Tax, Trusts & Estates Law Monitor | Estate & Tax Planning

2013 Estate Planning – Still Not The Time To Be Complacent

By Gary A. Phillips on May 13th, 2013 Posted in Estate Planning, Estate Tax, Gift Tax, Legislation

The end of 2012 saw an unprecedented surge of activity for estate planning attorneys and advisors counseling clients to implement estate plans before the 2013 changes in the law, which would have reduced gift and estate tax exemptions to $1 million. As it turned out, the American Taxpayer Relief Act enacted on January 2, 2013, did not reduce exemption amounts – they were set at $5 million and indexed for inflation (the 2013 gift and estate tax exemption amount is $5.25 million per person).

While the law is technically permanent, it does not mean that it cannot be changed. If President Obama’s 2013 budget (the Green Book) is passed as proposed, the estate tax exemption amount will be reduced to $3.5 million (with no indexing for inflation), estate tax rates will increase to 45% (from the current 40% rate) and the gift tax exemption amount would be reduced to $1 million. In addition, the President seeks to restrict the use of powerful estate planning techniques, including GRATs and Sales to Grantor Trusts.

While there may be a sense that you do not have to consider your estate planning now that exemption amounts are $10.5 million per couple, there are many reasons why this is an incorrect assumption, including (1) lower state estate tax thresholds, including New York ($1 million) and New Jersey ($675,000), (2) non-tax considerations such as proper designation of beneficiaries, the benefits of creating testamentary and inter-vivos trusts, appointment of executors, trustees and guardians, and appropriate asset ownership, (3) changes in your life situation, such as a new child, divorce, remarriage or beneficiary substance abuse, (4) the benefits of gifting assets during lifetime and (5) potential changes in the estate tax law in the future.

We have linked to this recent article in the New York Times, which highlights the need to continue to pay attention to your estate plan.

Who is a Large Employer Under Obamacare?

By Steven M. Saraisky on May 9th, 2013 Posted in Legislation

Among other things, the Patient Protection and Affordable Care Act (the “Act”), commonly referred to as Obamacare, requires “large employers” to provide qualified health coverage for all of their full-time employees, or pay an annual penalty. A large employer is generally an employer with 50 or more full-time employees.

In order to prevent employers from dividing businesses into several smaller businesses to avoid the “50 full-time employees” rule, the Act also contains rules that require businesses with common ownership to be treated as a single employer.

These rules refer to two Code sections – Code §1563 which deals with groups of corporations that qualify to file consolidated tax returns, and Code §414 which deals with commonly controlled businesses under ERISA. These rules are quite complicated though also somewhat mechanical. For groups of family-owned businesses with 50 or more employees in total, the ownership structure must be evaluated against the tests detailed in the statute and regulations to determine if the businesses are aggregated. Below is a brief summary of the rules and a discussion of potential planning opportunities.

Under the statutory tests, a controlled group can be either (1) a parent-subsidiary controlled group, (2) a brother-sister controlled group, or (3) a combination of parent-subsidiary and brother-sister controlled groups. There are also rules for attribution of ownership between related individuals, trusts and non-corporate entities.

A “parent-subsidiary controlled group” exists when a common parent corporation owns 80% or more of the stock of subsidiary corporations. This does not apply to most family businesses because they typically are not owned in parent-subsidiary ownership structures.

A brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners (a common owner must be an individual, a trust or an estate) own directly or indirectly a “controlling interest” of each group and have “effective control.” “Controlling interest” is defined in Regs §1.414(c)-2(b)(2) and generally means 80% or more of the stock of each corporation (but only if such common owners own stock in each corporation). “Effective control” is defined in Regs §1.414(c)-2(c)(2) and generally means more than 50% of the stock of each corporation, but only to the extent that such stock ownership is identical with respect to such corporation.

Under Code §414(m), there also can be aggregation for entities that are considered to be part of an “affiliated service group,” which applies to companies whose principal business is the performance of services.

