Tag Archives: AEG

Finseca (AALU) – “Houston, We Have a Problem – Valuations (Again)”

 The Washington Report: – Wealth Transfer Edition

“The IRS continues its attack on valuations, and there’s no end in sight.  The U.S. Tax Court recently issued its decision in Estate of Cecil v. Commissioner. The decision is important because it contributes to the discussion whether tax affecting is necessary and/or appropriate when valuing an S corporation. Additionally, the decision reveals the zeal with which the IRS is pursuing wealthy taxpayers on valuation matters and highlights the importance of deep expertise needed for successful business succession planning and using reliable appraisals. Taxpayers with successful family-owned businesses who desire to retain ownership of the business within the family are well advised to engage advisors well versed in business succession planning.  Reliable appraisals matter.”

To read the full report, click here.

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“If you think working with a professional is expensive, try working with an amateur” (Anon)

From the New York Times, “The High Stakes of Low Quality” by Yvon Chouinard, founder and former owner of Patagonia at https://www.nytimes.com/2023/11/23/opinion/patagonia-environnment-fast-fashion.html

  • “I know firsthand the high stakes of low quality. When I started forging climbing equipment and selling it out of the back of my car in the 1950s, I was my own best customer. My dirtbag climber buddies and I wanted stronger pitons and sturdier carabiners to support us as we hung thousands of feet above the Yosemite Valley floor. If the metal were too soft or a joint too weak, the resulting fall would have killed me or one of my friends.  I wanted to stay alive, so I chose quality at every turn, creating products that were simple, versatile and made with the lightest, strongest materials I could find.”
  • “People ask me how it has managed to stick around so long when the average life span of a corporation is less than 20 years. I tell them it’s been our unrelenting focus on quality, which includes making things that last and that cause the least amount of harm to our planet.” Quality is smart business. Even during economic downturns, people don’t stop spending. In our experience, instead of wanting more, they value better. Consumers should demand — and companies should deliver — products that are more durable, multifunctional and, crucially, socially and environmentally responsible.”

How does this relate to your practice and the clients you serve?  Do you believe that it’s better to do excellent planning and provide flawless implementation upfront, rather than to try to unwind poor planning and flawed implementation down the road?  The cost for working with the cheapest, least experienced, and perhaps, ethically-challenged professional can be prohibitively and dangerously high.

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WSJ – The Planning Point is Actuarial, Not Political

WSJ

 

 

Reading the WSJ article below made me wonder how the facts represented impact the planning we do for our older clients.  There are so many issues that depend on our understanding of aging and longevity.

The WSJ article which can be found by clicking here.

What is usually referred to as life expectancy typically means life expectancy at birth: how long a hypothetical newborn would live if current age-specific death rates prevailed through her entire life. For older individuals, we care more about how long someone their age can expect to live, which can be calculated with the Actuaries Longevity Illustrator.  Geriatricians are increasingly seeking ways to measure not just how many years someone will live but how many healthy years, sometimes called healthspan. The evidence for Trump and Biden is favorable. The University of Connecticut’s Healthy Life Expectancy Calculator suggests (again, based on what’s publicly known) that Trump and Biden are likely to not only be alive, but in good health, for at least 10 years. 

Regular drinking of two or more drinks, three or more times a week, shortens life expectancy by about seven years. Both Trump and Biden are teetotalers, in addition to being nonsmokers.  “Those are two of the biggest killers right there,” said Bradley Willcox, a professor and research director at the Department of Geriatric Medicine at the University of Hawaii.  Biden and Trump are each highly educated at a time when the life-expectancy gap between the educated and uneducated has been growing. They are wealthy, also a strong predictor of longer life. They receive excellent healthcare.  Median life expectancy is just that, the middle. Nonsmokers and nondrinkers, who are educated, wealthy and have long-lived parents and good medical care, are generally going to outlast the median quite a bit, which is why many people are not only reaching their 80s but continuing to thrive.  “Many people who are 80 years old now have more in common with people a couple generations ago who were 60,” said Willcox.

Putting together all the known data, Olshansky estimates that Trump and Biden would likely have at least an 80% chance of completing their terms in good health, far better than voters think.

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Finseca (AALU) “California Amends Tax Code Affecting Incomplete Gift Non-Grantor Trusts”

The Washington Report: – Wealth Transfer Edition

“Taxpayers should exercise caution in implementing ING trusts, particularly in light of California’s new law, which is effective retroactively.  While the ING trust remains a viable wealth preservation strategy in many states, it is unclear how long this will continue.  Taxpayers who implement this strategy are well advised to craft an exit strategy as well.”

Click here to read the full report.

 

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Finseca (AALU): Buy-Sell Agreements in Light of Connelly Part 2: Redemption Buy-Sell Agreements and Life Insurance Proceeds

The Washington Report: – Wealth Transfer Edition

“Valuation appears to be trending within the Internal Revenue Service (“IRS”) these days: insurance policy valuations, CCAs regarding GRATs, charitable planning targeted, and now the Connelly case.  The U.S. Court of Appeals for the Eight Circuit found that the value of life insurance proceeds funding a redemption buy-sell agreement should be included in the value of a closely-held business for estate tax purposes, changing conventional thinking.  Business owners should consider a cadence of regularly reviewing their buy-sell agreements. These are living, breathing documents. If their buy-sell agreement happens to be a redemption agreement, the economics should be reviewed assuming the same treatment as the Connelly case. It may be that these buy-sell agreements are woefully underfunded, triggering an audit of their life insurance plans. And if the owner has an agreement in place, they should follow it to the letter, not set-it-and-forget-it.”

