Tuesday, October 5, 2021

Corporate-Owned Life Insurance – Impact on Corporate Value and Shareholder’s Estate


A corporate buy-sell agreement funded with life insurance is fairly common in farm and ranch settings where there is a desire to keep the business in the family for subsequent generations and there are both on-farm and off-farm heirs.  When a controlling shareholder dies, it can be a good way to get the control of the business in the hands of the on-farm heirs and income into the hands of the off-farm heirs.  But, how does corporate-owned life insurance impact the value of the company and the value of the decedent’s gross estate?

The impact of corporate-owned life insurance on value – it’s the topic of today’s post.


Valuation is where the “action” is when it come to federal estate tax.  The rule for valuing property for federal estate (and gift) tax purposes is the “willing buyer-willing-seller” test.  Treas. Reg. §25.2512-1.  Whatever price the parties arrive at is deemed to be the property’s fair market value.  Id.  But, how is a corporation to be valued when it will receive insurance proceeds upon the death of a shareholder and the proceeds will be offset by a corporate obligation to redeem the decedent’s stock?  Will the proceeds of an insurance policy owned by a corporation and payable to the corporation be taken into account in determining the corporation’s net worth?  Under the Treasury Regulations, the proceeds do not add to corporate net worth to the extent that they are otherwise reflected in a determination of net worth, prospective earning power, and dividend-paying capacity.  Treas. Reg. §20.2031-2(f).  This means that, for the stockholders that have various degrees of control, the insurance proceeds may be reflected in the pro-rata determination of stock value.  The same is true for proceeds payable to a third party for a valid business purpose that results in a net increase in the corporate net worth.  See Treas. Reg. §20.2042-1(c)(6).

A related question is what the impact is on the decedent’s estate that has stock redeemed?  Does state law matter?

The Blount Case

The issue of corporate valuation when life insurance proceeds are payable to the corporation upon a shareholder’s death for the purpose of funding a stock redemption pursuant to a buy-sell agreement came up in Estate of Blount v. Comr., T.C. Memo. 2004-116.  In Blount, the decedent owned 83.2 percent of a construction company.  There was only one other shareholder, and the two shareholders entered into a buy-sell agreement in 1981 with the corporation.  Under the agreement, the stock could only be sold with shareholder consent.  Upon a shareholder’s death, the agreement specified that the corporation would buy the stock at a price that the shareholders had agreed upon or, if there was no agreement, at a price based on the corporation’s book value. 

In the early 1990s, the corporation bought insurance policies for the sole purpose of ensuring that the business could redeem stock and continue in business.  The policies provided about $3 million, respectively, for the stock redemption.  The corporation was valued annually, and a January 1995 valuation pegged it at $7.9 million. 

The first shareholder died in early 1996 at a time when he owned 46 percent of outstanding corporate shares.  The corporation received about $3 million in insurance proceeds and paid slightly less than that to redeem the shareholder’s stock based on the prior year’s book value.  The decedent was diagnosed with cancer in late 1996.  The 1981 buy-sell agreement was amended about a month later locking the redemption price at the January 1996 value of the corporation.  The decedent died in the fall of 1987.  The corporation paid his estate about $4 million in accordance with the 1996 agreement.  The decedent’s estate tax return reported the $4 million as the value of the shares.  Upon audit, the IRS asserted that the stock was worth about twice that amount based on the corporation being worth about $9.5 million (including the insurance proceeds to the other corporate assets).

Based on numerous expert valuations, the Tax Court started with a base corporate valuation of $6.75 million.  After adding the $3.1 million of insurance paid to the corporation as a non-operating asset upon the decedent’s death, the corporation was worth $9.85 million.  Given the decedent’s ownership percentage of 83.2 percent, the value of the decedent’s stock for estate tax purposes was $8.2 million.  But the Tax Court limited the stock value to slightly less than $8 million which was the amount that the IRS had determined in its original notice of deficiency.  In making its valuation determination, the Tax Court disregarded the buy-sell agreement on the basis that it had been modified and, therefore, didn’t meet the requirement to be binding during life.  In addition, the Tax Court reasoned that the agreement could be disregarded under I.R.C. §2703 because it was entered into by related parties that didn’t engage in arm’s-length negotiation.  Because the Tax Court disregarded the buy-sell agreement, the issue of whether the corporation’s obligation to redeem the decedent’s stock offset the proceeds was not in issue. 

The appellate court affirmed the Tax Court’s decision that the buy-sell agreement couldn’t establish the value of the corporate stock for estate tax purposes primarily because the decedent owned 83.2 percent of the stock and could have changed the agreement at any time, but reversed on the issue of whether the insurance proceeds should be included in the corporation’s value as non-operating assets.  Estate of Blount v. Comr., 428 F.3d 1338 (11th Cir. 2005).  The appellate court determined that the proceeds had already been taken into account in determining the corporation’s net worth.  The buy-sell agreement was still an enforceable liability against the company under state law even though it didn’t set the value of the company for tax purposes.  The appellate court noted that the insurance proceeds were offset dollar-for-dollar by the corporation’s obligation to satisfy its contractual obligation with the decedent’s estate.  The appellate court grounded this last point in Treas. Reg. §20.2031-2(f)(2), which it held precluded the inclusion of life insurance proceeds in corporate value when the proceeds are used for a redemption obligation. 

Note:  The Ninth Circuit also reached the same conclusion in Cartwright v. Comr., 183 F.3d 1034 (9th Cir. 1999).  In Cartwright, the court deducted the insurance proceeds from the value of the organization when they were offset by an obligation to pay those proceeds to the estate in a stock buyout.

Recent Case

Essential facts.  In Connelly v. United States, No. 4:19-cv-01410-SRC, 2021 U.S. Dist. LEXIS 179745 (E.D. Mo. Sept. 21, 2021), two brothers were the only shareholders of a closely-held family roofing and siding materials business.  They entered into a stock purchase agreement that required the company to buy back shares of the first brother to die.  The company then purchased about $3.5 million in life insurance coverage to ensure it had enough cash to redeem the stock.  The brother holding the majority of the company’s shares (77.18 percent) died on October 1, 2013.  The company received $3.5 million in insurance proceeds.  The surviving brother chose not to buy his shares, so the company used a portion of the proceeds to buy the deceased brother’s shares from his estate for $3 million pursuant to a Sale and Purchase Agreement.  Under the agreement the estate received $3 million and the decedent’s son received a three-year option to buy company stock from the surviving brother.  In the event that the surviving brother sold the company within 10 years, the brother and decedent’s son would split evenly any gains from the sale.

The estate valued the decedent’s stock at $3 million and included that amount in the taxable estate.  Upon audit the IRS asserted that the fair market value of the decedent’s corporate stock should have factored-in the $3 million in life-insurance proceeds used to redeem the shares which, in turn, resulted in a higher value of the decedent’s stock than was reported.  The IRS assessed over $1 million in additional estate tax.  The estate paid the deficiency and filed a refund claim in federal district court.

The buy-sell agreement.  The court noted that a stock-purchase agreement is respected when determining the fair market value of stock for estate tax purposes upon satisfying the requirements of I.R.C. §2703(b).  Those requirements are that the agreement must: 1) be a bona fide business arrangement; 2) not be a device to transfer property to members of the decedent’s family for less than full and adequate consideration in the money’s worth; and 3) have terms that are comparable to similar arrangements entered in an arms’ length transaction.  The court also noted several judicially-created requirements – 1) the offering price must be fixed and determinable under the agreement; 2) the agreement must be legally binding on the parties both during life and after death; and 3) the restrictive agreement must have been entered into for a bona fide business reason and must not be a substitute for a testamentary disposition for less than full-and-adequate consideration. 

The IRS expert claimed that the insurance proceeds should be included in the company’s value as a non-operating asset, and that allowing the redemption obligation to offset the insurance proceeds undervalued the company’s equity and the decedent’s equity interest in the company, and would create a windfall for a potential buyer that a willing seller would not accept.  The IRS expert concluded that the fair market value of the company was $6.86 million rather than $3.86 million.  The IRS also took the position that the stock purchase agreement didn’t meet the requirements in the Code and regulations to control the value of the company. 

The estate claimed that the company sold the decedent’s shares at fair market value and that the shares had been properly valued.  Thus, the $3 million in life insurance proceeds were properly excluded from the decedent’s estate based on the appellate opinion in Blount.  The estate claimed that the stock purchase agreement provided a sufficient basis for the court to accept the estate’s valuation as the proper estate-tax value of the decedent’s shares.  On that point, the IRS claimed that the stock purchase agreement was not a bona fide business arrangement and, as such, didn’t control the value of the decedent’s stock.  The IRS position was that the stated estate planning objectives of the stock purchase of continued family ownership of the company were insufficient to make it a bona fide business arrangement, particularly because the brothers did not follow it by disregarding the pricing mechanisms contained in it.

The court passed on the bona fide business arrangement issue because it determined that the estate had failed to show that the stock purchase agreement was not a device to transfer wealth to the decedent’s family members for less than full-and-adequate consideration.  The process that the surviving brother and the estate used in selecting the redemption price bolstered the court’s conclusion that the stock purchase agreement was a testamentary device.  They also did not obtain an outside appraisal or professional advice on setting the redemption price, thereby disregarding the appraisal requirement set forth in the agreement.  The court also noted that the agreement didn’t provide for a minority interest discount for the surviving brother’s shares or a lack of control premium for the decedent’s shares with the result that the decedent’s shares were undervalued.  This also, according to the court, demonstrated that the stock purchase agreement was a testamentary device to transfer wealth to the decedent’s family members for less than full-and-adequate consideration and was not comparable to similar agreements negotiated at arms’ length.

Inclusion of life insurance proceeds in corporate value.  On the issue of whether the life insurance proceeds should be included in corporate value, the court rejected the appellate court’s approach in Blount, finding it to be analytically flawed.  The court concluded that the appellate court in Blount had misread Treas. Reg. §20.2031-2(f)(2), and that the regulation specifically requires consideration to be given to non-operating assets including life insurance proceeds, “to the extent such nonoperating assets have not been taken into account in the determination of net worth.”  The court concluded that the text of the regulation does not indicate that the presence of an offsetting liability means that the life insurance proceeds have already been “taken into account in the determination of a company’s net worth.”  The court concluded that, “by its plain terms, the regulation means that the proceeds should be considered in the same manner as any other nonoperating asset in the calculation of the fair market value of a company’s stock…. And…a redemption obligation is not the same as an ordinary corporate liability.”  There is a difference, the court noted, between a redemption obligation that simply buys shares of stock, and one that also compensates for a shareholder’s past work.  One that only buys stock is not an ordinary corporate liability – it doesn’t change the value of the corporation as a whole before the shares are redeemed.  It involves a change in the ownership structure with a shareholder essentially “cashing out.”   

The court noted that the parties had stipulated that the decedent’s shares were worth $3.1 million, aside from the life insurance proceeds.  The insurance proceeds were not offset by the company’s redemption obligation and, accordingly, the company’s fair market value and the decedent’s shares included all of the insurance proceeds, and the IRS position was upheld.


The Connelly opinion is appealable to the Eighth Circuit, which would not be bound to follow either the Ninth or Eleventh Circuits on the corporate valuation issue.  The opinion does provide some “food for thought” when using life insurance to fund stock buyouts in closely-held business settings.  That will be an even bigger concern if the federal estate tax exemption declines in the future.

October 5, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Monday, September 27, 2021

Fall 2021 Seminars


I receive many requests for my seminar schedule, particularly during the fall season when I am doing training events for tax practitioners.   Today’s post provides a listing (as of today) for my events for the rest of the year.

September 29, 2021 (LaHarpe, Kansas)

This is not a tax event, but a breakfast meeting from 8:00 a.m. – 9:30 a.m. for local landowners impacted or potentially impacted by the Southwest Power Pool Blackberry Line from Wolf Creek Nuclear plant to Blackberry (south of Pittsburg).  I will be discussing real estate principles concerning easements.

October 8, 2021 (Laramie, Wyoming)

This event is for attorneys and CPAs and other tax professionals.  I will be providing an up-to-date discussion and analysis of the current status of proposed tax legislation.  I will also be addressing some other estate and tax planning topics of present importance.  You can learn more about this event and register at the following link:  https://www.washburnlaw.edu/employers/cle/farmranchplanning.html

Kansas State University (KSU) Tax Institutes (October 25 – December 14)

The KSU Tax Institutes are two-day Institutes at six locations across the state of Kansas and two, two-day webinars.  This fall I will be team-teaching Day 1 with Paul Neiffer at Garden City, Kansas and Hays, Kansas.  I will also be team teaching Day 2 at those locations with Ross Hirst, retired IRS.  The three of us will also be teaching Webinar No. 1.  The Garden City Institute is on October 25-26.  The Hays Institute is on October 27 and 28.  Webinar No. 1 is on November 3-4. 

The remaining Institutes will be taught on Day 1 by Prof. Edward A. Morse of Creighton University School of Law and Daniel Waters of Lamson Dugan & Murray in Omaha, Nebraska.  Prof. Morse is also a CPA and is an excellent presenter on tax topics for CPAs and other tax professionals.  He teaches various tax classes at the law school and also operates a farm east of Omaha in Iowa.  Daniel has an extensive tax and estate/business planning practice.  Ross Hirst and I will team teach Day 2 at each of these locations.

The dates for these five Institutes are:  Salina, Kansas on November 8-9; Lawrence, Kansas November 9-10; Wichita, Kansas on November 22-23; Pittsburg, Kansas on December 8-9; and Webinar No. 2 on December 13-14.

You can learn more about the KSU Tax Institutes and the topics that we will be covering, and registration information at the following link:  https://agmanager.info/events/kansas-income-tax-institute

December 16-17 (San Angelo, Texas)

At this two-day conference, I will be focusing on critical income tax and estate/business planning issues.  This event is sponsored by the San Angelo Chapter of the Texas Society of CPAs. 


I also have other in-house training events scheduled this fall for various CPA firms. 


I look forward to seeing you in-person at one of the events this fall.  If you can’t attend in-person, some of the events are online, as noted.   Also, thanks to those listening to the daily two-minute syndicated radio program that airs across the country.  Air plays were up about 30 percent in August compared to July.  

September 27, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Friday, September 24, 2021

Tax Happenings – Present Status of Proposed Legislation (and What You Might Do About It)


Earlier this week the U.S. House Ways and Means Committee released the legislative text (Amendment in the Nature of a Substitute to the Committee Print Offered by Mr. Neal of Massachusetts) that includes proposed tax changes to be included in the budget reconciliation bill – the massive “porkulus” spending bill to accompany the infrastructure bill that is a separate piece of legislation.   While there are likely still many permutations remaining, and it’s still possible that the entire spending bills could go down flames, if the current proposals move forward as is what can be done to prepare for their impact?

I will be covering the most recent developments at my October 8 conference in Laramie, Wyoming.  You may attend either in person or online.  I will provide at that event the then present status of tax proposals and what planning steps should be undertaken in advance of possible changes in the tax laws.  You can learn more about that conference and register here:  https://www.washburnlaw.edu/employers/cle/farmranchplanning.html

Tax provisions in the committees and associated planning steps – it’s the topic of today’s post.

Income Tax Rates

As of today, the proposal continues to be to raise the top marginal income tax rate (federal) to 42.6 percent.  For married persons filing jointly, that rate would kick-in at a modified adjusted gross income (MAGI) exceeding $5 million.  The new 39.6 percent bracket would apply to married persons filing jointly with MAGI of approximately $450,000 up to that $5 million mark.  For single persons the 39.6 percent rate would apply at taxable income above $400,000.  This rate would also apply to trusts and estates with taxable income exceeding $12,500 ($100,000 for the 42.6 percent rate).  Of course, applicable state and local taxes get added on. 

This higher rate would apply to tax years beginning after 2021, which means there is some time to do some tax planning associated with trusts.  Depending on the type of trust and the language of the trust it might be possible to trigger income in 2021 at a lower rate.  A call to your tax and estate planning professionals might be in order, particularly if you recently changed the beneficiary of a retirement plan to a trust.  Some did that in light of another recent law change that eliminated “stretch” IRAs.  If the higher rate actually becomes law, it would be better in many situations to have the retirement funds distributed directly to a beneficiary rather than via a trust.  Sec. 138201.

Corporate Tax Rates

Presently, the corporate tax rate is a flat 21 percent.  The proposal graduates the corporate rate structure as follows:  18 percent on corporate taxable income up to $400,000; 21 percent on taxable income between $400,000 and $5 million; and 26.5 percent on taxable income over $5 million but under not exceeding $10 million.  An additional tax is added to the 26.5 percent rate for corporations with taxable income in excess of $10 million.   Sec. 138101

Qualified Small Business Stock

I.R.C. §1202 stock gain exclusion provisions of 75 percent and 100 percent would be inapplicable to taxpayers with adjusted gross income (AGI) at or above $400,000.  The 50 percent exclusion would remain.   Sec. 138150. 

Capital Gain Rates

The initial proposal to raise capital gain rates to the (newer) top marginal income tax rate of 39.6 percent appears to be dead.  It looks more likely that what will move forward is a 25 percent rate.  The current legislation says that the higher rate would apply to gains triggered “after date of introduction.”  If have no clue what that means, other than it is sometime before 2022.  Perhaps it means September 13, 2021, the date the legislative text was released. 

Thankfully, it appears that the “deemed realization” rules are no longer included in the proposed legislation.  That would have made death a capital gain triggering event rather than waiting for an heir to sell inherited property.  Also, for now, the “stepped-up” basis at death rule (or adjustment to fair market value at death) is retained.  Sec. 138202.

Net Investment Income Tax

Obamacare added a 3.8 percent tax on passive sources of income under I.R.C. §1411.  The current proposal is to tack this additional tax onto all trade or business income on a joint return exceeding $500,000 ($400,000 single).  It does not apply to any earnings that are subject to FICA tax.  The effect of this is to make the tax apply to distributions from S corporations, limited liability companies and partnerships with profits above the threshold.  This provision specifies that it applies to tax years beginning after 2021.  Sec. 138203.

Qualified Business Income Deduction (QBID)

As I noted in a post last week, the current proposal is to limit the 20 percent QBID to a maximum deduction of $500,000 for married filing joint filers ($400,000 for single filers).  For trusts and estates, the maximum QBID would be $10,000.  So, businesses operating inside trust that could generate a sizable QBID would no longer be a good idea from a tax standpoint.  The legislation says nothing about limiting the amount of the deduction passed through to a patron of an agricultural or horticultural cooperative.  So, a farmers QBID would be limited to $500,000, but any amount passing through from a cooperative would not be.  This provision also would be effective for tax years beginning after 2021.  Sec. 138204.

Excess Business Losses

The proposal would permanently disallow excess business losses for noncorporate taxpayers.  Sec. 138205. 