For most closely held businesses, the key analysis will be whether the entities constitute brother-sister corporations. Also, in most cases, the first prong of the brother-sister test – the “controlling interest test” – will be satisfied because five or fewer shareholders together frequently own 80% or more of the ownership interest in each company. (On the other hand, it is worth noting that if two family members whose interests are not attributed to each other, such as father and son-in-law, each own a separate business, the businesses may fail this prong of the test.)

The second prong of the brother-sister test – the “effective control” test – looks at the common ownership in both entities and deems them to be effectively controlled by an owner group that owns more than 50%. One must first calculate the ownership interest that each owner has in both entities, and then determine if they exceed 50%.

For example, if A, B, C and D are each 25% owners of two companies, they each own 25% of both companies and together they effectively control 100%, so the companies would be brother-sister companies.

But, for example, assume that the ownership of the two companies is as follows:

Owner	Company 1	Company 2
A	80%	20%
B	10%	50%
C	5%	15%
D	5%	15%
Total	100%	100%

In this example, A, B, C and D together own 100% of the stock of both companies, but they do not have “effective control” because the sum of each stockholder’s common ownership in both companies does not exceed 50% (A = 20%, B = 10%, C = 5% and D = 5%, and the sum is 40%). See Larry Lawson and Jeff Nelson, Controlled and Affiliated Service Groups, IRS Tax-Exempt and Government Entities, pp. 7-7 – 7-8 (available here).

The effective control test raises some interesting possibilities, as stock ownership can be arranged to flunk the test and therefore avoid aggregation as a large employer. The following charts show ownership percentages for corporations with two and three shareholders that will not pass the effective control test.

Example for two owners (no attribution):

Owner	Company 1	Company 2
A	76%	24%
B	24%	76%
Total	100%	100%

In this case, A has 24% common ownership in both companies, and B has 24% common ownership in both companies. The total is 48%, which is below 50%, and the companies should not be a brother-sister controlled group.

Example for three owners (no attribution):

Owner	Company 1	Company 2	Company 3
A	68%	16%	16%
B	16%	68%	16%
C	16%	16%	68%
Total	100%	100%	100%

In this case, A, B and C together will not have more than 48% common ownership in any two companies. The total is 48%, which is below 50%, and none of the companies should be considered a brother-sister controlled group.

While the controlled group rules will effectively cause many family-owned businesses to be aggregated for purposes of Obamacare’s large employer test, for some businesses there may be planning opportunities to avoid these rules.

In addition, for more information on the Act, see Michael Morea and Lauren Manduke’s recent article, “Preparing for the Employer Mandate,” New Jersey Law Journal, April 29, 2013.

Tags: Applicable large employer, single employer, controlled group, parent-subsidiary controlled group, brother-sister controlled group, Code §1563, Code §414, Obamacare, Patient Protection Act.

New Jersey Estate Litigation: The Availability of Punitive Damages

By Christopher P. Massaro on March 5th, 2013 Posted in Estate Planning

In In re Stockdale, the New Jersey Supreme Court addressed the availability of punitive damages in estate disputes involving undue influence claims. 196 N.J. 275 (2008).

The Stockdale case concerned the propriety of a punitive damage award entered against two individuals who pressured an elderly woman to sell her residence on inequitable terms and convinced her to create a new will naming one of them as the sole beneficiary of her estate. These individuals offered the new will for probate following her death, but a beneficiary under the woman’s prior will argued it was invalid because they had procured it through undue influence. Agreeing with the beneficiary, the trial court judge refused to probate the new will and ordered the individuals to pay the attorneys’ fees incurred by the beneficiary as a form of punitive damages.

