Estate Taxes; Where Do We Go From Here?

By:  Rick Hurt, Jeffrey M. Gad, Drew LaGrande and Megan Devault

 Due to the ever changing and broadly applied federal estate tax laws, families can face dire and catastrophic consequences, such as a forced-sale of assets at less than optimal values, even with extensive advance planning.  Simply put, in the context of family wealth, the unexpected death of a family matriarch or patriarch is not only a family tragedy, but it can also significantly affect the family wealth and business. The federal estate tax can play a large part in this loss.

The reality of the federal estate tax on family wealth is compounded by the tremendous change that has surrounded the estate tax law for the last 10 years. Over the last decade, the federal estate tax has been manipulated by widely changing tax rates and exemptions and such changes make advance estate and succession planning for family wealth all the more challenging. With more dramatic changes to the federal estate tax law looming, and with the economic recovery still struggling to take hold, efforts must be made to solidify the foundation for future growth and family succession planning through a critical examination of the federal estate tax.

Summary of the Current Law

For the past several years, the federal estate tax law has provided elevated exemptions and lower tax rates. The key provisions of the current federal estate tax law, which sunsets on December 31, 2012, are as follows:

• $5.12 Million gift and estate tax exemption indexed for inflation.
• $5.12 Million Generation Skipping Transfer (“GST”) tax exemption indexed for inflation.
• 35%  maximum, estate, gift and GST tax rates.
• For decedent’s dying in 2011 and 2012, a surviving spouse may use the most recent deceased spouse’s unused exemption amount (“portability”).

If no new legislation is enacted prior to December 31, 2012, then the estate, gift and GST tax exemptions revert back to $1 Million, with maximum taxable rates of up to 60%.

Obama Proposal:

The Obama Administration’s Fiscal Year 2013 Revenue Proposal recommends the following changes to the current federal estate tax law:

• $3.5 Million estate and GST tax exemption.
• $1 Million gift tax exemption.
• 45% maximum estate, gift  and GST tax rates.
• Portability to remain intact.
• Require consistency in the reporting basis by the transferee of property received either through a gift or devise, with information reported by the transferor.
• Valuation rules will be enacted to limit the ability to discount closely-held entities for lack of marketability and lack of control.
• Require a minimum term of 10 years for grantor retained annuity trusts.  The new proposals would also require the remainder interest to be more than zero in value.
• Require a trust to terminate if it has been in existence for 90 years, thus limiting the effectiveness of the GST tax exemption.
• Require inclusion of irrevocable trust assets in the estate of an individual who, for income tax purposes, is deemed to be the taxpayer of the irrevocable trust. 

 Bipartisan Proposal:

One of the few bipartisan proposals dealing with the federal estate tax law was introduced by Kevin Brady (R–TX) on March 30, 2011.  H.R. 1259 is co-sponsored by two (2) Democrats and four (4) Republicans and entitled the “Death Tax Repeal Permanency Act of 2011.” This bill is presently before the House Committee on Ways and Means and provides for the following, to become effective upon the date of enactment:

• Repeal of federal estate tax.
• Repeal of the federal GST Tax.
• Make permanent the current $5 Million federal gift tax exemption, with taxes levied at a rate of 35% for transfers over $5 Million. 

The reasons for repeal, as cited by sponsoring Representatives, can be summarized as follows:

• Hurts Small Business Owners, Farmers and Ranchers.  The estate tax hurts families with small businesses and farmers by inhibiting their ability to transfer assets without imposing a second layer of taxes. 
• Job Loss.  By inhibiting the transfer of family businesses from one generation to the next, the estate tax affects jobs and diminishes employment opportunities within those businesses subject to estate tax.
• Punishes Prudent Investing.  The estate tax punishes families who prudently invest and accumulate wealth over the course of their lifetime, by subjecting them to taxes upon death.
• Bereavement. The surviving family members must find ways to pay the estate tax liability at a time when they are struggling with the loss of a loved one, including the matriarch, patriarch or head of the family household.  Family members should be allowed to deal with their bereavement, without having to be subjected to estate taxes on the assets which they inherit.
• Double taxation.  The estate tax subjects taxpayers and their beneficiaries to double taxation, by taxing the same assets first during life and again upon death. 

