Header Right

Estate Taxes

Family Business Changes of Ownership & Estate Planning

by

By: Jeffrey D. Urbach, CVA, CPA/ABV/CFF

Business owners have been saving estate taxes by transferring assets in the form of FLPs (Family Limited Partnerships)

Family Business

or outright gifts of company stock to family members.
The tax savings are the result of discounts taken by business appraisers on the value of the gift.

The IRS is proposing to disallow these discounts as of Jan. 1, 2017.
Based on many published surveys, selling a non-controlling interest can result in a 30 to 40% (or more) total discount off the value of the company because of the combination of the following two discounts.
These discounts are commonly called Minority (or Control) Discounts and DLOM (Discounts for Lack of Marketability).
A simple example:
Company A is worth $10,000,000 and 100% of the shares are owned by Mr. Smith. Assume he wants to gift 1/3 of the company to his daughter. The appraiser valued the company at $10,000,000 and in her judgment, the gift would warrant a combined Marketability and Control discount of 40%.
On the face of it, a 1/3 interest of a $10,000,000 is $3.3 Million. After application of the 40% discount ($1.32 Million), the value of the gift becomes $1.98 Million. ($3.3 million less $1.32 Million, or $1.98 million).
In the end, Mr. Smith removes $3.3 of value from his taxable estate and pays a Gift Tax on $1.98 million, say roughly 40% or $790,000. The same 1/3 interest, if left in his estate would have incurred a tax of $1.3 Million ($3.3 Million times 40%).
The gift saved his family $510,000 ($1.3 Million less $790,000).
The new IRS proposals to disallow these discounts may take effect on January 1, 2017. You should consult with your estate attorney and other financial advisors ASAP and to have a strategy in place when and if this change occurs.

Avoiding a Marriage Commitment? Pay NJ Estate Taxes Instead

by

People say that love conquers all, but a decision by the New Jersey Tax Court indicates that doesn’t always hold true.

The issue

In a ruling that’s sure to upset some cohabitating couples, the court earlier this year ruled that, for state tax purposes, the estate of a wealthy Alpine woman could not take a marital deduction for a multimillion-dollar payout to her longtime live-in companion—even though the deduction was permitted for federal purposes. The case presents a clear example of how state tax law does not always follow federal tax law, even though NJ tax positions are, for the most part, based on Federal ones.

Here’s the detail on the background

The decedent Lillian Garis Booth died testate on November 22, 2007 at age 92, leaving an estate worth some $200 million. Although fellow New Jersey resident Misha (Michael) Dabich and Booth cohabited together for approximately 51 years, he was not named as a beneficiary in her will. About two years later, however, the Estate reached a $9.9 million settlement with Dabich.

Trouble began brewing, however, when the Estate filed an amended NJ IT–Estate and a second amended IT–R in March 2010, seeking, among other changes, a net refund of previously paid taxes totaling $1.5 million. The amended items reflected, among other things, a deduction for the $9.9 million paid to Dabich, under the theory that their lengthy cohabitation period constituted a “common-law” marriage.

In April 2011, the NJ Dept. of Taxation issued a Notice of Assessment based on the amended IT–Estate. Among other adjustments, the Notice denied the $9.9 million marital deduction. The Court’s reasoning, according to the Notice, was that “[t]he common-law marriage claim of  Dabich is not recognized by” New Jersey, thus, the estate’s claim for marital deduction was being “disallowed for NJ estate tax and inheritance tax” purposes.

The Court added that it was “not bound by the IRS determination to recognize Misha Dabich as a common-law spouse” pursuant to a September 2008 settlement with Dabich and a subsequent 2009 amendment.

In July 2011, the Estate filed a timely administrative protest, maintaining that NJ Dept. of Taxation could not use the Inheritance Tax laws to disallow estate expenses, since the NJ estate tax is the federal “State death tax credit amount;” therefore, expenses allowed by the IRS must be allowed by NJ.

But after another denial, the Estate filed a lawsuit challenging, among other issues, the disallowance of the marital deduction.

In its response, the Tax Court noted that “The burden is upon the executor of an estate to prove facts establishing that “[t]he decedent was survived by a spouse” and “[t]he property interest passed from the decedent to the spouse.” For federal purposes, it reported, the IRS recognized “common-law” marriages “for over 50 years, despite the refusal of some states to give full faith and credit to common-law marriages established in other states” since “uniform nationwide rules are essential for efficient and fair tax administration.”

The reasoning

But, pursuant to state amendments made in 2002, the New Jersey estate tax was decoupled from the federal estate tax, and “was imposed independently of the federal estate tax and of the federal credit for state death taxes.”

Additionally, according to the Tax Court, the NJ Legislature specifically rejected the concept of common-law marriage, and “Although it is the federal estate tax law which provides for a marital deduction, it is State law that determines whether an individual is a spouse for purposes of application and allowance of that marital deduction.”

