Clinton v. Trump on estate taxes

The federal estate tax has remained unchanged since 2012, giving estate planners and their clients’ time to adjust to the permanent larger exemption and the portability of the exemption between spouses.  That comfort level could change in 2017, as both Presidential candidates have called for major changes in the federal estate tax.

Donald Trump advocates the complete repeal of the federal estate tax.  Repeal would not mean the end of planning for death taxes, however.  During the year that the federal estate tax was suspended, 2010, executors and heirs had to learn the intricacies of carryover basis, which took the place of the estate tax.  (Current law permits a tax-free step-up in the basis of inherited assets, a very valuable tax privilege.) In effect, the capital gains tax was substituted for the estate tax.

Many estate planning strategies have both tax and nontax objectives. Should Mr. Trump succeed and then persuade the Congress to accept his ideas for the estate tax, the tax planning benefit of many strategies would be reduced or eliminated.

Hillary Clinton goes to the other extreme. She wants to roll the federal estate tax exemption back to the level it was in 2009, $3.5 million, coupled with a bump in the estate tax rate.  She likely also would advocate a range of technical restrictions on estate tax planning strategies, similar to what President Obama has included in his budget proposals.

Unless Republicans lose control of the House of Representatives, enactment of her program seems unlikely. But should it happen, history suggests that there might be a frenzy of major gift giving.  Back in 2012, when the federal exemption was scheduled by law to be reduced, many wealthy families tried to “lock in” the higher exemptions with intra-family transfers.  That phenomenon would be likely to recur.

The two visions for the federal estate tax are not expected to play any role in the outcome of the election, but those who are planning to make or review estate plans might want to keep these points in mind.

© 2016 M.A. Co.  All rights reserved

Sensible Estate Tax Act of 2016

Democrats on the Ways and Means Committee are supporting H.R. 4996, the “Sensible Estate Tax Act of 2016,” introduced by ranking minority member Sander M. Levin (D-Mich). Key elements of the bill include:

  • reducing the federal estate tax exempt amount to $3.5 million;
  • chopping the federal gift tax lifetime exemption to $1 million;
  • capping the Deceased Spouse’s Unused Exemption at $1 million;
  • boosting the estate tax rate to 45%.

The bill isn’t expected to get much traction this year, but could be a preview of coming attractions should the Congress change hands next year.

© 2016 M.A. Co.  All rights reserved.

Unexpectedly strong post-death auction sale raises date-of-death death value.

Estate of Newberger v. Comm’r, T.C. Memo. 2015-2464

Bernice Newberger died in July 2009. Her estate included three valuable pieces of art, for which it obtained appraisals from Sotheby’s and Christie’s. The valuation was complicated by the fact that the market for fine art took a steep dive in 2008, as the economy slipped into recession. For example, in October 2008 some 44% of pieces put up for auction failed to attract minimum bids, double the rate of a year earlier. They had to be returned to their owners. In 2009 Sotheby’s revenue declined by 53% and Christie’s by 46%. Bernice’s death came at the trough of the slump.

Based upon the advice of appraisers, the estate valued two lesser pieces at $450,000 and $500,000. The real prize was a Picasso. Sotheby’s offered a $3.5 million guaranteed price. Christie’s offered the estate better guarantees and a professional estimate of date-of-death value of $5 million, which the estate duly included on its estate tax return, timely filed in October 2010.

The IRS challenged all three valuations. Perhaps to create some liquidity for paying taxes, the estate had accepted the terms from Christie’s and put the Picasso up for auction in February 2010. The expected sale price was $4.7 million to $6.3 million, consistent with the appraisal. In the event, including the buyer’s premium, the painting fetched over $12 million. The IRS cited that fact as it claimed that the Picasso had been undervalued by the estate.

Although events occurring after death are not to be taken into account to determine date-of-death values, the Tax Court held that the later sale may be used as evidence of value. The estate’s argument that the high price was “a fluke” that was unforeseeable at the date of death was rejected. The Court accepted the IRS’ downward adjustment to $10 million to reflect the changing market conditions. The estate’s values for the two lesser pieces were sustained.

