Problems with the Proposed Regulations
The proposed regulations were meant to curb the heavily scrutinized practice of funding assets into an entity and claiming a valuation discount for the interest held in that entity by members of the same family. Allowing aggressive discounting of passive entities creates an opportunity for wealthy individuals to pass on relatively liquid assets (e.g. stock portfolios) at steeply discounted values to avoid estate and gift tax. Obviously, such treatment should be limited to prevent loss of tax revenue where the structure of the entity has no legitimate purpose other than tax avoidance. This goal is accomplished but not reasonably tailored to prevent harsh treatment against legitimate businesses. Treasury drafted the proposed regulations extremely broadly covering both operating and passive businesses. Furthermore, the proposed 2704 Regulations cover more diverse ownership groups than what most would consider a “family business”. However, the current proposed regulations do not except legitimate businesses that have true economic purpose other than tax avoidance. Additionally, the proposed regulations redefine the concept of “Fair Market Value” that has been a fundamental concept of tax law for decades. Because of the broad nature of the regulations, they are akin to amputating a foot because of a wart on a toe. These issues caused significant pushback from commentators and will warrant revision, or wholesale abandonment, of the proposed regulations.
The current transition of presidential administrations places this battle in an interesting political context. Like all other departments, the Treasury will cede control to a new administration next year. Let’s explore the possible fate of the proposed regulations.
The treasury can move forward and implement a final rule with little or no modification. At that point, the rule can be challenged by litigation, overturned by Congress, or revised by later action of the treasury department. Actions against the rule can be pursued pre-emptively in Congress, and there are currently efforts underway to “vote down” the regulations legislatively. If the regulation is passed, both houses of Congress can pass a resolution of disapproval which, upon signature by the president, voids the rule. This congressional process is rarely used and would be unnecessary if a pre-emptive measure were successful. The new president would have the final say on a congressional vote to void the regulations due to the timeframe given for congressional review. A litigation challenge would be undertaken after the rule, which would subject the rule to judicial scrutiny, but could only be brought after the rule becomes final. Finally, the Treasury (under the new administration) has the ability to implement regulations of its own, which would likely walk back any rule that is implemented.
Impact on Family Businesses
Given the above opportunities for challenge, the proposed rule is likely short-lived in its current form. At a minimum, the drafting concerns voiced at the hearing need to be addressed. This presents a planning opportunity. In the near term, the hearing gave some clarification on the currently proposed regulations. In the long term, it looks like there may be a more favorable environment for transitioning ownership in family businesses. Discussing how the proposed rules and the potential changes of the next administration are critical to determining intermediate and long-range succession plans for family businesses. Contact our office to make an appointment with one of our estate planning attorneys to discuss how the current environment impacts your business.
Ask Kit Kat – Pet Sitters
Hook Law Center: Kit Kat, what can you tell us about dogs and how they respond to speech and tone of voice?
Kit Kat: Well, it looks like dogs are amazingly perceptive when it comes to interpreting speech and tone of voice. Researchers at Eotvos Lorand University in Budapest, Hungary have done some pioneering work on this subject. Like people, dogs use the left hemisphere of their brain to interpret meaning, They use the right hemisphere to interpret sound and its emotional content. The study was led by Dr. Attila Andics, and the techniques used were by themselves quite pioneering. The dogs in the study had to be trained to lie perfectly still while a picture of their brain was taken by a MRI machine. This is very remarkable, because other primates like apes cannot be similarly trained. The MRI requires complete stillness, and they cannot manage that.
This is what the researchers discovered. Dogs reacted most strongly when words of praise like ‘good boy’ or ‘well done’ were used. These positive words elicited a lot of activity in their brain’s reward center. When the researchers used less defined language like conjunctions and some adverbs (‘however’ or ‘nevertheless,’ for example), the dogs’ reward center in their brains registered much less brain activity. With the words of praise, it was almost like they were given a delicious treat to eat; it was that reinforcing. So what does this mean? It means humans are not the only creatures who have the ability to understand and react to language. What’s more, other scientists like Dr. Brian Hare of Duke University believe the canine’s ability to do this developed long before humans started to use language. Did this ability aide dogs in the domestication process, as dogs moved from the wild to living with humans? More research will be needed to answer that question.
I suspect many dog owners intuitively have known how smart their dogs are. Now we have confirmation. They really are man’s best friend. (James Gorman, “With Dogs, It’s what You Say—and How You Say It,” The New York Times, Science section, August 29, 2016) (http://nyti.ms/2c40znU)
Distribution of This Newsletter
Hook Law Center encourages you to share this newsletter with anyone who is interested in issues pertaining to the elderly, the disabled and their advocates. The information in this newsletter may be copied and distributed, without charge and without permission, but with appropriate citation to Hook Law Center, P.C. If you are interested in a free subscription to the Hook Law Center News, then please telephone us at 757-399-7506, e-mail us at mail@hooklawcenter.com or fax us at 757-397-1267.The post Problematic Proposed Regulations May Harm Family Businesses If Left Unaddressed first appeared on SEONewsWire.net.]]>
In June, 2016, the House Republicans released “A Better Way: Our Vision for a Confident America”. In it, they reiterated their oft-repeated promise of repealing the federal estate tax and the generation-skipping transfer tax. However, there is no mention of a repeal of the gift tax. This is consistent with the “Death Tax Repeal Act of 2015” introduced in the House and Senate in the spring of 2015. The “Death Tax Repeal Act of 2015” provided for the repeal of estate and generation-skipping transfer taxes; however, it retained the current law with respect to the annual gift tax exclusion amount and the current lifetime exemption ($5.45 million for 2016). The maximum rate for the gift tax would be 35%. All transfers into trust would be treated as taxable gifts unless the trust was a “grantor trust”. Finally our current carryover basis rules and stepped up basis at death rules would continue to apply.
