Florida Estate Planning, Probate and Asset Protection

The Valuation of Art … Or the Art of Valuation?

The fair market value is the fair market.  Right? Those people who work for the IRS.  They are really nice people, but a little cynical and not many of them art experts.  They’re probably going to think that if you gave it to charity you might have encouraged the appraiser to go on the high side, but that an executor might have pushed for a lower value. This is why the IRS has an Art Advisory Panel.  The panel is made up of art experts.

Giving things rather than dollars can be tricky, especially come tax time. Consequently, you really need a qualified appraisal on board to make it all work.

When it comes to art valuations, however, you should know that the IRS certainly will not take your word for it, or even the word of a decent appraiser, until they get their own expert opinion from their own experts: the Art Advisory Panel. A fair question to ask, then, is how fair is the Art Advisory Panel?

The question of the Panel and fairness was addressed in a recent Forbes article titled “Is Art Advisory Panel Giving Taxpayers A Fair Shake?” Here’s how the competing interests play out. First, if you are a taxpayer giving art to a loved one or bequeathing it as a part of your estate, then you likely want a lower valuation. Why? Because you want a lower tax bill. On the other hand, if you are selling that very same piece of art, then you will want to command the absolute top dollar. Likewise, a body in charge of taxation is pretty much always going to be interested in a high valuation because it triggers a higher tax bill.

So, statistically, how much of taxpayer appraisals does the government Panel accept? Would you believe only 51%? In addition, the Panel “adjusts” the other 49%, and of that adjusted percentage generates a net 47% increase on items in estate and gift appraisals.

Of whom are you more cynical, the IRS or the taxpayer?

The takeaway is that any gift of art is something to be fully considered with your valuation ducks in a row. Remember: there’s nothing an expert likes better than disagreeing with another expert - and the IRS keeps them on staff.

Reference: Forbes (February 6, 2013) “Is Art Advisory Panel Giving Taxpayers A Fair Shake?”

Valuations Matter – Making Your Gifts Count

Make no mistake: the IRS has been cracking down on charitable contributions. It’s not that they don’t want you out there giving; to the contrary … It’s just that they want you to properly document your contribution so they can govern any abuses, particularly when the donation consists of property rather than cash.

Qualifying for the charitable tax deduction is not simply a matter of giving, then claiming the deduction. No, there are a few steps to take and items of proof to gather if you want your generosity to count at tax time.

Fundamentally, you need to prove the value of what you have given, but that can get complicated when you are giving in the form of things. You need an appraisal of any thing you give (e.g., art, a house, an easement, or a service), and you need that appraisal to answer all the tax man’s questions even before he asks them. In short, appraisals can get tricky.

For example, if you give art you need an art appraiser, and if you give real estate you need a real estate professional. However, what if you give interest or stock in a company? Then the appraisal becomes even trickier.

When you are giving less than obviously valued interest, then you might want to consider the advice given in a recent Forbes article titled “It's Hard To Satisfy The Qualified Appraisal Requirement For A Charitable Contribution If You Appraise The Wrong Property.” The problem with interest or stock in a company is that the interest or stock is different than the things the company owns. So, 10% of the stock in a company with $5 million in assets is not (necessarily) equivalent to 10% of $5 million. Such is the case, even when the sole purpose of the company is to hold well-documented and appraised assets worth $5 million.

In a “simple case,” the IRS likely will provide leniency and determine that such and such an appraisal was “substantially compliant” if not fully so. Nevertheless, the greater the business complexity, the greater the risk of misstep and attending (and costly) determination of insubstantial compliance.

An appraisal is a very necessary step when recognizing the tax implications of any transfer of property that is more than simply money itself. In the end, when giving to charity or to loved ones it just stings all the more when your attempted good deed is punished.

Reference: Forbes (February 5, 2013) “It's Hard To Satisfy The Qualified Appraisal Requirement For A Charitable Contribution If You Appraise The Wrong Property”

When Gifts Become a Burden

The Brooklyn Museum seemed to have garnered a bonanza in 1932 when it received a large bequest from the estate of Col. Michael Friedsam, president of the elegant retail emporium B. Altman. But eight decades later that cache of Dutch and Renaissance paintings, Chinese porcelains, jewelry and furniture has become something of a burden. A quarter of the 926 works have turned out to be fakes, misattributions or of poor quality, and the museum potentially faces a hefty bill to store the 229 pieces it no longer wants.

It’s an awkward thing to give away or sell a gift made to you. However, it can be even more awkward when you can’t hold onto a gift. No, this is not a post-Christmas catastrophe, rather it’s the very real problem so many museums face every year.