 Impact of Federal Estate Tax (and Failure to Act by Congress) on Family Wealth

The worst case scenario for wealthy families is for Congress to ignore the estate tax issue. Indeed, no action by Congress will be more detrimental than the enactment of any of the lesser-favored proposals being debated. For instance, if the current law “sunsets,” many families will face a $1 Million estate and gift tax exemption and increased estate and gift tax rates of 55% (and up to 60% for estates valued over $10 Million).

Risk of Claw Back

There is also considerable uncertainty surrounding the application of any “claw back” penalty for gift and estate tax exemption.  In other words, there is a risk that if permissible gifts of up to $5 Million are made prior to December 31, 2012, and no further action is taken to clarify the federal estate tax laws going forward, a decedent’s estate could be forced to incur an additional tax based upon the difference of the gifts made during life and the exemption level upon death. If this occurs, families following the law and engaging in proactive planning to preserve family wealth could still face tax consequences which could undo important plans set in motion to ensure succession to future generations.

Conclusion

In the midst of such estate tax turmoil, families should still consult with tax and legal professionals to ensure that they are maximizing all planning options and tools available to them to minimize adverse impacts of the estate tax law.  Akerman has experts to assist in various areas of tax and estate planning.  Please feel free to speak with one of our attorneys to find out more information and maximize your tax and estate planning.

NOTE: This publication was written in collaboration with Family Enterprise USA.

Rick Hurt, Jeffrey M.Gad, Drew LaGrande and Megan Devault counsel family-owned businesses on matters integral to family enterprises, including litigation matters, tax planning, corporate governance, mergers, acquisitions and more.  As all individuals are aware, nothing is simple when it comes to taxes.  This paper contains many general statements and simplifies complex concepts.  There are many nuances in the issues discussed in this paper and exceptions to the general rules.  A tax advisor should be consulted before taking any action with respect to a particular business or situation.

Extension of Voluntary Disclosure deadline to September 9

By:  Sherwin P. Simmons, II, Esq., Drew LaGrande, Esq., 

Jonathan Gopman, Esq. and Barbara Ruiz-Gonzalez, Esq.

The IRS just announced at 5:45 pm EST that the Voluntary Disclosure deadline has been extended to September 9, 2011.  The reasoning provided is the potential impact of Hurricane Irene.  All deadlines have been moved to September 9 and no additional steps must be taken in order to obtain this extended deadline.
Thus, all complete submissions now need to be received by the IRS on September 9 and not August 31 and all extension requests now need to be received by the IRS on September 9 and not August 31.
Additionally, the IRS clarified guidance as to the Voluntary Disclosure Letter stating that as much of the information for the Letter as possible should be submitted by September 9 and the Letter must be updated at a later date.

Conversation Starters for Seniors and their Children

Please join me tonight at Pinecrest Place for a presentation on Conversation Starters for Seniors and their Children.  If you have ever had trouble communicating with your aging parents, come to Pinecrest Place and learn about the “40-70 Rule.” This means that if you are around 40 and your parents are around 70, it’s time to start talking about certain senior topics. This informative seminar, presented by four experts in the fields of retirement living, finance, law and pre-planning, will help the adult children of aging parents pave the way for better communication and a more fulfilling relationship. Learn about options in retirement living, strategies on how to pay for it, get a check list of what documents you need to protect your interests, and finally, how to make the last days easier by pre-planning funeral arrangements.


While you’re here, you’ll enjoy heavy hors d’oeuvres, beverages and mingle with other professionals before the presentation. Come prepared to ask questions and then leave with a check list of things to do to help you and your parents prepare for their future, and yours!  Hor d' oeuvres begin at 5:30 pm and the presentation begins at 6 pm.

Seating is limited so call 727-581-8142 to R.S.V.P. or for directions.

