Heckerling 2018: Day 2
Today’s blog post about the Heckerling Institute on Estate Planning is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi.
Day 2 is highlighted by sessions hitting many of the hot topics concerning estate planners across the country. Below is a brief summary of the topics discussed throughout the day.
Putting It On & Taking It Off: Managing Tax Basis Today for Tomorrow Presented by Paul S. Lee, Northern Trust
The management and creation of tax basis is the most important planning issue today and, even more so, with “tax reform” occurring for 2018 and beyond. Death may be inevitable but capital gains taxes shouldn’t be. Every client should capitalize on strategies to maximize and concentrate basis in assets where it can be of most benefit. This presenter discussed how innovative, advance planning can maximize value many times over.
Two types of trusts that were discussed in detail to try and take advantage of the tax code to maximize basis step up were Joint Revocable Trust (JEST) and Section 2038 Estate Marital Trust.
Business Succession: Abdicate? Affiliate? Alienate? Bifurcate? Syndicate? Liquidate? Vacillate? Don’t Wait. Cogitate and Participate. Presented by Thomas W. Abendroth, Schiff Hardin LLP
Business succession planning is the process of planning to exit the business, either through sale or through transfer to succeeding generations. This session examined selected tax and non-tax issues associated with exiting the business, and how planning must work with either form of exit.
There is not a special category of estate planning strategies designed solely for use when an owner is planning for the future transfer of her or his business interests or selling. Rather, the usual array of planning strategies and transfer tax techniques are available to owners. Indeed, some of these techniques may be especially effective with such interests.
- Direct gifts using the annual exclusion and the lifetime gift exemption.
- Grantor Retained Annuity Trusts.
- Sales to irrevocable grantor trusts in exchange for a note.
- Use of multiple classes of equity to freeze or limit the growth of certain equity owners.
- Transfers using limited partnerships or LLCs, to facilitate transfers of value while maintaining the consolidated management, and to better take advantage of valuation discounts.
- Use of a charitable remainder trust to avoid immediate capital gain upon a sale.
Care and Feeding of a Dynasty Trust: High Protein or Low Fat? Presented by Diana S.C. Zeydel, Greenberg Traurig, P.A.
Tax law and concerns about asset protection have driven estate planners to create trusts with longer and longer durations. Keeping these trusts healthy can be challenging. The presenter discussed how we can build muscle to withstand challenges. She discussed whether we go lean now the estate and GST taxes exemptions have been significantly increased. The best practices to achieve a fit and flexible trust in uncertain times was discussed in great detail.
Money in Politics: A Hydraulic or a Legal Issue? Presented by Trevor Potter, Caplin & Drysdale
For over a century federal law has attempted to regulate the sources and amounts of money in elections. The result proves to some that money is a hydraulic force: efforts to channel it only result in broken dikes and washed away dams. Others believe that the problem is inartful drafting, failed regulators, partisan greediness, the leveraging of the tax code to subvert the campaign finance laws, and a Supreme Court which has no understanding of how politics and the legislative system actually work.
Estate Planning in Anticipation of a Contest or a Difficult Beneficiary Presented by S. Andrew Pharies, DLA Piper LLP
This session focused on practical issues in structuring an estate plan to withstand a potential contest or a beneficiary likely to disrupt the post-death administration. It focused on enhancing the enforceability of no contest clauses as well as structuring an estate plan to mitigate fiduciary risk.
Estate planners face high-risk cases on a regular basis. In order to deal with those cases effectively, estate planners must reach outside of their regular form files and office procedures and adopt the mindset of a litigator in order to reverse engineer an estate plan that will carry out and protect, against all external influences, the client’s testamentary desires. This task is much harder than it used to be, and it is much harder than many estate planners imagine. While post-death contests and disgruntled beneficiaries are age-old enemies of testamentary intent, new threats have arisen in recent decades in the form of sanctioned post-death modifications of testamentary documents. While giving lip service to carrying out the testamentary intent of a testator or trustor, courts and legislatures are rapidly devising new ways to frustrate that intent by giving the beneficiaries greater power to devise an estate plan that meets their, rather than the decedent’s, objectives. The session discussed the tools to carry out the testamentary desires of the client while mitigating the possibility of post-death frustration of those desires. The presenter explored methods to mitigate the risk of a direct attack on estate plan documents and to mitigate the risk of an indirect attack on testamentary intent by a disgruntled beneficiary during the post-mortem administrative period.