One museum currently on the hook is the Brooklyn Museum in New York. The New York Times recently reported on its plight regarding a gifted collection in an article titled “Brooklyn Museum Finds Some Problematic Gifts Can’t Be Returned.”

It seems that in 1932, Colonel Michael Friedsam gave a massive collection to the then fledgling museum. Nevertheless, since then the museum has grown and has too much to put on its walls, no longer displays items like historic battle axes, and half the Colonel’s collection turned out to be fakes or “not of museum quality.” Bottom line: the museum wants to give or sell the artworks and stop paying the exorbitant storage and restoration fees.

Now, it’s not that the museum is unappreciative. No, it’s more complicated even than that. Unfortunately, the Colonel’s will legally excludes any option the Colonel’s estate executor hasn’t signed off on. Even more unfortunately, the last executor died in 1962.

The lesson for those with artworks worth preserving for future generations is to include alternatives permitting like-minded individuals (executors) to further your objectives for your gifts in the future.

The Colonel and his estate planners couldn’t have foreseen the next 90 years, but therein lies the challenge. Predicting the future can be a very tricky thing and, certainly, a very inexact science. So, how are your gifts structured?

Reference: The New York Times (January 15, 2012) “Brooklyn Museum Finds Some Problematic Gifts Can’t Be Returned”

To Give or Not to Give

Discussions of the looming fiscal cliff have paid scant attention to estate and gift taxes.

But wealthy people might do well to consider being very generous this month and giving very large gifts at today’s bargain tax prices.

While the estate and gift tax has been in flux for the past decade, only its most recent uncertainty has forced the wealthiest to address their financial fate. A recent Forbes article, Give Now or Pay Later: Rich Face Dilemma With Fate Of Estate And Gift Taxes Up In Air, discusses, in plain language, the consequences of giving now or waiting.

Basically, the current estate and gift tax exempts $5 million of gifts or bequests and taxes any excess at 35 percent. And unless Congress takes action, on January 1, the tax will return to a $1 million exemption with the excess taxed at 55 percent. Accordingly, the wealthy may want to consider giving large gifts before the end of the year.

However, proceed with caution. If you are gifting assets to your nephew that have appreciated in value, your gift comes with your basis – the amount you paid for the asset. If your nephew sells the asset, he will owe tax on both your capital gain and any appreciation after the gift. If your nephew inherits the asset, however, he will only owe capital gains tax on the gains that occur after inheriting the assets. 

The undetermined fate of the federal estate and gift taxes has the potential to cause the wealthy to make ill-advised gifts. To avoid making one of these ill-advised gifts, and potentially costing you or your loved ones millions of dollars, consult with your estate planning attorney in advance.

Reference:  Forbes (December 17, 2012) “Give Now of Pay Later:  Rich Face Dilemma With Fate of Estate and Gift Taxes Up In Air”

Racing the Clock on 2012 Mega Gifts

I think the case for urgency is fairly self-evident.  Given how difficult and involved estate planning can be, people, for whom this is relevant, should be gearing for action now, if they have not already done something.

When it comes to 2013 taxation, the future may be catastrophic for estate tax planning. As each day of 2012 passes us by, incredible wealth transfer opportunities are dwindling away.  Can you beat the clock before time runs out?

These last few months are either a time to seize the unprecedented gifting opportunity of a $5.12 million gift tax exemption, or a time to run out the clock on this opportunity perhaps for the rest of your lifetime. The gift tax exemption is scheduled to return to $1 million.

If you are looking to seize the opportunity in 2012, then you will find encouragement in a recent Forbes article titled “Romney Wants No Estate Tax - Case For 2012 Mega Gift Remains Compelling.” In short, the article notes that there are ways to give now without spoiling future opportunities, if you think carefully about the right kinds of assets to give. The author of the article calls such strategic assets “legacy assets,” and offers this quote from an attorney comrade:

Legacy assets are ideal for the “megagift” for several reasons:

1. Art, real estate, family business interest and other Legacy Assets are secular investments, that is held for more than 10 years, and so the gifting of an asset does not substantially reduce the lifestyle or disposable financial wealth of the client,
2. The financial value of Legacy Assets is not correlated to the investment market,
3. The personal and social value of legacy assets is both real and significant,
4. Since there is both a financial and a social value to the ownership of legacy assets, they work well with charitable split interest trusts that can significantly leverage the Unified Credit, and
5. There are techniques that can be used with legacy assets that cannot be used for investment assets.

