October 11, 2012 – Investment Mania Over the 2013 Tax Reform Bill and 5th Circuit Court of Appeals Approves Large Tax Refund in Texas
Providing updates and comments on Florida estate planning and creditor protection developments and insight for lawyers, CPAs, and other planning professionals
1. INVESTMENT MANIA OVER THE 2013 TAX REFORM BILL
2. EVERYTHING IS BIGGER IN TEXAS: 5th CIRCUIT COURT OF APPEALS APPROVES A $115,000,000 TAX REFUND
We welcome individuals to submit 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.
ALAN IN THE NEWS
To hear Alan S. Gassman, J.D., LL.M., and Erica Good Pless, J.D., LL.M.’s radio interview on The Voice of Russia, please visit the following link:
We are pleased to welcome guest Thursday Report writer, Michael H. Davis J.D., LL.M., CFP® of Resource Consulting Group in Orlando, Florida. Mr. Davis can be reached at 407-
INVESTMENT MANIA OVER THE 2013 TAX REFORM BILL
With all of the possible income tax changes just around the corner, what adjustments should investors make to their portfolios? Ever mindful of the maxim not to let the tax tail wag the economic dog, here are some moves that every investor should consider.
The Trick: First, with higher marginal income tax rates, tax-
The Trap: Regardless of the exposure to tax-
The Trick: There is no doubt that in a higher income tax atmosphere tax-
The Trap: Remember, insurance companies aim to make money, and they price their products to do so. If they are making money, the simple mathematical fact is that their policyholders are losing money in the aggregate. Also, don’t lose sight of the fact that tax-
The Trick: What about the death of qualified dividends? Currently, dividends are taxed the same as long-
The Trap: While qualified dividends may sound tempting, they are likely to result in a non-
The Trick: Similarly, REITs (Real Estate Investment Trusts) could regain their past allure in a great many portfolios if qualified dividend rates go away. For the past ten years, many investment advisors have refrained from using REITs in taxable accounts because the dividends paid by REITs are not qualified dividends and are therefore taxed at the taxpayer’s highest marginal tax rate. If the investor has a large tax-
The Trap: Not all investors have both taxable and tax-
QUALIFIED RETIREMENT PLANS
The Trick: Certainly, it makes sense to maximize contributions to qualified retirement plans to reduce taxable income.
The Trap: Some advisors tout Roth IRA conversions in the face of higher income tax rates, but the author is skeptical of such conversions except in compelling circumstances. Giving taxes to the government many years in advance rarely makes sense.
The Trick: Should investors sell appreciated stocks and other investments now to lock in the 15% capital gains tax rate and avoid the impending Medicare tax? It depends on the anticipated holding period. If the investor was planning to sell the asset in 2013, then probably yes. If the investor was going to hold the asset for ten to fifteen years, then probably not. If the investor was going to hold the asset until he or she died, then definitely not. It amounts to a number crunching exercise with various scenarios of future tax rates, taking into account the time value of money.
The Trap: Many people vastly underestimate the value of a tax paid later rather than now, even at a significantly higher rate in the future. Many investors will look to their CPAs and/or sophisticated financial planners to help make these decisions.
The Trick: Non-
The Trap: Once someone reaches an age around fifty to fifty-
The Trick: What about investing in life insurance? Unless the product is a stripped-
The Trap: The tax-
The Trick: Section 529 Educational Savings Plans may be more attractive if established when the beneficiary is very young. No tax is paid on the earnings of such an account if the funds are used to pay college and post-
The Trap: A UTMA (or UGMA) account is considered an irrevocable gift, meaning you can’t take back any of the money or assets that have been contributed to the account. The minor becomes the owner of the account at the age of 18 or 21 (depending on the state in which the account was opened and the specific titling of the account). However, you can change the beneficiary of a 529 plan.
EVERYTHING IS BIGGER IN TEXAS: 5th CIRCUIT COURT OF APPEALS APPROVES A $115,000,000 TAX REFUND
By GASSMAN LAW ASSOCIATES, P.A.
On September 25, 2012, the Fifth Circuit Court of Appeals affirmed a decision allowing a $115,000,000 tax refund to the Estate of Maude Williams. Prior to Mrs. Williams’ death, she discussed with her advisors moving certain substantial assets into a family limited partnership to protect those assets from being lost in a divorce. Mrs. Williams died before finishing all of the paperwork forming the partnership. As a result, the Estate significantly overpaid estate taxes, and filed suit in the U.S. District Court, which approved a substantial tax refund. An article discussing the District Court opinion in this case was printed in 2009 by Leimberg Services and written by Lance S. Hall, ASA, Alan S. Gassman, Esq., and Christopher J. Denicolo, Esq. This article can be accessed HERE and a chart illustrating Mr. and Mrs. Williams’ various holdings, and the District Court’s conclusion can be accessed by clicking HERE.