IRA Changes

The proposed legislation contains contribution limits to Individual Retirement Accounts (IRAs).  The limitations start to apply on retirement plan balances in excess of $10 million as of the end of the prior tax year and where the account owner’s MAGI exceeds $450,000 on a joint return.  The limitation applies to regular IRAs, Roth IRAs and defined contribution plans.  In addition, owners of account balances exceeding the $10 million threshold will be required to withdraw more from the account on an annual basis than will account owners with balances not exceeding the threshold.  That excess amount as a minimum distribution for the following year would be 50 percent of the amount by which the individual’s prior-year aggregate traditional IRA, Roth IRA and defined contribution account balance exceeds the $10 million limit.  A different minimum distribution calculation is specified for combined account balances of an owner exceeding $20 million.  Secs. 138301 and 138302.

IRAs would also be barred from holding investments in nonregistered securities.  For IRA accounts that hold nonregistered securities after 2021, such investments would be deemed to be distributed over a two-year transition period. 

Another provision changes the existing threshold prohibiting investment by an IRA in an entity in which the IRA owner owns at least a 50 percent ownership interest to a 10 percent ownership interest for investments that are not traded on an established securities market. 

Roth conversions would be eliminated for married taxpayers filing jointly with taxable income exceeding $450,000 ($400,000 single).  Sec. 138311.

Exemption Equivalent of the Unified Credit

I have written in prior articles about the proposal to “decouple” the estate and gift tax systems.  They are presently “coupled” but if the proposed changes make it into law, the systems will be decoupled.  There will be a credit to offset estate tax, and a separate credit to offset gift tax.  Under current law, the coupled estate and gift tax credit rises with inflation through 2025.  Beginning in 2026 it is scheduled to drop so that its exemption equivalent is $5 million in 2011 dollars.   The present proposal fast-forwards the 2026 law to 2022.  In other words, the exemption equivalent of the unified credit would be $5 million adjusted for inflation since 2011 – approximately $6.2 million.  Thus, for higher-wealth persons, it might be wise to start using some of the higher exemption by the end of 2021.  Strategies might include the formation of a “self-settled” trust (in some states); a special power of appointment trust; or a spousal lifetime access trust.  Sec. 138207.

Special Use Valuation

Under current law, as I have noted in other posts, farm and ranch land (and other non-farm business property) can be valued at death for federal estate tax purposes at its use value rather than fair market value.  I.R.C. §2032A. For deaths in 2021, the maximum value reduction possible is $1,190,000.  Under the current proposal the maximum reduction in value would be $12 million.  Sec. 138208.

Trust Planning

I have written previously on proposals that would essentially end dynasty trusts and intentionally defective grantor trusts as well as grantor retained annuity trusts, qualified personal residence trusts and even irrevocable life insurance trusts.  The provisions attacking these traditional planning methods remain. 


Eliminating valuation discounting as a planning tool was a target of the Obama-Biden administration.  After the valuation regulations largely eliminating such discounts was removed by the Trump Administration, the restrictions on valuation discounting are now back.  This time the restrictions would be statutory and would eliminate discounts on non-business assets.  Passive assets are non-business assets.  That could mean that farm and ranch land under a cash lease is a passive, non-business asset in the landlord’s hands.  Likewise, the value of marketable securities would not be eligible for a valuation discount. 


The draft legislation ends the employer credit for wages paid to employees during family and medical leave for tax years beginning after 2023.  Sec. 138506.

An S corporation could reorganize as a partnership tax-free.  The S corporation that qualifies is one that was an S corporation as of May 13, 1996.  Sec. 138509.

The Work Opportunity Tax Credit would be increased to 50 percent for the first $10,000 of wages for all groups except youth employees.  This provision would apply for persons hired before 2023.  Sec. 138513.

A new payroll tax credit for compensation of “local news journalists” is created.  The tax credit applies against employment taxes for each calendar quarter up to $12,500.  The credit is 50 percent for each of the first four calendar quarters (total of $25,000) and then 30 percent thereafter.  An “eligible local newspaper publisher” is one having substantially all gross receipts derived from publishing a local newspaper.  “Local newspaper” means any print or digital publication if the content is original and derives from primary sources relating to news and current events.  The publisher must not employ more than 750 employees during the calendar quarter during which a credit is allowed.  A “local news journalist” is a person providing at least 100 hours of service during the calendar quarter.  Sec. 138517.


I will provide the latest up-to-date discussion of pending tax legislation and possible year-end planning steps at the conference in Laramie, WY on October 8.  Again, attendance may either be in person or online.

September 24, 2021 in Estate Planning, Income Tax | Permalink | Comments (0)

Monday, September 20, 2021

Estate Planning to Protect Assets From Creditors – Dancing On the Line Between Legitimacy and Fraud


According to the U.S. Financial Education Foundation, it is estimated that over 40 million lawsuits are filed annually.  Thus, for some persons, including farmers and ranchers, an important aspect of estate and business planning is asset protection.  The goal of asset protection planning is to protect property from claims of creditors by restructuring asset ownership to limit liability risk in the event of a lawsuit.  Done correctly the restructuring creates a degree of separation between the assets and their owner to properly shelter them from creditors. 

A significant key to asset protection planning is timing.  Once a lawsuit has been filed or is a substantial certainty to be filed with an anticipated adverse outcome for a client, it’s too late to start utilizing legal strategies to shelter assets from potential creditors.  Civil and criminal liability is possible for all parties involved as well as malpractice liability for related ethical violations.  A recent case illustrates the point.

Considerations when engaging in asset protection – it’s the topic of today’s post.

The Attempt To Shield an Iowa Farm From Creditors – Recent Case

Facts of the case.  A recent federal court case from Iowa illustrates the serious problems that can result for parties and their professional counsel that engage in asset protection if not done properly.  Kruse v. Repp, No. 4:19-cv-00106-SMR-SBJ, 2021 U.S. Dist. LEXIS 114013 (S.D. Iowa Jun. 15, 2021), involves three interrelated lawsuits. The plaintiff was injured in an automobile accident, which left her in need of 24-hour care likely for the rest of her life. The accident was Weller’s fault and, due to his experience as an insurance agent, he knew he would face a large claim for the plaintiff’s injuries. Weller told family members he feared losing the family farm as a result of the impending lawsuit. After determining his liability exposure exceeded his insurance coverage, he sought legal counsel to help him shelter the assets from a potential claim.  Based on the initial legal advice he received, less than two months after the accident Weller transferred the farm and other assets into a revocable trust and made several cash transfers to family members exceeding $100,000.  He notified the defendant bank that he had recently been found at-fault in a major motor vehicle accident and that he faced liability exposure that exceeded his insurance coverage.  However, the bank began working with him to weaken the appearance of his financial condition. 

After leaving his previous attorney when settlement negotiations broke down, Weller met the defendant attorney (Repp) two months before the personal injury trial was set to begin.  Repp holds himself out having a practice focusing on estate planning and that he “counsels and advises clients with respect to the management of their wealth to minimize estate and inheritance taxes through the use of asset protection trusts.”  Weller later testified at trial that he told Repp of his previous attempts to shield himself from judgment by transferring his assets to a revocable trust and making cash "gifts."  To this end, Weller testified he went to Repp specifically because Repp holds himself out as an "asset protection attorney."  Repp told Weller that his previous attorney had given bad legal advice and that the cash gifts were inappropriate transfers of wealth.  Repp then created an LLC and had Weller transfer the farm to the LLC by quitclaim deed to protect it from the anticipated personal injury judgment.  The deed was accompanied with a trustee’s affidavit that Repp prepared and notarized stating that the Trust was conveying the real estate "free and clear of any adverse claim."  This transaction was completed approximately one month before trial in the personal injury case was scheduled to begin.

State court judgment.  The plaintiff was awarded approximately $2,557,100 million in damages in the personal injury lawsuit. Judgment was entered on May 1, 2015. In early 2016, Repp helped Weller prepare a financial statement reporting the value of the farmland as an LLC asset.  The bank helped Weller refinance mortgages on the farm, which listed the farm as Weller’s personal asset, and issued promissory notes that were secured by the mortgage. This led to the plaintiff suing Weller on March 3,2016, for fraudulent transfers intended to shield Weller’s assets from the personal injury judgment. The state trial court determined that the LLC was formed with the intent to shield Weller’s assets from the plaintiff levying her judgment lien against his real estate. The state trial court, on March 13, 2018, found in the plaintiff’s favor and held that all assets of the LLC remained available to the plaintiff for satisfaction of the judgment.

Claims for personal liability and removal to federal court.  The plaintiff sued the bank and Repp in early 2019, alleging that they both knowingly participated in Weller’s fraudulent attempts to shield his assets from the plaintiff’s judgment.  Specifically, the plaintiff claimed that fraudulent transfers had been made under state law; that the defendants conducted or otherwise participated in the conduct of a racketeering enterprise with the purpose of defrauding the plaintiff; and that the defendants tortiously interfered with her ability to collect the personal injury award. The defendants removed the case to federal court and claimed that the undisputed facts entitled them to judgment as a matter of law on various claims.  The federal court largely denied the defendants’ claims in early 2020, and the case proceeded.

Under the fraudulent transfer state law claim, the defendants argued that the plaintiff could not prove that they knew of Weller’s fraudulent intent or that they helped in his scheme to shield his assets from the plaintiff’s judgment. The court strongly disagreed pointing to Weller’s disclosures to the bank that he was at fault in a major motor vehicle accident and the bank’s subsequent dealings. The trial court also noted that the bank allowed Weller to inconsistently classify the farm as both a personal and LLC asset. The court determined a factfinder could reasonably infer that the bank had knowledge of Weller’s intent to defraud the plaintiff. The bank argued that the plaintiff did not show prejudice by reason of priority in interest. The court noted that the bank’s argument was based on a false premise, and that prejudice may be shown if a debtor encumbers property to create the appearance of over-securitization. Thus, the court determined that because critical questions existed concerning the effect of Weller’s refinancing with the bank, summary judgment under the fraudulent transfer claim was precluded.

RICO claim.   The Racketeering Influenced and Corrupt Organizations Act (RICO) provides for criminal penalties and a civil cause of action for acts performed as part of an ongoing criminal organization.  18 U.S.C. §§1861-1868.   Under RICO, a person who has committed "at least two acts of racketeering activity" within a 10-year period can be charged with “racketeering” if the acts are related in a specified manner to an "enterprise."  Those found guilty of racketeering can be fined up to $25,000 and sentenced to 20 years in prison per racketeering count.  18 U.S.C. §924; §1963.  In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity." 

RICO also permits a private individual "damaged in his business or property" by a "racketeer" to file a civil suit.  The plaintiff must prove the existence of an "enterprise." There must be one of four specified relationships between the defendant(s) and the enterprise: (1) either the defendant(s) invested the proceeds of the pattern of racketeering activity into the enterprise; (2) the defendant(s) acquired or maintained an interest in, or control of, the enterprise through the pattern of racketeering activity;  (3) the defendant(s) conducted or participated in the affairs of the enterprise "through" the pattern of racketeering activity; or (4) the defendant(s) conspired to do one of the first three. 18 U.S.C. §1962(a)-(d).  In essence, the enterprise is either the 'prize,' 'instrument,' 'victim,' or 'perpetrator' of the racketeers.  See National Organization for Women v. Scheidler, 510 U.S. 249 (1994).  RICO also allows for the recovery of damages that are triple the amount of the actual or compensatory damages. 

Repp claimed that there was no common purpose among himself and Weller to constitute an associated in-fact enterprise, and if there was, that the enterprise required a common purpose that is fraudulent, illicit, or unlawful.  He asserted that these elements did not exist. The court disagreed, expressing disbelief at the assertions, and noted that RICO liability is extended to those who play some role in directing the group to further its shared goals, unlawful or not, so long as those goals are carried out through a pattern of criminal behavior.

The court stated as follows:

“They nevertheless prepared legal documents transferring his [Weller’s] property to a corporate form that posed significant barriers to any recovery by Kruse, assisted Weller in the creation of financial statements that painted an inaccurate picture of Weller's finances, and defended the legality of the conveyances in court. In both cases, the facts are sufficient for a reasonable jury to find Defendants tacitly agreed to participate in Weller's scheme to defraud Kruse and conspired to further the purpose of a RICO enterprise.”

Thus, the court determined that sufficient evidence existed for a fact-finder to possibly infer that Weller, Repp and the bank shared an unlawful purpose to shield Weller’s assets from the plaintiff’s looming judgment.

The court further stated:

“…Repp changed the course of the effort to defraud Kruse and "joined in a collaborative undertaking with the objective of releasing [Weller] from the financial encumbrance visited upon him by [Kruse]'s judgment."… Reversing the mechanisms put in place by Weller's prior attorney, Repp organized Weller Farms, filed a trustee's affidavit that ignored Kruse's unliquidated tort claim, directed Weller to execute a quit claim deed conveying his real estate to the entity, and assisted Weller in preparing financial statements that embedded multiple "ambiguities" that devalued Weller's financial picture during settlement negotiations. [Repp} then defended the transactions in the fraudulent transfer action, devising a legal strategy in an attempt to persuade the state court to validate the transactions. In essence, Repp agreed Weller's previous efforts were inappropriate. All of his advice that followed was consistent with the expertise in asset protection that Repp, not Weller, possessed.”

The defendants also claimed that there was no pattern of racketeering activity and that they had not directed the conduct of the enterprise’s affairs. The court disagreed, noting that the evidence of three years’ worth of communications led to a reasonable inference that a pattern of racketeering existed. Repp also asserted that he provided nothing more than ordinary legal services such that his conduct played no part in directing the affairs of Weller or the LLC. The court again disagreed and determined that factual issues remained concerning whether Repp played some part in directing the affairs of Weller’s fraudulent scheme.

The court lastly noted that for liability to arise from a RICO conspiracy, the plaintiff only needs to establish a tacit understanding between the defendants for conspirators to be liable for the acts of their co-conspirators. The defendants argued they did not know the full extent of Weller’s fraudulent scheme and were mere scriveners of information provided by him. The court disagreed, stating as follows:

“They claim he was a mere scrivener of information provided by Weller and intended only to assist Weller in setting up a farming entity by which to bring his son into the family business. That characterization, in light of the circumstances surrounding his [Repp’s] relationship with Weller, present genuine factual issues and credibility determinations on whether Repp played "some part" in directing the affairs of Weller's fraudulent scheme and require a jury to resolve.”

The trial court determined there was a genuine issue of material fact as to whether the defendants knew of or were willfully blind to the scope of the RICO enterprise. Therefore, the trial court denied summary judgment on the RICO charges and determined the defendants’ position was a question for the jury.

Tortious interference with economic expectancy.  On the common law tortious interference claim, the defendants argued that the Iowa Supreme Court had not yet recognized tortious interference with an economic expectancy as a cause of action. The Second Restatement of Torts describes this action as, “one who intentionally deprives another of his legally protected property interest or causes injury to the interest.”  Second Restatement of Torts §871.  A party that does this is subject to liability if the party’s conduct is generally culpable and not justifiable under the circumstances. The court determined that although the Iowa Supreme Court had not yet considered this issue, it would likely recognize this tort as a prima facie tort in the context of fraudulent financial practices.

Repp argued that the plaintiff failed to show that his predominant intent in forming the LLC was to injure the plaintiff’s property interest. However, the court noted that the majority rule governing a prima facie tort does not require that the defendant be motivated predominantly to injure the plaintiff. The court pointed out that the facts led to a reasonable inference that Repp knew the transfer of Weller’s assets to the LLC would interfere with the plaintiff’s collection efforts. The bank made a similar argument, which the court rejected, resulting in summary judgment on the tortious interference claim being denied. Thus, the jury will need to determine whether the defendants were more than mere scriveners, and thus subject to tort liability.

Note:  It’s important to remember that the case was positioned on a motion for summary judgment.  That’s a fairly low hurdle for the plaintiff to clear, especially when the evidence on such a motion is viewed in the light most favorably to the non-moving party (the plaintiff in the Iowa case).

Ethical Considerations

The asset protection legal field is fraught with ethical “landmines” for attorneys.  I asked Prof. Shawn Leisinger, Associate Dean for Centers and External Programs at Washburn University School of Law to comment on some of the possible ethical issues involved in the Iowa case.  Shawn teaches ethics at the law school and also sometimes makes ethics presentations at my events around the country.  The following comments are his.

It is fairly well settled that attorneys generally, and certainly attorneys who specialize in taxation issues, may advise clients in the area of “tax avoidance” but must not have that same advice go over the line into “tax evasion.”  This concept frames the ethical guidelines that attorneys must consider when they work with their clients on asset ownership structuring, whether for tax or  liability purposes.  In the Iowa case, a fairly common business entity formation asset protection tactic arguably stepped over the line that falls in that gray area between avoidance and evasion.

While each state has its own version of ethical rules that the attorneys licensed their must follow, these rules generally incorporate or adapt what are known as the Model Rules of Professional Conduct promulgated by the American Bar Association.  In the case at hand a number of these rules would warrant consideration but we only touch on a few of those that apply most directly here. 

MRPC Rule 2.1: Advisor. Under this rule, attorneys are deemed to be counselors who are advised, “In representing a client, a lawyer shall exercise professional judgment and render candid advice.  In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.”  This rule is arguably permissive and would suggest that Repp should have had a candid conversation with the client about the steps being taken to protect the client’s assets and the risks and realities of those steps.  We are not privy to the private conversations that occurred in this case, however. 

MRPC Rule 8.4: Misconduct.  This rule sets forth the specific definitions of attorney misconduct that in turn warrant and could support attorney discipline under the rules.  The rule provides, “It is professional misconduct for a lawyer to: … (b) commit a criminal act that reflects adversely on the lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects; (c) engage in conduct involving dishonesty, fraud, deceit or misrepresentation; (d) engage in conduct that is prejudicial to the administration of justice; …”. 

While the “criminal act” under (b) might seem a higher bar to hit in the asset planning realm, as one reads the facts of the Iowa case it is fairly easy to conclude that the multiple steps taken by and with multiple parties to try to shelter the assets noted, and the continuing interaction with the bankers and others involved in the property transfers, hit either the disjunctive “dishonesty” or “misrepresentation” standards in section (c).  I note section (d) as well due to the fact that in many of these kinds of cases a court may well conclude that the catch-all of “acts prejudicial to the administration of justice” certainly must define the actions if one might argue the other provisions do not fit.   

From an ethical perspective one should also know that attorneys have an obligation to report unethical conduct of other attorneys under the rules.  Rule 8.3 provides, “A lawyer who knows that another lawyer has committed a violation of the Rule of Professional Conduct that raises a substantial question as to that lawyer’s honesty, trustworthiness or fitness as a lawyer in other respects, shall inform the appropriate professional authority”.  

An important point to remember is that the ethical perspective on these cases is largely fact specific and subject to argument and interpretation of when and how that gray line may have been crossed.          


To put the Iowa case in perspective and provide further guidance for others engaged in asset protection strategies, I asked Timothy P. O’Sullivan, a partner in Foulston Siefkin LLP, a law firm in Wichita, Kansas to comment.  Among other things, Tim is a Fellow in the American College of Trust and Estate Counsel and is an adjunct professor of law at Washburn University School of Law.  The following comments are his.