On appeal, the Supreme Court noted that punitive damages are typically inappropriate when an estate dispute involves family members and a claim that one member employed undue influence to gain a greater share of an estate’s assets. Under those circumstances, the Court indicated that the correct remedy generally involves reducing the inheritance or statutory commissions the family member otherwise would have received from the estate by any amount obtained through undue influence. In contrast, the Court noted that a punitive damage award remains a viable possibility when those accused of undue influence do not possess any lawful inheritance or commission rights to reduce, such as third parties who are essentially strangers to the decedent. In those situations, the estate may sue to recover both compensatory and punitive damages.

The Court ultimately concluded that the individuals who had unduly influenced the elderly woman could be held liable for punitive damages because they were unrelated to her and did not possess any lawful inheritance or commission rights to abate. Nevertheless, the Court rejected the method the trial court judge used to calculate the award and instructed the judge to reconsider the matter in light of the evidence and general standards for awarding punitive damages. Both the trial court and Appellate Division recently concluded that the beneficiary had failed to establish the requirements for a punitive damage award. See In re Stockdale, No. 4037-10 (App. Div. Jan. 29, 2013, unpublished opinion).

In sum, the Court’s decision has the practical effect of eliminating punitive damage awards in most estate disputes where a decedent’s family member is accused of undue influence, while at the same time confirming that wrongdoers outside the decedent’s family face the specter of punitive damages when they obtain an estate’s property through undue influence.

After the Fiscal Cliff — A Summary of the New Federal Gift and Estate Tax Law

By Gary A. Phillips and Steven M. Saraisky on January 10th, 2013 Posted in Estate Tax, Gift Tax, Legislation

Congress took the fiscal cliff negotiations over the brink but was finally able to reach a deal resulting in the American Taxpayer Relief Act of 2012 (“2012 Act”). The 2012 Act makes the estate and gift tax laws “permanent,” meaning that they are not scheduled to expire, be repealed or rolled back. This is a significant change because since the 2001 estate tax legislation was passed under President Bush, taxpayers and their advisors have had to plan based on an uncertain statutory framework.

The 2012 Act sets the estate tax exemption amount at $5 million. This is the amount of money that can pass estate tax free to any individual without triggering federal estate tax. In addition, the exemption amount will be adjusted for inflation. The exemption amount was actually $5.12 million in 2012, and it is predicted that in 2013, the exemption amount will rise to $5.25 million.

The 2012 Act unifies the estate tax with the gift tax. Thus, the lifetime gift tax exemption amount also equals $5 million (adjusted for inflation). In addition, the generation-skipping tax (“GST”) exemption amount is set at $5 million (adjusted for inflation). As a result, a person can gift over $5 million during life ($10 million between spouses) and not trigger any transfer tax.

The maximum estate and gift tax rate was increased from 35% to 40%.

The portability of exemptions between spouses has been permanently extended. Thus, a surviving spouse will be able to utilize his or her last deceased spouse’s unused exemption amount. This does require the filing of a federal estate tax return, but with proper elections a surviving spouse can protect up to $10 million (adjusted for inflation) if his or her last deceased spouse did not utilize any of his or her exclusion amounts.

While the exemption amounts are high and portability enables a surviving spouse to use both spouses’ exemptions, there are still many reasons why planning during life is very important, including:

All appreciation on gifted assets escapes federal and state estate taxes. For this reason, it still may make sense to gift during life for taxpayers who anticipate that their estates will appreciate and/or grow to a level that ultimately exceeds the exemption amounts.
While the federal exemption amount is $5 million, the New Jersey estate tax exemption amount is $675,000 and the New York estate tax exemption amount is $1 million. A $10 million estate may not be subject to federal estate tax but will be subject to approximately $1 million in New York and New Jersey estate tax. Proper planning can reduce or eliminate this $1 million state estate tax exposure.
While the estate tax exemption is portable, the state level estate tax exemption and the federal GST exemption are not portable. If not properly planned for, these valuable exemptions can be wasted, costing significant tax dollars.
The use of sophisticated planning techniques, such as GRATs, sales to grantor trusts, and family limited partnerships were not limited by the 2012 Act. These techniques may provide additional benefits to taxpayers where lifetime gifting is appropriate.

