The Top Ten Estate Planning and Estate Tax Developments of 2015 Click to edit Master title style Prepared for The Estate Planning Council of Delaware February 9, 2016 Ronald D. Aucutt www.mcguirewoods.com www.mcguirewoods.com
The Top Ten Estate Planning and Estate Tax Developments of 2015 Adapted from: https://www.mcguirewoods.com/Client-Resources/Alerts/2015/12/Ron-Aucutt- Top-Ten-Estate-Planning-Tax-Developments-2015.aspx McGuireWoods | 2 CONFIDENTIAL
Number Ten Redstone Cases The Media Industry and Family Discord Drama McGuireWoods | 3 CONFIDENTIAL
SEASON 1: The Redstone Family and the Formation of National Amusements, Inc. (NAI) (August 1959) Michael Sumner Edward Redstone Redstone Redstone (“Mickey”) (Mickey’s Son) (Mickey’s Son) Stock contributed $30,328 $18,445 $17,845 (book value) Cash contributed 3,000 0 0 Total $33,328 $18,445 $17,845 Percentage 47.88% 26.49% 25.63% Shares issued 100 100 100 (common stock) Offices* President Vice President Sec’y-Treas. McGuireWoods | 4 CONFIDENTIAL
The Redstone Family and the Formation of National Amusements, Inc. (NAI) (August 1959), continued * “Mickey gave Sumner, his elder son, the more public and glamorous job of working with movie studios and acquiring new theaters. Edward had principal responsibility for operational and back-office functions. His duties included maintaining existing properties and developing new properties.” (Tax Court Judge Lauber) – Today Sumner is the controlling shareholder and executive chairman of Viacom and CBS. McGuireWoods | 5 CONFIDENTIAL
SEASONS 10-13: Tensions (late 1960s and early 1970s) • Edward and his wife decided to have their son admitted to a hospital for psychiatric care. – Mickey, Mickey’s wife, and Sumner opposed that. – “in part because they feared it reflected badly on the Redstone family name” (wrote Judge Lauber). • Edward also began to feel marginalized in the business. • He quit, demanded possession of the 100 shares registered in his name, and threatened to sell that stock to an outsider if NAI did not redeem it for a fair price. • But Mickey claimed that at least half of that stock had been held under an “oral trust” for Edward’s two children since 1959, reflecting the disproportionate capital contributions. McGuireWoods | 6 CONFIDENTIAL
FINALE: Settlement (June 30, 1972) • Edward would separate from NAI. • One-third of the stock registered in his name would be treated as subject to the 1959 oral trust for his children. The rest of his stock (66⅔ shares) would be redeemed for • $5 million ($75,000 per share). • Contemporaneously, Edward executed two irrevocable trust agreements, one for each of his children, and transferred 16⅔ NAI shares to each trust. • Two weeks later, Sumner did the same thing for his two children. • Neither Edward nor Sumner filed gift tax returns for 1972. McGuireWoods | 7 CONFIDENTIAL
RERUNS: More Litigation (2006-2008) • Edward’s son and the trustees of some trusts argued that more shares should be in trust for Mickey’s grandchildren. • Edward testified that he believed he had been entitled to all 100 shares originally registered in his name. • Sumner testified that Mickey had never mentioned an oral trust for his children; he had transferred the shares to the trusts “voluntarily, not as the result of a lawsuit.” – “I just made an outright gift.” • The court ruled that the plaintiffs had failed to prove that any oral trust ever existed. • The IRS heard about it and asserted gift tax of $737,625 each against Edward and Sumner for their 1972 gifts, plus penalties. McGuireWoods | 8 CONFIDENTIAL
PAY TO VIEW: Estate of Edward Redstone v. Commissioner , 145 T.C. No. 11 (Oct. 26, 2015) (Judge Lauber) • Edward’s 1972 transfers were not taxable gifts, but rather transfers in the ordinary course of a trade or business, because they were part of the settlement of a claim of an oral trust that “had sufficient plausibility to generate a great deal of litigation over the course of many years,” even though it was rejected by the Massachusetts court 37 years later. • The IRS argued that Edward’s children had not been parties to the litigation and had not provided consideration. • But Reg. §25.2511-1(g)(1) tests whether the transfer is made “ for a full and adequate consideration,” which the court viewed as looking to whether the transferor receives consideration, not whether the transferees provide it. McGuireWoods | 9 CONFIDENTIAL