This Iowa decision puts into stark relief the personal and professional exposure asset protection attorneys may have when advising clients of estate planning techniques to protect their assets from creditor claims.  Most estate planning attorneys whose practice extends into this area have given thought, but often not enough, to the possibility that they can be held in violation of attorney professional conduct rules by participating in or structuring a transaction that is a fraudulent conveyance by their clients, as well as risk possible personal liability for damages by an aggrieved creditor.  Although there does not appear to be more than a modicum of cases to date imposing such liability against assisting third parties, such exposure is nonetheless present. The exposure may derive from a state’s version of the Uniform Fraudulent Transfer Act, which has been enacted in the vast majority of states, which otherwise would not have included a remedy against a third party involved in the transaction. 

As noted in the Iowa case, other potential legal authority for imposing personal liability rests more solidly and broadly under the federal RICO Act as an alleged “civil conspiracy,” or (as the court also noted) an actionable tort by an aggrieved creditor under the Second Restatement of Torts for assisting in the fraudulent act.   These principles extend well beyond applicable state law.

The potential liability  of estate planning professionals generally requires not only  that the creditor incur damages as a result, but also actual knowledge as to the principal purpose of the estate planning device used, and that the client had a debt (which need not be liquidated) the satisfaction of which  would be avoided, delayed, or hindered by the implementation of a specific asset protection plan. The plan could be as simple as gifting assets away or it could be a plan to make the claim more arduous or unlikely to be satisfied, such as putting exposed non-exempt assets in an LLC or restructuring debt to the detriment of a claim by a creditor.  All three of these strategies were present in the Iowa case.  As noted by the court, there is no defense against the personal liability of an attorney that the attorney was a mere scrivener of his client’s plan if the attorney is assisting in implementing a strategy that the attorney knows to be fraudulent. 

For professionals engaging in asset protection strategies, there can be no more important prophylactic measure against professional liability exposure than gaining sufficient knowledge of the client, the client’s assets and liabilities, and most importantly, determining ab initio whether the client is seeking advice as protection against a specific currently existing, or problematic current creditor.  Perhaps the client is simply desiring to protect against potential future creditors in general due to the nature of the client’s assets or personal, business or professional activities.  If so, asset protection planning is entirely appropriate.  But, determining the client’s purposes up-front is a must.

The use of detailed salient client questionnaires and requisite financial statements that gather complete and relevant legal and financial information from clients is most desirable.  Checking clients’ references and gleaning knowledge of a client’s background can also serve as valuable indicia in determining a client’s honesty and intent in seeking asset protection advice. In all events, the attorney’s engagement letter should make it clear that the attorney is relying on the accuracy of the client’s disclosures and submitted information in recommending or implementing any asset protection plan and further clearly stating that the attorney will not participate, or continue to represent the client, in any plan that might constitute a fraudulent transfer.

Although the Iowa case involved a decision that denied summary judgment in favor of the defendants, the court’s analysis of the legal underpinnings make it quite evident as to the third-party liability exposure of the defendants, including not only the debtor’s attorneys involved in setting up the LLC, but also the debtor’s bank in favorably restructuring the debtor’s debt to the creditors’ disadvantage, should the factual assertions of the plaintiffs be proven at trial.

September 20, 2021 in Business Planning, Criminal Liabilities, Estate Planning | Permalink | Comments (0)

Saturday, September 18, 2021

The Future of Ag Tax Policy – Where Is It Headed?


The Tax writing committees in the Congress are busy trying to figure out ways to pick your pocket through the tax Code to pay for the massive spending legislation that is currently proposed and being debated.  If and when any legislative proposals become law, important planning steps will be necessary for many farm and ranch families.  But, all hinges on just exactly what changes become law.  It’s difficult, if not impossible, to plan for changes that are unknown.  That’s particularly the case if tax changes are done on a retroactive basis. 

In today’s post, I highlight where the areas of change might occur by referring you to a lengthy article resulting from interviews with farm media in recent days.  Also, I invite you to attend either in-person or online, my upcoming 4-hour seminar on the tax landscape on October 8.  The in-person presentation will be at the University of Wyoming College of Law in Laramie.  The event will also be simulcast over the web.  I will provide the most up-to-date information of where legislative proposals are at as of that time and the prospects for passage, and planning steps that need to be taken.

The current tax landscape and the upcoming October 8 seminar – it’s the topic of today’s post.

Possible Changes

In the article in which I am quoted that is linked below, I attach percentages (as of September 17, 2021) as to likelihood of whether particular current tax Code provisions would change.  The areas that I address include the following:

  • The federal estate tax exemption
  • “Stepped-up” basis at death
  • Income tax rates
  • The deduction for state and local taxes
  • A cap on itemized deductions
  • The capital gains tax rate(s)

Stepped-Up Basis

As for the stepped-up basis issue and the possible elimination of modification of the rule, the Congress has tried this approach before.  The long-standing rule has been that the basis of property that is included in a decedent’s estate for tax purposes gets a basis equal to the fair market value of the property in the hands of the heir(s).  I.R.C. §1014.  But, for property that is gifted, the donee generally receives an income tax basis equal to the donor’s basis at the time of the gift.  This is known as a “carryover basis.”  The Tax Reform Act of 1976 expanded carryover basis to include dispositions at death.  Pub. L. No. 94-455, Sec. 2005, 90 Stat. 1872 (1976).  Section 2005(a)(1) of that law retained the old step-up/step-down (fair market value basis) rule of I.R.C. Sec. 1014 in the case of a decedent dying before January 1, 1977.  The Revenue Act of 1978 delayed the effective date of I.R.C. Sec. 1023 (the new carryover basis rule) to decedents dying after 1979, and the non-application date of I.R.C. Sec. 1014 (the old step-up basis rule), to estates of decedents dying before January 1, 1980.  Pub. L. No. 95-600, Sec. 515, 82 Stat. 2884.  The new carryover basis rule of I.R.C. §1023 was repealed by Pub. L. No. 96-223, Sec. 401, 94 Stat. 229 (1980).   This amendment was made effective for decedents dying after 1976.  The date on this repeal amendment is April. 2, 1980.

As of this writing, it appears that the Congress will not change the existing fair market value basis at death rule.  The chairman of the House Ways and Means committee has indicated that the votes are not there to change the rule.  That’s good news for farmers and ranchers and tax practitioners – the administrative burden of changing to a carryover over basis would be extensive.

Corporate Tax and I.R.C. §199A

Corporate tax.  Presently, the proposal is to increase the corporate tax to 26.5 percent on income exceeding $5 million from its current 21 percent rate.  That would amount to a 25.5 percent rate increase at the federal level that corporations would, depending on the competitive structure of their market, pass through to consumers in the form of higher prices.  On top of the 26.5 percent rate would be any state-level corporate tax.  The current federal corporate income tax rate puts the United States near the middle of the pack in comparison with its Organisation for Economic Co-operation and Development peer countries.  The proposed change would give the U.S. one of the highest corporate tax rates of the OECD countries. The result would be a drop in investment in U.S. companies and cause some firms to locate outside the U.S., taking jobs with them.  Also, if the corporate rate is increased, it’s not likely that the various tax deductions and other favorable corporate tax provisions that the Tax Cuts and Jobs Act removed, would not be restored. 

Qualified Business Income Deduction (QBID).  The QBID of I.R.C. §199A, under the current House proposal, the QBID would be limited to a $500,000 deduction (joint), $400,000 (single) and $250,000 (MFS).  It would be capped at $10,000 for a trust or an estate.  For farmers that are patrons of qualified cooperatives the amount passed through from the cooperative would not be limited.  The QBID is presently 20 percent of business income.  There is “talk” on the Senate side of eliminating the QBID, but retaining any amount passed through to a patron from a cooperative. Either proposal, if enacted, would result in a significant tax increase for many farmers. 

For discussion of the other major tax proposals, you can read my comments in the article linked here:   https://www.farmprogress.com/farm-life/farm-busting-tax-changes-possible-unlikely

Wyoming Seminar

As mentioned above, I will be addressing the legislative tax proposals and providing possible planning steps at a seminar to be held at the University of Wyoming College of Law in Laramie on October 8, 2021.  You may attend either in person or online.  For more information the October 8 event, you may click here:  https://www.washburnlaw.edu/employers/cle/farmranchplanning.html


The future of tax policy for agriculture is of critical importance at the present time.  Make sure you are staying up with the developments. 

September 18, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Monday, September 13, 2021

Gifting Assets Pre-Death (Entity Interests) – Part Two


In Part One of this series, I discussed some of the basics with respect to gifting pre-death to facilitate estate planning and/or business succession.  Also covered in Part One was a gifting technique utilizing what is known as the “Crummey demand power” as a means of moving property into trusts for minors and qualifying the gifts for the present interest annual exclusion.  In Part Two, the commentary continues with the use of the Crummey gifting technique with respect to entity interests.

Gifting interests in closely-held entities – it’s the topic of today’s article.

Using Crummey-Type Demand Powers in the Entity Context – Significant Cases

Crummey-type demand powers may also be relevant in the context of gifted interests in closely-held entities. From a present-interest gifting standpoint, the issue is whether there are substantial restrictions on the transferred interests such that the donee does not have a present beneficial interest in the gifted property. If so, the present interest annual exclusion is not available for the gifted interests.  The courts have set forth markers that provide guidance.

The Hackl case.  In Hackl v. Comr., 118 T.C. 279 (2002), the taxpayer purchased two tree farms (consisting of about 10,000 acres) worth approximately $4.5 million. He contributed the farms along with another $8 million in cash and securities to Treeco, LLC (“Treeco”), and had an investment goal of long-term growth (the trees were largely unmerchantable timber).  The actual tree farming activities were conducted via a separate entity.   The taxpayer and his wife initially owned all of Treeco’s interests, with the taxpayer serving as Treeco’s manager. Under the LLC operating agreement, the manager could serve for life (or until he resigned, was removed or became incapacitated) and could also dissolve the LLC. The operating agreement also specified that the manager controlled any financial distributions and members needed the manager’s approval to withdraw from the company or sell their shares. As for cash distributions, the operating agreement specified that the taxpayer, as manager, “may direct that the Available Cash, if any, be distributed to the members pro rata in accordance with their respective percentage interests.” No member could transfer their respective interest unless the taxpayer gave prior approval. If a member made an unauthorized transfer of shares, the transferee would only receive the economic rights associated with the shares – no membership or voting rights transferred. In addition, before dissolution, no member could withdraw their respective capital contribution, unless the taxpayer approved otherwise. It also took an 80 percent majority to amend Treeco’s articles of organization and operating agreement and dissolve Treeco after the taxpayer ceased being the manager.

Upon Treeco’s creation, the taxpayer and his wife began transferring voting and nonvoting shares of Treeco to their eight children, the spouses of their children and a trust established for their 25 minor grandchildren. Eventually, a majority of Treeco’s voting shares were held by the children and their spouses. The taxpayer and his wife elected split-gift treatment, and reported the transfers as present interest gifts covered by the annual exclusion ($10,000 per donee, per year at the time).  However, the IRS disallowed all of the annual exclusions, taking the position that the transfers involved gifts of future interests. The taxpayer claimed that the gifts were present interests because all legal rights in the gifted property were given up, but IRS viewed the gifted interests as still being subject to substantial restrictions that did not provide the donees with a substantial present economic benefit. As a result, the IRS position was that the gifts were future interests’ ineligible for the exclusion.

The Tax Court agreed with the IRS that the transfers were gifts of future interests that were not eligible for annual exclusions. The Tax Court determined that the proper standard for determining present interest gift qualification was established in Fondren, 324 U.S. 18 (1945), where the key question was whether the transferee received an immediate “substantial present economic benefit” from the gift. To answer that question, Treeco’s operating agreement became the focus of attention. On that point, the Tax Court noted that Treeco’s operating agreement required the donees to get the taxpayer’s permission before transferring their interests and gave the taxpayer the retained power to either make or not make cash distributions to the donees. In addition, the donees couldn’t withdraw their capital accounts or redeem their interests without the taxpayer’s approval, and none of them, acting alone, could dissolve Treeco.  Based on those restrictions, the Tax Court determined that the donees did not realize any present economic benefit from the gifted interests. Instead, the restrictive nature of Treeco’s operating agreement “forclosed the ability of the donees presently to access any substantial economic or financial benefit that might be represented by the units.”  Thus, the gifts, while outright, were not gifts of present interests. See also Treas. Reg. §25.2503-3. On appeal, the U.S. Court of Appeals for the Seventh Circuit agreed. Hackl v. Comr., 335 F.3d 664 (7th Cir. 2003).

The Price and Fisher cases.  In 2010, the Tax Court reached the same conclusion in a case that was factually identical to Hackl where the donees lacked the ability to “presently to access any substantial economic or financial benefit that might be represented by the ownership units.”  Price v. Comr., T.C. Memo. 2010-2.  Likewise, a federal district court reached the same result in Fisher v. United States, No. 1:08-cv-0908-LJM-TAB, 2010 U.S. Dist. LEXIS 23380 (S.D. Ind. Mar. 11, 2010).  In Fisher, the taxpayers transferred 4.762 percent membership interests in an LLC to each of their seven children (one-third total interest in the LLC). The LLC’s primary asset was undeveloped land bordering Lake Michigan. The taxpayers claimed present interest annual exclusions for the gifts, but on audit, IRS disagreed on the basis that the gifts were future interests and assessed over a $650,000 gift tax deficiency.

The Fisher court noted that the LLC’s operating agreement specified that any potential of the LLC’s capital proceeds to the taxpayers’ children was subject to numerous contingencies that were completely within the LLC general manager’s discretion. So, consistent with Hackl, the court determined that the right of the children to receive distributions of the LLC’s capital proceeds did not involve a right to a “substantial present economic benefit.” As for the taxpayers’ argument that the children had the unrestricted right to possess, use and enjoy the LLC’s primary asset, the court noted that there was nothing in the LLC’s operating agreement that indicated such rights were transferred to the children when they became owners of the LLC interests. Finally, the court rejected the taxpayers’ argument that the children could unilaterally transfer their LLC interests. The court noted that such transfers could only be made if certain conditions were satisfied – including the LLC’s right of first refusal which was designed to keep the LLC interests within the family. Even if such a transfer stayed within the family, the LLC operating agreement still subjected the transfer to substantial restrictions.  The result was that the court upheld the IRS’ determination that the gifts were not present interest gifts, just as the similarly structured transfers in Hackl and Price didn’t qualify as present interest gifts.

The Wimmer case.  In Estate of Wimmer v. Comr., T.C. Memo. 2012-157, the decedent and his wife established an FLP to invest in land and stocks. The decedent also established a trust for his grandchildren. The trust was a limited partner of the FLP and was set-up as a Crummey Trust. The trust, as a limited partner, received dividends. The decedent and his wife were limited partners and they made gifts of partial limited partner interests on an annual basis consistent with the present interest gift tax exclusion. The gifts of the limited partner interests were significantly restricted, however, under the FLP agreement.

The IRS claimed that the gifts of limited partner interests were not present interests and, as such, were not excluded from the decedent's gross estate. However, the Tax Court concluded that while the donees of limited partner interests did not receive an unrestricted right to the interests, they did receive the right to the income attributable to those interests. The Tax Court also noted that the estate had the burden of establishing that the FLP would generate income and that some portion of that income would flow to the donees on a consistent basis and that the portion could be ascertained. Importantly, the FLP held dividend-producing, publicly traded stock. Thus, the court determined that the income from the stock flowed steadily and was ascertainable. Accordingly, the limited partners received present interests and the gifted amounts were excluded from decedent's estate.  Based on Wimmer, an FLP that makes distributions on at least an annual basis should allow the use of present interest gifting. 

Planning Implications

If a partnership/LLC places sufficient restrictions on gifted interests or the general partner has unfettered discretion to make or withhold distributions, any gift of an interest in the partnership/LLC may be treated as a gift of a future interest that does not qualify for the annual gift tax exclusion.  See, e.g., Tech. Adv. Memo. 9751003 (Aug. 28, 1997).  In Hackl, Price and Fisher, there was no question that the donees had the immediate possession of the gifted interests.  However, even if such interests have vested, the Tax Court (and the appellate court in Hackl) listed numerous factors that led to the conclusion that the gifted interests were not present interests.  Unfortunately, from an estate and business planning perspective, those same factors are typically drafted into operating agreements with the express purpose of generating valuation discounts for estate and gift tax purposes.

So, there’s a trade-off between annual exclusion gifts and valuation discounts.  But, Wimmer may provide a way around the corner on that problem if the FLP generates income and it can be established that at least some of that income will consistently flow to the donees in ascertainable amounts.  Beyond that, there may be other ways to achieve both present interest status for gifts and valuation discounts for transfer tax purposes.  Clearly, from a present interest perspective, the key is to gift equity interests in an entity that give a donee the right to withdraw from the entity, have less restrictions on sale or transfer and make regular distributions to a donee.  Structuring to also take valuation discounts upon death could include drafting the entity’s operating agreement to specify that transferred interests are subject to put rights allowing the transferee the ability to force the entity or another transferee to repurchase the transferee’s interests at a particular price, after a specified date or upon the occurrence of a specified event. That seemingly provides the done with a present interest while preserving valuation discounts. 

In any event, a combined strategy of present interest gifting of entity interests with valuation discounting requires careful drafting.


Present interest gifting is possible via entity interests.  When valuation discounts upon death are also desired, the structuring and drafting becomes complex.  In Part Three, I will focus on additional income tax considerations involving income tax basis as well as income tax issues associated with gifting partnership interests.

September 13, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Friday, September 10, 2021

Gifting Assets Pre-Death - Part One


Proposed legislation that would decrease the federal estate tax exemption and the federal gift tax exemption is raising many concerns among farm and ranch families and associated estate and business planning issues.  For farmers and ranchers desirous of keeping the family business intact for the next generation, questions about gifting assets and business interests to the next generation of owners now are commonplace. 

Gifting assets before death – Part One of a series - It’s the topic of today’s post.

Federal Estate and Gift Tax - Current Structure

The current federal estate and gift tax system is a “coupled” system.  A “unified credit” amount generates and “applicable exclusion” of $11.7 per individual for 2021.  That amount can be used to offset taxable gifts during life or offset taxable estate value at death.  It’s and “either/or” proposition.  Any unused exclusion at the time of death can be “ported” over to the surviving spouse and added to the surviving spouse’s own applicable exclusion amount at death. 

However, some gifts are not “taxable” gifts for purposes of using up the unified credit and, in turn, reducing the amount of asset value that can be excluded from federal estate tax at death.

Gifting – The Present Interest Annual Exclusion

Basics.  “Present interest” gifts are not “taxable” gifts and do not reduce the donor’s unified credit.  The present interest annual exclusion amount is a key component of the federal gift tax.  I.R.C. §2503.  The exclusion is presently $15,000 per donee, per year. That means that a donor can make gifts of up to $15,000 per year, per donee (in cash or an equivalent amount of property) without triggering any gift tax, and without any need to file Form 709 – the federal gift tax return.  