JUST THE FAQs PLEASE, The IRS has updated guidance on the Offshore Voluntary Disclosure Initiative

By: Sherwin Simmons, Drew LaGrande and Barbara Ruiz-Gonzalez

Tampa, Florida

On June 2, the IRS updated the frequently asked questions (FAQ) related to the 2011 Offshore Voluntary Disclosure Initiative (OVDI).  The OVDI, which was originally announced February 8, 2011, provides an opportunity for taxpayers to disclose previously unreported offshore assets in exchange for a 25% penalty (or in some cases, a 5% or 12.5% penalty) on the highest amount of the assets between 2003 and 2010, payment of unreported taxes and interest for the tax years 2003 through 2010 and various other civil penalties.

90-Day Extension to Submit Documents
The updated FAQ’s provide(i) for a 90-day extension period for taxpayers wishing to comply that are unable to make the August 31 deadline, so long as the taxpayer makes a good faith attempt to comply and can explain which items are missing and why; (ii) compare in detailed explanations, the penalties that would potentially apply to taxpayers participating in the initiative versus with those penalties that would potentially apply to taxpayers that “opt-out” of the initiative; and (iii) and most importantly, provide an additional reduced penalty for US persons who are living outside the US.

The 90-day extension is not a blanket extension of the deadline for the OVDI.  It is in fact, a completely discretionary extension as determined by the IRS for taxpayers pre-cleared in the OVDI who need additional time.

The IRS stated that a taxpayer may request an extension of the August deadline to complete the OVDI submission if, and only if, the taxpayer can demonstrate a good faith attempt to fully comply on or before August 31, 2011.  The good faith attempt to fully comply must include the properly completed and signed agreements to extend the period of time to assess tax (including tax penalties) and to assess Report of Foreign Bank and Financial Accounts (FBAR) penalties.

Written requests for up to a 90-day extension must include a statement of those items that are missing, the reasons why such items are missing, and the steps taken to secure them.  In addition, the submission must include copies of filed original and amended income tax returns, various completed information forms required by the OVDI, and in some cases, copies of offshore financial account statements.

A taxpayer wishing to be a part of the OVDI after August 31, 2011 does not benefit from the 90-day extension.

New Opt Out and Removal Guide
As part of the updated guidance, the IRS also provided a new Opt Out and Removal Guide (“Guide”) that includes steps that should be taken before and after opting out or being removed from the OVDI.  This Guide includes sample letters, a rundown of penalties that may apply to a taxpayer, and a list of possible exceptions to the three-year statute of limitations for individuals who have opted out or have been removed from the OVDI.

Opting out of the OVDI is an irrevocable election by a taxpayer to have his or her case handled under the standard IRS audit process. Removal from the OVDI, in contrast, is a determination made by the IRS to remove a taxpayer from the OVDI. In both situations, an examination is immediately initiated.

Under the procedures outlined in the Guide, a centralized review committee will make a determination as to whether the case merits a normal examination, should be reassigned to a Special Enforcement Program agent, or should receive some other treatment. The Guide states that the review committee will decide the appropriate level of examination, keeping in mind that the taxpayer is not to be viewed in a negative light for opting out of the OVDI.  The IRS described in the Guide several scenarios in which a taxpayer might wish to opt out from the OVDI.

The Guide also states that the review committee will consider the apparent severity of the results under the OVDI and the cooperation of the taxpayer, including whether removal was under consideration at the time of opt out.  The Guide further states, that all committee decisions are final.

A taxpayer should fully explore all results and options prior to opting out of the OVDI.

Dual Resident Penalty Reduction
Additionally, the OVDI was modified to include a reduction of the 25% offshore penalty to 5% if certain requirements are met.

This relief is only available to taxpayers who meet all of the following requirements during all years of the OVDI: (i) resided in a foreign country; (ii) were in compliance with the tax laws of their resident country; (iii) had $10,000 or less of U.S. source income each tax year; and (iv) any offshore-related taxable income not reported on the individual's U.S. tax return must have been reported on the individual's income tax return filed with their resident foreign country.

If such requirements are met, the taxpayer would be eligible for a reduced 5% offshore penalty that would apply only to the value of their foreign financial accounts.