The government appealed the ruling in the District Court opinion, and the United States Fifth Circuit Court of Appeals affirmed the District Court’s decision.
Prior to her death, Mrs. Williams’ CPA, Lane Keller, completed significant steps in order to form a family limited partnership, consisting of two family trusts and an LLC with Mrs. Williams as managing member. Mr. Keller filed paperwork with the state of Texas, drafted the partnership agreement requiring equal contributions from the two trusts, and applied for taxpayer identification numbers. Prior to receiving the taxpayer identification number for the Partnership and transferring assets into the Partnership, Mrs. Williams died. Believing that the Partnership had not been properly formed or that they did not have an obligation to document the intended transfer of bonds, the Estate took no further action regarding the partnership for a year. The Estate paid over $147 million in estate taxes.
While attending an estate planning CLE conference only a few months later, Mr. Keller learned of Church v. U.S., a case from the United States District Court for the Western District of Texas. In Church, the court found that a taxpayer’s contribution to a limited partnership of over $1 million in securities and interest in real estate was evidence of her intent to form a partnership even though the paperwork was not completed before her death. The Church court recognized the formation of the partnership without all of the formalities because of the deceased’s intent.
Once Mr. Keller and the Estate reconsidered their position and determined that the Partnership was successfully established based upon the holding in Church, they formally transferred substantial assets, including bonds, into the Partnership. If the Partnership was successfully established as under Church, the Estate would not have had enough liquid assets to have paid the $147 million in taxes, so they re-
The estate filed a claim for a refund on two grounds: (1) the Estate’s initial fair market value assessment of Mrs. Williams’ assets failed to discount the value of the Partnership interests, and therefore the Estate overpaid taxes; and (2) the Estate accrued interest on its loan from the Partnership that was used to pay the estate taxes, which entitles the Estate to a deduction.
The District Court found in favor of the Estate on both grounds, and the Fifth Circuit recently affirmed.
The Trick: The state law in Texas favored Mrs. Williams’ Estate in this case. Well-
The Trap: In order for the family partnership to be treated as it was by the court, it had to meet “the significant and legitimate non-
There is a long line of cases that set forth the “dos and don’ts” with respect to the use of family limited partnerships and LLCs in an estate planning context. It is important that advisors remain conscious of the various factors that can affect how a family limited partnership or LLC is viewed by the IRS, and to establish a substantial non-
What is the most important lesson to learn from this case? Perhaps that hope is not lost with respect to estate tax planning even if a client’s death is imminent, so long as a substantial non-
For more detail regarding the 5th Circuit Opinion as written by Steve Leimberg on Leimberg Information Services, please visit http://www.leimbergservices.com/trial_registration.cfm.
For a copy of the 5th Circuit Opinion, click here.
APPLICABLE FEDERAL RATES
We are providing a chart that shows the Applicable Federal Rates for this month, last month, and the preceding month. Please click here to view the chart. Please note that for a sale you can use the lowest of the 3.
NEWS AND UPCOMING EVENTS
THURSDAY, OCTOBER 18, 2012 12:30 p.m. – 2:00 p.m.|
Professor Jerry Hesch, Alan Gassman, Esq. and Christopher Denicolo, Esq. will be speaking on a Bloomberg BNA webinar entitled Interesting Interest. To register please visit http://www.bna.com/interesting-
THURSDAY, OCTOBER 18, 2012
Alan S. Gassman, Esq. will speak at the The Tampa Bay Research Institute, Inc. 2nd Annual Estate Planning Seminar, in partnership with the Pinellas Community Foundation. Alan Gassman’s topic is Trust Planning for 2013 and Beyond – How to Keep Wealth in the Family. The seminar will take place at TBRI, 10900 Roosevelt Boulevard in St. Petersburg, Florida. Additional Topics and presenters include, Panel Discussion on Conflict of Interest Issues for Estate Planning Professionals. The moderator for the panel discussion is Sandra F. Diamond, J.D., and the panel consists of Angela Adams and Jeffrey Goethe; and Charitable Estate Planning in a Changing Tax Environment by Christopher Pegg, J.D., LL.M., Taxation. For more information please contact Tom Taggart at firstname.lastname@example.org.
THURSDAY, OCTOBER 25, 2012, 4:00 p.m. – 4:50 p.m.
Please join us for The 4-
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-
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-
Thank you to our law clerks who assisted us in preparing this report:
Kacie Hohnadell is a third-
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-