Note:   Spouses can elect split gift treatment regardless of which spouse actually owns the gifted property. With such an election, the spouses are treated as owning the property equally, thereby allowing gifts of up to $30,000 per donee. Also, under I.R.C. §2503(e), an unlimited exclusion is allowed for direct payment of certain educational and medical expenses. In effect, such transfers are not deemed to be gifts.

The exclusion “renews” each year and is not limited by the number of potential donees.  It is only limited by the amount of the donor’s funds and interest in making gifts.  Thus, the exclusion can be a key estate planning tool by facilitating the passage of significant value to others (typically family members) pre-death to aid in the succession of a family business or a reduction in the potential size of the donor’s taxable estate, or both. But, to qualify for the exclusion, the gift must be a gift of a present interest – the exclusion does not apply to future interests.

Note:   A present interest gift is one that the recipient is free to use, enjoy, and benefit from immediately.  A gift of a future interest is one where the recipient doesn't have complete use and enjoyment of it until some future point in time. “Strings” are attached to future interest gifts.

Gifts to minors.  I.R.C. §2503(c) specifies that gifts to persons under age 21 at the time of the gift are not future interests if the property and the income from the gift “may be expended by, or for the benefit of, the donee before attaining the age of 21 years, and will to the extent not so expended, pass to the donee on his attaining the age of 21 years, and in the event the donee dies before attaining…age…21…, be payable to the estate of the donee or as he may appoint under a general power of appointment…”.  This provision contemplates gifts to minors in trust with a trustee appointed to manage the gifted property on the minor’s behalf.  But, to qualify as a present interest, the gift still must be an “outright” gift with no strings attached. 

Whether gifts are present interests that qualify for the annual exclusion has been a particular issue in the context of trust gifts that benefit minors. In 1945, the U.S. Supreme Court decided two such cases. In Fondren v. Comr. 324 U.S. 18 (1945) and Comr. v. Disston, 325 U.S. 442 (1945), the donor created a trust that benefitted a minor. In Fondren, the trustee had the discretion to distribute principal and income for the minor’s support, maintenance and education and, in Disston, the trustee had to apply to the minor’s benefit such income “as may be necessary for…education, comfort, and support.” In both cases, the Court determined that the minor was not entitled to any amount of a “specific and identifiable income stream.” So, no present interest was involved. The gifts were determined to be future interests.

What if a transferee has a right to demand the trust property via a right to withdraw the gifted property from the trust? Is that the same as outright ownership such that the gifted property would qualify the donor for an annual exclusion on a per donee basis?  In 1951, the U.S. Court of Appeals for the Seventh Circuit said “yes” in a case involving an unlimited timeframe in which the withdrawal right could be exercised without any time limit for exercising the right. Kieckhefer v. Comr., 189 F.2d 118 (7th Cir. 1951).  But in 1952 the U.S. Court of Appeals for the Second Circuit said “no” because it wasn’t probable that the minor would need the funds. Stifel v. Comr., 197 F.2d 107 (2d Cir. 1952).  In Stifel, the minor’s access to the gifted property was to be evaluated in accordance with how likely it was that the minor would need the funds and whether a guardian had been appointed.

The “breakthrough” case on the issue of gifts to minors and qualification for the present interest annual exclusion came in 1968.  In that year, the U.S. Circuit Court of Appeals for the Ninth Circuit, in Crummey v. Comr., 397 F.2d 82 (9th Cir. 1968), allowed present interest annual exclusions for gifts to a trust for minors that were subject to the minor’s right to demand withdrawal for a limited timeframe without any need to determine how likely it was that a particular minor beneficiary would actually need the gifted property. Since the issuance of the Crummey decision, the “Crummey demand power” technique has become widely used to assure availability of annual exclusions while minimizing the donee’s access to the gifted property.

Gifting – The Income Tax Basis Issue

In general, property that is included in a decedent’s estate receives an income tax basis in the hands of the heir equal to the fair market value of the property as of the date of the decedent’s deathI.R.C. §1014(a)(1).  However, the rule is different for gifted property.  Generally, a donee takes the donor’s income tax basis in gifted property.  I.R.C. §1015(a).  These different rules are often a significant consideration in estate planning and business transition/succession plans. 

With the current federal estate and gift tax exemption at $11.7 million for decedent’s dying in 2021 and gifts made in 2021, gifting assets to minimize or eliminate potential federal estate tax at death is not part of an estate or succession plan for very many.  But, if a current proposal to reduce the federal estate tax exemption to $3.5 million and peg the gift tax exemption at the $1 million level would become law, then gifting to avoid estate tax would be back in “vogue.”  However, legislation currently under consideration would change the basis rule with respect to inherited property.  The proposal is to limit the fair market at death income tax basis rule to $1 million in appreciated value before death, and apply a “carry-over” basis to any excess.  An exception would apply to farms and ranches that remain in the family and continue to be used as a farm or ranch for at least 10 years following the decedent’s death.  Gifted property would retain the “carry-over” basis rule. 

Another proposal would specify death as an income tax triggering event causing tax to be paid on the appreciated value over $1 million, rather than triggering tax on appreciated value when the heir sells the appreciated property.  If any of these proposals were to become law, the planning horizon would have to be reevaluated for many individuals and small businesses, particularly farming and ranching operations. 

Still another piece of the proposed legislation would limit present interest gifts to $10,000 per donee and $20,000 per donor on an annual (it appears, although this is not entirely clear) basis. 

Note:  At this time, it remains to be seen whether these proposed changes will become law.  There is significant push-back among farm-state legislators from both aisles and small businesses in general.


Even if the rules change surrounding the exemption from federal estate tax and/or the income tax basis rule at death, and/or the timing of taxing appreciation in wealth, gifting of assets during life will still play a role in farm and ranch business/succession planning.  A big part of that planning involves taking advantage of the present interest annual exclusion to avoid reducing the available federal estate tax exemption at death. 

September 10, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, August 22, 2021

Planning to Avoid Elder Abuse


Many people have had or will have a family member in need of in-home or nursing home care.  Medical issues are often frequently associated with advanced age.  Those issues can result in at least part-time care or, in some cases, a full-time in-home nursing aide or even institutionalized care. 

A significant concern of family members of a loved one requiring some level of nursing care, whether by an in-home aide or in a nursing home, is the potential for abuse, particularly financial abuse, of their family member.  What steps can be taken to minimize the potential for elder abuse? 

Planning steps to take to avoid elder abuse – it’s the topic of today’s post.

Tax Court Saga

A unique place to find an example to use for discussing elder abuse is in a U.S. Tax Court opinion.  But elder abuse was certainly involved in Alhadi v. Comr., T.C. Memo. 2016-74.  The case involved Dr. Marsh.  He was born into a Montana farm family in 1915.  After World War II, he moved to California and practiced optometry.  He never married and lived a frugal life in his small second story apartment.  He invested his money prudently and grew the sum to over $3 million. 

At age 85 Dr. Marsh fell and broke his hip.  He rehabilitated, but by the time he reached age 91 he could no longer drive, couldn’t prepare his own food and couldn’t go to the doctor by himself.  He suffered from hearing and vision loss and also had a stroke.  He was eventually diagnosed with dementia and cognitive decline.  His short-term memory was diminished, and he had trouble recalling details about his personal assets and finances.  He also suffered from incontinence, atrial fibrillation, congestive heart failure, hypertension, chronic back pain, and arthritis,

Dr. Marsh eventually outlived his siblings and had no other family members, and at age 91 was hospitalized again for his numerous conditions.  His doctor determined that he could not be discharged unless in-home care was arranged for him.  A hospital employee, Ms. Alhadi learned that Dr. Marsh wouldn’t be discharged without in-home care.  Even though the hospital had a policy that employees couldn’t solicit work from patients, Ms. Alhadi slipped a note to Dr. Marsh offering her services for in-home care.  He accepted her offer and she became his primary caregiver.  Dr. Marsh initially paid her by the hour, but then switched payment to a $6,000 per month amount – more than 50 percent above the going rate.  He also paid her an additional monthly amount for groceries.  Within a few months, she used the money she received from Dr. Marsh to put a down payment on a $1 million home and began to pressure him to help her with the mortgage payments.  Over the next few months, Dr. Marsh wrote her checks totaling $400,000.  She used the money to pay off her husband's $80,000 interest in their old home and to remodel her new home. Dr. Marsh also bought $7,000 worth of furniture for her, and she paid $8.,000 for a new stone façade, $34,000 for landscaping work at the new home and $73,000 for a new pool complete with a spa and a "therapeutic turtle mosaic."

Ms. Alhadi also convinced Dr. Marsh to pay $25,000 for a cruise.  She took him along but left him alone sitting in the sun while she spent time with her own children.  Dr. Marsh later couldn’t remember paying for the cruise and was surprised when he was shown the check he had written. 

Dr. Marsh had a niece that lived in Seattle that would call him each Sunday evening, but within a year of Ms. Alhadi becoming his primary caregiver, she encountered difficulty in reaching him.  Ultimately, neither she nor any other relatives could get in touch with Dr. Marsh.  Ms. Alhadi, would tell Dr. Marsh that she loved him and suggested that they get married.  She would sit in front of him and cry about her financial struggles. 

Ms. Alhadi divorced her husband, and in the divorce action didn’t disclose any of the money that she was being paid for her in-home care job.  She hired a tax preparer to prepare her 2007 return, but again didn’t disclose the income from her in-home care work.  However, on mortgage applications for her new home, she did disclose the income received from working for Dr. Marsh. 

By the end of 2008, Dr. Marsh had written checks to her totaling almost $800,000.  She then got Dr. Marsh to write her five more checks worth $100,000 each.  Because most of Dr. Marsh’s wealth was held in Vanguard Group mutual funds, a Vanguard representative questioned why five checks were written in a short timeframe.  On Vanguard’s recorded calls with Dr. Marsh, Ms. Alhadi could be heard in the background coaching him.  Vanguard suspected fraud, dishonored the checks and suspended his accounts. Vanguard also suspected elder abuse and sent a report to the California Department of Health and Human Services.  An investigator checked into the matter and learned about what had been happening.  Ms. Alhadi also took Dr. Marsh to an estate attorney to try to have him name her his agent under a power of attorney so that she could get the Vanguard accounts unblocked.  She also wanted Dr. Marsh to have a will prepared that named her as the beneficiary. 

Finally, the state filed a petition in state court to put Dr. Marsh under a temporary guardianship.  The court granted the petition in January of 2009 on two grounds – 1) his assets were at risk; and 2) he wasn’t being provided even a bare minimum of care.  The court’s description of his living conditions in his apartment were truly disgusting.  The next month, Dr. Marsh died.  Ms. Alhadi appeared at the funeral screaming and made an attempt to get into Dr. Marsh’s casket with him. 

In 2010, Dr. Marsh’s trust settled a lawsuit it had brought against Ms. Alhadi.  The trust recovered $310,000 in cash, but the home was lost to foreclosure, and she had spent the balance of the money.  Ultimately, the IRS caught up with Ms. Alhadi and sent her a notice of deficiency for 2007 and 2008 for over $1 million.  She claimed in Tax Court that the funds she received from Dr. Marsh were either loans or nontaxable gifts.  The Tax Court agreed with the IRS that they were neither.  Rather, the amounts totaling over $900,000 in checks were taxable income subject to self-employment tax.  The Tax Court noted that Dr. Marsh never referred to the amounts provided to her as anything other than compensation and that, in any event, she never had any intent to repay the amounts.  The funds were also not gifts because any donative intent on Dr. Marsh’s part was negated by undue influence.  The Tax Court also upheld penalties, including the fraud penalty of I.R.C. §6663

Avoiding Elder Abuse

The saga of Dr. Marsh and his in-home aide is a sorrowful tale.  What steps can be taken to minimize the likelihood of elder abuse happening to a loved one of yours?  Consider the following suggestions:

  • Keep your eyes and/or ears open. Be alert for situations where a vulnerable person can be taken advantage of.  Clearly, in Dr. Marsh’s situation, his niece should have taken the time to physically visit him.  A surprise visit might be the key to spotting abuse.
  • Stay on top of the cognitive ability of the family member. Cognitive ability is not always tied to age, but it’s a good idea to have cognitive ability professionally evaluated.  Those in cognitive decline can more easily be manipulated by others with nefarious goals.
  • Make sure you know the nature and extent of the loved one’s assets before in-home or nursing home care begins. Include all assets, including household and personal assets.  It’s the small things that be taken without anyone noticing.  The only way to determine if assets or funds are missing is to know what exists at the start.  Then, commit to a periodic review of income and assets. 
  • It might be a good idea to have a family member control the loved one’s mail. Setting up direct deposit for incoming checks, etc., can also be a good idea.
  • Monitor receipts. If an aide is buying groceries and supplies, require that receipts be retained and then commit to checking them at least periodically.
  • Negotiate a contract with the aide that builds in a vacation. During the time the aide is on vacation, make sure the substitute is not related to or a colleague of the normal full-time aide.  The vacation time can tend to reveal issues if the normal full-time aide is not there for several consecutive days.    
  • Make sure valuables are kept in a safety deposit box or in a safe that the aide can’t access.
  • Make sure that appropriate legal documents are in place. This includes a power of attorney for financial and health care decisions as well as a will or a trust. 


I am sure that the list of planning steps could include additional suggestions.  But the basic point is to stay on top of the situation and not leave the family member to the complete discretion of an aide.  That can go along way toward avoiding the disastrous elder abuse situation that befell Dr. Marsh.

August 22, 2021 in Estate Planning | Permalink | Comments (0)

Thursday, August 19, 2021

The Illiquidity Problem of Farm and Ranch Estates


Concerns about the possibility of a reduction in the federal estate tax exemption is significant in agriculture.  If a significant drop in the exemption would impact the farming or ranching business, is there a plan in place to pay the resulting tax?  It’s a real problem because ag estates are typically illiquid – as you’ve probably heard it said, ag estates are often “asset rich, but cash poor.” 

The issue of illiquidity in an ag estate, and some thoughts on what can be done about it – it’s the topic of today’s post.

The Problem of Illiquidity

Farmers and ranchers engaged in the production of agricultural commodities often face the same estate and succession planning problems that confront all businesses.  But there are unique issues that face those engaged in agriculture, and the law often treats farm and ranch businesses differently than it does other business types. In numerous other posts, I have highlighted these differences.  Entity structuring can aid in taking advantage of some of those differences.  But, those differences often don’t provide any relief from a common issues for agricultural estates – that of illiquidity.  capital assets, but little cash or assets that are readily convertible into cash.  If the federal estate tax exemption falls significantly as current proposed legislation promises to do starting next year, an estate’s tax bill could pose a significant burden.  That raises a question – has the estate plan been structured in a manner that provides liquidity to pay costs associated with death?  Planning for the potential problem of illiquidity at death That means that planning for this potential problem at should be part of the farm and ranch estate plan.

What is at the heart of the liquidity (or the lack thereof) issue?  Farming and ranching often involves a substantial investment in farm capital assets (land, buildings, equipment, etc.).  It also commonly involves large borrowings that can carry significant interest charges.  This is typically coupled with fluctuating income (or loss) from year-to-year because of diverse weather and market conditions.  On the positive side, ag land values tend to rise over the long-term, but short-term shocks to the land market do occur and can present timing issues for the estate planner.  All of these factors require the use of estate planning strategies that will minimize death taxes and estate administration costs, preserve liquidity of the estate and provide for a systematic and economic disposition (or continuance) of the farm business on the death of the farm owner. In addition, it’s important that the estate plan take full advantage of the ag-tailored tax provisions designed to alleviate the tax burdens of farmers.

Illiquidity of the farm or ranch estate makes it difficult for the estate executor to find readily available cash, or assets that are readily convertible to cash, with which to pay monetary legacies (such as the buy-out of an off-farm heir), administration costs, debts, taxes and other estate obligations. Planning to improve the liquidity of the estate before death can prevent losses which might otherwise be incurred through a quick or forced sale of estate assets to meet post-death obligations.  It can also avoid the necessity of borrowing funds and can avoid post-death disputes (and possible litigation) among beneficiaries over the sale of assets.  Planning can  also help minimize the resulting income and capital gain taxes triggered by assets sold to generate funds to pay obligations associated with death. 

Pre-Death Liquidity Planning 

Where an objective of the estate plan is to preserve as much of the farm business in the hands of the farmer’s heirs, proper planning for liquidity can minimize or eliminate the sale of farm assets. Various steps can be taken during the lifetime of the farmer or rancher to improve the liquidity of the estate. Some common planning steps include deliberately building up liquid assets; buying life insurance; properly using buy-sell agreements; and utilizing other available techniques to reduce the potential estate tax liability at death. 

One approach to liquidity planning is to make a current estimate of existing monetary obligations that the estate is expected to face upon death.  Given the current uncertain status of the transfer tax system, the estimate should involve various projections based on anticipated levels of the federal estate tax exemption and applicable rates at death, with those estimates serving as a rough guide to the amount of funds needed in the estate. The plan should be reviewed periodically to account for changes in asset values.

During profitable years, post-tax investments can provide additional liquidity.  While farmers and ranchers tend to reinvest any surplus back into farm/ranch capital assets, a liquidity planning strategy might be to invest surplus funds in liquid assets such as interest-bearing bank deposits and marketable stocks and bonds. Likewise, surplus funds could be invested in other agricultural real estate with a potential for appreciation, such as from development, with an eye toward later sale.  This could be accomplished without interfering with any objective to keep the original farming operation in-tact for subsequent generations of the farm family. 

Life insurance under a policy on the life of the estate owner can provide an appropriate amount of cash for the estate.  Those funds can then be used to meet estate obligations upon death. This can substantially improve estate liquidity. But care must be exercised to minimize or eliminate estate tax on the life insurance proceeds.  This can be accomplished by properly structuring the ownership of the policy and the beneficiary designation(s). 

Where the farm is operated in partnership or corporate form, a buy-sell agreement among partners or stockholders is often a good planning tool.  A well-drafted buy-sell agreement with well-defined triggering events that is properly funded (likely with life insurance) can ensure that there will be a buyer for the decedent’s ownership interest upon death.  Likewise, a buy-sell agreement can ensure that the estate will have liquid funds from the sale of the decedent’s interest in the farming/ranching entity. 

There are also provisions included in the tax Code that can aid in providing liquidity at death.  Special use valuation allows the agricultural land in the estate to be valued at its use value for agricultural purposes rather than fair market value at death.  I.R.C. §2032A.  There are many rules that must be satisfied for the executor of the decedent’s estate to make a special use valuation election and reduce the land value in the estate by up to (for 2021) $1,190,000.  In addition, the family (knowns as “qualified heirs”) must continue to farm the elected land for 10 years (and, possibly, 12 years) after the decedent dies. 

Another Code provision allows the decedent’s estate to pay federal estate tax in installments over 15 years coupled with a special rule for interest payments.  I.R.C. §6166Normally, federal estate tax is due nine months after the date of the decedent’s death.  But, again, this is a complex provision that requires proper pre-death planning for the estate executor to utilize it. 


