Friday, December 29, 2006

Looking Back & Ahead

Steve R. Akers, a managing director with Bessemer Trust Company, N.A., in Dallas, Texas, periodically distributes well-written, informative material about wealth planning, taxation, & fiduciary administration. I recently received from him by email his article entitled "Fall Musings 2006: Estate Planning Hot Topics and Current Developments", with permission to redistribute it. On this, the last business day of 2006, I post his review of recent developments in this field that have been, and likely will be, significant.

Estate Planning Hot Topics and Current Developments

Steve R. Akers

Attached is a summary of estate planning hot topics and current developments. Much of this is a summary of what have been highlights for me from a wide variety of seminars and conferences that I have attended this fall.

There are a wide variety of other topics, but some of the topics include the following.

1. Prospects for estate tax reform legislation (do not be surprised if a compromise is not reached—meaning that it can garner 60 votes in the Senate — on reform legislation until 2009, but there are indications that Congress will try to address estate tax reform in the second half of 2007 and that the Democrats may try to include a provision to eliminate some family discounts, in particular marketable securities FLPs, in order to help reduce the revenue cost of the reform package.) [See Item 1.]

2. The Pension Protection Act provides generally that employer owned life insurance will no longer be fully excluded from taxable income. There are various exceptions, including an exception for insurance used to fund buy-sell agreements, but there are written notice and consent requirements that must be satisfied to qualify for the exceptions. One possible suggestion is to revise buy sell agreements in the future to include the notice and consent provisions directly in the buy sell agreement. Form language, provided by Howard Zaritsky, is included. (The new rules apply to policies issued after 8-17-2006 or pre-existing policies with significant increases after that date.) [See Item 2.e.]

3. For tax years beginning after 12-31-2006, the existence of any UBTI in a charitable remainder trust will no longer destroy the tax-exempt status of the trust for the year. Instead, the Tax Relief and Health Care Act of 2006 substitutes a 100% tax on UBTI in a CRT. This is a very welcomed change—avoiding the danger of having even $1 of UBTI in a CRT destroying the exempt status of the entire trust for that year. [See Item 2.f.]

4. There is considerable uncertainty as to whether and how installment sales reporting may apply to private annuity transactions in the future. [See Item 4.g.]

5. FLP discounts continue (assuming §2036 does not apply). A recent survey in Florida and broader surveys indicate that FLP discounts are often allowed in the 30% range (sometimes up to almost 40%) for marketable securities FLPs. [See Item 6.b.]

6. IRS agents are using Judge Laro’s 7-point analysis in Rosen as a checklist for determining if the “bona fide sale exception” to §2036 applies. (One of those factors is whether there are “legitimate business operations,” despite Judge Laro’s having lost that argument with his fellow Tax Court judges in Bongard.) [See Item 6.i.]

7. The Korby §2036 cases were affirmed by the Eighth Circuit, including FLP assets in the decedent’s estates. These cases had terrible facts for the taxpayers.

8. In Rudkin, the taxpayers have requested a petition for rehearing en banc before the Second Circuit Court of Appeals. It will be interesting to see if the IRS attempts to support the extremely restrictive test adopted by the Second Circuit, which said that trustees may fully deduct (i.e., the 3% haircut rule does not apply) only those types of expenses that individuals “are incapable of incurring.” [See Item 7.f.]

9. There are various planning pointers from recent valuation cases. [See Item 11.]

10. Tax litigators provide various planning pointers for audits and tax controversies, including whether to permit the IRS to have access to family members during audits, and what must be done during audits to shift the burden of proof to the IRS in the Tax Court. [See Item 12.]

11. Standards for upholding IRS regulations (in connection with a case that upheld the GST regulation regarding the effect of the lapse or exercise of a general power of appointment over a grandfathered trust). [See Item 13.e.]

12. A pithy generalization of intergenerational family business dynamics [Item 20]:

· 1st generation—risk takers and make money

· 2nd generation—great managers

· 3rd generation—great spenders.

Steve sent with his summary (above) the 65-page full-text version of his article in PDF format. For those interested in receiving a copy free, you may contact me and I would forward it to you (by reply email only) in the copyrighted form that I received it. Or you may contact Steve directly. His contact information is: Steve R. Akers, Bessemer Trust, 300 Crescent Court, Suite 800, Dallas, Texas 75201 (Ofc: 214 981 9407) Email: You may also contact his assistant, Debbie with your request (Email: