BBA Event Recap: Estate Planning for Owners of Closely Held Businesses

Program Date:  Friday, October 28, 2016

PanelistsJeffrey W. Roberts and Johanna L. Wise Sullivan of Nutter McClennen & Fish LLP

Program Chairs:  Sara Goldman Curley of Nutter McClennen & Fish LLP, and David L. Silvian of Day Pitney LLP, co-Chairs of the Estate Planning Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  This program provided an overview of key issues and planning points that attorneys should keep in mind when engaging in estate planning for a business owner.  It included an overview of different tax structures (C corporations, S corporations and LLCs), other structural issues (women owned businesses and business succession planning), and drafting considerations.  The panelists also discussed planning options, including the use of discounted valuations, freezing techniques and liquidity issues.

 

BBA Event Recap: Planning for Contested Estates: Estate Planning Strategies to Avoid (or Prevail In) Litigation

Program Date: Tuesday, October 18, 2016

PanelistsAlison Irving Glover of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Marshall D. Senterfitt of Goulston & Storrs, and Ryan P. McManus of Hemenway & Barnes LLP

Program ChairsMarshall D. Senterfitt of Goulston & Storrs and Ryan P. McManus of Hemenway & Barnes LLP, co-Chairs of the Fiduciary Litigation Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  This program provided an in-depth review of estate planning strategies and best practices to be employed when a contest is possible or even likely.  The program focused on steps that can be taken during the planning stage to reduce the likelihood of litigation and to ensure that an estate plan, if challenged, will be upheld.  The panelists included a discussion of procedures that can be employed to try to achieve certainty and finality when litigation is anticipated.

 

 

Proposed Regs. Under § 2704

Author: Allison A. Kazarian, Paster & Harpootian, Ltd.

On August 2, 2016, the IRS released proposed regulations under Internal Revenue Code section 2704. If the proposed regulations are finalized as written, they will have a significant impact on the valuation of interests in family-controlled entities for estate, gift, and GST tax purposes due to new limitations on discounts for lack of control.

The proposed regulations, if finalized, will make the following changes to § 2704:

Three-Year Recapture Rule.  The proposed regulations narrow the current exception to § 2704(a), which provides that a transfer of an interest resulting in the lapse of a voting or liquidation right is not subject to 2704(a) if the rights associated with the transferred interest are not restricted or eliminated. The proposed regulations adopt a three-year recapture rule.  The exception for rights with respect to transferred interests that are not restricted or eliminated continues to apply unless the transfer occurs within three years of the transferor’s death.  If a transfer results in the lapse of the transferor’s right to force liquidation and such transfer occurs within three years of the transferor’s death, it will result in a deemed transfer of the value of the lapsed right at the transferor’s death.

Transferee with Assignee Status. The proposed regulations clarify that § 2704(a) applies to lapses of rights resulting from transfers made to assignees that do not participate in management.  For example, when a partner in a general partnership dies and under state law the deceased partner’s estate receives an assignee interest entitled to participate in profits but not management, such transfers may still be treated as taxable lapses.

Disregarded Restrictions.  Section 2704(b) currently provides that restrictions on liquidation rights shall be disregarded for valuation purposes when an interest of a family-owned business is transferred among family members and the restriction can be removed by the family.  The proposed regulations adopt additional “disregarded restrictions,” which include any restriction that (1) limits the interest holder to liquidate or redeem his interest; (2) limits liquidation proceeds to less than a “minimum value” (defined as a pro rata share of the net value of property held by the entity less outstanding obligations of the entity); (3) defers payment of liquidation proceeds for more than six months; or (4) permits payment of liquidation proceeds by a note from the entity or family members unless the note meets certain specifications.

A transfer of an interest that is subject to a disregarded restriction will be valued as if there is no such restriction. However, the “disregarded restriction” will not be ignored for valuation purposes if the entity has nonfamily members that meet the following tests: (1) the nonfamily members have held interest for at least three years; (2) the nonfamily member’s interest is equal to at least 10% of the entity’s equity interests or capital and profits interest (and 20% in the aggregate with other nonfamily members); and (3) the nonfamily member has the right to redeem the interest with six months’ notice for “minimum value” payment.