The possibility of a decline in the federal estate tax exemption raises real concerns about liquidity in an ag estate.  While the estate of a farmer or rancher valued at $12 million net worth at death would presently have no federal estate tax bill, for instance, that same estate would likely owe more than $2 million in federal estate tax if the exemption were to drop to $3.5 million as currently proposed.  That makes liquidity planning very important to farm and ranch families – particularly those intending on keeping the family business intact for future generations. 

August 19, 2021 in Business Planning, Estate Planning | Permalink | Comments (1)

Monday, August 16, 2021

Ag Law Summit


On Friday, September 3, I will be hosting an “Ag Law Summit” at Nebraska’s Mahoney State Park.  This one-day conference will address numerous legal and tax issues of current relevance.  The conference will also be broadcast live online.

The Ag Law Summit – it’s the topic of today’s post.

Topics and Speakers

Proposed legislation and policy implications.  The day begins with my overview of what’s happening with proposed legislation that would impact farm and ranch estate and business and income tax planning.  Many proposals are being discussed that would dramatically change the tax and transfer planning landscape.  From the proposed lowering of the federal estate tax exemption, to the change in the step-up basis rule at death, to changes in the rules governing gifts, there is plenty to discuss.  But, the list goes on.  What about income tax rates and exemptions?  What about capital gain rates?  There are huge implications if any of these changes are made, let alone all of them.  What does the road forward for ag producers look like?  What changes need to be made to keep the family farm intact?  The discussion during this session should be intense!

State ag law update.  Following my discussion of what is going on at the federal level, the discussion turns to the state level.  Jeff Jarecki, an attorney with Jarecki Lay & Sharp P.C. out of Albion and Columbus, NE will team up with Katie Weichman Zulkoski to teach this session.  Katie is a lawyer in Lincoln, NE that works in lobbying and government affairs.  They will provide a NE legislative update specific to agriculture and review significant federal developments that impact agriculture – including the current Administration’s proposed 30 by 30 plan.

Farm succession planning.  After the morning break.  Dan Waters, a partner in the Lamson, Dugan & Murray firm in Omaha will get into the details of the mechanics of transitioning a farming/ranching business to subsequent generations.  How do you deal with uncertainty in the factors that surround estate and business planning such as commodity prices, land values, taxation, and government programs?  This session will examine various case studies and the use of certain tools to address the continuity question. 

Luncheon.  During the catered lunch, the speaker is Janet Bailey.  Janet has been involved in ag and food policy issues for many years and has an understanding of rural issues.  Her presentation will be addressed to legal and tax professionals that represent rural clients.  How can you maintain a vibrant practice in a rural community?  What other value does a rural practice bring to the local area?  The session’s focus is on the importance of tax and legal professionals to small towns in the Midwest and Plains.

Special use valuation.  If the federal estate tax exemption is reduced, the ability to value the ag land in a decedent’s estate at it’s value for ag purposes rather than fair market value will increase in importance.  During this session, I will provide an overview of the key points involved in this very complex provision of the tax Code.  What steps need to be taken now to ensure that the eventual decedent’s estate qualifies to make the special use valuation election on the federal estate tax return?  How do farmland leases impact the qualification for the election and avoidance of recapture tax being imposed?  Those are just a couple of the topics that will be addressed.

Ag entrepreneur’s toolkit.  This final session for the day will cover the business and tax law feature of limited liability companies.  The session is taught by Prof. Ed Morse of the Creighton University School of Law and Colten Venteicher, an attorney with the Bacon, Vinton, Venteicher firm in Gothenburg, Nebraska.  They will address some of the practical considerations for how to properly use the LLC in the context of farm and ranch businesses. 

Online Broadcast

The Summit will be broadcast online for those unable to attend in-person.  Washburn Law is an NASBA CPE provider. The program will qualify in the taxes area for the minutes noted next to each presentation for both the online and in-person attendees.  The goal of the Summit is tto continue providing good legal and tax educational information for practitioners with a rural client base.  That will aid in the provision of excellent legal and tax services for those rural clients and will, in turn, benefit the associated rural communities.

We hope that you will join us either in-person or online for the Summit on September 3.  For more information and to register, click here:  https://www.washburnlaw.edu/employers/cle/aglawsummit.html

August 16, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (2)

Saturday, August 14, 2021

Farm Valuation Issues


It is not uncommon for farmers to encounter the need to have their farm assets valued.  Lenders, for instance, have a keen interest in understanding the value of assets utilized in the farming operation.  Also, valuation is an issue when estate, business and succession planning is engaged in.  What are the valuation issues that are associated with estate and business planning for farmers and ranchers? 

Valuing farm and ranch assets – it’s the topic of today’s post

Real Estate Valuation

Number of acres.  Farmland is typically the asset of largest value in a farmer’s estate.  That makes it important to arrive at an accurate measure of market value.  The starting point is to correctly denote the number acres.  What are the total acres?  What are the taxable acres?  What are the tillable acres?  Often “total acres” defines the total area within a legal description and makes no reference to quality or any restrictions on title, such as easements.  “Taxable acres” is tied to assessed acres, and “tillable acres” are those that are used in crop production.  Recent developments in technology have made it easier to more accurately determine tillable acres, and certifications to the USDA can also determine tillable acres.  But, “tillable acres” does not include areas that can’t be farmed – waterways, fence rows, timber land, creeks etc.  Make sure that the valuation is accurately measuring the type of land at issue and breaks it out properly. 

Legal descriptions.  Make sure that legal descriptions are accurate.  Local government offices such as the County Recorder and County Auditor can be helpful on this.  They can review a legal description and should be able to determine if any part of the legal description has been transferred.  They can also help to determine how the land at issue is owned – individually, in some form of entity, in fee simple, in life estate, etc. 

Zoning.  For farmland, zoning issues are usually not much of an issue.  But, if an airport is nearby there could be issues that come into play that would restrict the height of structures on the property.  That could impact the ability to erect a cell tower, aerogenerator, or even impact the use of drones on the property. 

Some rural counties do have zoning rules that separate farm uses from non-farm rural homeowners.  When those rules apply, they can impact large-scale confinement operations.  However, each state has a right-to-farm law and in some states, counties do not have the authority to zone “agriculture.”  Of course, the key to that issue is what constitutes “agriculture.”  That’s an issue that either state law defines, or the courts have determined the parameters of in judicial opinions. 

Appraisal.  Getting some type of formal valuation of farmland is critical to gaining a proper understanding of the land’s worth for planning purposes.  One approach is to use a certified appraisal, while another approach is to use an estimate of selling price based on comparable sales.  In any event, some attempt needs to be made to get an accurate view of the land’s fair market value.  Land markets are tricky, and appraisals have their drawbacks and may need to be supplemented with additional data that might not be incorporated into the appraisal, such as local buyer strength, distance to local markets and similar features.  There can also be some unique situations that provide inaccurate data about land values.  Discount the reliability of data involving individual sales and look at larger pool of sale data from your area or region.  The state land-grant university ag land sale/survey data is a good place to start.  That data is typically broken down by region of the state and by land type and whether the land is irrigated or not.  The USDA/ERS (Economic Research Service) also provides survey data of land values on its website.  


Valuing livestock is usually not as difficult as valuing land.  Daily market prices exist for just about all types of livestock.  The key is to make sure to understand and properly note differences in livestock with respect to gender, and whether the livestock are to be used for breeding, dairy or meat production purposes.  So, if you know your categories and weight ranges in those categories you will get an accurate picture of value.  Also, livestock can be affected by health issues and catastrophes that can wipe out value very quickly. 


It is easy to come up with an accurate value for most agricultural crops.  They are valued in a similar manner to that of livestock.  There is a daily market price that is readily accessible.  But, factors that can influence the bottom line regardless of the daily market price include quality and the cost to deliver the commodity to market. 

Valuing fruits and vegetable can be a bit trickier.  Most of those types of agricultural crops do not have any reliable daily market price, and there may not be any type of reasonable guarantee that the fruit or vegetable can be sold at its highest valued use.  Many of these crops are sold via production contract, so that can determine value, but there are risks associated with production contracts that can affect value, such as the contracting processor terminating the contract. 

Also, valuation issues can arise when growing crops need to be valued, perhaps because of the death of the farmer.  Some states, such as Iowa, have specific regulations that apply to establish the value of growing crops.  The IRS also has regulations that provide guidance in this area.  Relatedly, predicting harvest yields is highly speculative.  But it might be possible to use the amount of the potential harvest that is insured as a basis for determining a yield when valuing a growing crop.


Under the Obama/Biden Administration, the Treasury Department issued proposed regulations that that would have denied minority discounts in family-controlled entities.  Thankfully, the Trump Administration directed the Treasury to repeal those regulations.  But, there is a much greater likelihood now that those regulations will come back.  If they do, that will be problematic for many farming and ranching operations – particularly so if the exemption from the federal estate tax is reduced significantly as is currently proposed.

In recent decades, discounts for minority interest and lack of marketability have been recognized by the courts as a necessary element in arriving at the true fair market value of a gifted or inherited interest in a family business.  But, if the valuation regulations return they would foreclose many, if not all, of those planning opportunities.  Those regulations represent the Treasury’s attempt to redefine value in just about any manner it desires, and is a movement away from the time-tested (and judicially validated) willing-buyer/willing-seller test.  If the Treasury does resurrect those rules and finalize them in the form they had previously been in, you can expect court challenges that will take years to arrive at a final determination on their validity.


Valuation issues arise often in agriculture. Land is the big item to determine value accurately to the best of one’s ability.  Crops and livestock are usually fairly easy to get an accurate valuation, at least for Midwest type agricultural crops.  But, as always, good valuation numbers will help for financial, tax, and estate, business and succession planning purposes.  Valuation issues will become a bigger issue if the federal transfer tax rules change significantly. 

August 14, 2021 in Business Planning, Estate Planning, Real Property | Permalink | Comments (0)

Thursday, July 15, 2021

Montana Conference and Ag Law Summit (Nebraska)


The second of the two national conferences on Farm/Ranch Income Tax and Farm/Ranch Estate and Business Planning is coming up on August 2 and 3 in Missoula, Montana.  A month later, on September 3, I will be conducting an “Ag Law Summit” at Mahoney State Park located between Omaha and Lincoln, NE.

Upcoming conferences on agricultural taxation, estate and business planning, and agricultural law – it’s the topic of today’s post.


The second of my two 2021 summer conferences on agricultural taxation and estate/business planning will be held in beautiful Missoula, Montana.  Day 1 on August 2 is devoted to farm income taxation, with sessions involving an update of farm income tax developments; lingering PPP and ERC issues (as well as an issue that has recently arisen with respect to EIDLs); NOLs (including the most recent IRS Rev. Proc. and its implications); timber farming; oil and gas taxation; handling business interest; QBID/DPAD planning; FSA tax and planning issues; and the prospects for tax legislation and implications.  There will also be a presentation on Day 1 by IRS Criminal Investigation Division on how tax practitioners can protect against cyber criminals and other theft schemes. 

On Day 2, the focus turns to estate and business planning with an update of relevant court and IRS developments; a presentation on the farm economy and what it means for ag clients and their businesses; special use valuation; corporate reorganizations; the use of entities in farm succession planning; property law issues associated with transferring the farm/ranch to the next generation; and an ethics session focusing on end-of life decisions.

If you have ag clients that you do tax or estate/business planning work for, this is a “must attend” conference – either in-person or online.

For more information about the Montana conference and how to register, click here:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html


On September 3, I will be holding an “Ag Law Summit” at Mahoney St. Park, near Ashland, NE.  The Park is about mid-way between Omaha and Lincoln, NE on the adjacent to the Platte River and just north of I-80.  The Summit will be at the Lodge at the Park.  On-site attendance is limited to 100.  However, the conference will also be broadcast live over the web for those that would prefer to or need to attend online.

I will be joined at the Summit by Prof. Ed Morse of Creighton Law School who, along with Colten Venteicher of the Bacon, Vinton, et al., firm in Gothenburg, NE, will open up their “Ag Entreprenuer’s Toolkit” to discuss the common business and tax issues associated with LLCs.  Also on the program will be Dan Waters of the Lamson, et al. firm in Omaha.  Dan will address how to successfully transition the farming business to the next generation of owners in the family. 

Katie Zulkoski and Jeffrey Jarecki will provide a survey of state laws impacting agriculture in Nebraska and key federal legislation (such as the “30 x 30” matter being discussed).  The I will address special use valuation – a technique that will increase in popularity if the federal estate tax exemption declines from its present level.  I will also provide an update on tax legislation (income and transfer taxes) and what it could mean for clients. 

The luncheon speaker for the day is Janet Bailey.  Janet has been deeply involved in Kansas agriculture for many years and will discuss how to create and maintain a vibrant rural practice. 

If you have a rural practice, I encourage you to attend.  It will be worth your time. 

For more information about the conference, click here:   https://www.washburnlaw.edu/employers/cle/aglawsummit.html


The Montana and Nebraska conferences are great opportunities to glean some valuable information for your practices.  As noted, both conferences will also be broadcast live over the web if you can’t attend in person.   

July 15, 2021 in Bankruptcy, Business Planning, Environmental Law, Estate Planning, Income Tax, Real Property, Regulatory Law, Water Law | Permalink | Comments (0)

Thursday, July 1, 2021

Reimbursement Claims in Estates; Drainage District Assessments


Two interesting issues that sometimes come up in the agricultural setting are those involving claims in a decedent’s estate as well as those involving drainage district assessments.  Matters involving ag estates are often difficult because family members tend to be involved.  Drainage issues can also become contentious and can become tangled in numerous ways.

Reimbursement claims in an estate and drainage district assessments – it’s the topic of today’s post.

Former Trustee Fails to Establish Claims for Reimbursement

In Re Estate of Bronner, No. 20-0747, 2021 Iowa App. LEXIS 488 (Iowa Ct. App. Jun. 16, 2021)

A married couple as operated a 276-acre family farm.  Upon the husband’s death, his one-half interest in the farm passed to a family trust for his wife for life, and named a son as trustee.  Upon the surviving spouse’s death, the trust would terminate with the remaining assets distributed to the couple’s then surviving children.  The surviving spouse and trustee son continued to operate the trust’s farmland.  In addition, the trustee rented other land from his mother for his own farming operation, and he paid his annual farm rent by depositing into his mother’s account the amount necessary to cover the loan payment and real estate taxes on the trust’s farmland.  The trustee also made insurance premium payments. 

Ultimately, the surviving spouse’s cognitive function declined, and she was no longer competent to enter into contracts.  The trustee then arranged for the sale of a 76.11-acre parcel of trust farm property to an adjoining landowner through a private sale for $275,000.  The net sale proceeds were paid to reduce the amount owed on the existing farm loan.  Shortly before the surviving spouse’s death, another son sued the trustee for elder abuse, but later agreed to dismiss his claim in exchange for a court-appointed guardian and conservator for his mother.  When the surviving spouse died, the trustee was appointed executor of her estate.  The other son sued to remove the trustee son as executor, alleging that he breached his fiduciary duties as trustee by paying farm rent at less than market value and in selling the 76.11-acre parcel of land for less than its market value. 

The trial court found that the trustee had breached his fiduciary duties and removed him as trustee.  He was not compensated for his services.  He was also removed as executor.  He then sued to recover for expenditures he made on behalf of his mother and the family trust totaling over $199,000 for farm maintenance/capital improvements; taxes and insurance; appraisal costs; costs associated with prior litigation; and funeral and nursing home/medical expenses.  The trial court denied the claims for maintenance and capital improvements, and the appellate court affirmed noting that most of the expenses went to improve his own farming operations or to benefit himself personally, and the invoices he submitted did not establish that he paid the expenses.  The appellate court also affirmed the trial court’s denial of reimbursement for taxes and insurance as they were considered part of his farm rent payments and the evidence showed that some were paid by the estate.  The appellate court also affirmed the trial court’s denial of appraisal costs because the costs didn’t benefit the trust, and the trial court’s refusal to allow reimbursement for legal expenses because the expenses were court-ordered as part of prior litigation.  The former trustee/executor also failed to substantiate that he had paid funeral expenses, and the appellate court affirmed the trial court’s decision to he was not entitled to reimbursement of these costs. 

Observation:  Keeping good records of transactions personally entered into on behalf of an estate or trust is an essential part of successfully being reimbursed for expenses incurred. 

Drainage District Incorrectly Makes Improper Assessment

Union Pacific Railroad Co., et al. v.  v. Drainage District 67 Board of Trustees, No. 20-0814, 2021 Iowa App. LEXIS 458 (Iowa Ct. App. Jun. 16, 2021).

In 1913, a wholly owned subsidiary of the plaintiff built a railway within its right-of-way.  The right-of-way became included in the defendant’s drainage district that was established in 1915.  State law requires drainage districts to keep any improvements in good condition and to pay for repairs, and when a drainage district has insufficient funds to pay for a repair, it must assess the costs of repairs to the property located within it in proportion to the benefit the land receives from the improvement.  A classification of benefit remains the same unless the drainage district reclassifies the land. A reclassification commission determines the percentage of actual benefits received by each tract of land and makes an equitable apportionment of the costs of repairs.  Apportionment of costs must be made strictly in accordance with the benefits reasonably expected or actually enjoyed. 

The defendant constructed an artificial tile to drain the agricultural lands in the district with the main tile crossing the railroad’s right of way.  The railroad had been originally assessed 5.81 percent for its share of the drainage benefits in the district.  In 2018, the defendant discovered that tile needed repaired or replaced, including a collapse in the tile under the plaintiff’s tracks that, if not repaired, would cause soil to enter the main tile.  To comply with federal safety requirements, the portion of the repair running under the right-of-way required steel casing and mechanical restrained leak resistant joints.  Use of these materials approximately doubled the cost of using just corrugated plastic pipe.  The drainage district received a base bid price of $200,891 for the project.  Of that figure, $98,343 was for items necessary to prevent erosion at the railroad crossing – about 49 percent of the project cost.  The reclassification commission found that about one-half of the construction costs resulted from federal regulations and determined that the railroad would receive 100 percent of the benefit of compliance.  Thus, the reclassification commission recommended that the railroad be assessed one-half of the total cost of repair. 

At a public hearing, the railroad objected to the assessment, but the defendant approved it.  The plaintiff sued, and the trial court noted that the defendant had the authority to modify an assessment if there was evidence of an erroneous assessment or inequitable apportionment.  However, the trial court determined that the plaintiff had satisfied its burden to show that the cost had not been properly assessed.  Specifically, the trial court found that the defendant had reclassified the land based on “extra costs” driven by compliance with federal requirements that were not a benefit to the plaintiff so as to lower the assessments to other lands in the district.  The appellate court affirmed the trial court’s award of summary judgment for the plaintiff, noting that construction costs are not benefits that may be considered in a reclassification, nor are the costs of federal compliance.


The law intersects with agriculture in many ways.  Sometimes production activities are involved, sometimes the two meet at the point of family relationships and transactions, and other times it’s a matter of only tangential connections that can ultimately have an impact on production activities.  Often, state law is involved.  The two cases discussed in today’s post are an illustration of the myriad of ways that the law can touch agriculture and those involved in it.

July 1, 2021 in Estate Planning, Regulatory Law | Permalink | Comments (0)

Friday, May 21, 2021

Ohio Conference -June 7-8 (Ag Economics) What’s Going On in the Ag Economy?


The first of two summer conferences focusing on agricultural taxation and farm/ranch estate and business planning sponsored by Washburn Law School is coming up soon on June7-8. The live presentation will be at the Shawnee Lodge and Conference Center near West Portsmouth, Ohio.  Attendance may also be online because we will be broadcasting the conference live.

This year’s conference includes a component focusing on the farm economy.  I want to focus on that presentation for today’s article.  Understanding ag economics is critical to a complete ability to represent a farmer or rancher in tax as well as estate/business planning. 

The farm economy and the upcoming Ohio conference – it’s the focus of today’s post.

The Ag Economy

As is well known the general economy is struggling.  Of course, the struggles are related to the economy trying to recover from the various state-level shut-downs.  But what about the ag economy?  Understanding the economics that farm and ranch clients are dealing is critical for tax practitioners and those that advise farmers and ranchers on estate and business planning matters.

So, what are the key points concerning the farm economy right now that planners must understand? 

Net farm income.  For starters U.S. net farm income was higher in 2020 than it was in 2019.  When government payments are included, net farm income was 46 percent higher than in 2019 representing the fourth highest amount for any year since 1970. That’s good news for ag producers, rural communities and the practitioners that represent them.  However, it’s also important to understand that 38 percent of the total amount was from government payments and not the private marketplace.  That’s also a record – and not a good one.  What government giveth, government can taketh away. 

Earlier this year, USDA projected net farm income to drop eight percent compared to 2020.  But, even with that drop, net farm income would still be 21 percent higher than the 2000-2019 average.  So far this year grain prices for the major row-crop commodities (corn, soybeans and wheat) have been soaring.  These prices have been driven by strong export demand, tight stocks, weather concerns in South America and the U.S. economy coming out of the various state-level shutdowns. 

Cattle market.  So far this year, the cattle market has shown improved beef demand as restaurants reopen and exports have been strong.  There is also a smaller 2021 calf crop.  However, there are challenges on the processing side of the equation with capacity issues and higher feed prices presenting difficulties.  In addition, drought in cattle country will always be a concern. 

Dairy.  As for the dairy industry, demand is showing greater strength and dairy prices are increasing.  This can also be a resulting impact of the loss of numerous dairy farms in recent years that lowers production.  However, feed cost is wiping out all of the impact of higher dairy prices.   

Exports.  In 2020, total ag exports were also seven percent higher than they were in 2019.  U.S. ag exports to China alone were 91 percent higher in 2020 than they were in 2019, with total ag exports to China being higher in 2020 than at any point during the Obama Administration (or any prior Administration).  China is a critically important market for U.S. ag producers.  China has approximately 20 percent of global population but only seven percent of the world’s arable land.  China must import food from elsewhere.  The Trump Administration got serious with China’s global trade conduct, imposed tariffs and other sanctions against it to the benefit of U.S. agriculture.  Whether this pattern continues is an open question.

So far in 2021, total U.S. ag exports are up 24 percent compared to last year.  A large part of that is due to the increased level of exports to China.  But, there are numerous other ag export markets around the world to keep an eye on.

Accounting.  What about the farm balance sheet?  How is it looking.  For starters, U.S. farmland values continue to hold steady if not slightly higher.  The primary influencers of land values are commodity prices, government support programs, the supply of land, interest rates and inflation in the general economy.  Shocks to one or more of those factors could impact land values significantly.

Farm working capital has seen four straight years of increases after reaching a low point in 2016.  However, total farm debt continues to inch upward the U.S. farm debt to asset ratio is at its highest point in about 12 years (though still far below where it was during the height of the farm debt crisis of the 1980s.  Overall, farm balance sheets (especially for crop producers) have improved primarily because of higher government payments, higher commodity prices and strong land values.   

Prognosticating the Future

What does the future hold for the agricultural sector in the U.S.?  For starters, there is a different administration consisting largely of retreads that have been in the bureaucratic swamp for decades.  They love to regulate economic activity.  While taxpayer dollars may still flow to the sector, that doesn’t mean it will be to support traditional and “ad hoc” farm programs.  It’s more likely that taxpayer dollars will flow to support “food stamps” (remember, a record number of people were on food stamps the last time the current USDA Secretary held the position) and “rural development” and conservation programs.  Of course, with taxpayer dollars flowing to support conservation activities on farms and ranches comes regulation of private property. 

The next Farm Bill comes up in 2023.  What will be the focus of the debate?  Of course, much depends on the outcome of the 2022 mid-term elections.  Will there be an examination of the existing farm programs and how they apply to large farms compared to smaller ones?  Will there be an even greater focus on the environment?  Will the “waters of the United States” (WOTUS) rule be revisited yet again?  What about efforts to regulate carbon?  What about the illegal immigration issue and the current policy fostering a wide-open border?  What about ethanol production?  Recently, the Iowa Governor was quoted as saying, “Every day under normal circumstances hunger is a reality for one in nine Iowans.”  Iowa prides itself is being the nation’s leader in ethanol production.  In light of that, let the Governor’s quote sink-in.  Also, recall where the current USDA Ag Secretary is from. 

As noted above, ag trade and exports is in a rather good spot right now.  There was an emphasis on bilateral rather than multilateral trade agreements.  Will that continue?  Probably not.  It’s likely that there will be an emphasis on rejoining various multilateral trade agreements.  What will be the impact on U.S. ag?  What about China?  It now has more leverage on trade deals with the U.S. 

There are always external factors and policies that bear on the bottom-line of agricultural producers.  What are those going to be?  In 2015, the Congress passed, and the President signed into law, a $305 billion infrastructure bill.  Now, the present (old) Administration is at it again wanting to spend taxpayer dollars on “infrastructure.” I guess that’s an admission that the 2015 bill didn’t work – or maybe the new push for another bill is just an attempt to throw money around to potential voters. 

Another factor influencing farmers and ranchers is tax policy.  The potential for increased income and capital gain rates, the removal of “stepped-up” basis at death, higher estate and gift tax rates coupled with lower exemptions, and a higher corporate tax rate is significant. 

In the general economy, inflation and unemployment are lurking.  Fuel (and other input) prices are up in some places by 50 percent since the beginning of the year – a significant input cost for ag producers.  That, coupled with record taxpayer dollars flowing into the sector are being capitalized into higher food prices.  Providing lower-income people with non-taxable cash has caused them not to seek jobs and has caused unemployment to be higher than what it otherwise would be.  The economy is presently characterized by a high level of job openings and high unemployment at the same time.  Let that sink in. 

As the Congress tosses around trillion-dollar spending bills, it represents spending money that the government doesn’t have.  So, the government just makes more by printing it (or borrowing it).  The influx of money in the economy makes the dollars that are already there worth less. Remember, the promise was that “no one making less than $400,000 would have their taxes go up.”  Ok, but the money you have in your pocket is worth less.  Same difference? Not quite.  Inflation deals more harshly with lower-income persons than it does with someone of greater wealth and with higher income.  Even without factoring in the rise in fuel and food prices, inflation was at 4.2 percent in April, the sharpest spike since 2008. 

What do these external factors mean for agriculture?  Any one of them can be bad.  A combination of them can be really bad.  Now is not the time to be buying more things on credit.  It’s time to be prudent with the income that is presently there.  Pay-off debt.  Tidy-up estate plans.  Righten the “ship” and get ready.  The ride could get rough.


Join us at the Ohio conference either in person or via the online simulcast and join in the discussion.  You don’t want to miss this one.  For more information and to register, you can click here:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html 

May 21, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Sunday, May 16, 2021

Intergenerational Transfer of Family Businesses with Split-Dollar Life Insurance


Last week, the U.S. Tax Court, in Morrissette v. Comr., T.C. Memo. 2021-60, decided a case involving an intergenerational transfer of a closely-held family business and the “split-dollar” life insurance technique.  There are some good “take-home” points from the case that show how the use of the technique can work in a complicated estate plan involving a family business where the intent is to keep the business in the family for multiple generations.

Estate Planning with the split-dollar life insurance technique – it’s the topic of today’s post.

Split-Dollar (In General)

In general, a split-dollar life insurance plans exists when two persons enter into an agreement to share both the premiums due and the proceeds receivable on a whole life policy.  See, e.g., Treas. Reg. 1.61-22(B)(1).  This is usually accomplished is by an employer entity splitting premiums and proceeds with an employee.  The employee either pays premiums for his portion (via a loan from the employer) based on the one-year cost of term insurance or pays income tax on the employer’s payment of such amount.  See Rev. Rul. 64-328, 1964-2 C.B. 11.  The advantage is that the employee is responsible for only the cost of pure life insurance protection.  That cost is either determined by the PS58 Cost Table that is published in Rev. Rul. 55-747, 1955-2 C.B. 228, or if it is less, by the insurance company’s premium tables for one-year term insurance of standard risks.  Rev. Rul. 66-110, 1966-1 C.B. 12.   Often, the employee has the option to continue the policy when the agreement terminates.  If the employee dies, the named beneficiary receives a tax-advantaged death benefit.   

The split-dollar technique is sometimes used by large estates in an attempt to minimize taxes at death, often in conjunction with an irrevocable life insurance trust (ILIT).  It can also be used as a funding mechanism for a buy-sell agreement in a closely-held family business where the goal is to maintain family ownership of the business over multiple generations.  But split-dollar arrangements are heavily regulated and specific rules must be followed precisely. 

The Morrissette Estate Plan

Arthur Morrissette founded International Moving Company (Interstate Van Lines) in 1943. He and his wife established revocable trusts in 1994 and funded the trusts, at least in part, with company stock.  The trusts directed that the company stock pass to qualified subchapter S trusts (QSSTs) for the benefit of their sons, and then to trusts for the benefit of their grandchildren. 

After Arthur’s death, his surviving spouse established a plan to secure the funds to pay the estate taxes imposed on the stock passing via the QSST trusts to her sons and grandchildren. She first created three” dynasty” insurance trusts (irrevocable life insurance trusts (ILITs)) – one for each of her sons and their families.  The ILITs and the sons entered into shareholder agreements which set forth arrangements whereby the ILITs would purchase the stock held by a son’s QSST upon the son’s death.   To fund the buyouts, each ILIT secured a life insurance policy on the lives of the two other sons via a cross-purchase buy-sell arrangement.  Ultimately, the three ILITs purchased a total of six policies.

The surviving spouse arranged to pay all the premiums for the policies in lump sums out of her revocable trust. The lump-sum amounts that she advanced to pay premiums on the policies were designed to be sufficient to maintain the policies for her sons' projected life expectancies (which at the time ranged from approximately 15 to 19 years).  The ILITs would ultimately acquire the stock of QSST trusts for the benefit of her grandchildren and subsequent generations, and were designed to not be subject to federal estate tax.

The surviving spouse advanced approximately $29.9 million to make lump sum premium payments on policies insuring the lives of her three sons. The financing for these life insurance policies was structured as “split-dollar arrangements,” meaning that the cost and benefits would be split between the trusts. When she paid a lump sum amount to cover the premiums on the policies, the policies themselves were designed to pay out varying amounts to the trusts for both herself and her sons.

Specifically, upon the death of each of her sons, her revocable trust would receive (attributable to her “split-dollar receivables”) the greater of either (i) the cash surrender value of that policy, or (ii) the aggregate premium payments on that policy. Each ILIT would receive the balance of the policy death benefit.  Such arrangements are commonly structured so that the company advances funds to an ILIT to pay premiums on insurance on the life of the owner of the company, and the split-dollar receivable is payable upon the death of that owner. However, the surviving spouse’s plan was structured such that the receivable wasn’t payable until the death of one of the sons. Also, the company did not own the split-dollar receivable and it would become an asset of her taxable estate.  Given her sons’ life expectancies, the estate was not likely to collect the amounts payable with respect to the split-dollar receivables for 15 to 19 years.

From 2006 until her death in 2009, the surviving spouse made (and reported) gifts to the ILITs out of her revocable trust based upon the cost of the current life insurance protection in accordance with the IRS tables corresponding to the “economic benefit regime.” The total amount of the gifts was $29.9 million, but the economic benefit of the gifts was far less than that.  Accordingly, the surviving spouse reported the payment of the premiums as gifts to her sons for gift tax purposes to the extent of the economic benefit specified by Treas. Reg. §1.61-22. 

IRS gift tax challenge. 

The IRS issued two Notices of Deficiency to the estate. One Notice determined a gift tax liability for the tax year ending December 31, 2006, which concluded the surviving spouse’s estate had failed to report total gifts in the amount that the surviving spouse’s revocable trust advanced to the ILITs to make lump-sum payments of policy premiums. The second Notice grossed-up the surviving spouse’s lifetime gifts by the $29.9 million gifted to the ILITs.  

The surviving spouse’s estate moved for partial summary judgment on the threshold legal question of whether the split-dollar arrangements should be governed under the economic benefit regime of Treas. Reg. §1.61-22.  If so, the surviving spouse didn’t make any significant gift in 2006, and the total value reported for the split-dollar receivables should be based on the present value of the right to collect the split-dollar receivables in 15 to 19 years.  The IRS asserted that it was factually unclear as to whether or not the revocable trust had conferred upon the ILITs an economic benefit in addition to the current cost of life insurance protection.  The IRS claimed that the revocable trust’s lump-sum premium payments should be treated as loans owed back to the estate and valued under Treasury Regulations finalized in 2003 concerning how to treat split-dollar arrangements for tax purposes.  See Rev. Rul. 2003-105, 2003-2 C.B. 696.  The issue was, in essence, whether the 2003 regulations controlled the outcome, or whether the economic benefit regulation controlled.

Ultimately, the Tax Court disagreed with the IRS position. Estate of Morrissette, 146 T.C. 171 (2016).  The Tax Court held that the split-dollar agreements complied with the economic benefit regulation of Treas. Reg. § 1.61-(1)(ii)(A)(2), and that the surviving spouse made annual gifts only of the cost of current protection for gift tax purposes.  Under the regulation, only the economic benefit provided under the split-dollar life insurance arrangement to the donee is current life insurance protection.  As such, the donor is deemed owner of the life insurance contract, irrespective of actual policy ownership, and the economic benefit regime applies.  Thus, to determine if any additional economic benefit was conferred by the revocable trust to the ILITs, the Tax Court considered whether or not “the dynasty trusts [ILITs] had current access to the cash values of their respective policies under the split-dollar life insurance arrangements or whether any other economic benefit was provided.”  Because the split-dollar arrangements were carefully structured to only pay the ILITs that portion of the death benefit of the policy in excess of the receivables payable to the revocable trust, the Tax Court concluded that the ILITs could not have any current access under the final regulations. The Tax Court also determined that no additional economic benefit was conferred by the revocable trust to the dynasty trusts.  The valuation of the receivables at $7.48 represented an approximate 77 percent valuation discount from the value of the amount advanced to pay the premiums. 

IRS estate tax challenge.  The surviving spouse’s estate valued the receivables at $7.48 million.  The IRS disagreed with the estate’s valuation, claiming instead that the transfer of $29.9 million made by her revocable trust should be included in her estate at death by virtue of I.R.C. §2036 and I.R.C. §2038.  The Tax Court did not agree with the IRS position, determining that the transfers had valid non-tax purposes.  The evidence showed that the decedent desired to keep the business in the family, needed liquidity for estate tax purposes, and also wanted to provide a transition of the business to the next generation of the family while maintaining family harmony.  As such, the Tax Court concluded, the cash surrender value of the policies was not pulled back into the estate at death.  The Tax Court also held that I.R.C. §2703 did not apply because the split-dollar agreements served a business purpose and were not simply a manner in which to transfer property for less than full and adequate consideration.  They were also comparable to arm’s length transactions.  However, the court held that the estate was liable for the 40 percent understatement penalty of I.R.C. §6662 because of an undervaluation of the decedent’s split-dollar rights to the life insurance policies. 

The Tax Court did not determine the estate’s federal estate tax value, but directed the parties to value of the rights associated with the split dollar arrangements based on cash surrender values, life expectancies and discount rates.  The Tax Court said that the split-dollar rights are the rights of the decedent’s trust to payment in exchange for paying the policy premiums.  That payment, the Tax Court said, is either the amount of premiums paid or the cash surrender values of the policies, whichever is greater.


The Tax Court’s 2016 decision is very helpful to high-net-worth individuals and owners of closely held businesses.  Similarly structured split-dollar arrangements will be governed by the economic benefit doctrine and protect from gift tax liability.  The result will be that the value of the split-dollar receivables would be determined based on typical valuation principles (i.e., the amount a third party would pay to purchase the split-dollar receivables).

Last week’s Tax Court decision that I.R.C. §2703(a) does not apply to the split-dollar receivables, because they were not subject to any restriction on the revocable trust’s rights to sell or use them opens the door to intergenerational split-dollar arrangements. 

These two Tax Court opinions, taken together, provide a blueprint for passing family assets (like closely held businesses such as a farm or ranch) throughout subsequent generations, with predictable (and favorable) estate and gift tax consequences for the original owners.  That is particularly important in light of the unfavorable changes the present Congress might make to the laws governing the transfer tax system.

May 16, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Wednesday, May 12, 2021

The Revocable Trust – What Happens When the Grantor Dies?


My article last month on the use of the revocable trust in an estate plan generated many nice comments.  You can read that article here:  https://lawprofessors.typepad.com/agriculturallaw/2021/04/the-revocable-living-trust-is-it-for-you.html.  I also received several questions concerning what happens from an income tax standpoint when the grantor of the trust dies.  After answering those questions, I thought it might be a good idea to write an article on it for the blog.

What are the income tax impacts of a revocable trust when the grantor dies – it’s the topic of today’s post.

Income Tax Issues for the Year of Death

When the grantor of a revocable trust dies, the trust assets are not impacted.  The trust continues according to its terms and, as mentioned in last month’s article, the assets contained in the trust are not included in the decedent’s probate estate.  For income tax purposes, the trust is required to obtain a taxpayer identification number (TIN).  That’s the case even if the trust had obtained a TIN during the grantor’s lifetime.  Treas. Reg. §301.6109-1(3)(i)(A).    That means that the trustee will likely have to establish new accounts for the trust with banks and other financial institutions with which the trust does business.

For the year of the grantor’s death, all tax items must be allocated between the grantor and the trust for the pre-death and post-death periods.  This requires the trustee to establish some type of system to make sure that the proper amounts of income, loss, deduction, credit, etc., are allocated appropriately in accordance with the trust’s method of accounting. 

Returns and Reporting Issues

When the grantor of a revocable trust dies, the trust is no longer a grantor trust.  Thus, all tax-related activity of the trust that occurred before the grantor’s death during the year of death must be reported on the grantor’s final income tax return.  Upon the grantor’s death, the trust becomes a separate taxpayer (from the grantor’s estate) with a calendar year as its tax year.  I.R.C. §644(a).  Because of this separate taxpayer status, the grantor’s estate will also have to obtain a TIN and report tax items separately from those of the trust.   

