election period would be tolled if a petition by an attorney-in-fact or a guardian was timely filed during the six-month election period. The tolling continues for at least 30 days after the rendition of the order allowing the election, “A petition by an attorney in fact or by a guardian of the property of the surviving spouse for approval to make the election must be filed within 6 months after the decedent’s death and during the surviving spouse’s lifetime. If the petition is timely filed, the time for making the election shall be extended for at least 30 days.”
4. Termination of Parental Rights — Section 732.1081, F.S. Prevents a parent(s) whose parental rights have been terminated pursuant to chapter 39 prior to the death of the child from inheriting from that child. The natural or adoptive parent is treated as if the parent predeceased the child for the purposes of intestate succession. The new statute provides as follows “Termination of parental rights. – For the purposes of intestate succession by a natural or adoptive parent, a natural or adoptive parent is barred from inheriting from or through a child if the natural or adoptive parent’s parental rights were terminated pursuant to chapter 39 prior to the death of the child, and the natural or adoptive parent shall be treated as if the parent predeceased the child.”
Florida Principal and Income Act
CS/SB 1050 makes a number of clarifying and substantive changes to the Florida Principal and Income Act. This bill represents the first broad revision of the act since it was enacted in 2002. The bill implements a smoothing rule where fiduciaries calculate the average fair market value of the current year assets and the preceding years’ assets to address spikes due to fluctuations in the market. The bill modifies the default guidelines applicable to unitrusts, distribution of income, the partial liquidation rule, marital tax deductions, liquidating assets, income taxes, and property improvements. (Chapter 2012-49, Laws of Florida.)
Relaxed Background Check Requirements for Volunteers
House Bill 943 makes a number of changes to background screening requirements, primarily relating to individuals who work and volunteer with vulnerable populations. Specifically, the bill:
1. Exempts mental health personnel working in a facility licensed under ch. 395, F.S., who work on an intermittent basis for less than 15 hours per week of direct, face-to-face contact with patients and who are not listed on the Florida Department of Law Enforcement’s (FDLE) Career Offender Search or the Dru Sjodin National Sex Offender public website from fingerprinting and screening – unless that person works in a facility with a primary purpose of providing treatment for children;
2. Establishes a re-screening schedule for those individuals who have been screened and qualified to work by the Agency for Health Care Administration (AHCA);
3. Revises a list of professionals to include law enforcement officers such that officers are not required to be re-fingerprinted or re-screened if they are working or volunteering in a capacity that would otherwise require them to be screened;
4. Includes provisions covering the Division of Vocational Rehabilitation’s (DVR) background screening needs and requirements;
5. Exempts, from the definition of “direct service provider;” individuals who are related to the client, and volunteers who assist on an intermittent basis for less than 20 hours per month of direct, face-to-face contact with a client and who are not listed on FDLE’s Career Offender Search or the Dru Sjodin National Sex Offender public website;
6. Specifies that employers of direct service providers previously qualified for employment or volunteer work under Level 1 screening standards, and individuals required to be screened according to the Level 2 screening standards, shall be re-screened every five years, except in cases where fingerprints are electronically retained;
7. Creates a definition of the term “specified agency” for purposes of conducting background screening. These agencies include the Department of Health (DOH), the Department of Children and Family Services (DCF), AHCA, the Department of Elder Affairs (DOEA), the Department of Juvenile Justice (DJJ), the Agency for Persons with Disabilities (APD) and DVR;
8. Requires fingerprint vendors to meet certain technology requirements;
9. Provides that employees may be hired before completing the background screening process but those employees may have no direct contact with vulnerable persons;
10. Waives the additional background screening requirement for Certified Nursing Assistants (CNA) under certain circumstances; and
11. Provides for requirements relating to fingerprinting including who may take the prints, standards for vendors, and fee collection.
In November 2012 Floridians passed an amendment to Art. VII, Section 6, of the State Constitution that would allow the Legislature to provide ad valorem tax relief to the surviving spouse of a veteran who died from service-connected causes while on active duty as a member of the U.S. Armed Forces and to the surviving spouse of a first responder who died in the line of duty. A first responder includes a member of law enforcement and paramedics, among others. Those who qualify will receive a 100% exemption from tax on their homestead. If the surviving spouse remarries, they will lose the exemption.
As part of the same November ballot, voters also passed a constitutional amendment to Art. VII, Section 6, State Constitution, that authorizes the Legislature, by general law and subject to conditions set forth in the general law, to allow counties and municipalities to grant an additional homestead tax exemption for certain low income seniors. The exemption, if adopted in a municipality, would be equal to the assessed value of the property with a just value less than two hundred and fifty thousand dollars. To qualify, a person must have maintained permanent residence on the property for not less than twenty five years, must be at least sixty-five years of age and must have a household income less than $20,000.
Property Tax Administration
CS/HB 7097 is a comprehensive package that makes several clarifying and administrative amendments to the property tax statutes. It clarifies language and repeals obsolete provisions. It reduces the number of reports that tax collectors and value adjustment boards must send to the Department of Revenue. It amends the information required to be included in property tax rolls. It clarifies value adjustment board scheduling requirements and the tax treatment of homestead property that has been rented. It requires the Department of Revenue to provide assistance to other agencies that are investigating property appraisers.