Marital and Charitable Deductions.  The proposed regulations clarify that if restrictions are disregarded for purposes of valuing an interest in an estate, it will also be disregarded when valuing the interest for purposes of the marital deduction.  Interests transferred to charity are not subject to § 2704 because § 2704 only applies to family member transfers.

Covered Entities.  The proposed regulations clarify that § 2704 applies to corporations, partnerships, limited liability companies, and other entities and business arrangements.

Effective Dates.  Comments have been requested, and a hearing is scheduled for December 1, 2016.  It is anticipated that final regulations will be issued and take effect sometime in 2017.

The “disregarded restrictions” rules will become effective 30 days after the proposed regulations are finalized.

The provisions related to voting and liquidation rights apply to rights and restrictions created after October 8, 1990, but only to transfers that are completed after the regulations are finalized. However, it is unclear whether the three-year recapture rule will apply to a transfer of interest completed prior to the date the regulations are finalized.  Therefore, there is a potential that transfers may be recaptured even if such transfers are made before the regulations are finalized.

Please join the Estate Planning Committee on Friday, October 28, 2016, for a brown bag lunch on Estate Planning for Closely Held Business OwnersJeffrey W. Roberts and Johanna L. Wise Sullivan of Nutter McClennen & Fish LLP will provide an overview of key issues and planning points that attorneys should keep in mind when engaging in estate planning for a business owner.  The program will include an overview of different tax structures (C corporations, S corporations and LLCs), other structural issues (women-owned businesses and business succession planning), and drafting considerations.  It also will include a discussion of planning options, including the use of discounted valuations, freezing techniques and liquidity issues.  Section 2704 will be discussed.

 

Rev. Proc. 2016-42: Language To Be Included In A CRAT To Qualify Under IRC Section 664(f)

Author: Kerry Reilly, Esq., K. Reilly Law LLC

Rev. Proc. 2016-42 – Language To Be Included In A CRAT To Qualify Under IRC Section 664(f)

The IRS has released sample language to be included in Charitable Remainder Annuity Trusts (CRATs) to satisfy the qualified contingency requirements under Internal Revenue Code (Code) Section 664(f). The sample language applies to all CRATs created after the effective date of the Rev Proc.

By using the language provided in the Rev. Proc., the CRAT will not “fail to qualify as a CRAT under Code §664,” nor be subject to the “probability of exhaustion test” pursuant to Rev. Proc. 70-452 (see also Rev. Proc. 77-374). The language is designed to ensure that (1) the beneficiary does not benefit at the expense of the charity, (2) that the charity ultimately receives an amount in keeping with the donor’s charitable deduction at the creation of the CRAT, and (3) that the charity be protected from some of the investment risk of the assets in the CRAT.

The use of similar but not identical language to the sample provision will not guarantee treatment as a “qualified beneficiary” pursuant to §664(f).

The sample language is as follows: (emphasis unchanged)

“The first day of the annuity period shall be the date the property is transferred to the trust and the last day of the annuity period shall be the date of the Recipient’s death or, if earlier, the date of the contingent termination. The date of the contingent termination is the date immediately preceding the payment date of any annuity payment if, after making that payment, the value of the trust corpus, when multiplied by the specified discount factor, would be less than 10 percent of the value of the initial trust corpus. The specified discount factor is equal to [1/(1+i)]t, where t is the time from inception of the trust to the date of the annuity payment, expressed in years and fractions of a year, and i is the interest rate determined by the Internal Revenue Service for purposes of section 7520 of the Internal Revenue Code of 1986, as amended (section 7250 rate), that was used to determine the value of the charitable remainder at the inception of the trust. The section 7520 rate used to determine the value of the charitable remainder at the inception of the trust is the section 7520 rate in effect for [insert the month and year], which is [insert the applicable section 7520 rate].”

Bank of America v. Commissioner of Revenue

Author: Kerry Reilly, Esq., K. Reilly Law LLC

Bank of America v. Commissioner of Revenue

SJC – 11995 (July 11, 2016)

On July 11, 2016, the Massachusetts Supreme Judicial Court (“SJC”) upheld the decision of the Appellate Tax Board (the “board”) that Bank of America N.A. (“B of A”), in its capacity as corporate trustee, qualified as an inhabitant of the Commonwealth of Massachusetts (“MA”) and was subject to the state’s fiduciary income tax for the trusts in question.