IRS Issues Non-Acquiescence in Wandry – Formula Valuation Clauses Are Valuable But Uncertain

By Steven M. Saraisky on December 4th, 2012 Posted in Gift Tax

On November 13, 2012, the IRS issued an “action on decision” that it will not acquiesce in the Tax Court’s decision in Wandry, TC Memo 2012-88 (appeal dismissed) regarding formula valuation clauses. In Wandry, the Tax Court held that the taxpayers who gifted membership units in a family LLC could limit their gift to the dollar amount stated in the transfer document by using a formula valuation clause. In permitting the use of a formula valuation clause, Wandry follows several other recent cases (see, eg, McCord, Christiansen, Petter). In its Wandry non-acquiescence, the IRS stated that the Tax Court erred in determining that the property transferred for gift tax purposes was anything other than the fixed percentage membership interest transferred on date of gift to each donee.

Formula valuation clauses remain valuable as a tool to protect against the assessment of gift tax (and interest and penalties) when transferring hard to value assets. However, practitioners should be aware that the IRS may not follow the Wandry decision in cases involving other taxpayers.

IRS Provides Tax Relief to Victims of Hurricane Sandy; Return Filing and Tax Payment Deadline Extended to Feb. 1, 2013

By Tishya M. Signorelli on November 7th, 2012 Posted in Estate Tax, Income Tax

As a result of Hurricane Sandy, the Internal Revenue Service announced tax relief to affected individuals and businesses.

Following recent disaster declarations for individual assistance issued by the Federal Emergency Management Agency, the IRS has announced that affected taxpayers in Connecticut, New Jersey and New York will receive tax relief. Other locations may be added in coming days based on additional damage assessments by FEMA.

The tax relief postpones various tax filing and payment deadlines (including estate and gift tax filings) that occurred starting in late October. As a result, affected individuals and businesses will have until February 1, 2013 to file these returns and pay any taxes due. This also includes fourth quarter individual estimated tax payments, normally due Jan. 15, 2013, payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013, respectively, and it applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area.

New Jersey and New York are also in the process of implementing tax relief plans and we will keep you apprised of the developments regarding this relief.

Emergency Contact Information: Attorneys’ Cell Phone Numbers

By Joe Koshar on November 5th, 2012 Posted in Uncategorized

We apologize, but our New Jersey telecommunication systems remain adversely affected and are currently not functioning. This includes phone, voicemail and fax communication. Thus, if you need to contact anyone at our NJ office, please click here for an attachment containing all of our attorneys’ mobile phone numbers.

You may also access our attorneys’ phones numbers on our website.

Alternatively, you may also dial 212-752-8000 for our New York main line, where our Client Service Representative will direct your call accordingly.

All of our offices are open and operational.

Again, and most importantly, we truly wish our best to everyone.

Pet Trusts in New Jersey and New York

By Gary A. Phillips on August 3rd, 2012 Posted in Estate Planning

People love their pets, and with some regularity, clients express a desire to leave money to special trusts for the care of their pets. Leona Helmsley made this type of planning famous by providing in her estate plan for a $12 million trust for the benefit of her Maltese, Trouble. These types of gifts or bequests are specifically permitted in New Jersey and New York, but must follow certain rules.

In New Jersey, N.J.S.A 3B:11-38 validates trusts for domesticated animals. This statute provides that the term of the pet trust can be for the life of the animal covered under the trust or the end of 21 years, whichever occurs earlier. It will be important to appoint a trustee as well as a successor trustee to follow the terms outlined in the trust, including caring for the pet. The trust also should provide for the disposition of any balance remaining in the trust at the trust’s termination.

Under the pet trust statute, New Jersey courts are able to reduce the amount allocated to the trust if it is determined that the amount substantially exceeds the amount required for the intended use of the trust.