Note:   If the terms of the trust require all of the trust income to be distributed annually but not trust corpus, the trust is a “simple” trust.  If not, the trust is a “complex” trust. 

Note:   The grantor’s estate can elect either a fiscal year or a calendar year for tax reporting purposes.  When a grantor dies late in the year, it may be beneficial for the executor of the grantor’s estate to elect a fiscal year.  That may provide some ability to use tax-deferral techniques for the estate or the beneficiaries and can allow the executor more time to deal with administrative duties concerning the estate. 

One technique that can help simplify tax filings after the grantor dies is for the trustee to work with the administrator of the grantor’s estate in considering whether to make an I.R.C. §645 election.  The election can be used for certain revocable trusts, and has the effect of treating the trust as part of the decedent’s estate.  I have written about the I.R.C. §645 election here:  https://lawprofessors.typepad.com/agriculturallaw/2020/11/merging-a-revocable-trust-at-death-with-an-estate-tax-consequences.html.  To recap that article, the election can reduce the number of separate income tax returns that will have to be filed after the grantor’s death.  The irrevocable election is made via Form 8855. 

A Sec. 645 election makes available several income tax advantages that would not otherwise be available in a separate trust tax filing.  I detailed those in my article linked above that I wrote last fall, but for our purposes here, while the election is in force (two years if no federal estate tax return is required to be filed; other deadlines apply if a Form 706 is required (See Treas. Reg. §1.645-1(f)) income and deductions are reported on a combined basis – all trust income and expense is reported on the estate’s income tax return.  The one exception is for distributable net income (DNI).  DNI is computed separately.  The combined reporting on the estate’s income tax return might be on a fiscal year instead of the calendar year-end that is required for trusts. 

When the election period terminates, the “electing trust” is deemed to be distributed to a new trust.  That’s a key point to understand.  The new trust must use the calendar year for reporting purposes.  As a result, the trust beneficiaries might receive two Schedule K-1s if the co-electing estate files on a fiscal year. 

If the decedent’s estate was large enough to require the filing of Form 706, the assets in the revocable trust are aggregated and reported on Schedule G.  They are not listed separately.  Part 4 should be answered, “yes.”  In addition, a verified copy of the trust should be attached to Form 706. 

Complexity of Farm Estates

A decedent’s estate is a separate entity for income tax purposes.  In general, an estate’s net income, less deductions for the value of property distributed to heirs, is taxed to the estate.  The distributions are taxed to the heirs in the calendar year which includes the last day of the estate fiscal year during which the distributions were made.  When these principles are applied to the unique aspects of a farmer’s estate, problems (and opportunities) arise.  A farmer’s estate has numerous attributes that require specialized application of the general principles of estate income taxation.  Those include the seasonal nature of the business with bunching of income and expense in different times of the year; a complex mix of land and depreciable property that is subject to recapture; inventory; common use of income tax deferral due techniques; the problem of establishing income tax basis in property; determining accurate property inventories; and unique capital gain holding periods for certain assets.


A revocable trust is a common and often beneficial part of the estate plan of a farmer or rancher.  But, understanding the tax issues when the trust grantor dies is important.  Likewise, fitting the tax aspects a revocable trust that are triggered by the grantor’s death with the overall complexity of an agricultural estate is crucial.    

May 12, 2021 in Estate Planning, Income Tax | Permalink | Comments (0)

Monday, May 10, 2021

The “Mis” STEP Act – What it Means To Your Estate and Income Tax Plan


In late March, a group of five Democrat Senators from northeastern states introduced the “Sensible Taxation and Equity Promotion (STEP) Act.  Similar legislation has been introduced into the U.S. House, also from an East Coast Democrat.  These bills, combined with S.994 that I wrote about last time, would make vast changes to the federal estate and gift tax system, have a monumental impact on estate planning for many – including farm and ranch families – and would also make significant income tax changes.  The STEP Act also has a retroactive effective date of January 1, 2021. That makes planning to avoid the impacts next to impossible.  Today’s focus will be on the provisions of the STEP Act.

The key components of the STEP Act and its impacts and planning implications – it’s the topic of today’s post.

Income Tax Provisions

Before addressing the STEP Act’s provisions, it’s important to remember other proposals that are on the table.  Those include an income tax rate increase on taxable income exceeding $400,000 (actually about $450,000) by setting the rate at 39.6 percent.  Also, for these taxpayers, the itemized deduction tax benefit is capped at 28 percent.  That makes deductions less valuable.  In addition, the PEASE limitation of three percent would be restored.  This limitation reduces itemized deductions by three percent of adjusted gross income (AGI) over a threshold, up to 80 percent of itemized deductions.  Also, proposed is a phase-out of the qualified business income deduction (QBID) of I.R.C. §199A.  The phaseout of the QBID would impact many taxpayers with AGI less than $400,000. 

Capital Gains 

The STEP Act is largely concerned with capital gains and trusts.  The STEP Act applies the 39.6 percent rate to capital gains exceeding $1,000,000. Passive gains exceeding this threshold would be taxed at 43.4 percent after adding in the additional 3.8 percent net investment income tax of I.R.C. §1411 created by Obamacare.  An additional $500,000 exclusion is provided for the transfer of a personal residence ($250,000 for a taxpayer with single filing status).  Also, outright charitable donations of appreciated property are excluded, but (apparently) not transfers to charitable trusts), and some assets held in retirement accounts.

From an estate planning standpoint, if this provision were to become law a “lock-in” effect would occur to some extent – taxpayers would simply hold assets until death to receive the basis adjustment at death equal to the asset’s fair market value (I.R.C. §1014).  Unless, of course, the “stepped-up” basis rule is eliminated. 

Note:   Planning strategies such as charitable remainder trusts (maybe), appropriate timing of the harvesting of gains and losses and similar techniques can be used to keep income under the $1 million threshold.  Also, especially for high-income taxpayers residing in states with relatively high income tax rates, a tax minimization strategy has been the use of the incomplete non-grantor trust (ING).  An ING is a self-settled, asset protection trust that allows a grantor to fund the trust without incurring gift tax while also achieving non-grantor status for income tax purposes.  The typical structures is to establish the trust is a state without an income tax with the grantor funding the ING with appreciated assets having a low basis. The ultimate sale of the trust assets thereby avoids state income tax.  The IRS has announced that it is studying INGs and will not issue any further rulings concerning them.  Rev. Proc. 2021-3, 2021-1, IRB 140, Sec. 5.


The Step Act also proposes new I.R.C. §1261 which, under certain circumstances, imposes income recognition on gains at the time an asset is transferred to a trust.  Under this provision, gain recognition occurs at the time of a transfer to a non-grantor trust, as well as a grantor trust if the trust assets (corpus) will not be included in the grantor’s estate.  If the corpus will be included in the grantor’s estate at death, there apparently is no gain until a triggering event occurs.  Proposed I.R.C. §1261(b)(1)(A).  

Note:   The lack of clarity of the STEP Act’s language concerning transfers to grantor trusts creates confusion.  Seemingly the relinquishment of all retained powers under I.R.C. §2036 would mean that the trust corpus would not be included in the grantor’s estate, and the transfer to trust would be an income recognition event.  It simply is not clear what the STEP Act’s language, “would not be included” means. 

Apparently, a transfer to a non-grantor marital trust is not an income recognition event. Proposed I.R.C. §1261(c)(2).  Similarly, a transfer qualified disability trust or cemetery trust does not trigger gain recognition.  As noted above, the language is unclear whether a transfer in trust to a charity is excluded from recognition.  However, a transfer to a natural person that is other than the transferor’s spouse is taxed at the time of the transfer. 

Assets that are held in a non-grantor trust would be deemed to be sold every 21 years.  That will trigger gain to the extent of unrealized appreciation every 21 years, with the first of these “trigger dates” occurring in 2026. 

The STEP Act also requires annual reporting for trusts with more than $1 million of corpus or more than $20,000 of gross income.  The reporting requires providing the IRS with a balance sheet and an income statement, and a listing of the trustee(s), grantor(s) and beneficiaries of the trust. 

Note:   The built-in gain on an asset that is transferred during life either outright to a non-spouse or to a type of trust indicated above cannot be spread over 15 years.  However, the transfer of illiquid property (e.g., farmland) to a non-grantor trust that is not otherwise excluded is eligible for installment payments over 15 years, with interest only needing to be paid during the first five years.  If the tax on the appreciated value is caused by death, the tax can be paid over 15 years by virtue of I.R.C. §6166.

Grantor trusts – sales and swaps.  An important estate planning technique for higher wealth individuals in recent years designed to reduce potential estate tax involves the sale or gifting of assets to a grantor trust.  The goal of such a transaction is to make a completed transfer for federal estate and gift tax purposes, but retain enough powers so that the transfer is incomplete for income tax purposes.  This is the “intentionally defective grantor trust” (IDGT) technique. The result of structuring the transaction in this manner is that the future appreciation of the assets that are sold to the trust is removed from the grantor’s estate, and the grantor remains obligated for the annual income tax liability.  Of course, the trust could reimburse the grantor for that tax obligation.  Thus, the grantor ends up with a tax-free “gift” to the trustee of the trust’s income tax liability.  This allows the trust assets to grow without loss of value to pay taxes. 

The IRS blessed the IDGT technique in Rev. Rul. 85-13, 1985-1 C.B. 184.  In the Ruling, the IRs determined that the grantor’s sale of the asset to the trust did not trigger income tax – the grantor was simply “selling” to himself.  The irrevocable, completed nature of the transfer to the trust coupled with grantor trust status for income tax purposes is done by particular trust drafting language.  Also, that language can be drafted to allow the grantor to “swap” low basis assets in the trust with assets having a higher basis.  This allows the “swapped-out” asset to receive a basis increase at the time of the grantor’s death by virtue of inclusion in the grantor’s estate.  I.R.C. §1014

Under the STEP Act, a sale to a grantor trust might be treated as a transfer in trust.  If that is what the language means, then Rev. Rul. 85-13 is effectively repealed.  It also appears that swaps to a grantor trust would be treated that same as a sale.  If this is correct, IDGTs as a planning tool are eliminated. 

GRATs.  One popular estate planning technique for the higher-valued estates has been the use of a grantor-retained annuity trust (GRAT). With this approach, the grantor transfers assets to a trust in return for an annuity. As the trust assets grow in value, any value above the specified annuity amount benefits the grantor’s heir(s) without being subject to federal gift tax.  However, under the STEP Act, a transfer to a grantor trust is taxable if all of the transferred assets are not included in the grantor’s estate.  But, if all of the assets transferred to a grantor trust are included in the grantor’s estate, the transfer to the trust is not a taxable event.

This language raises a couple of questions.  One of the characteristics of a GRAT is that it can be drafted to make a portion taxable.  In that case, it is not completely includible in a decedent’s estate.  Likewise, if property is transferred into a GRAT and the transferor dies during the GRAT’s term and the I.R.C. §7520 rate rises, then less than all of the corpus of the GRAT is included in the decedent’s estate. See Treas. Reg. §20.2036-1, et seq.  This would appear to mean that, under the STEP Act, the transfer to the GRAT would be a taxable event.  It is also unclear whether the use of a disclaimer in the context of a GRAT will eliminate this potential problem. 

Estate Tax Deduction

Income taxes that the STEP Act triggers would be deductible at death as an offset against any estate tax that is due on account of the taxpayer’s death. 

The Constitutional Issue

As noted above, the STEP Act carries a general effective date of January 1, 2021.  It is retroactive.  If that retroactive provision were to hold, many (if not all) planning options that could presently be utilized will be foreclosed.  But is a retroactive tax provision constitutional? 

To be legal, a retroactive tax law change can satisfy the constitutional due process requirement if it is rationally related to a legitimate purpose of government.  Given the enormous amount of spending that the Congress engaged in during 2020 to deal with the economic chaos caused by various state governors shuttering businesses, a "legitimate purpose" could be couched in terms of the “need” to raise revenue.  See, e.g., Pension Benefit Guaranty Corporation v. R.A. Gray & Co., 467 U.S. 717 (1984)United States v. Carlton, 512 U.S. 26 (1994); In re Fifield, No. 04-10867, 2005 Bankr. LEXIS 1210 (Bankr. D. Vt. Jun. 20, 2005).  That’s the case even though historic data indicate that government revenues rarely increase in the long-term from tax increases – particularly the type of tax increases that are presently being proposed. 

Planning Steps

Will the STEP Act become law as proposed?  Probably not.  But, combined with S. 994 the two proposals offer dramatic changes to the rules surrounding income tax, as well as federal estate and gift tax.  With the proposal to basically double the capital gains tax rate, it could be a good idea to intentionally trigger what would be a gain under the STEP Act.  Doing so would at least remove those assets from the transferor’s estate.  In general, “harvesting” gains now before a 39.6 percent rate applies could be a good strategy.  Also, estate plans should be reexamined in light of the possible removal of the fair market value basis rule at death.  Consideration should be given to donating capital gain property to charity, setting up installment sales of property, utilizing the present like-kind exchange rules and making investments in qualified opportunity zones.   

Is all planning basically eliminated for 2021?  I don’t know.  There simply is no assurance whether transfers made to lock in the existing federal estate and gift tax exemption, utilize valuation discounts, etc., will work.  If the STEP Act is enacted, perhaps one strategy that will work would be to gift cash (by borrowing if necessary).  If the STEP Act is not enacted, then utilizing grantor trusts with sales and swaps could be an effective technique to deal with a much lower exemption.

One key to estate planning is to have flexibility.   The use of disclaimer language in wills and trusts is one way to provide flexibility.  Coupled with a rescission provision, disclaimer language included in documents governing transactions completed in 2021 might work…or might not.  It’s also possible that such a strategy could work for estate and gift tax purposes, but not for income tax purposes.

Another technique might be to set up an installment sale of assets to a marital trust for the spouse’s benefit that gives the spouse a power of appointment and entitles the spouse to lifetime income from the entire interest payable at least annually (basically a QTIP trust for the spouse (see I.R.C. §2523(e)).  The STEP Act indicates that such a transfer would not be a gain recognition event – marital trusts are excluded so long as the spouse is a U.S. citizen.  The surviving spouse would be given the power to appoint the entire interest and it could be exercised in favor of the surviving spouse or the estate of the surviving spouse.  No person other than the surviving spouse could have any power to appoint any part of the interest to any person other than the surviving spouse.  With a disclaimer provision the surviving spouse could disclaim all interest in the trust if the STEP Act is not enacted (or is enacted but becomes effective after the transfer by installment sale).  The disclaimer would then shift the assets into a trust for the surviving spouse’s heirs.  There are other techniques that could be combined with this approach to then add back the spouse.  If the STEP Act is enacted, the assets could remain in the marital trust and not trigger gain recognition.  The point is that the disclaimer adds tremendous flexibility (until disclaimers are eliminated – but the drafters of the STEP Act haven’t figured that out yet). 

Also, I haven’t even discussed the proposed American Families Plan yet.  On that one, Secretary Vilsack’s USDA put out an incredibly misleading press release titled, “The American Families Plan Honors America’s Family Farms.”  In it, the USDA claims that the proposed changes to the federal estate tax would apply to only two percent of farms and ranches.  That’s true as long as the family continues to own the farm and is materially participating in the farming operation.  What the USDA didn’t mention is that the American Families Plan eliminates many income tax deductions and will increase the federal income tax bill for practically all farmers and ranchers.


Presently, there is considerable uncertainty in the income tax and estate/business planning environment.  Also, the next shift in the political winds could wipe-out all of these proposed changes (if enacted) and the rules will swing back the other direction. 

There’s never a dull moment.  I can’t emphasize enough how important it is to attend (either in-person or online) this summer’s national conference on farm income tax and estate/business planning.  It’s imperative to get on top of these issues.  For more information on those conferences click here:  https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html and here: https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html 

May 10, 2021 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)

Friday, May 7, 2021

Planning for Changes to the Federal Estate and Gift Tax System


I have received many questions recently on what the Congress might do to the federal estate and gift tax laws and the planning steps, if any, that can be taken now to prepare for changes.  It’s an important questions that many have, particularly farm and ranch families.  It’s also a topic that I will spend a good deal of time on during the summer conferences in Ohio and Montana.  You can learn more about those conferences here:   https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html  and https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html

What has been proposed?  Will it pass?  Will valuation discounts be eliminated?  What about the income tax basis rule at death – will it change?

The possible changing estate and gift tax (and income tax basis at death) landscape – it’s the topic of today’s post.

The Current Situation

The Tax Cuts and Jobs Act (TCJA) doubled the basic exclusion amount as well as the generation-skipping transfer tax (GSTT) exemption for years 2018-2025 to $10 million (in 2011 dollars).  Starting in 2026, the exemptions revert to pre-TCJA law - $5 million in 2011 dollars.  In other words, beginning in 2026, the exemptions will fall to $5 million but will be adjusted for inflation since then.  But will we get to 2026 without the current exemptions being reduced before then?  That’s a good question that depends entirely on politics.

What if the exemption decreases?  If the current Congress decreases the exemption, it’s important to understand the “math” behind the computation of a decrease.  Presently, the exemption equivalent of the unified credit for federal estate and gift tax purposes is $11.7 million.  It was $5.49 million in 2017, before TCJA increased it to $11.18 million in 2018.  One strategy to address a drop in the exemption might be to make gifts now while the exemption is at $11.7 million and use exemption to cover the taxes on the gifts.  However, the way the IRS views the $11.7 million exemption is in two separate pieces.  One piece is $5.85 million and represents the “old” exemption.  According to the IRS, gifts made in 2021 use this part of the current $11.7 million exemption first.  Then, for taxable gifts beyond $5.85 million in 2021, the other “piece” of the exemption (also equal to $5.85 million) is utilized.  This piece represents the 2018 exemption increase.  It is this piece that is lost if it is not used before the law changes that decreases the exemption.  This assumes, of course, that any reduction in the exemption would take effect after 2021.  A retroactive change would wipe out this planning strategy of making gifts now to use up the higher exemption. 

Proposed Legislation – S. 994 

Exemption and rates.  Earlier this year, Senator Bernie Sanders proposed the “For the 99.5% Act.”  S. 994.  The bill is currently in the Senate Finance Committee.  A similar proposal was proffered in 2019 but didn’t’ go anywhere.  Basically, the same proposal was made in the President’s final proposed budget in 2016.  The proposals all do essentially the same thing – set the federal gift tax exemption at $1 million without indexing for inflation; set the federal estate tax and GSTT exemption at $3.5 million; and retain portability of any unused exclusion amount.  S. 994, Sec. 2(b).  In terms of the tax rate structure, taxable estates exceeding $3.5 million up to $10 million would face a 45 percent rate.  Taxable estates over $10 million up to $50 million would be taxed at a 50 percent rate.  Those over $50 million but not over $1 trillion would be taxed at 55 percent, and those exceeding $1 trillion would be taxed at 65 percent.  If enacted in its present form, the effective date would be for deaths, GSTT transfers and gifts made after December 31, 2021.  S. 994, Sec. 2(c). 