To read the full report, click here.

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Finseca (AALU): Buy-Sell Agreements in Light of Connelly Part 1: The Fundamentals of Buy-Sell Agreements

The Washington Report: – Business Uses Edition

“At question was whether the life insurance proceeds received by a corporation and intended for redemption in the context of a stock-purchase agreement should be taken into account when determining the corporation’s value at the time of one of the stock-holder’s death.  Buy-sell arrangements (“BSAs”) address how the business or other business owners can “buy-out” an owner’s interests after a specified triggering event, such as death.  To be effective, the terms and structure of a BSA must be tailored to the unique needs of each business and business owner; there is no “one size fits all” form.  BSAs also should take a comprehensive approach to buy-outs, addressing not just an owner’s death, but also disability, divorce, and bankruptcy, among other events.  BSAs create a ready market for the purchase of a deceased or departing owner’s interests at a fair value, which makes them a key component of a business owner’s financial and legacy plan. To obtain optimum results, business owners should coordinate with their insurance advisors, attorneys, accountants, and other financial advisors from inception to ensure the BSA is properly customized to their business and appropriately funded.  Owners and their advisors also should conduct regular reviews of their BSAs and any funding sources, especially after any changes in the business’s ownership, tax status, or value.”

Click here to read the full report.

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Finseca (AALU): The IRS Takes an Unprecedented Position Against Perceived GRAT Valuation Abuse

The Washington Report: – Wealth Transfer Edition

“Abusive taxpayer transactions simply continue to raise the ire of the IRS. Commonly seen as a very conservative planning technique, the Internal Revenue Service (“IRS”) has recently taken extreme positions to challenge the use of grantor retained annuity trusts (“GRATs”).  The IRS in a recent CCA takes the position that by undervaluing the assets transferred to a GRAT, the GRAT annuity interest is not a “qualified interest,” and therefore the entire transfer is a taxable gift. The IRS finds that the transferred interest can be undervalued to such an extent that it ceases to be a qualified interest under IRC § 2702.  While the CCA is not precedent, it is a clear indication of how the IRS may deal with perceived abusive (valuation) transactions. A softer touch could have permitted use of the self-adjustment regulations to correct the transaction. Instead, the IRS uses a hammer to address, in our view, bad taxpayer behavior. To avoid costly disputes with the IRS, when funding a GRAT or any irrevocable trust with hard-to-value assets, obtain a qualified appraisal as of the date of the transfer.

Click here to read the full report.

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Finseca (AALU): “The Nongrantor ILIT: A Discussion”

The Washington Report: – Wealth Transfer Edition

“As Congress and the Biden administration continue to consider the grantor trust rules, some practitioners have turned their attention to the little-used nongrantor irrevocable life insurance trust (“ILIT”) as a planning alternative.  The ILIT, one of the most commonly used legacy management tools, is typically established as a grantor trust for income tax purposes for many reasons but the most important being the ability to use the trust income to pay life insurance premiums.  The nongrantor ILIT is possible but not ideal.  In most situations, the grantor ILIT will remain the preferred structure.  However, it is possible to structure the ILIT as a grantor trust from the outset and allow for a future toggling-off of grantor trust status to manage possible changes in the law.”

Click here to read the full report.

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Trusts & Estates – “The GRAT Enhancement Strategy”

Robert W. Finnegan has an excellent article in the current issue of Trusts & Estates (April, 2023) entitled, “The GRAT Enhancement Strategy.”

From the article:

  • Grantor retained annuity trusts (GRATs) have been a great wealth transfer success story…the shortcoming of successful GRATs is that their assets will be included in the children’s taxable estates.
  • With the GRAT enhancement strategy, the GRAT remainder makes a split dollar loan to a dynasty trust to purchase life insurance, moving appreciation of GRAT assets via the policy death benefit to the dynasty trust.

Finnegan provides a robust and detailed Case Study illustrating the benefits of this planning and concludes with “The GRAT enhancement strategy is a powerful wealth transfer tool in and of itself.  It’s applicable to GRATs, staged distribution trusts and any trust in which the assets have been removed from the clients’ estates but will be taxed in the children’s estates.  Clients may be more receptive to additional planning if they can minimize their involvement and expenses and use assets that have already been transferred.”

I highly recommend this article for your review and consideration.

The GRAT Enhancement Strategy – Trust & Estates – 3.20.23

 

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Finseca (AALU) Rabbi Trusts: Key Legal and Business Considerations

The Washington Report: Business Uses Edition

“A rabbi trust is a vehicle that provides for such informal funding without running afoul of tax or ERISA compliance issues resulting from “funded” NQDC plan benefits. This article addresses key questions to consider when adopting a rabbi trust, including (i) whether the rabbi trust should be irrevocable; (ii) even if irrevocable, when can assets revert to the employer; (iii) should the rabbi trust include enhanced protections upon the employer’s change in control; (iv) what kind of investments should the rabbi trust hold and what kind of control over those investments should the employer retain; and (v) can the rabbi trust hold employer stock?”

Click here to read the full report.

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