In New York, E.P.T.L 7-8.1 validates pet trusts. For the most part, the New York statute mirrors the New Jersey statute, except that a New York pet trust can last longer than 21 years if the animal survives longer than 21 years. Note that the pet trust created by Leona Helmsley for Trouble was reduced under the New York statute as being too excessive.

Typically, pet trusts are created under the pet owner’s Will, but they also can be created during life.

Six Months Remain Before Significant Tax Opportunities Expire

By Gary A. Phillips on June 27th, 2012 Posted in Estate Tax, Gift Tax

Over the past eighteen months, we have posted frequently to the blog about the valuable tax opportunities available to taxpayers in 2011 and 2012 in connection with gifting assets to younger generations. We are now six months away from those opportunities expiring if Congress fails to act in 2012.

As a further incentive to clients who are considering gifting plans, the July Applicable Federal Rate (“AFR”) has been recently released, and it continues to remain historically low. This means that sophisticated techniques such as GRATs and sales to grantor trusts become even more advantageous to implement when planning significant transfers of wealth.

Emphasizing these valuable opportunities is not only in the hands of professional advisors; the mainstream press has taken up the cause as well. This recent New York Times article also describes these opportunities:

Section 529 Plans – Protection from Creditors

By Patrick J. McCormick on June 7th, 2012 Posted in Articles

Many people look to set up Section 529 plans to provide higher education funding for their family’s future use. In so doing, questions sometimes arise as to whether these funds are protected from creditors. Generally, a determination of whether protection is provided depends on the state in which the plan’s participants reside.

Section 529 plans are named after Section 529 of the Internal Revenue Code, a provision of the Code covering qualified tuition programs. The plans are sponsored by states and/or educational institutions, and allow tax-advantaged savings for future college costs incurred by the plan’s beneficiary. Basically, the amounts contributed to a Section 529 fund are allowed to grow tax-free under the Section 529 rules.

Three principal parties are involved with Section 529 accounts: the account donor, the account owner, and the account beneficiary. An account donor contributes funds to the account. Each Section 529 account also has an account owner, who manages the use of funds contributed. The account donor and account owner will often, but not always, be the same person. Typically, the account owner is a parent of the account’s beneficiary. The beneficiary of the account is the party for whose future use funds are invested. Beneficiaries of an account can be changed if changed circumstances arise (i.e. the beneficiary decides not to attend college, or receives a substantial scholarship). Of note, contributions to a Section 529 plans by parents or grandparents for a child’s benefit are deemed to be completed gifts, and are not included in the account donor or owner’s estate for estate tax purposes.

Protection of Section 529 plans from creditors is a state-specific issue, with slightly over one-half of states providing some type of protection. Under New Jersey law, funds in a Section 529 account are granted protection from creditors of the account donor and the beneficiary. However, protection is not explicitly provided for the account owners. Other states, such as Pennsylvania and Florida, explicitly provide this protection.

New York offers more limited protection for Section 529 plans than New Jersey. If the owner of a New York account is not both a minor and the account’s beneficiary, only $10,000 of the account balance will be protected from creditor claims. The remainder of the account’s funds will not be protected.

In most states, creditor protection for 529 accounts is provided only for accounts established within the state. A few states (such as Florida, Texas, and Tennessee) have statutes which could potentially offer protection to Section 529 plans established under the laws of any state. For example, a resident of Florida who holds an account in New York may be offered protection by Florida law. However, New Jersey and New York’s respective statutes follow the typical approach of only protecting plans established within the state.

The level of protection which can be provided to a resident of one state who holds a 529 plan in a different state is unclear. As an example, a New York resident establishing a 529 account under Florida law will not receive protection in New York (as mentioned above), and also may or may not receive protection in Florida. A determination as to whether protection would be granted under these circumstances would be made under Full Faith and Credit principles. However, different standards are used for different Full Faith and Credit decisions. This issue has not yet been tested in Court decisions. Because of this level of uncertainty, establishing Section 529 plans in the state in which the participants reside appears to be the safest route to ensure some level of protection.