The June update to the OVID has provided some additional tools for taxpayers with respect to the OVDI.  It has provided reduced penalties in very specific situation and guidance on opting out of the OVDI.  Although the update provides for an extension of time to the August 31, 2001 deadline, taxpayers should be weary of its use and benefit, considering the discretionary approval process by the IRS and a showing of a good faith attempt to comply with the deadline.

2010 FOREIGN FINANCIAL ACCOUNT REPORTING REQUIREMENTS

By: Sherwin Simmons, II and Drew LaGrande

Tampa, Florida

U.S. citizens or residents who owned, directly or indirectly through an entity, or who had power of attorney/signature authority over one or more foreign financials account with an aggregate value exceeding $10,000 at ANY point in time during 2010 may be required to report such foreign financial accounts. The definition of a reportable foreign financial account includes any investment account, brokerage account, certain pension funds, cash value life insurance or annuity policy, mutual fund, some commodity accounts, and other types of foreign financial accounts.

U.S. citizens and residents with a reportable foreign financial account are required to file a Form TD F 90-22.1 (FBAR). The due date of the FBAR is June 30th. Unlike other IRS forms, the FBAR MUST be received by June 30th, not mailed June 30th.

Published IRS guidance also allows for U.S. citizens and residents who have reported and paid all their worldwide taxable income for tax years 2003 through 2010 but who failed to file FBARs for those tax years, to file such FBARs by June 30th without any exposure to penalties. U.S. citizens and residents who have not reported and paid all their worldwide taxable income for tax years 2003 through 2010 should NOT file any FBARs by June 30th without seeking proper legal advice.

The IRS published new guidance on the reporting of foreign financial accounts on February 24, 2011 which further broadens the definition of a foreign financial account and who is responsible for filing an FBAR. Due to the overwhelming penalties, we highly recommend that all U.S. citizens or residents holding an asset offshore seek proper legal advice to determine if they now possess an FBAR filing obligation.

The Tax Man Cometh – The New IRS Off-Shore Voluntary Disclosure Initiative

By: Sherwin P. Simmons, II and Drew LaGrande

Tampa, Florida

On February 8, 2011, the IRS announced the 2011 Offshore Voluntary Disclosure Initiative (the “2011 VDI”). The 2011 VDI provides a new framework allowing taxpayers with undisclosed offshore personal and business assets a mechanism in which to disclose the undisclosed offshore assets with limited exposure to criminal prosecution and civil penalties. In response to the 2011 VDI, IRS Commissioner Douglas Shulman urged, “For those hiding cash or assets offshore, the time to come in is now.” The 2011 VDI is available through August 31, 2011 only. Taxpayers with undisclosed offshore personal and/or business assets must act quickly.

Under the 2011 VDI, taxpayers with undisclosed offshore assets have an opportunity to avoid criminal prosecution so long as the proper procedures are followed. These procedures include the following:

     (1) File Amended Tax Returns for tax years 2003 though 2010 reporting previously undisclosed offshore income;

     (2) Pay applicable income tax resulting from such undisclosed offshore income along with interest resulting therefrom;

     (3) File all Informational Returns applicable to the undisclosed offshore assets for tax years 2003 through 2010;

     (4) Pay an accuracy-related penalty based on the additional income tax;

     (5) Pay a failure to file and/or failure to pay penalty, if applicable; and

     (6) Pay a penalty of 25% of the highest aggregate balance of the undisclosed foreign financial accounts and/or assets during tax years 2003 through 2010. In certain limited circumstances, taxpayers may be eligible for a reduced penalty of 12.5% or even 5%.

The 2011 VDI is the IRS’ second amnesty program focused on undisclosed offshore assets. The IRS provided for a similar voluntary disclosure program in March of 2009 which resulted in 15,000 voluntary disclosures before the program ended in October 2009. Since October 2009, an additional 3,000 taxpayers have come forward to disclose their offshore financial assets. The 2011 VDI will cover those 3,000 taxpayers.