Special use valuation.  For farms and ranches potentially subject to federal estate tax, electing special use valuation can be a viable estate tax planning technique if the elected land will be farmed by a family member (or members) for 10 years after the decedent dies.  I.R.C. §2023A.  For deaths in 2021, the maximum reduction in value of farmland subject to the election is $1.18 million.  The proposal is to increase that amount to $3 million, effective for deaths after 2021.  S. 994, Sec. 3. 

Conservation easement.  Under current law, land subject to a conservation easement can be excluded from estate tax up to $500,000 in value.  S. 994 increases that amount to $2 million.  It also increases the maximum percentage of the land which can be excluded from 40 percent to 60 percent.  S. 994, Sec. 4.  This provision would be effective for deaths and gifts after 2021.

Grantor trusts.  S. 994 eliminates the current income tax basis step-up rule at death for property contained in certain types of grantor trusts.  The provision applies to property held in a trust of which the transferor is considered to be the owner, and the property transferred to the trust is not included in the transferor’s gross estate at death.  S. 994, Sec. 5. 

Valuation discounts.  As for valuation discounts for such things as lack of marketability, minority interests, blockage, and built-in gain taxes, S.994 specifies that any assets of an entity that are not used in the active conduct of the trade or business that are transferred are to be valued as if the assets were transferred directly (i.e., non-actively traded interests).  Likewise, “passive assets” are not treated as used in the active conduct of a trade or business.  S. 994, Sec. 6.  In addition, no discount for minority interest is allowed if the transferee and family members have control or majority ownership (for non-actively traded interests).  Id.  These assets are to be valued as if the transferor had transferred the assets directly to the transferee.  Id. 

Excluded from the definition of non-business assets are inventory and real estate rental activities involving a real estate professional where the 750-hour requirement has been satisfied.  See, I.R.C. §469(c)(7).  There is also an exception for working capital.  Id.  A “look-through” rule also applies with respect to non-business assets.  This rule is designed to prevent any discount for non-business assets that are held in a lower-tier entity.  A 10 percent ownership interest threshold applies for this purpose.  If the rule applies, the upper-tier entity is treated as if it directly owns its ratable share of the lower-tier entity’s assets.  Id. 

As for minority discounts, S.994 disallows them when the transferor, transferee and family members together have either control or majority ownership after the transfer of entity interests.  “Member of the family” is defined in accordance with I.R.C. §2032A(e)(2).  There the definition includes an individual’s spouse and siblings, ancestors and descendants (including lineal descendants of the decedent’s spouse or parent of the decedent), spouses of descendants, and lineal descendants and spouses of the decedent’s spouse.  For these purposes, a legally adopted child of an individual is treated as blood relation. 

As a distinction from other parts of the legislation, the valuation rules would be effective upon date of enactment.  Id. 

Consider the following example illustrating the impact of eliminating (or severely restricting) valuation discounts:

Example:  Snarkfeltcher Valley Farms (SVF) is a closely-held family farming operation owned by family members.  The parents would like to transfer controlling interests to their son and daughter so that they can manage and control the family business after the parents retire and ultimately pass away.  Presently, SVF has a fair market value of $12 million.  With appropriate estate planning, upon the last of the parents to die with transfer of full operational control to the children, valuation discounts could be achieved.  Under current law, the federal estate tax would be computed as follows (assume that all of the assets are used in SVF’s trade or business):

            Gross Value:                                       $12,000,000

            Lack of marketability discount           $3,000,000

            Minority interest discount:                   $1,800,000

            Net taxable value:                                 $7,200,000

            Available exemption:                         $11,000,000

            Estate tax due:                                    $0

Now assume that S.994 becomes law and the transfer of control of SVF occurs after the law become effective.  Here’s how the federal estate tax would be computed:

Gross Value:                                       $12,000,000

Lack of marketability discount:         $3,000,000

            Minority interest discount:                 $0

            Net taxable value:                               $9,000,000

            Tentative estate tax:                            $3,795,800 ($1,320,800 + .45 x $5.5 mil.)

            Less available credit:                          $1.455,800 (credit that offsets first $3.5 mil.)

            Estate tax due:                                    $2,340,000

Grantor-retained annuity trusts.  An important business succession planning concept for some families is that of the grantor-retained annuity trust (GRAT).  A GRAT is a technique that can allow the grantor to “freeze” the value of the transferred assets while simultaneously providing the grantor with a cash flow stream for a specified time-period.  I have written about the use of the GRAT here:  https://lawprofessors.typepad.com/agriculturallaw/2018/09/farm-wealth-transfer-and-business-succession-the-grat.html

S. 994 essentially eliminates GRATs as a planning strategy by imposing a minimum 10-year term, and a maximum term tied to the life expectancy of the annuitant plus 10 years. In addition, the remainder interest must have a value (as determined at the time of the transfer) that is not less than an amount that is equal to the greater of 25 percent of the GRAT’s fair market value or $500,000, and not be greater than the fair market value of the property in the trust.  S. 994, Sec. 7.  These rules would be effective to transfer made after the date of enactment.  Id. 

Grantor trusts.  S. 994 also makes changes to the rules governing grantor trusts.  While assets in a grantor trusts are included in the grantor’s estate for federal tax purposes, distributions from grantor trusts during the grantor’s life are treated as taxable gifts.  S. 994, Sec. 8.  In addition, if at anytime during the life of the owner, the owner ceases to be treated as the owner of any of the trust assets, those assets are deemed to be a gift.  Id.  These changes would apply to trusts created after the date of enactment as well as to transfers made to pre-existing trusts after date of enactment and sales to pre-existing trusts.  Apparently existing grantor trusts would be grandfathered. 

GSTT.  The proposed legislation specifies that the inclusion ratio of any trust other than a qualifying trust is pegged at 1.  In addition, a qualifying trust must terminate not greater than 50 years after the trust is created.  Also, pre-existing trusts must terminate within 50 years of enactment.  S. 994, Sec. 9.  Also, S. 994 eliminates the GSTT exemption for certain long-term trusts.  Id. 

Gift tax rule changes.  S. 994 specifies that the first $10,000 of gifts made to a person during the calendar year are not to be included in the amount of gifts made during the year.  S. 994, Sec. 10.  The limit is $20,000 per donor.  The transfers subject to this limitation include transfers in trust, a transfer of an interest in a pass-through entity, a transfer of an interest subject to a prohibition on sale, and any other transfer of property that, without regard to withdrawal, put, or other such rights in the done, cannot immediately be liquidated by the donee.  S. 994, Sec. 10. 

Client Relations

Given these proposed changes in federal estate and gift tax law, how should practitioners advise clients?  For starters, the possible impacts on a client’s estate plan of the proposed changes should be discussed.  Perhaps a projection should be done of a client’s estate value particularly in light of the changes in the valuation discount rules.  Also, consideration should be made of the benefits of accelerating the funding of GRATs and other grantor trusts.  In that vein, sales to an intentionally defective grantor trust (IDGT) may also need to be accelerated.  I have discussed IDGTs here:  https://lawprofessors.typepad.com/agriculturallaw/2017/07/using-an-idgt-for-wealth-transfer-and-business-succession.html and here: https://lawprofessors.typepad.com/agriculturallaw/2018/08/intentionally-defective-grantor-trust-what-is-it-and-how-does-it-work.html

Also, give consideration to using the lifetime federal estate/gift tax exclusion prior to the law’s enactment (assuming that it does get enacted).  That also means being prepared to make taxable gifts.  Other thoughts should be given to the ordering rules surrounding the ordering rules for the deceased spouse unused exclusion (DSUE) amount. 


The proposed changes in the rules governing federal estate and gift tax are creating many questions and concern.  Knowing what the proposed changes might be is useful for purposes of evaluating the steps that can be taken to best handle the changes if they are enacted, and ensure that one’s estate/business planning goals can be achieved.  Again, I will spend a significant amount of time at the summer events in Ohio and Montana discussing these matters.  Don’t miss out.  Attendance online is also possible. 

May 7, 2021 in Business Planning, Estate Planning | Permalink | Comments (0)

Saturday, May 1, 2021

The Agricultural Law and Tax Report

Starting Monday May 3, I am hosting a daily 2-minute program, The Agricultural Law and Tax Report on farm radio stations nationwide and on SiriusXM 147.  The purpose of each report is to educate farmers and ranchers and rural landowners on the unique legal and tax issues that they are often faced with.  Each program explains what the law is on a particular topic, and how actual court cases and IRS rulings have been decided based on that law, and what the application is to a farming or ranching operation.
Topical Coverage
Some of the topics that I will address include:
Contract Issues - (auction sales; farm leases; hunting leases; grain and livestock sale contracts; types of clauses to protect the farmer-seller; remedies if there is a breach).
Ag Financing Issues - (collateral issues; rules governing lenders and farm borrowers; foreclosure issues and Farmers’ Home (FSA); redemption rights for farmland; agricultural liens).
Agricultural Bankruptcy - (Chapter 12 farm bankruptcy issues).
Farm Income Tax - (handling USDA/CCC loans; government payments; crop insurance proceeds; pre-paying expenses; deferred payment contracts; commodity trading income; easement payments; crop and livestock share rental income).
Real Property Issues - (fences and boundaries; buying and selling farmland; recoveries from settlements and court judgments (such as the Roundup litigation, etc.)).
Farm Estate Planning - (types of title ownership; disruption of family farm if there is no will or trust; planning approaches to facilitate keeping the farm in the family; federal estate tax planning; gifting of farm assets; treating off-farm and on-farm heirs fairly).
Liability Issues - (food product liability issues (labeling and disparagement laws); liability for trespassers and others on the property; trespassing dog laws; nuisance law; employer's responsibility for farm employees; animal diseases; fence laws).
Criminal Law Issues - (what can the government search without a warrant; cruelty to animal laws; government programs and criminal liability; environmental liability for farmers and ranchers).
Water Law Issues - (types of water law systems; use of surface water for crops and livestock; use of subsurface water; boundary disputes).
The initial sponsor is First State Bank headquartered in Lincoln, NE.  If you are interested in also becoming a sponsor, please let me know.
Many thanks to John Mellencamp and Sony Music Publishing Co. for the "bumper" music that accompanies each show. And...special thanks to Donn Teske.
Check with your local farm radio station to see if they are carrying The Agricultural Law and Tax Report. If not, please call your local station and request it, and let me know
My hope is that you find the show profitable for your farming business, rural practice, and your local rural community.

May 1, 2021 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Friday, April 30, 2021

Court Developments of Interest


Periodically on this blog, I summarize recent cases of interest to those involved in agriculture and tax practitioners in general.  Today is one of those days. 

Recent court developments of interest – it’s the topic of today’s post.

Defendant’s Removal of Trees Within Conservation Easement Not a Nuisance

Cergnul v. Bradfield, 2021 Ind. App. Unpub. LEXIS 295 (Ind. Ct. App. Apr. 9, 2021)

The developers of a subdivision agreed to record a conservation easement twenty feet wide along two boundaries of the subdivision after complaints by local farmers. The conservation easement’s purpose was to preserve the visual aesthetic for residents who enjoyed the rural setting. Although the restrictive covenants that were recorded did not reference the conservation easement, the developer recorded a final plat that explicitly referred to the conservation easement. The defendant purchased a lot in the subdivision and proceeded to remove some trees and brush from within the conservation easement. The defendant had reviewed the restrictive covenants, which had not been updated after the final plat was recorded. The defendant also had met with a representative of the subdivision’s homeowner’s association, who advised the defendant that he could clear the trees and brush so long as he did not change the grade of the land. The plaintiff was an adjoining neighbor outside the subdivision who sought damages for the loss of quiet enjoyment of his property.

The trial court found that the plaintiff lacked standing to challenge the activity within the conservation easement. Further, the trial court noted that the plaintiff failed to demonstrate that he had been denied a property right. On appeal, the plaintiff argued that although he lacked standing to enforce the conservation easement, he was entitled to damages to address a nuisance. The plaintiff noted that the developers had set aside a conservation easement pursuant to state law and that the defendant’s conduct amounted to nuisance per se. The appellate court noted that the conservation easement enabling statute did not provide the plaintiff with a private right of enforcement. Alternatively, the plaintiff argued that the defendant’s conduct created a nuisance per accidens as the right to the quiet enjoyment of his property had been destroyed. The appellate court noted that whether the defendant’s conduct qualified as a nuisance per accidens depended on whether his conduct would cause actual physical discomfort to a person of ordinary sensibilities. The appellate court found that the plaintiff failed to show any such evidence, and as a result, affirmed the trial court’s decision and denied the nuisance damages sought by the plaintiff. 

No Attorney-Client Privilege For Communications Between Trustee and Attorney

In re Estate of McAleer, No. 6 WAP 2019, 2021 Pa. LEXIS 1524 (Pa. Sup. Ct. Apr. 7, 2021)

The decedent created a revocable trust and named his son as the sole trustee. The trust named the son and his two step-brothers as beneficiaries. In 2014, the trustee filed a first and partial accounting of the trust. A step-brother objected and the trustee hired two separate law firms to respond to the step-brother’s objections. After an evidentiary hearing, the probate court dismissed the objections. During the court process, additional filings indicated that about $124,000 of trust funds had been expended from the trust for attorney’s fees and costs through 2015. The step-brothers then filed a petition to determine the reasonableness of the fees. In early 2016, the trustee filed a second and final accounting to which the step-brothers also objected. The trustee claimed that he had no obligation to provide the step-brothers with copies of billing invoices because they were protected by attorney-client privilege. The probate court disagreed and ordered the trustee to forward the unredacted invoices to the step-brothers withing 30 days. The trustee disclosed the invoices, but filed an interlocutory appeal on the issue of the attorney invoices.

The state Supreme Court upheld the probate court’s ruling, noting that the assertion of privilege requires sufficient facts be established to show that the privilege has been properly invoked. According to the state Supreme Court, the trustee had not established those facts. The state Supreme Court also held that the privilege didn’t apply because the interests the privilege protected conflicted with “weightier obligations” – the fiduciary duty of the trustee to provide information to the beneficiaries outweighed the privilege. This was especially the case because the attorney fees were paid from the trust.

Will Authorized Court To Review Sale/Transfer of Farmland

In re Estate of Burge, No. 19-1881, 2021 Iowa App. LEXIS 214 (Iowa Ct. App. Mar. 17, 2021)

The decedent left her estate to her three children and six grandchildren. Two of her children sought to probate the will as executors. One of the executors died shortly after, and his wife participated in the proceedings as the executor and sole beneficiary of his estate. The will distributed a lump sum to the now deceased son if he “is surviving on the death of the survivor” of the decedent. The will distributed half of the remainder to the three children in equal shares and the other half to the six grandchildren in equal shares. The decedent’s will also granted four grandchildren an option to purchase all of her farmland. If they chose to exercise this option, the will directed them to pay a penalty if they sold the farmland within 15 years. The will also had a provision that offered one of the decedent’s children, the remaining executor, to receive his share of the estate in farmland, provided that he could agree upon a division with the grandchildren. Both the grandchildren and the executor exercised their option to purchase the farmland.

The first proposed contract filed by the executor to purchase the farmland was rejected by the trial court because some of the beneficiaries did not participate in negotiations or agree to the terms. The executor filed a second proposed contract to transfer the decedent’s farmland to himself and the four grandchildren. The trial court approved this contract but included direction that if the executor continued with the exercise of his option, he would not be entitled to his residuary share of the estate. Two of the four grandchildren and the executor appealed, and argued that the trial court should not have removed them as residue beneficiaries. The executor also argued that the trial court should have excluded his deceased brother’s wife as a beneficiary.

The appellate court held that since the deceased son survived the decedent, the deceased son’s wife was entitled to his share of the estate as the sole beneficiary. The two grandchildren argued that the executor had the sole right to sell the real estate without court oversight, because the will provided an unrestricted power of sale. The appellate court disagreed and noted that the decedent’s will contained numerous provisions on the sale in her will, namely that the court could resolve any dispute as to the reasonableness of the terms and conditions of the sale. The two grandchildren also argued that the first proposed contract was binding and that the trial court was bound to accept it without modification. The appellate court noted that the first proposed contract did not provide for the executor’s share of the farmland, and the farmland sale/transfer was subject to the terms and conditions in the will and court review for reasonableness.

FBAR Penalties Not Subject to “Full Payment” Rule

Mendu v. United States, No. 17-cv-738-T, 2021 U.S. Claims LEXIS 537 (Fed. Cl. Apr. 7 2021)

The plaintiff was assessed approximately $750,000 of “willful” Foreign Bank and Financial Account (FBAR) penalties. Such penalties can reach up to 50 percent of the highest account balance of the foreign account. He paid $1,000 of the penalty amount and then sued in the U.S. Court of Federal Claims under the Tucker Act to recover the $1,000 as an illegal exaction. The IRS counterclaimed, seeking the entire judgment of $750,000 plus interest. The plaintiff moved to dismiss his complaint on the basis that the court lacked jurisdiction over the illegal exaction claim on the basis of Flora v. United States, 362 U.S. 145 (1960). Such dismissal would nullify the court’s jurisdiction over the counterclaim of the IRS. Under Flora, in accordance with 28 U.S.C. §1346(a)(1), a taxpayer seeking to file a federal tax claim in federal court (other than the U.S. Tax Court) must pay the full amount of the tax before filing suit. However, the plaintiff claimed that 28 U.S.C. §1346(a)(1) only applied to “internal revenue taxes” and claims related to “internal revenue laws.” The petitioner noted that Bedrosian v. United States, 912 F.3d 144 (3d Cir. 2018) hinted that FBAR penalties may fall within the reach of 28 U.S.C. §1346(a).

The court, in ruling for the plaintiff, flatly rejected the Bedrosian decision in holding that FBAR penalties are not subject to the Flora rule because they are not internal revenue laws or internal revenue taxes. The court noted that FBAR penalties are contained in Title 31 of the U.S. Code rather than Title 26 (the Internal Revenue Code), and that this placement was intentional. Title 31, the court noted, has as its purpose, the regulation of private behavior rather than the purpose of being a charge imposed for the purpose of raising general revenue. In addition, the court concluded that FBAR penalties are unlike civil penalties in that they contain no statutory cross-reference that equate “penalties” with “taxes.” The court also reasoned that the if the full payment rule didn’t apply to FBAR penalties there wouldn’t be any concern that the collection of FBAR penalties would be seriously impaired because they are enforced via a civil action to recover a civil penalty. That meant that there were no administrative collection procedures for FBAR penalties with which a partial payment illegal exaction claim would interfere. Thus, the court concluded that the Congress did not intend to subject FBAR penalty suits to the full payment rule. 


There’s always action in the courts and with the IRS.  That’s especially true this tax season which continues…

April 30, 2021 in Estate Planning, Income Tax, Real Property | Permalink | Comments (0)