The Motley Fool Discussion Boards

Previous Page

Financial Planning / Tax Strategies


Subject:  Good news – No Change! Date:  9/6/2012  5:44 PM
Author:  Wradical Number:  116576 of 123001

This morning’s mail brought a letter from IRS, and those things usually make me cringe.

It was an Estate Tax Closing Letter, informing us that our late client’s 706 was accepted as filed. This was a big deal. We filed the return in late March 2012, with an extension (He died in late 2010.) And after some debate with their attorney, we decided NOT to file a “Request for Prompt Assessment”, and invite closer scrutiny. We also did the valuation of the family limited partnership (FLP) interest that was the biggest asset of the estate.

I have a couple of ugly jobs going on – IRS appeals/collection problem, delinquent filers – so this was truly a breath of fresh air.

In a way, this could be a good case study of what you can do with good planning over a period of years. The deceased was a self-made man, and most of his wealth was in real estate. He owned various business properties. He was 91 years old. His wife died about 20 years ago, at which time he got seriously concerned about what his ultimate estate tax would be when his time came. So he did a couple of big things.

1.Put his largest holdings into the FLP, and made gifts of Ltd. Partnership interests to his children and grandchildren. He did this in big chunks to use up his lifetime exemption amount, as that increased over the years. And in other years he made gifts at the annual exclusion amount, using FLP shares (at discounted values, also calculated by our firm.) Altogether he moved about $2 million out of his estate doing this, over a 20 year period. As far as management succession, his daughter succeeded him as the managing partner of the FLP.

2.He had some other investments in a corporation, which was a C-Corp., and actually a Personal Holding Company – not the best vehicle these days, but it would have cost a lot to change that around. He sold his interest in that back to the company for a private annuity. That worked out OK. If anything, he lived about 4 years too long. Optimally, it would have worked better to sell for a fixed price installment note. And that is how the IRS would insist you treat it today.

The whole process didn’t go exactly according to plan. For one thing, 3 of his 4 children predeceased him, largely due to their lifestyles. His daughter who survived him was the stable one of the group, and was in place to manage the family business affairs, as well as be the personal representative. The grandchildren (her children, and those of her brothers), as limited partners, are no