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| Best Practices: Taxes |
Mind the Gaps
Gayle B. Ronan
07/01/2005
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At
McGuireWoods, Belcher tells clients that if they are contemplating using these
discounts to transfer assets they should do it quickly, on the grounds that this
particular proposal could easily be tucked into a final estate tax reform bill.
“By using a family limited partnership or LLC, parents may transfer wealth at an
average discount of 40 percent to their beneficiaries,” Belcher says. “Such
valuation discounts definitely may not be available next year.”
Based on the
IRS’s recent history of aggressively pursuing taxpayers over this issue,
Congress may well enact this proposal to bolster the efforts of their IRS
colleagues. Mel Warshaw, a wealth advisor with JP Morgan Private Bank in Boston,
observes that the IRS has been spending a great deal of money litigating cases
involving valuation discounts. Although, for the most part, the IRS has won only
when the record-keeping was flawed or there was outright abuse, eliminating the
discounts would greatly reduce its litigation load.
THE DYNASTY’S DOMICILE
The following states allow dynasty trusts to exist in
perpetuity:
Alaska
Arizona
Colorado
Delaware
District of
Columbia
Idaho
Illinois
Maine
Maryland
Missouri
Nebraska
New Hampshire
New
Jersey
Ohio
Rhode Island
South
Dakota
Virginia
Wisconsin
Wyoming and Utah allow a dynasty trust to
last 1,000 years, Florida allows 360 years and Washington allows 150 years. |
However, Marilyn Calister, a managing director with Wealth and Tax Advisory
Services in New York, believes that Congress will not be the final arbiter of
the discount controversy. She expects that, with the large number of legal cases
pending, the valuation issue is more likely to be resolved by the courts.
Endangered Trusts
The committee also seems intent on obliterating both
dynasty and Crummey trusts. Removing them from the arsenal of asset transfer
techniques would raise tax revenue by $500 million to $1 billion over 10 years,
according to JCT estimates. These proposals seem a bit more politically
motivated than fiscally revolutionary, however, in light of the $300 billion to
$400 billion tax gap. Thus the rumors of the imminent death of these popular
strategies are most likely exaggerated.
Dynasty Trusts. These trusts enable
assets to pass from generation to generation free of gift, estate or
generation-skipping transfer taxes. The JCT plan would impose an estate tax or
transfer tax on a family’s assets every two generations, practically ensuring
that a perpetual dynasty trust will not achieve tax savings beyond one
generation.
Yet the life cycle of a trust has been a matter left to state
rather than federal law. Seventeen states and the District of Columbia have
eliminated rules against perpetuities or are allowing grantors to extend the
life of a trust so that it can last under the rule against perpetuities. (See
box, above.) The proposal to limit the exemption on dynasty trusts would face
opposition from the states, the banking industry and representatives of closely
held businesses.
Crummey Trusts. Named for D. Clifford Crummey, who won a
1968 case establishing the legality of this type of trust, a Crummey trust
enables a wealth holder to make multiple gifts to multiple beneficiaries, with
each gift qualifying for the annual $11,000 gift and estate tax exclusion.
Beneficiaries waive the right to withdraw the funds, allowing the gifts to
become trust assets, typically used to pay the premium on a life insurance
policy held by the trust. Most people set up the trusts with their children and
grandchildren as the beneficiaries of the insurance policy.
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