Buy-Sell Agreements: A Critical Part of Any Business Formation Presented by Louis A. Mezzullo, Withers Bergman LLP
This session discussed the objectives and key tax and non-tax issues when drafting a buy-sell agreement for a closely-held business.
The following planning considerations were discussed
- Nature and size of the entity.
- Value of the entity as a going concern.
- Book value, market value, or other liquidation value of the entity’s underlying assets.
- Relative ownership interests of the owners.
- Ages of the owners.
- Financial condition of the owners.
- Health and insurability of the owners.
- Commitment of owners to the business and importance of their participation in the business.
- Availability of assets for redeeming the interest.
- State law with respect to stock redemptions in the case of a corporation or distributions to members of an LLC.
- Existence of restrictions under loan agreements on the use of the entity’s assets to redeem equity interests.
- Family relationships among owners.
- Working relationships among owners.
- The extent to which the owners are active in the business and intend to remain active in the business.
- Licensing or other qualification requirements.
- Type of entity: C corporation, S corporation, personal holding company, professional corporation, general partnership, limited partnership, or LLC.
- Potential conflicts of interest and ethical questions involved in representing or advising more than one owner and the entity, either when the agreement is negotiated or when an event occurs that causes the agreement to become operative.
Beyond the Private Foundation Presented by Martin Hall, Ropes & Gray LLP
A private foundation may not be the most effective tax-exempt vehicle to implement a client’s charitable intentions. The presenter explored the use and structuring of other options, including donor-advised fund accounts, supporting organizations and 501(c)(4) social welfare organizations. He also provided a detailed summary comparing the differences between the private foundation, donor advised fund and a SO.
A Donor Advised Fund (“DAF”) is not a separate charitable entity for federal tax purposes. Instead, the term describes a segregated fund or account maintained by an existing section 501(c)(3) public charity to which a donor or small group of donors can make contributions. What distinguishes the fund is that, while its assets belong legally to the public charity, the donor, or a person designated by the donor, retains an advisory role with respect to the distribution and/or the investment of assets held in the fund.
A Supporting Organizations (SO) are a group of organizations that were closely associated with public charities but formed as separate entities. As defined by the Code, a SO is a type of public charity described in Internal Revenue Code section 509(a)(3). SOs are classified as public charities but are not required to meet the strenuous public support tests that must be met by most section 509(a)(1) organizations and by all section 509(a)(2) organizations. Instead, a SO derives its public charity status from a close relationship with one or more public charities described in those provisions. In many cases, SOs perform functions or provide services that are integral to the conduct of the exempt purpose of the public charity or charities supported. Examples of SOs include trusts established to provide scholarships to students attending a particular college or university, fundraising foundations for a school or hospital, and endowment management entities. Many non-profit healthcare systems and other large non-profit organizations also use SOs in their structures, sometimes as parent entities.
501(C)(4) Organizations Section 501(c)(4) of the Internal Revenue Code embraces two general classifications of tax-exempt organizations: a. civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare (“social welfare organizations”); and b. local associations of employees.
An organization is operated exclusively for the promotion of social welfare if “it is primarily engaged in promoting in some way the common good and general welfare of the community” and is operated primarily “for the purpose of bringing about civic betterments and social improvements. While the concept of social welfare is inherently abstruse and the categorization somewhat of a catch-all for non-profit organizations that resist classification under other parts of Internal Revenue Code section 501(c), the organization “must be a community movement designed to accomplish community ends” to fall within its ambit. Examples of section 501(c)(4) organizations include homeowners associations, veterans organizations, volunteer fire departments, parks associations, community service organizations such as Rotary Clubs, Kiwanis Clubs, and Lion Clubs and public recreational facility organizations.
In addition, many advocacy organizations are operated as section 501(c)(4) social welfare organizations. Well-known examples include the American Association of Retired Persons (AARP), American Civil Liberties Union (ACLU) and National Rifle Association of America (NRA). In addition, section 501(c)(4) social welfare organizations are not prohibited from engaging in political campaign activities; however, those activities must be secondary to their primary focus on the promotion of social welfare.
Stay tuned for more updates about the remaining days of the conference coming out this week!