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



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.


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 407-422-0252.  The following is Mr. Davis’ commentary on how the 2013 tax reform bill will affect investments:


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-exempt bonds will have greater appeal. Also, with the U.S. economy still in the doldrums, most respected investment advisors recom­mend keeping the credit quality of bond portfolios high, even though this will result in lower interest income. The best way to keep credit quality high, earn reasonable interest income, and achieve broad diversification is by using a low-cost tax-exempt bond mutual fund.

The Trap:  Regardless of the exposure to tax-exempt or taxable bonds in your portfolio, rising interest rates will have a corrosive effect on prices of all your bond holdings. With interest rates at historic lows, it would be prudent to keep the weighted average maturity of bond portfolios on the short-term side.


 The Trick: There is no doubt that in a higher income tax atmosphere tax-deferred annuities will be touted. Investors should look before they leap though. Such products often have layer upon layer of fees, and the costs are not justified by the tax-deferral wrapper. Products that have “guarantees” require additional premiums for those guarantees or impose other conditions on securing the guarantee, such as requiring that the contract be annuitized. Annuitization means that the policy holder has to take the value out ratably over his or her life expectancy, which is usually at vastly inferior annuity rates than would be available in the marketplace. Investors with shorter-than-average life expectancies may be particularly less well served by having to annuitize to receive the touted minimum rates of return.

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-deferred annuities convert what could have been capital gain into ordinary income and do not get a stepped-up basis at death. And if the markets tank, will the insurance companies issuing these guarantees survive to make the payments they have promised?


 The Trick: What about the death of qualified dividends? Currently, dividends are taxed the same as long-term capital gains, so investors have been treated very well by dividend-paying stocks. In fact, some investors have been actively seeking high-dividend stocks because they are one of the few sources of income in today’s low interest rate environment. Will the pendulum now swing in the other direction? If dividends are taxed at the taxpayer’s highest marginal rate AND subject to the 3.8% Medicare tax, will a great many investors shun dividend-paying stocks and adjust their portfolios accordingly?

 The Trap: While qualified dividends may sound tempting, they are likely to result in a non-diversified portfolio and could even be counterproductive if taxable gains were incurred in shifting the portfolio. However, this could result in renewed interest in “asset location” engineering, i.e. holding tax efficient investments in taxable accounts and non-tax efficient assets in tax-deferred accounts. To the extent possible and practicable, hold bonds and high-dividend stocks in tax-deferred accounts and hold no or low dividend stocks in taxable accounts.


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-deferred account such as an IRA, the REITs could be held in that account.

 The Trap: Not all investors have both taxable and tax-deferred accounts in sufficient proportion. If qualified dividend rates don’t go away and you can’t house REITs in a tax-deferred portfolio, it may still make sense to hold REITs in a taxable account if you’re in the lowest tax bracket.  The additional diversi­fication benefits provided to a portfolio by REITs can potentially offset the tax burden.


 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-deductible IRAs may see a resurgence. Assuming the taxpayer and his or her spouse are already covered by a qualified retirement plan and they have adjusted gross income over $112,000, any contribution to an IRA will be non-deductible. For a younger person, such a contribution is still advisable because of the tax deferral on the investment earnings.

 The Trap: Once someone reaches an age around fifty to fifty-five, non-deductible IRA contributions are probably not a good idea because there is not sufficient time for tax-deferred earnings to compound before minimum required distributions commence at age 70-1/2. With higher marginal rates, higher capital gains rates, loss of qualified dividends, and Medicare tax on investment earnings, this age could be pushed out a bit.


 The Trick: What about investing in life insurance? Unless the product is a stripped-down private placement life policy with the minimum death benefit allowable, it is most likely not a good idea. As in the case with annuities, the costs imbedded in life insurance policies are typically very high, so attempting to convert a risk management tool into an investment usually does not make sense.

 The Trap: The tax-free build-up of cash value and income-tax-free death benefit sound very appealing on the surface, but the price of admission is simply too high, especially when one evaluates the rising mortality costs imposed on such policies as the insured gets older.


 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-graduate educational costs. Because of the restrictions of such accounts, some people funded custodial accounts instead. Now with higher taxes on investment income, the advantage may shift to 529 plans. Perhaps a combination approach will work best. The author has a rule of thumb – “Fifty by Five” – have the 529 plan funded with $50,000 by the time the beneficiary reaches age five. That way the assets will have sufficient time to “cook” before needed for college. If further funding is necessary or desirable based on education projections, do that funding in a UTMA custodial account or a trust. That way you will be taking advantage of the tax-free earnings on the 529 plan while not running the risk of over-funding the plan and having the earnings subject to income tax and penalty when used for purposes other than higher education.

 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.


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-characterized the transaction as a loan to the estate for $114 million.

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-settled principles of Texas law provide that the intent of an owner to make an asset partnership property will cause the asset to be property of the partnership. That is obviously not the case in every state. An executor of an estate may file suit in the district in which an executor resides, even if the decedent was a resident and the estate tax was paid in another district. This means that you can appoint a fiduciary in a more favorable jurisdiction.

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-tax business purpose” requirement. The District Court found that the primary purpose of forming the family partnership was to “consolidate and protect family assets for management purposes and to make it easier for those assets to pass from generation to generation.” The primary purpose of the partnership was not estate tax avoidance, and any tax savings were “merely incidental.”

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-tax business purpose for family limited partnerships or LLCs.

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-tax business purpose can be established for entering into estate planning strategies for the client.

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.


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.


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-interest-interest-w17179869894/.  If you are unable to attend the webinar and would like to receive a complimentary copy of the PowerPoint presentation please email Janine Ruggiero atJanine@gassmanpa.com

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 ttaggart@tampabayresearch.org.

THURSDAY, OCTOBER 25, 2012, 4:00 p.m. – 4:50 p.m.
Please join us for The 4-4-4 Show, a monthly Clearwater Bar Association continuing education webinar series that qualifies for 1 hour of continuing education credit and is moderated by Alan S. Gassman, Esq.  This month’s topic is “Lawyer Ethics in a Digital World: Hot Topics and Important Tips on How to Survive!” with well known expert Joe Corsmeier, Esquire.  To register please visit: www.clearwaterbar.org

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 who 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.