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Davidow, Davidow, Siegel & Stern, LLP
Long Island's Elder Law, Special Needs & Estate Planning Firm

Friday, February 13, 2009

Bill Introduced to Freeze Estate Tax at 2009 Levels and to Eliminate Discounts on Nonbusiness Assets - Part II

Valuation discounts (particularly of the minority and marketability type) can significantly reduce what might otherwise have been the estate and gift tax values of transferred property. In contrast, the IRS often takes the position, on audit and in litigation, that application of these discount reductions should not be available for estate and gift tax purposes. For example, the Revenue Service has argued that a taxpayer may make gifts to a child of minority interests in property and incorrectly (in the Service’s view) claim lack-of-control discounts under the gift tax even though the taxpayer or the taxpayer’s child controls the property being transferred. The Service has also contended that a taxpayer, who contributes marketable property (such as publicly-traded stock) to a partnership (such as a family limited partnership) or other entity that he or she controls, may (when interests in that entity are transferred through the estate) inappropriately claim marketability discounts even though the heirs may be able to liquidate the entity and recover the full value by accessing the underlying assets directly.

H.R. 436 presents a standard for gift and estate tax purposes, with respect to discounts, that is sympathetic to those IRS articulated positions. Under the bill, in the case of the transfer of any interest in an entity, other than an interest which is actively traded:

“(A) the value of any nonbusiness assets held by the entity shall be determined as if the transferor had transferred such assets directly to the transferee (and no valuation discount shall be allowed with respect to such nonbusiness assets), and

(B) the nonbusiness assets shall not be taken into account in determining the value of the interest in the entity.”

The bill also contains a 10% “look-through” rule. Under this rule, if a nonbusiness asset of an entity consists of a 10% interest in any other entity, the bill would disregard the 10% interest and would treat the entity as holding directly its ratable share of the assets of the other entity. This rule would be applied successively to any 10% interest of the second entity in any other entity, thus seeking to prevent the circumvention of the “nonbusiness asset” discount disallowance through the use of a holding company structure.

Finally, the bill attacks “minority interest” discounts by providing that, in the case of the transfer of any interest in an entity other than an interest which is “actively traded,” no discount shall be allowed by the reason of the fact that the transferee does not have control of the entity if the transferee and members of the family of the transferee have control of the entity.

The Pomeroy bill’s proposed effective date is “date of enactment.”

The Association for Advanced Life Underwriting expects other proposals respecting the estate, gift and generation-skipping transfer taxes will follow this Pomeroy proposal. We will report promptly on them as they arise.

Source: AALU Bulletin No: 09-10, 1/23/09.

Friday, February 6, 2009

Bill Introduced to Freeze Estate Tax at 2009 Levels and to Eliminate Discounts on Nonbusiness Assets - Part I

House Ways and Means Committee member Pomeroy (D-ND) has introduced H.R. 436, “Certain Estate Tax Relief Act of 2008,” a bill that would freeze the lifetime estate tax exemption at $3.5 million per decedent (the 2009 level) and would retain the 2009 estate tax rate ceiling at 45%. The “carryover basis” rules that would have taken effect upon the repeal of the estate tax are themselves repealed under the bill. In addition, H.R. 436 would reduce the availability of valuation discounts for gift and estate tax purposes and, through a “clawback” provision, would effectively impose a higher rate on estates over $10 million. The Association for Advanced Life Underwriting strongly supports sustainable estate tax reform which can enable clients to plan with certainty; for example, reform with an exemption level of $2.5 to $3.5 million, a top rate of 45% and a reunification of gift and estate tax exemption levels. Some of the provisions have to be closely examined for potential negative impact on clients.

The bill contains a provision that would phase out the effect of the graduated estate tax rates and unified credit on estates over $10 million. Although the bill does not address directly the generation-skipping tax exemption (currently $3.5 million), the fact that the GST exemption is tied to the estate tax exemption would also raise the GST exemption under this bill. The bill would implement an idea that discounts to the value of an entity holding “nonbusiness” assets (including most assets not used in the active conduct of a trade or business) should be eliminated for transfer (estate, gift and GST) tax purposes.

Under current law, transfer taxes are imposed on the “fair market value” of the property transferred, which is generally defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” In the case of non-publicly traded interests, a hypothetical “willing buyer” would take into account numerous factors, including the degree of control of the business represented by the equity interest being acquired., as well as any limits on his or her ability to dispose of the interest in the future. Recognition of the existence of these factors by the courts has resulted in the allowance of often steep minority interest and marketability discounts to the value of such property. Other discounts include those applicable to transfers of partial interests in property and built-in capital gains. Next week, in Part II, we will go on to list some of the other provisions included such as Valuation Discounts.

Source: AALU Washington Report, 1/23/09


On January 27th, Governor Paterson signed new power of attorney legislation as Chapter 644 of the Laws of 2008. This law makes dramatic changes, including a new statutory short form, to be notarized, and if a principal wants to authorize gifts, a new form that must be witnessed rather than notarized. As enacted, the law has a March 1, 2009 effective date, but we are hopeful that the date will be extended to at least September 1, 2009 by separate legislation, that is, by a chapter amendment. Look for subsequent newsletters as developments warrant.