The decision could reportedly cost the estate some $1.5 million in net NJ Estate & Inheritance Taxes.

Should you be concerned?

The ruling appears to break new ground. Although it only addresses an allowable estate deduction, it also illustrates the way that common misperceptions can result in a costly tax bill. That’s one more reason to speak with your tax, accounting or legal advisor before committing yourself to any kind of significant activity.

 

Domestic Partners: Do it New Jersey’s way or NJ says, “No Way”

by

The Tax Court ruled against a plaintiff that claimed she was a domestic partner of the decedents and exempt from Inheritance Tax as a Class A beneficiary. The Story:
Claudette Lugano and Armin Lovi lived together from at least 2003 until his death in 2011. They had filed a Declaration of Domestic Partnership with the Federal Reserve Bank (FRB) but not an Affidavit of Domestic Partnership with any local registrar as required by NJ law per the provisions of the Domestic Partnership Act.
Because they had filed with the FRB, she was entitled to benefits under their retirement plan. However, NJ refused to treat her as a Class A beneficiary and to exempt her from NJ Inheritance Tax.

Bottom line; She’s a domestic partner as far as the Federal Reserve Bank is concerned but not for NJ purposes.

Offering popular women’s necklaces such as pendants https://www.swisswatch.is/product-category/rolex/sky-dweller/ chokers and chain necklaceThis post is sponsored by our partners Wigs Shop for jewelry in a variety of metals and gemstones to suit any occasion

Executors Beware: NJ Law Requires Child Support Search Prior to Distribution

by

If you are executor of an estate in New Jersey and intend to make a distribution to the beneficiaries, there’s one important step you need to take first. NJ law requires an executor/administrator to initiate a child support enforcement order for any beneficiary receiving in excess of $2,000 prior to the distribution. The executor is personally liable for making a distribution without initiating the order, as the Child Support Judgment is a lien against the net proceeds of any inheritance in NJ.

The search must be conducted by a private judgment search company that will verify results. Urbach & Avraham’s estate administration services include the performance of Child Support Searches. If you would like assistance with your Child Support Search, call us at 732-777-1158 or email Pamela at pma@ua-cpas.com

 

 

 

Supreme Court Decision Impacts Same-Sex Couples

by

The Supreme Court’s ruling that a key component of the Defense of Marriage Act (DOMA) is unconstitutional was perceived by most as a victory for same-sex couples. The Court decided to leave the definition of a “marriage” to the States, 12 of which currently permit same-sex marriages. Same-sex couples living in one of those states will now be entitled to the same federal benefits as traditional couples. The 12 states include NY and all of the New England states, MD and DE. This has many far-reaching implications, including:

  • Medical insurance coverage will become more affordable, as they will now be recognized as a married couple. Employers must offer insurance to same-sex spouses of employees in the 12 states.

 

  •  They will be able to file jointly on their federal tax returns to ensure tax savings, and will be able to amend prior year tax returns (most likely as far back as 3 years).

 

  • Federal benefits, such as Social Security, military and veteran benefits, pension and health benefits for federal employees will be available.  

 

  • The federal gift and estate tax marital deduction will be available to same sex married couples. As a result, they will be able to transfer assets between one another without payment of a transfer tax. This also means they can amend prior year estate tax returns to claim refunds previously disallowed due to DOMA.

 

 Sounds like cause for celebration, right? Welcome to married life. While the ruling is clearly a victory for equality, it actually has a negative tax implication for many same-sex couples. They will now be subject to the “marriage penalty,” a penalty that has become more significant due to several recent changes in tax law. Under the Patient Protection and Affordable Care Act (“Obamacare”), for example, an additional 0.9% Medicare tax on wages and self-employment income, as well as a 3.8% tax on investment income will be imposed. While the threshold is $200,000 for a single taxpayer, married taxpayers only get a $250,000 threshold. As a result of this ruling, many married same-sex couples that would have previously avoided the new tax by filing their federal income tax returns separately will now have to pay the tax.

All this is just the beginning. With over 1,000 federal rules and regulations that need rewriting, aside from tax, time will tell just how far reaching the implications will be.

 

US Estate Tax: When Filing is Optional but Advisable

by

Your beloved spouse has passed away.  The last thing you need is extra paperwork.  But…sometimes completing an extra form can mean the difference in literally millions – $5.25 million to be exact – able to be passed  free of federal estate taxes upon your death to your loved ones.

Completing a US Form 706 (US Gross Estate Tax Return) allows a decedent who is married and does not fully use his $5,250,000 exemption, to pass his unused exemption (“Decease Spousal Unused Exclusion or DSUE”) to his spouse. This is known as portability.

What does this mean in practical terms?