G.L. c.62 §10 (a) provides that income received by trustees is subject to MA taxes if “the persons to whom the same is payable, or for whose benefit it is accumulated, are inhabitants of the commonwealth…”  Under G.L. 62 §1(f), inhabitant” means – “(1) any natural person domiciled in the commonwealth, or (2) any natural person who…maintains a permanent place of abode in the commonwealth and spends in the aggregate more than 183 days of the taxable year in the commonwealth.” Section 14 subjects corporate trustees to the same tax regime as “natural” trustees.

The SJC affirmed that B of A was an inhabitant of the Commonwealth based on its extensive branch structure, its conducting of business related specifically to the trusts at issue – “maintaining relationships with the beneficiaries, making decisions about distributions to those beneficiaries, administering trust assets, and retaining certain records” – as well as conducting similar business for other trusts, and was thus subject to taxes pursuant to G.L. c.62 §10.

BBA Event Recap: Estate Planning with Retirement Benefits – Part II

Program Date: Friday, September 23, 2016

PanelistSuma V. Nair, Goulston & Storrs

Program Chairs: Sara Goldman Curley of Nutter McClennen & Fish LLP, and David L. Silvian of Day Pitney LLP, co-Chairs of the Estate Planning Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  This program provided an in-depth review of estate planning with retirement benefits as a follow up to last spring’s introductory program.  It included a discussion of the different options for a surviving spouse who receives retirement benefits, drafting tips, traps for the unwary, the practical issues that arise when it comes time to implement beneficiary designations, and ideas to fix issues that come up during estate administration.

 

 

REMINDER 6/24/16: BBA CLE – Trusts & Estates Section Year End Review

CLE Title: Trusts & Estates Section Year End Review

Time: 12:30 PM to 2:30 PM

Location: Boston Bar Association, 16 Beacon Street, Boston, MA

Description: An annual event not to be missed, the Trusts and Estates Section Year End Review covers recent federal and state case law, legislation and tax law matters. This year’s Year End review will touch on

  • New Developments subcommittee: in terrorem clauses; whether property held in an irrevocable trust will be considered a countable asset for MassHealth purposes; identifying heirs; evidence of lifetime gifts; and will contests.
  • Public Policy subcommitee: The Public Policy committee will give an update on legislative items relevant for trusts & estate attorneys and professionals, including (i) the revised Massachusetts estate tax reform act submitted by Rep. Dooley, (ii) the Massachusetts Revised Uniform Fiduciary Access to Digital Assets Act, which is expected to be submitted to the legislature in the coming year, (iii) Gov. Baker’s budget proposal that would affect estate recovery for MassHealth patients, and (iv) the pending correction on Adopted Children Act.
  • Tax Law Update subcommittee: Basis Reporting.

Information: For more event details, including accreditation, agenda, and fees, click here.

Sponsors: Trusts & Estates Section.

SpeakersMelissa E. Sydney of Burns & Levinson LLP, Allison Whitmore of Morgan Lewis, Annette Eaton of Nixon Peabody LLP, Katherine (Kerry) Reilly of K. Reilly Law LLC, David Menchaca.

BBA Event Recap: Non-Judicial Settlement Agreements

Program Date: Friday, May 6, 2016

Panelist: Jeffrey W. Roberts, Esq. and Johanna L. Wise Sullivan, Esq., both of Nutter McClennen & Fish LLP

Program Chairs: Kerry L. Spindler, Goulston & Storrs PC  and Sara Goldman Curley, Nutter McClennen & Fish LLP, co-Chairs of the Estate Planning Committee.

Materials:  To view the program materials, click here.

Summary of Program Topic: The use of non-judicial settlement agreements under the Massachusetts Uniform Trust Code as a way to resolve ambiguities or other issues with irrevocable trusts without having to go to the Probate Court. The program reviewed the basics of non-judicial settlement agreements.