The overall penalty structure of the 2011 VDI is slightly higher than the previous 2009 amnesty program. Taxpayers who did not participate in the voluntary disclosure program in 2009 will not be rewarded by the IRS for waiting to come forward.

To see the IRS' announcement, click here

The advantages and disadvantages of the 2011 VDI should be carefully analyzed based upon each taxpayer’s particular circumstances. Sherwin Simmons and Drew LaGrande have a long history of representing clients in international tax controversy matters, including a significant number of voluntary disclosure matters. Sherwin P. Simmons, II can be reached at (813) 209-5039 and Drew LaGrande can be reached at (813) 209-5063. We are ready to provide immediate assistance with 2011 VDI matters.

TAX BILL IN CONGRESS WILL CHANGE ESTATE AND GIFT TAX LAWSPRESERVE LOWER TAX RATES AND PROVIDE OTHER TAX INCENTIVES

By: Rick Hurt, Frank Cordero, and Bill Sullivan of Akerman Senterfitt

Congress passed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Relief Act) and sent it to the President for signature. The 2010 Tax Relief Act extends Bush-era tax cuts for two years and provides significant estate tax and alternative minimum tax (AMT) relief. The bill also contains other tax incentives for businesses and individuals, including 100% first-year write-offs of qualifying property placed in service after Sept. 8, 2010 and before Jan. 1, 2012, a payroll/self-employment tax cut of two percentage points for 2011 for employees and self-employed individuals, and extensions of other tax incentives for businesses and individuals.

Estate, Gift and Generation-Skipping Tax Changes

The proposed change in federal estate taxes includes an increase in the exemption to $5 million and a reduction in the tax rates applicable above the exempt amount to 35%. In 2009 the exemption was set at $3.5 million and the rate of tax was 45%. For 2010 the estate tax provisions are not effective, but in 2011 without passage of a new law the exemption reverts to $1 million and the maximum rate increases to 55% with a 5% surcharge on estates from $10 million to $22 million.

With the changes the gift tax exemption will be reunified with the estate tax exemption in 2011. While the $1 million lifetime gift tax exemption remains in place through the end of 2010, beginning January 1, 2011 the gift tax exemption for lifetime gifts will increase to $5 million. Thus major gifting possibilities will arise for wealthy families who have previously utilized their gift tax exemption. The legislation sets a $5 million exemption for the generation-skipping transfer tax and a 0% tax rate for 2010. This GST tax exemption would continue for 2011 and 2012, but the GST tax rate will be 35%.

There are several nuances included. First, the new estate tax provisions are effective January 1, 2010, but they are optional. Thus for a person dying in 2010 the estate may elect to be subject to the new law with a step up in the income tax basis for all included assets or the estate may be exempt from the estate tax, but be subject to carryover basis rules with a maximum basis step up of $1.3 million plus, for certain spousal transfers, an additional basis increase of $3 million.

Since the new law sunsets after 2012 without the adoption of another new law in the next two years we will again face the prospects in 2013 of a $1 million exemption and much higher estate tax rates. So true long term planning is still elusive.

The new law adopts "portability" which means that a surviving spouse may utilize the estate tax exemption of their "most recently deceased spouse" upon the surviving spouse's death. Thus a surviving spouse may be able to exempt up to $10 million in assets from the estate tax without the need to create a "bypass trust" upon the death of the first spouse to die. This provision, however, seems fraught with complex problems. If the first spouse creates a bypass trust at death, then appreciation on the assets in the bypass trust during the surviving spouse's lifetime will also be excluded from taxation at the surviving spouse's death. However, the assets in the bypass trust will not receive a step up in basis upon the surviving spouse's death which would occur if those assets were distributed to the surviving spouse and owned at the surviving spouse's subsequent death. In addition, if the surviving spouse remarries and the new spouse dies, then the estate tax exemption for the first spouse is lost. So portability coupled with the sunset possibilities will make this an extremely difficult area of planning. It appears, however, that the $5 million GST tax exemption of a deceased spouse will not be portable so it may not be used by a surviving spouse.

