MARCH 2, 2009
For many, this is not a happy time. The economic situation is not good - the economic indicators do not show a bottom to the market fallout.
Pension plans will make the economic picture even worse. Most large companies maintain retirement plans. These are one of two types.
The "defined benefit" plan provides a certain amount of pension at retirement pay - this might be, for example, 40% of the employee's compensation during the average of the three highest-paid years. The pension plan must have a certain amount of money available at the employee's retirement in order to fund his pension.
The profit-sharing plan or the "money purchase" plan requires the employer to contribute a certain amount of money each year. In the case of the profit-sharing plan, this amount may vary from year to year, but in the case of the money purchase plan it is a fixed amount. In either format, the employee's benefit will be what the money will purchase at retirement (hence the name "money purchase").
Many companies are switching from defined benefit plans to types of money purchase plans, such as 401-K plans. These are easier and less expensive to administer, and may reduce some of the liability for the employer.
Most defined benefit plans are insured with the Pension Benefit Guaranty Corporation, a quasi-governmental entity funded by premiums paid by the employers. PBGC was created by the Employee Retirement Income Security Act of 1974.
If an employer becomes bankrupt or cannot make the plan contributions, the PBGC takes over as trustee. Some of the plans taken over by the PBGC include Bradlees, Caldor, Allis Chalmers, Eastern Airlines, Delta Pilots, Grand Union, Kaiser Aluminum, Outboard Marine, Polaroid, TWA, United Airlines, and Weirton Steel.
The Pension Benefit Guaranty Corporation is believed to be about 14 billion dollars under-funded at the present time. The PBGC has suggested that the pension plan of General Motors is about 20 billion dollars under-funded.
There is considerable discussion about the poor economic condition of many companies. In most cases, the discussion does not include unfunded pension liabilities.
It is likely that the economic downturn will continue for some time. Pension liabilities have not been taken into account. If employers are not able to make contributions to pension plans, the PBGC will have to take over those plans, and it would appear likely that the PBGC will itself need to be bailed out by the government.
Estate Plans - the Federal Estate Tax
At the present time the amount that passes free in every estate is $3,500,000, and the federal estate tax will expire on December 31, 2009. In 2010 there will be no federal estate tax, and in 2011 the federal estate tax will return as it was prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).
Last year it appeared clear that the federal estate tax would continue at the present level of $3,500,000 per estate. Various legislators had said that they would support such a solution. Recently several pieces of legislation have appeared, one of which may present estate planning issues for those with large estates. Here are the proposed bills:
H.R. 533
H.R. 533, called "Opportunity for Family Farms and Small Businesses Act of 2009" would repeal Section 901 of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRA). Thus, the estate tax repeal would be permanent.
H.R. 96
H.R. 96, the "Save Family-Owned Farms and Small Businesses Act of 2009" would increase the reduction in tax value for farmland and other special use property and restore and increase the estate tax deduction for family-owned business interests.
H.R. 173
H.R. 173 does not have an exotic name. Its purpose is "To amend the Internal Revenue Code of 1986 to exempt certain farmland from the estate tax."
H.R. 205
H.R. 205, "The Death Tax Repeal Act" is one of the shortest pieces of legislation I have seen. The operative part states "Subtitle B of the Internal Revenue Code of 1986 (relating to estate, gift, and generation-skipping taxes) is hereby repealed."
H.R. 436
H.R. 436, the "Certain Estate Tax Relief Act of 2009." provides that the present federal estate tax exclusion amount ($3,500,000) would be retained. A sleeper in the bill provides that much of the planning currently carried out with family limited partnerships, LLCs, and the like would not be effective to reduce the value for transfer tax purposes.
We are watching this bill very carefully, because it may reflect the position of the Obama administration. If the bill were to pass, it would be a substantial victory for the Internal Revenue Service and would require changes in planning for larger estates.
A present technique that is widely used involves placing assets, such as securities, in a family limited partnership, limited liability company, or similar entity, and then transferring minority interests to family members. Such minority interests, for transfer tax purposes, would be valued at "fair market value."
A buyer paying fair market value would claim a discount for lack of marketability and a discount for lack of control. In some cases, these discounts add up to 40% or more.
The bill would eliminate those discounts in the case of "non-business assets" and in the case of transfers between family members.
As an illustration of current planning, assume a married taxpayer with assets of $10,000,000. Under present law, $7,000,000 ($3,500,000 per estate) could be sheltered from estate tax. This would leave $3,000,000 subject to tax, at an effective rate of 45%.
If the taxpayer placed $2,000,000 in securities in a family limited partnership or limited liability company and then gave shares in the partnership or Limited Liability Company to his children, he might ultimately transfer as much as $2,000,000 in assets to his children. Since no purchaser would pay the full dollar amount for a minority interest in an entity that was not publicly traded, the taxpayer might claim a reduction of 40% or more in determining the value for transfer tax purpose. Thus, the taxpayer would have saved $400,000 in estate taxes.
What we are doing
We are watching H.R. 436 closely. We will review the estate plans of our clients with more assets than can be sheltered by the exclusion amount of $3,500,000 per estate, and we will work with them to determine whether it would be appropriate to transfer assets now, to avoid the problems which may arise if H.R. 436, or some bill with similar terms, becomes law.
We, Russ Haddleton, Bob Heppe, and Kimberly Hogan, all hold the degree of Master of Laws in Taxation. We have been planning and administering estates for many years. H.R. 436, if enacted, will present a challenge, but we will be available to help our clients plan for this challenge.
If it appears that the reductions in value, which are presently available using family limited partnerships, limited liability companies, and other vehicles, will no longer be available, we will let you know. H.R. 436 may not ever become law, but if it does it will foreclose some estate planning devices that we are now using. If you have any questions about the information in this Bulletin, please call us.
Stress in the New Budget
President Obama proposes to bail out the economy with a stimulus program that will probably approach $1,000,000,000, and at the same time reduce the deficit within two years. I have studied the "bare bones" of the budget (the details will not be out for several months) and I do not think that the expectations are reasonable.
In the analysis I have seen so far, it is assumed that the economic situation will not become much worse, and that it will soon be on the mend. Based upon what has been happening in the last two years, the projections are not appropriate.
If the budgetary projections do not work out, it is likely that there will be more emphasis on raising taxes. One of those taxes that might be raised is the estate tax. Thus, there will be more changes coming along. We will keep you informed about those that may affect you.
The Massachusetts Estate Tax
The Massachusetts estate tax should be repealed. It is a regressive tax. Those with large estates may change their domiciles to Florida or other states that do not have estate taxes. When those with large estates do change their domiciles, they take with them many business connections, and they no longer pay income taxes to Massachusetts.
It has been shown in a past survey that the Massachusetts estate tax costs the Commonwealth more than it generates in revenue. I am determined to seek legislative support to repeal the Massachusetts estate tax, but in talking with representatives on Beacon Hill I have concluded that this is not the time to try to do this. Massachusetts is in a fiscal crisis, and trying to convince legislators that wiping out a tax will actually be a financial benefit to the Commonwealth is not an easy task at this time.
If you spend more time in some other state, such as Florida, than you spend in Massachusetts, it may be beneficial for you to change your domicile to that other state. We will be glad to talk with you about the benefits of doing this.
Website
Our website is Haddletonlaw.com. We will post bulletins and other material there for you to help you keep up-to-date on tax and estate planning matters.