Donald Trump’s Tax Plan as related on his website (www.donaldjtrump.com/policies/tax-plan) states that he intends to repeal the estate tax with a catch. Capital gains on appreciated assets in excess of $10 million is subject to tax. (No tax rate is stated but the current highest capital gains tax rate is 20%. It seems likely that this rate would be applicable.) However, appreciation on small businesses and family farms are to be exempt from this capital gains death tax. In addition, contributions of appreciated assets to private charities established by the decedent or the decedent’s relatives would be disallowed. There is no mention of the gift tax or the generation-skipping transfer tax (this is a tax on transfers to persons more than one generation below that of the transferor and the law on it is very complex).
These plans are not entirely reconcilable. Under President-elect Trump’s plan, a 20% capital gains tax would be imposed on appreciated assets owned at death if the appreciation was in excess of $10 million and the assets in question are not family farms or small businesses. Because it would be very simple to avoid this tax by giving assets away shortly before death (and frankly, this would not be a problem for most Americans), it seems to me that his tax plan would have to address the issue of the gift tax in some fashion.
However, I would anticipate that the desire in Congress to fully repeal the estate tax and the generation skipping transfer tax (again) would likely pressure Mr. Trump to alter his plan to accommodate his fellow Republicans. After all, his plan as stated is not actually workable. The Republican vision as set forth in the “Death Tax Repeal Act of 2015” may well get worked over some more when the lawmakers actually think they have a chance to pass tax reform. The current proposal has “planning opportunities” that would make avoidance of the gift tax possible.
So, what does this mean for you? Unfortunately it means that we are likely walking into a period of uncertainty for how long these taxes may remain on the books and how they may be transformed by Congress. Given that a Republican led Congress also wants to balance the budget, it is possible that these changes may phase in over time. Should you delay making annual exclusion gifts in 2016? Absolutely not. The changes, if they come about, will not be effective before Mr. Trump takes office. Should you stay in touch with the attorneys at the Hook Law Center? Absolutely. We will analyze the changes and inform you of how they will affect you and your existing plan and whether you need to make any changes. However, since the last round of estate and gift tax reform increased the lifetime exemptions in excess of $5 million, most of you will not need to alter your current estate plans to accommodate the tax law changes. Your plans already reflect that you are not subject to the various taxes and are structured to protect your families and your non-tax related goals. For those of you who have been facing an estate or gift tax issue currently, stay tuned.
Ask Kit Kat – Learning From Bees
Hook Law Center: Kit Kat, what can you tell us about bees in northern Alaska which are helping scientists gather information about climate change?
Kit Kat: Well, I think this is fascinating. Scientists from the University of California, Riverside traveled to Prudhoe Bay, north of Fairbanks, along the Dalton Highway, made famous by the TV show “Ice Road Truckers.” They were looking for the Polaris bumblebee, known scientifically as the Bombus polaris. Increasingly as the earth’s climate warms, this particular bumblebee has migrated north into the Arctic, where climate change is happening at a fast pace. Climate change in the Arctic is evident by the fact that areas once covered only in low plants and lichens are now able to support willow trees. The expedition is being financed by a grant to foster collaboration among scientists. Six scientists participated. Their job—collect specimens and bring them back to the lab for further testing.
One of the scientists, Dr. S. Hollis Woodard, calls the bumblebee ‘…the pandas of the insect world.’ They are the largest of bees, and like the panda, they are big and move slowly. In contrast to the honeybee which tend to live in large colonies of 100,000 bees or more, the bumblebee lives in small clusters, ranging from 50 to a couple of hundred. Most bumblebee colonies live for one season, Most die as the weather turns cold. However, a few hearty females that have already mated, seek refuge under the tundra, and in essence hibernate until spring. They are the only bees which manage to survive in the Arctic, where temperatures go as low as 60 below zero. They do this by shivering their muscles. This can raise their body temperature to a toasty 95 degrees, even though the outside temperature may be at the freezing point.
There is some urgency to the scientists’ work. Just this past September of 2016, the US Fish and Wildlife Service proposed that the rusty patched bumblebee, previously very common, be considered endangered. There are 250 bumblebee species, but scientists become alarmed when even one shows signs of decline. Each bee that is captured is placed in a plastic tube, which is then given a shot of ordinary compressed air from a can available at the average grocery store. This immobilizes the bees. Then bodies and inside organs are separated and placed in a solution to preserve them. Back at the lab in California, they will conduct the examinations which will tell us more about the bees, how they survive in such adverse conditions, and possibly the implications about changing climate. (James Gorman, “Six Scientists, 1,000 Miles, One Prize: The Arctic Bumblebee,” The New York Times, Oct. 7, 2016) (http://nyti.ms/2dFqzYi)
Distribution of This Newsletter
Hook Law Center encourages you to share this newsletter with anyone who is interested in issues pertaining to the elderly, the disabled and their advocates. The information in this newsletter may be copied and distributed, without charge and without permission, but with appropriate citation to Hook Law Center, P.C. If you are interested in a free subscription to the Hook Law Center News, then please telephone us at 757-399-7506, e-mail us at mail@hooklawcenter.com or fax us at 757-397-1267.The post What President-Elect Trump and the Republican Party have in Store for You: Estate, Gift and Generation Skipping Transfer Taxes first appeared on SEONewsWire.net.]]>