Legislation has circulated for quite some time to eliminate discounts for gifts of certain partnership and other ownership interests in entities among family members. Proposals have also been made to mandate a minimum term of 10 years for grantor retained annuity trusts ("GRATs"). Neither of these proposals has been included in the proposed legislation so planning techniques utilizing these strategies remain viable at least for a while.
Individual Retirement Accounts

The $100,000 tax-free rollover for someone at least age 70 & 1/2 from an IRA to a charity is extended for 2010 and 2011. Plus an IRA/charitable rollover made in January 2011 may be treated as made on December 31, 2010.

Major Income Tax and Employment Tax Provisions

Extension of Current Individual Income Tax Rates. Current individual income tax rates are due to expire on December 31, 2010. Upon expiration, the maximum federal income tax rate applicable to individuals would increase to 39.6%. The 2010 Tax Act postpones the expiration of current tax rates for 2 years until the end of 2012. Hence, the maximum ordinary federal income tax rate applicable to individuals will remain at the current 35% level through 2012.

Extension of Current Rates on Long-Term Capital Gain and Qualified Dividends. Current individual tax rates applicable to long-term capital gains and qualifying dividends are due to expire on December 31, 2010. Upon expiration, the maximum federal income tax rate applicable to individuals on long-term capital gains would increase to 20%, and the rate on dividends would increase to 39.6%. The 2010 Tax Act postpones the expiration of current tax rates for 2 years until the end of 2012. Hence, the maximum federal income tax rate applicable to individuals with respect to long-term capital gains and qualifying dividends will remain at the current 15% level through 2012.

Temporary Social Security Tax Reduction. Under current law, employees pay a 6.2% Social Security tax on wages earned up to the applicable limit (which is currently $106,800), with employers also paying a matching 6.2%, and self-employed individuals paying 12.4% Social Security taxes on all their self-employment income up to the same limit. The 2010 Tax Act provides for a one year, two percentage point reduction of the Social Security tax paid by employees and self employed persons on wages up to the applicable limit. Accordingly, in 2011, employees will pay only 4.2% Social Security tax on wages instead of 6.2% and self-employed individuals will pay 10.4% Social Security tax instead of 12.4%.

Other Individual Tax Relief. The 2010 Tax Relief Act also provides additional tax relief for individual taxpayers including: (1) increase of AMT exemption amounts for 2010 through 2012; (2) preservation of the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return for 2011; (3) preservation of the current thresholds for phaseout of itemized deductions through 2012; (4) preservation of current thresholds for phaseout of personal exemptions through 2012.

Incentives for Businesses to Invest in Machinery and Equipment. The 2010 Tax Relief Act provides major new incentives for businesses to invest in machinery and equipment, including the following: (1) A 100% writeoff in the placed-in-service year of the cost of property eligible for bonus depreciation applicable to property acquired and placed in service after Sept. 8, 2010, and before Jan. 1, 2012; (2) A 50% bonus first-year depreciation allowance for property placed in service after Dec. 31, 2011, and before Jan. 1, 2013; (3) Extension through Dec. 31, 2012, of the election to accelerate the AMT credit instead of claiming additional first-year depreciation; (4) For tax years beginning after Dec. 31, 2011, setting the maximum expensing amount at $125,000 under Code Section 179 and the investment-based phaseout amount at $500,000 (without these changes, both of these amounts would have been reduced to much lower levels after 2011), and (5) qualification of off-the-shelf computer software for the Code Section 179 expensing election if placed in service in a tax year beginning before 2013.

Other Tax Incentives Retroactively Reinstated and Extended Through 2011. Multiple tax breaks that expired at the end of 2009 will be retroactively reinstated and extended through 2011. These include the research credit; the new markets tax credit; 15-year writeoff for qualifying leasehold improvements, restaurant buildings and improvements, and retail improvements; 7-year write-off for motorsports entertainment facilities; accelerated depreciation for business property on an Indian reservation; expensing of environmental remediation costs; look-thru treatment of payments between related controlled foreign corporations under foreign tax rules; and basis adjustment to stock of S corporations making charitable contributions of property. Moreover, various energy-related provisions will be extended through 2011.