Personal Wealth Law News

Another Possible Solution To Estate Tax Problem

By Robert H. Louis

Very recent discussions in Washington have resulted in a proposal that resolves the estate tax issue and avoids litigation on constitutionality.

Congress is expected to reenact the estate tax at some point, although the exact date is unclear.  Some commentators have suggested that no action may be taken in all of 2010, which would result, under the law enacted in 2001, in a return to a graduated tax system with rates up to 55% and a $1,000,000 exemption.

But here is a proposal that is being discussed by some Democrats in DC: the estate tax would be reenacted through 2011 with a 45% rate and a $3,500,000 exemption.  But for those who died between January 1, 2010 and the date the new law is passed, there would be a choice: you could be taxed under the reenacted law (45%, $3,500,000) or you could pay no estate tax and have carryover basis for the assets owned by the decedent; that is, there would be no stepup in basis at death.  Thus, for those decedents, there could be a determination of which taxation method produces less tax and less complexity.

That idea seems to avoid the possibility of litigation challenging the retroactive enactment of the estate tax.  If the tax is simply reenacted in a few weeks, retroactive to January 1, there is sure to be litigation challenging its constitutionality, and the outcome is not clear.  Further, such litigation could drag on for years, resulting in uncertainty as to how estates are to be administered for a long period of time.  The option technique permits decedents’ representatives to choose how to be taxed, so they would have nothing to complain about.

(from the Legal Intelligencer)

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Continued Planning in the Era of Estate Tax Repeal

by Robert H. Louis

At mid-February, 2010, we still have no indication of the future of estate tax legislation. There was a suggestion that it might be included in the jobs bill that could be considered by Congress soon. All that we know is that every prediction, guess and inside tip from every commentator and tax lawyer has so far proved wrong.

But there is still planning that can and should be done now. The values of business and investment assets are generally lower than they were a few years ago and that, we hope, they will be in a few more years. The interest rates used to value such interests and the rates used by the IRS to determine the gift element of transfers are both at historic lows. Those two circumstances make it important to consider planning techniques such as grantor retained annuity trusts (GRATs), which are forms of deferred gifts. In addition, because housing values are still low, it’s worthwhile to consider qualified personal residence trusts (QPRTs). Conventional wisdom suggests that QPRTs work best in a high interest environment and, all other things being equal, that’s true. But all other things aren’t equal: the continued “dip” (recession, collapse, depression?) in housing values make QPRTs a good technique even while interest rates are low.

To these techniques should be added the value of outright gifts and other forms of gifts in trust, since the federal gift tax rate has fallen to 35% this year. And, thought should also be given to Roth IRA conversions, another subject of continued discussion now that the rules permitting such conversions have been relaxed.

We expect that the federal estate tax will return, either this year or next, and it may be that Congress will act to restrict one or more of the techniques described above. Until then, estate planners should consult with clients to review the advantages of planning right now.

(from the Legal Intelligencer)

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  A Blog That Mentions Both Trusts and Estates Law and HootersBy Robert H. Louis 

A recent news report indicates that an effort will be made to sell or recapitalize the restaurant chain Hooters, as a result of a family dispute over the will of the majority owner of the business.  (I’ve never visited one of these restaurants, but I see that their ads feature a picture of an owl, so I assume they have a library-like atmosphere.)  The report illustrates several issues in the operation of family businesses, and how a failure to plan and to consider the effect of trusts and estates law on such businesses can lead to an unfortunate result.

Apparently, the decedent and some other businessmen purchased control of the chain some years ago, and the decedent was the majority owner.  In addition, the decedent had married for a second time, and had a son from his first marriage who was actively involved in the business, a much younger second wife, and a young child from the second marriage.  His will gave 30% of the estate to each of those children, another 10% to Clemson University (carrying on the decedent’s long years of philanthropic giving), and other amounts to friends and associates.  He left $20,000,000 to his wife, payable $1,000,000 per year.  The decedent and his wife, who were not living together at the time of his death, were residents of South Carolina, which has a provision in its law allowing a surviving spouse to elect to “take against” the will to the extent of one third of the decedent’s estate.  Pennsylvania law has a similar provision.  The widow made such an election, and this election was challenged by the decedent’s older child, in part because he contended it was unconstitutional.  After some legal wrangling, the parties settled for an undisclosed sum, and now the older child is looking at various options to either carry on the business or sell it.

It seems clear, from several reports on this case, that the decedent wanted the older child to run the business.  He had retired from active involvement and placed his older child in charge.  However, he made no arrangements other than in his will for the transfer of the business to that child.  This was clearly a mistake.  Planning for the business transition could have been completed before the decedent’s death in ways that could have protected the older child’s management of the business.  The second wife should have been asked to sign a prenuptial agreement, very common these days especially in second marriages, to limit her rights against the estate.  The wife could also have been provided for through insurance or other planning techniques. 

It is possible that these possibilities were considered by the decedent and didn’t work.  But in the world of family businesses, a much more common occurrence is to defer consideration of family business issues, in no small part because they require difficult conversations.  It’s easier to do nothing and hope that “things” sort themselves out.  But that doesn’t often happen.  An important service that lawyers can offer to business clients is to help them address these issues and, if other types of professionals are needed to facilitate the process, to recommend hiring such people. 

(from the Legal Intelligencer) 

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