MANNING ON ESTATE PLANNING

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1 MANNING ON ESTATE PLANNING

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5 MANNING ON ESTATE PLANNING Seventh Edition Jerome A. Manning Anita S. Rosenbloom Seth D. Slotkin Kevin Matz Incorporating Release #4 March 2018 # Practising Law Institute New York City #37416

6 This work is designed to provide practical and useful information on the subject matter covered. However, it is sold with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. QUESTIONS ABOUT THIS BOOK? If you have questions about replacement pages, billing, or shipments, or would like information on our other products, please contact our customer service department at info@pli.edu or at (800) 260-4PLI. For any other questions or suggestions about this book, contact PLI s editorial department at: plipress@pli.edu. For general information about Practising Law Institute, please visit Legal Editor: Kelliann Kavanagh Copyright 1980, 1982, 1988, 1991, 1995, 2004, 2005, 2006, 2007, 2008, 2009, 2011, 2012, 2013, 2014, 2015, 2017, 2018 by Practising Law Institute. First edition 1980, Jerome A. Manning Second edition 1982 Third edition 1988 Fourth edition 1991 Fifth edition 1995, Jerome A. Manning, Anita S. Rosenbloom, Alan S. Halperin Sixth edition 2004, Jerome A. Manning, Anita S. Rosenbloom, Seth D. Slotkin Seventh edition 2013, Jerome A. Manning, Anita S. Rosenbloom, Seth D. Slotkin, Kevin Matz All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of Practising Law Institute. LCCN: ISBN:

7 About the Authors JEROME A. MANNING draws on more than fifty years of estate planning practice. Since 1961 he has been with the New York City law firm of Stroock & Stroock & Lavan LLP, where he is currently Of Counsel. Mr. Manning was an adjunct professor with NYU School of Law for forty years, teaching estate planning for the last twenty-five years. A member of the New York and Florida bars, Mr. Manning is a graduate of NYU School of Law and Yale s Master of Laws program. ANITA S. ROSENBLOOM is a partner with the New York City law firm of Stroock & Stroock & Lavan LLP. She has practiced in this field for over thirty years, concentrating in the areas of estate planning, business succession planning, and estate and trust administration and litigation. Ms. Rosenbloom has lectured at the New York City Bar Association, New York State Society of Certified Public Accountants and the Practising Law Institute and has written articles on numerous estate planning subjects, including the use of life insurance and other trust vehicles to reduce tax liability and special planning considerations for the succession of closely held business interests. Her articles appear in publications such as the New York Law Journal, the New York University Institute on Federal Taxation, New York State Bar Association N.Y. Real Property Law Journal and the New York State Bar Association Trusts and Estates Law Section Newsletter, as well as the Practising Law Institute s Tax Law and Estate Planning Series. She is a member of the New York State Bar Association and of the Trusts & Estates Tax Committee, Association of the Bar of the City of New York. She is also a Fellow of the American College of Trust and Estate Counsel. Ms. Rosenbloom received both J.D. and LL.M. (Tax) degrees from N.Y.U. School of Law. SETH D. SLOTKIN is a partner with the New York City law firm of Stroock & Stroock & Lavan LLP. He has practiced in this field for over twenty years, counseling clients in all aspects of the trusts and estates area, including estate planning and estate and trust administration and litigation. Mr. Slotkin is Chair of the Trusts and Estates Committee of United Jewish Appeal Federation of Jewish Philanthropies. He is also a member of the Planned Giving Advisory Committee (Manning, Rel. #4, 3/18) vii

8 MANNING ON ESTATE PLANNING of New York Presbyterian Hospital and the Trusts, Estates & Surrogate s Courts Committee, Association of the Bar of the City of New York. Mr. Slotkin is a graduate of NYU School of Law, both the J.D. and LL.M. (Tax) programs. He is a member of the New York and New Jersey bars. He lives in New York City with his wife Lisa and his children Asher and Sylvie. KEVIN MATZ is a partner with the New York City law firm of Stroock & Stroock & Lavan LLP, where his practice is principally devoted to domestic and international estate and tax planning, estate administration and related litigation. Mr. Matz earned his J.D. from Fordham University School of Law (where he was a Notes & Articles Editor of the Fordham Law Review) and his LL.M. in Taxation from New York University School of Law. He is a Fellow of the American College of Trust and Estate Counsel (ACTEC), Co-Chair of the Taxation Committee of the Trusts and Estates Section of the New York State Bar Association, Chair of the Estate Planning Committee of the New York State Society of Certified Public Accountants (NYSSCPA) and a member of the New York City Bar Association, among other professional organizations, and has helped to draft several of the City Bar s, the State Bar s and the NYSSCPA s comment letters to both the U.S. Department of Treasury and the New York State legislative and executive branches. Mr. Matz has written and spoken extensively about the use of family limited partnerships and various other leveraged transfer techniques, as well as estate planning strategies for groups ranging from private equity fund managers to professional athletes, and has been frequently cited in the professional literature (including at the Heckerling Institute on Estate Planning) for his innovative solutions and analysis. In addition, Mr. Matz is a certified public accountant, in which connection he is the current Chairman of both the NYSSCPA s Estate Planning Committee and its Foundation for Accounting Education s Curriculum Committee, a past Chairman of the NYSSCPA s Entertainment, Arts and Sports Committee, and currently a member of the Foundation for Accounting Education s Board of Trustees, of which he is currently the President-Elect. Further, Mr. Matz currently serves as Vice Chair of the UJA Federation of New York s Lawyers Division Trusts & Estates Group. Mr. Matz may be contacted at or kmatz@stroock.com. viii