In terms of a Mega Gift, legacy assets are definitely worth considering. Remember, the time is now to act on these amazing wealth transfer opportunities.  Don’t wait until it’s too late and the ball is already dropping in Time’s Square.

Reference: Forbes (October 14, 2012) “Romney Wants No Estate Tax - Case For 2012 Mega Gift Remains Compelling”

Buffett “Gives” Instead of “Gets” on His Own Birthday

Warren Buffett celebrated his 82nd birthday by announcing an additional $3.1 billion in donations to the charities run by his three children. Buffett said they had "exceeded my high expectations" in making use of the gifts so far, and that he was upping his pledge by 12.2 million shares each.

When we think of birthdays, we are used to the tradition of receiving gifts. So it almost seems backwards to give something instead, an idea that often doesn’t come to mind when celebrating another milestone of life.

We all can learn from Warren Buffet’s example, however, and the so-called “reverse birthday.”

In an article titled “Buffett gives $3 billion to his kids' foundations,” CNN Money reports how the Oracle of Omaha celebrated his most recent birthday “in reverse.” While Mr. Buffett already pledged some 17.5 million Class B shares of his firm, Berkshire Hathaway, to each of his three children and their respective charitable organizations back in 2006, now, in an open letter to his children, he has doubled down to about 29.7 million Class B shares. Mr. Buffett himself even estimates that the annual distribution will average more than $100 million each.

Whether there’s an approaching birthday or other occasion to celebrate, there may be something to take away from the Oracle’s example. Mr. Buffett is giving to his children and working to charitable ends in the same moment.

So if you find yourself wanting to give instead of receive, ask yourself what you and your loved ones are passionate about.

Reference: CNN Money (August 30, 2012) “Buffett gives $3 billion to his kids' foundations”

The IRS Wants to Know About Your Gifts from Foreign Sources

With the sharp eyes of the IRS abroad and looming FATCA compliance, foreign bank accounts are less secret than they used to be. Income from abroad is taxable and you must report your foreign bank accounts.

If you have received a gift or inheritance from a loved one in a foreign country, the IRS wants to know about it. The recent Forbes article, “Beware IRS Reporting Of Foreign Gifts Too,” states that you will need to file an IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if you receive:

More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

More than $14,375 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

You are required to report these bequests on Form 3520 when you actually or constructively receive them. Late reporting penalties are high – five percent of the gift’s value for each month the gift is not reported, up to 25 percent of the total value.

One way to avoid penalties is to consult with your estate tax attorney for counsel on your individual circumstance. Remember that income from abroad is taxable, and the IRS is looking at foreign accounts ever more closely under the Foreign Account Tax Compliance Act (FATCA). To learn more, read the Forbes article, “How to Report Foreign Gifts and Bequests to IRS.”

Reference: Forbes (August 13, 2012) “Beware IRS Reporting Of Foreign Gifts Too”

Elderly Senior’s Extravagant Gifts Spark Litigation

While clashes over who got what and how during someone's lifetime crop up in many will fights, the staggering size, two-decade timeframe and uncommon circumstances distinguish the dispute surrounding [Huguette] Clark's gifts.

Are you planning your estate or perhaps caring for an elderly loved one who is planning his or her own? If yes, then you can learn some important lessons from Huguette Clark’s case, as recently reported in the San Francisco Chronicle.

In the article, titled “Copper heiress' huge gifts spotlighted in NY court,” Ms. Clark was cast as either an oddball or a thoughtful “eccentric.” Such was the description of one side to the litigation over her estate. The other side, however, painted her as a “poor, manipulated old woman.” In case you haven’t followed the case, Ms. Clark was a wealthy heiress to a copper fortune, and she died recently at the age of 109 after two decades of hospitalization.

Before dying, however, Ms. Clark gave extravagant gifts to her staff:

Her nurse was showered with almost $28 million in gifts, including three Manhattan apartments, two homes elsewhere and a $1.2 million Stradivarius violin. Her doctors' families received more than $3 million in presents. A night nurse received a salary plus money to cover her children's school tuition and to help buy two apartments.

Now, after her death, a court-appointed official has begun to demand the return of these gifts, valued at $37 million, to her $400 million estate. The basis for the demanded return is that the recipients received the gifts through manipulation. The case is ongoing.

When it comes to estate planning, however, old age and wealth are a dangerous combination. Some wealthy seniors are generous by nature, but others kept the first nickel they earned. Regardless, expect extra scrutiny of any gift or inheritance from a wealthy senior when the object of such bounty is not someone with a family tie or a long relational history.

