Time to Make the Soup
Recently, our office, sent a client alert regarding IRS news that hit the estate and financial planning communities late this summer. If you or someone you know has a small business, the information below will probably be of interest. What Is Given Can Be Taken Away In August, the Internal Revenue Service (“IRS”) issued Proposed Regulations that could have a dramatic impact on estate and business succession planning by eliminating valuation discounts traditionally available to closely held businesses. Discounts are currently used to help protect a family or closely held small business from the risks of future divorce, lawsuits, or malpractice claims while maximizing the value of the underlying assets. When a Valuable Business Can\’t Be Sold: Discounts Explained Consider this example: Thomas has a $7M estate that includes a $5M family business. He gifts 40% of the business to a trust to grow the asset out of his estate. The gross value of the 40% business interest is $2M. Since a minority 40% shareholder (the trust) cannot force a sale or redemption of its interest, the non-controlling interest in the business transferred to the trust is worth less than the pro-rata fair market value of the underlying business. Thus, the value of the business interest should be reduced to reflect the difficulty of marketing the non-controlling interest. As a result, the value of the 40% business interest transferred to the trust might be appraised, net of discounts, at $1.2M. The discount has reduced the estate by $600,000. From another perspective, consider the issue if Thomas\’ children buy the business and the taxes they would have to pay for a business interest that isn\’t \”marketable\” were it not for the valuation discount. Timing Is Everything Once the Proposed Regulations eliminating or decreasing discounts are effective, which could be as early as December 31 of this year, the ability to obtain discounts might be substantially reduced or eliminated, thus curtailing wealth planning flexibility. Furthermore, as the 2016 year–end gets closer, it will become more difficult and, at some point, will become impossible to have banks and trust companies create trust accounts. If you’re unsure of what you might wish to do, you may want to take the preliminary steps as soon as possible. For example, if you don’t already have trusts that could serve as appropriate receptacles for 2016 discounted gifts, it would be wise to establish trusts immediately. You can always determine later which assets and how much to transfer. Get in the Kitchen Make that alphabet soup, i.e., contact your planning team. A collaborative effort is essential to solid, effective wealth planning. Your wealth transfer strategy team, i.e., your attorney, CPA, CFP, and insurance professional, can review strategic wealth transfer options that will maximize your benefit from discounts while still meeting other planning objectives. Projections completed by your wealth manager could be essential to confirming how much planning should be done and how. ***Disclaimer*** The Law Offices of Max Elliott advises clients on legal strategies regarding estate and wealth planning issues; we do not provide financial planning or tax planning advice. We\’re only one letter – albeit a good one – in the alphabet soup.
Dead Clients Do Talk
The legal doctrine of “attorney-client privilege” has become a well-known phrase in the general public\’s lexicon. What the general public does not know is that the “privilege” generally lasts past death. Additionally, what is not understood, even by some attorneys is that the attorney-client privilege is called a “privilege” because the rule is actually an exception to our overarching duty to disclose facts to opposing counsel during disputes. Further unknown to the general public and most attorneys who do not practice in probate or estate administration is the exception to this exception: the “testamentary exception.” A case decided earlier this year, Eizenga v. Unity Christian School of Fulton, Illinois, involved a trust dispute and clarifies this rule and its exceptions for Illinois courts and attorneys. FACTS Walter Westendorf (Westendorf) established trust in 1997, which he amended 7 times before dying in 2013. Dale A. Eizenga (Eizenga) was designated as successor trustee when the trust was initially prepared and executed. In fact, Eizenga, in their capacity as successor trustee, was nearly the only relevant constant during the 16 years after the initial trust was prepared. In 2006, with the trust’s 3d amendment, Attorney Russell Holesinger (Holesinger) became a trustee and Unity Christian School of Fulton, Illinois (School), of which Holesinger also allegedly represented (read potential conflict of Interest), became 1 of 3 charitable remainder beneficiaries. Four amendments later, in 2012, Holesigner became the single second successor trustee and the School became the primary trust beneficiary. Eizenga filed a complaint against Holesinger, alleging “undue influence,\” and eventually sought Holesinger’s client documents. Holesinger refused and a lower court held Holesinger in contempt, and Holesinger appealed on the grounds of attorney-client privilege and the attorney work-product doctrine. As mentioned above, the attorney-client privilege generally lasts past death but for the testamentary exception that provides that in will contests, the attorney-client privilege cannot be invoked. Ironically, in the year of Westendorf’s death, another Illinois case, DeHart v. Dehart, reiterated the testamentary exception. Holesinger argued that this case, however, didn’t involve a will but instead involved a trust. ANALYSIS The Third District Appellate Court then examined the 2010 Graham Handbook of Illinois Evidence, other case law, and treatises addressing this issue and ruled that a will contest is not the only situation where the testamentary exception can be used. Next the court considered Holesinger’s attorney work-product argument. The attorney work-product doctrine is another exception to our disclosure duties, allowing attorneys to protect trial strategies and the mental impressions and opinions used to prepare for trial and establish said strategies. Because the documents in Holesinger’s files were not “created in preparation for any impending or pending litigation,” the Court held that Holesingers documents were not protected by the attorney work-product doctrine and, thus, affirmed the contempt finding by the lower court. The rationale is that a testator or trustmaker (settlor) would want their intent followed; so, if the attorney’s work-product was the only way to settle the dispute, then that information must be made available.