Had Newberger lived another seven months, her estate would have avoided all estate taxes, as 2010 was the year when the federal estate tax was optional. In the absence of estate tax, carryover basis would apply. In that event the heirs would have been exposed to a very large capital gains tax upon the sale of the art, as Newberger had acquired the Picasso for just $195,000 in 1981.

David Bowie: Tax Exile

David_Bowie_-_TopPop_1974_08Rock star David Bowie died of cancer in January at age 69. According to a recent account in TaxNotes, Bowie became a tax exile in 1972. At that time he had accumulated U.S. and California tax debts of some $300,000. As England then had a top marginal income tax rate of 83%, that also was not very inviting. Bowie’s wife at that time, Angela, had been educated in private schools in Switzerland, so she suggested that they explore relocating there.

The couple flew to Switzerland, hired a local lawyer, and negotiated Swiss legal residency in Blonay, a village near Lake Geneva. Bowie was required to spend significant amounts of time in Switzerland to maintain that status, but in exchange his income was taxed at only 10%.

Reportedly Bowie later changed his legal residency to Ireland by purchasing a 640-acre estate near Dublin. This could have been an even better tax deal than that offered by Switzerland. After 1969 the Irish tax code exempted royalty earnings of musicians, writers and other artists from income tax. The exemption was capped in 2007, leading some artists to relocate to The Netherlands.

Another savvy move by Bowie in the financial realm was the creation of Bowie Bonds in 1997. $55 million worth of bonds were sold, secured by Bowie’s back catalog. The interest and principal payments for the bonds came from the royalties from some 300 songs that he wrote and still owned. When the bonds were fully paid off, the intellectual property rights reverted back to Bowie. This model for securitization of royalty rights has since been emulated by other artists.

Press reports pegged Bowie’s estate at about $230 million. No word yet on which nation or nations expect to impose an estate tax on it.

The tax value of fine art

Bernice Newberger died in July 2009. Her estate included three valuable pieces of art, for which it obtained appraisals from Sotheby’s and Christie’s. The valuation was complicated by the fact that the market for fine art took a steep dive in 2008, as the economy slipped into recession. For example, in October 2008 some 44% of pieces put up for auction failed to attract minimum bids, double the rate of a year earlier. They had to be returned to their owners. In 2009 Sotheby’s revenue declined by 53% and Christie’s by 46%. Bernice’s death came at the trough of the slump.

Based upon the advice of appraisers, the estate valued two lesser pieces at $450,000 and $500,000. The real prize was a Picasso. Sotheby’s offered a $3.5 million guaranteed price. Christie’s offered the estate better guarantees and a professional estimate of date-of-death value of $5 million, which the estate duly included on its estate tax return, timely filed in October 2010.

The IRS challenged all three valuations. Perhaps to create some liquidity for paying taxes, the estate had accepted the terms from Christie’s and put the Picasso up for auction in February 2010. The expected sale price was $4.7 million to $6.3 million, consistent with the appraisal. In the event, including the buyer’s premium, the painting fetched over $12 million. The IRS cited that fact as it claimed that the Picasso had been undervalued by the estate.

Although events occurring after death are not to be taken into account to determine date-of-death values, the Tax Court held that the later sale may be used as evidence of value. The estate’s argument that the high price was “a fluke” that was unforeseeable at the date of death was rejected. The Court accepted the IRS’ downward adjustment to $10 million to reflect the changing market conditions. The estate’s values for the two lesser pieces were sustained.

Had Newberger lived another seven months, her estate would have avoided all estate taxes, as 2010 was the year when the federal estate tax was optional. In the absence of estate tax, carryover basis would apply. In that event the heirs would have been exposed to a very large capital gains tax upon the sale of the art, as Newberger had acquired the Picasso for just $195,000 in 1981.

(February 2016)
© 2016 M.A. Co. All rights reserved.