Reference: The San Francisco Chronicle (June 17, 2012) “Copper heiress' huge gifts spotlighted in NY court”

A Graduation Gift that Keeps on Giving

If you want to give a high-school or college graduate a gift with a big financial impact, go beyond writing a check. Giving the gift of investing—with individual stocks, bonds or investment accounts and even some financial planning—will help a young adult get started on the long road to financial security.

If you have a newly-minted graduate in your family, consider giving him or her a gift that will keep on giving.

With the generous $5.12 million gift tax exemption, in addition to the $13,000 annual gift exclusion, 2012 is the year of gifting. Giving a substantial gift in life, rather than a bequest at death, not only means seeing the fruits of your decision, but also perhaps being there to guide it to the best use.

A recent article in The Wall Street Journal titled “Give a Graduate the Gift of Becoming an Investor,” discussed the gift of stock to a recent graduate.

You might say there are gifts that provide the means and then there are gifts that provide the tools, or the know-how. If you are there to assist and teach, then a gift of stock may very well be a gift that accomplishes both objectives. The stock itself has value, especially if it has been your own, and it can lead to financial security. Furthermore, teaching the financial secrets behind choosing and maintaining your portfolio is an even greater tool and life lesson.

Choosing the stock to give is another matter. You can work together to buy something and thereby make a direct gift, or you also could give a stock you’ve owned for some time and hope to pass on.

This second route is altogether more rewarding since it kills two birds with one stone. In addition, this move may even help keep the tax-man at bay if you’ve determined the basis and are working with a “temporarily depreciated” stock (i.e., the kind that abound these days).

For more ideas on the kinds of financial assets to give and the lessons to teach, I highly recommend the original article as a prelude to a fuller investigation.

Reference: The Wall Street Journal (June 2, 2012) “Give a Graduate the Gift of Becoming an Investor”

Good News For Transferring Business Interests

The Tax Court has just passed a new technique that closely-held businesses owners —and wealthy families — can use to pass assets to heirs with a minimal amount of taxes and complications. The ruling in the case, Wandry v. Commissioner, is stirring up excitement among experts.

Just between us, isn’t it nice when the IRS loses a case to a taxpayer? For example, the little-guy victory in the landmark case of Wandry v. Commissioner affirms and simplifies a very powerful tool for passing on wealth, especially for the business owner.

While the case and the estate planning tool in the crosshairs have been the subject of previous articles, The Wall Street Journal provided a new explanation of the two in an article appropriately titled “Shielding the Family Business.”

The basic plan for wealth transfer when there is a business involved is to give it in pieces, and that’s precisely the plan that benefits from Wandry v. Commissioner. Giving away the entire business outright is a good way to take a tax hit, since it will invoke a gift tax when you cross certain thresholds during the year and in your lifetime.

There’s currently a lifetime exemption of $5.12 million and an annual exclusion of $13,000. Nevertheless, it’s easy for a business to be worth more than $5.12 M, and using that exclusion in full will drain what you have available against the estate tax later at death. However, by their very nature and structure, business interests are especially amenable to piecemeal ownership transfer. This is because ownership of the business, and therefore the underlying assets owned by the business, is an abstraction, and you can simply gift your interests in the business without a tax hit. For example, you can chip away by giving a usefully small amount, say, $13,000 per year per individual (or whatever number Congress and the IRS set for that year), without gift taxes.

Of course, gifting business ownership is not entirely ideal. Fortunately, that’s what the Wandry v. Commissioner case tries to fix. Gifting exactly $13,000 is pretty easy by simply writing out the figures and name on a check. On the other hand, with an abstraction like business ownership, the gift depends on the value of the business and, more to the point, on the value that you and the IRS agree or disagree about.

If you give $13,000 of ownership on the basis of your valuation, but the IRS adds up $15,000 based on its own valuation, then the IRS might also think you owe a tax (or, alternatively, that your gift/estate tax exemption should erode by that much). As you might have guessed, that’s exactly what happened in the Wandry case. Unfortunately for the IRS, the court held that the Wandrys had clearly intended to give their annual exemption amount and, if there is a new appraisal and higher valuation of the gift, then the excess wasn’t intended to be gifted in the first place.

Obviously, there is much more to this case and more guidance to be gleaned for the business owner. I would recommend reading the original article if you are or will be transferring interests in your business. As always, make sure you engage qualified legal counsel before taking action.

Reference: The Wall Street Journal (April 30, 2012) “Shielding the Family Business”