The bill amends statutes relating to property tax exemptions and limitations. It changes the order in which tax exemptions are applied and allows qualifying taxpayers to apply for disability-related exemptions earlier. It clarifies the tax treatment of property when the property no longer qualifies for one assessment limitation, but begins qualifying for another. It clarifies the tax treatment of combined and divided property for assessment limitation purposes. It updates the list of military operations included in the deployed service-member exemption. It provides a property exemption for municipally-owned property that is financed through convention development taxes. It allows the educational facility exemption to apply to property used for education when title to the land is held by a non-profit organization. It allows spouses to allocate the benefit of their Save our Homes limitation between themselves under certain conditions.
These provisions were approved by the Governor on April 27, 2012 and became effective upon becoming law. Some provisions apply retroactively to the 2012 tax roll. (Chapter 2012-193, Laws of Florida.)
Thanks again to Linda Suzzanne Griffin for allowing us to use her descriptions, and for always being there for us.
Beta Readers Wanted
Health care lawyer Lester Perling and Alan S. Gassman are finalizing a book for Florida physicians on Florida medical law, which concentrates on the Florida Patient Self-Referral Act, the Stark Law, anti-kickback statutes, and similar practice rules.
If you would like to receive a free beta copy of this book, please let us know. We would appreciate any questions, comments, and suggestions that you might have on this topic or on the beta book.
APPLICABLE FEDERAL RATES
To view a chart of this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3 please click here.
The 7520 Rate for December is 1.2% and for November was 1.0%.
SEMINARS AND WEBINARS
FREE WEBINARS OF INTEREST:
THURSDAY, December 13, 2012, 12:30 – 2:00 p.m.
Alan S. Gassman, Kenneth J. Crotty, and Christopher J. Denicolo, will be presenting a webinar for Bloomberg BNA Tax & Accounting on Final EGT Planning in 2012: How to Design, Explain and Implement Dynasty Trusts and Asset Protection.
MONDAY, January 7, 2012, 12:30 p.m.
Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman, Esq. This month’s topic is the first part of a two part series with Shannon Waller from Strategic Coach. The topic for the two part series is Accelerating Law Office Teamwork with Interesting Tools You Can Use Immediately. To register for the webinar please visit the www.clearwaterbar.org.
TUESDAY, January 8, 2013, 5:00 – 5:30 pm
How to Land That First Job After College or Graduate School – What the Placement Office Hasn’t Told You. Recent college and graduate school graduates are having a difficult time finding their first professional job and are unaware of many proven techniques to help them find their first position. Job consultant Darry Griffis has an excellent track record in this area and will be sharing ten important techniques that your children or the children of your clients need to know to help find their first professional position. To register for this FREE webinar please click here.
THURSDAY, January 24, 2013, 4:00 – 4:50 p.m.
Please join us for the 444 Show. A monthly CLE webinar for professionals sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is Real Estate Tax Laws PALS & WOWS with Rick Buschart and Mike O’Leary.
MONDAY, FEBRUARY 4, 2012, 12:30 -1:00 p.m.
Please join us for Lunch Talk, a free monthly webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is the second part of the two part series with Shannon Waller on Accelerating Law Office Teamwork with Interesting Tools You Can Use Immediately. To register for the webinar please visit www.clearwaterbar.org
FRIDAY, JANUARY 18, 2013 Florida Bar Seminar
Save the date for a three day weekend in Ft. Lauderdale! The Florida Bar Continuing Legal Education Committee, the Health Law Section and the Tax Law Section present Representing the Physician 2013: Practical Considerations for Effectively Guiding Physicians and Their Practices. The seminar will be held at the Sheraton in Ft. Lauderdale, Florida. Speakers include Lester J. Perling, Esq., on the topic of Federal and Florida Health Law: Hypothetical Situations that Are Often Overlooked by Physicians and Alan S. Gassman on the topic of It is Not Just Health and Tax Laws: Charting Florida Waters When Designing Physician and Medical Group Arrangements. Laws you Knew or Wish you Knew. Please click here to register.
WEDNESDAY, FEBRUARY 13, 2013 15th Annual All Children’s Hospital Estate, Tax, Legal and Financial Planning Seminar.
All Children’s Hospital Foundation is hosting the Estate, Tax, Legal and Financial Planning Seminar at the All Children’s Hospital Education Conference Center in St. Petersburg. Programs and presenters include Samuel A. Donaldson on the topic of Federal Tax Update, Jonathan Blattmachr on Myths & Realities of Charitable Trusts and Some Really Cool Generation Skipping Tax Ideas, Investments in Trusts: Charting a Prudent Course by Tami Foley Conetta, and Alan S. Gassman on the topic of Avoiding Disaster in the Sunshine State – Tricks, Traps, and Nuances That Make Florida Planning Interesting and Unique.
Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters and the Florida Bar Journal. is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law and his LL.M. (Estate Planning) from the University of Miami. His email address is Christopher@gassmanpa.com.
Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is Ken@gassmanpa.com.
Thank you to our law clerks that assisted us in preparing this report:
Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.
Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and was recently admitted to the Florida Bar. She wants to pursue a career in business, employment, and labor law. Her email is Alexandra@gassmanpa.com .
Eric Moody is a third-year law student, scheduled to graduate in December 2012, at Stetson University College of Law and is considering pursuing an LLM in estate planning upon graduation. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is Eric@gassmanpa.com.