PAY TO VIEW: Sumner Redstone v. Commissioner , T.C. Memo. 2015-237 (Dec. 9, 2015) (Judge Lauber) • The Tax Court found Sumner’s 1972 transfers to be gifts: “There is no evidence that any dispute existed in 1971-1972 concerning ownership of Sumner’s stock or that Mickey was determined to withhold any of Sumner’s shares from him.… Because no demand was ever placed on Sumner’s shares, no negotiations ever occurred concerning his ownership of those shares. Sumner never filed a lawsuit, and he received no release of claims from Mickey (or anyone else) upon transferring his stock.” • The court found the $75,000 per share redemption price paid to Edward for his shares to be a reliable index of the value of the stock when Sumner made his gifts. • But the court held that Sumner was not liable for penalties. McGuireWoods | 10 CONFIDENTIAL
Number Nine Developments Regarding Crummey Powers McGuireWoods | 11 CONFIDENTIAL
Mikel v. Commissioner , T.C. Memo. 2015-64 (April 6, 2015) [also CCA 201208026 (Sept. 28, 2011)] • In 2007, Mr. and Mrs. Mikel gave property they claimed to have a value of $3,262,000 to a trust in which 60 descendants and their spouses had “Crummey” withdrawal rights. $3,262,000 Gift-split $1,631,000 Annual exclusion: $12,000 x 60 - 720,000 Taxable gift $911,000 Gift tax lifetime exemption - 1,000,000 No tax McGuireWoods | 12 CONFIDENTIAL
Mikel v. Commissioner , continued Tax Court’s Response IRS Position (Judge Lauber) Withdrawal rights are “unenforceable “A beneficiary would suffer no and illusory” because disputes can adverse consequences from be brought only to a “ beth din ,” not to submitting his claim to a beth din, a court. and respondent has not explained why this is not enforcement enough.” … and because a beneficiary who The specific in terrorem provision in filed or participated in a civil this case would not apply to a proceeding to enforce the trust beneficiary’s withdrawal right would be excluded from any further because it applies only to actions to participation in the trust under a “no oppose or challenge discretionary contest” or “ in terrorem ” clause. trust distributions. Partial summary judgment for Mikels McGuireWoods | 13 CONFIDENTIAL
Other Issues • Are the Mikels entitled to payment of attorney’s fees under section 7430? – Judge Lauber said no, finding that the position of the IRS, although unsuccessful, was “substantially justified,” in that it had a reasonable basis in fact and law and was justified to a degree that could satisfy a reasonable person. Mikel v. Commissioner , T.C. Memo. 2015-173 (Sept. 8, 2015). • Is the value of the property really only $3,262,000? Do all 60 withdrawal rights really count? – Yet to be adjudicated, if not settled. McGuireWoods | 14 CONFIDENTIAL
Treasury’s Proposal to Limit Crummey Powers • “Greenbooks” (March 4, 2014, and Feb. 2, 2015) would limit the (currently) $14,000 annual exclusion to: – Outright unrestricted gifts. – “Tax-vested” one-beneficiary trusts under section 2642(c)(2). – Up to $50,000 per donor (still subject to the $14,000 per donee limitation) for “transfers in trust (other than to a trust described in section 2642(c)(2)), transfers of interests in passthrough entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee.” McGuireWoods | 15 CONFIDENTIAL
Number Eight Continued Erosion of the Power of States To Tax Trust Income McGuireWoods | 16 CONFIDENTIAL
Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue , 12 CVS 8740 (N.C. Sup’r Ct. April 23, 2015) • North Carolina sought to tax the income of a New York trust with a beneficiaries in North Carolina, even though a New York resident was the trustee, all trust records were maintained in New York, the custodian of the trust investments was in Boston, the trust tax returns were prepared in New York, the trustee did not travel to North Carolina, the trustee did not make any distributions to the North Carolina beneficiary, and the beneficiary could not compel the trustee to make a distribution. • The court held that the tax, as applied to this trust, violates both the due process and commerce clauses of the U.S. Constitution. McGuireWoods | 17 CONFIDENTIAL
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