9 Acknowledgments The authors appreciate the contributions of Lee Slavutin, who provided invaluable assistance with chapter 8 on life insurance, and Steven Rabitz, Abbey Keppler and Marissa Holob of Stroock & Stroock & Lavan LLP, who provided invaluable assistance with chapter 9 on retirement benefits. The authors also appreciate the contributions to this book of Etta Brandman of Stroock & Stroock & Lavan LLP. (Manning, Rel. #4, 3/18) ix

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11 Table of Chapters Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Getting Started The Marital Deduction The Nonmarital Share Providing for Children Making Gifts Generation Skipping Grantor Retained Interest Trusts, Combined Purchases, and Sales of Remainder Interests Life Insurance Retirement Benefits Valuation and Other Estate and Gift Tax Issues Relating to Closely-Held Enterprises Business Interests: Family and Partner Concerns Joint Interests Choosing Executors and Trustees Payment of Transfer Taxes Not to Be Overlooked (Manning, Rel. #4, 3/18) xi

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13 Table of Contents About the Authors...vii Acknowledgments...ix Table of Chapters...xi Chapter 1 Getting Started 1:1 Introduction :2 The Interview :3 Domicile :4 Human and Family Problems :5 Family History :5.1 The Need for Information :6 The Family s Assets :6.1 Registration of Assets :7 Tax Facts :8 Summary of the Estate, Gift, and Generation-Skipping Tax Provisions of the American Taxpayer Relief Act of :9 Planning and Drafting Considerations : Tax Reform Act Chapter 2 The Marital Deduction 2:1 Introduction :2 Size of the Deduction :2.1 Setting Aside a Bypass Trust :2.2 Exploiting the Spouse s Credit :3 Factors Favorable to Deferral :4 Factors Unfavorable to Deferral :5 Portability of Exemptions :5.1 Portability Election :5.2 Calculating the Deceased Spousal Unused Exclusion Amount :5.3 Simplified Method for Certain Taxpayers to Make a Late Portability Election :5.4 Planning with Portability (Manning, Rel. #4, 3/18) xiii

14 MANNING ON ESTATE PLANNING 2:6 Specific Bequests :7 The Pecuniary Legacy :8 The Fractional Share Legacy :9 Choosing the Formula :10 Eligible Bequests :10.1 Outright Bequests :10.2 Bequests in Trusts :10.3 The Classic Marital Deduction Trust :10.4 The Estate Remainder Trust :10.5 The Income-Only Trust :11 Disclaimers :12 Eligible Portions :13 The Noncitizen Spouse :14 The Qualified Domestic Trust :15 Simultaneous Death :16 The Arithmetic Chapter 3 The Nonmarital Share 3:1 Introduction :1.1 The Exemption Equivalent of the Unified Credit :1.2 Source of Payment of Estate Taxes and Administration Expenses :2 Sprinkling Trusts :2.1 Generation-Skipping :2.2 Power of Appointment :2.3 Basis Considerations :3 Invasion of Principal :3.1 5-and-5 Power :4 Further Use of Sprinkling Trusts :4.1 Generation-Skipping Tax :5 Charitable Provisions :5.1 Form of Bequest [A] Pooled Income Fund [B] Charitable Remainder Trust [C] Charitable Lead Trust :5.2 Private Foundation Rules :5.3 Taxation Chapter 4 Providing for Children 4:1 Fundamental Considerations :1.1 The Lawyer s Role [A] Use of Trusts [B] Provisions for Flexibility [C] Picking the Right Age xiv

15 Table of Contents 4:1.2 Guardianships :1.3 Uniform Transfers to Minors Act [A] The Family Business [B] Section 2503(c) Trusts [C] Straight Income Trusts :2 Child As Trustee :3 When Parents Die :3.1 One Trust for Children :3.2 Choice of Guardian :4 Further Tax Aspects :4.1 Distributable Net Income :4.2 Capital Gains :4.3 The Kiddie Tax :4.4 Withheld Income :5 Support :5.1 Items of Support :6 Generation-Skipping Transfers Chapter 5 Making Gifts 5:1 Introduction :1.1 The Applicable Credit Amount :2 Advantages of Gifts :3 Contemplation of Death :4 A Transfer That Is Not a Gift :5 What the Children Would Like :6 Gifts with Strings to Children :7 Interplay of Taxes :7.1 When Tax Savings Are Subordinate :8 Discretionary Trusts :9 The Private Annuity :10 Installment Sale :11 Short-Term Trusts :12 Trust and Leaseback :13 Loans :14 Net Gifts :15 Personal and Household Effects :16 The Residence :17 Transfers to Charity and Family :18 Charitable Remainder Trusts :19 Charitable Lead Trusts :20 Gifts for Conservation and Historic Purposes :21 Stock of Family Corporations :22 Tangible Personal Property :23 Valuation of Gifts (Manning, Rel. #4, 3/18) xv

16 MANNING ON ESTATE PLANNING Chapter 6 Generation Skipping 6:1 Introduction :2 Statutory Framework :3 Taxable Terminations :3.1 Requirements for Taxable Terminations :3.2 Taxable Amount :3.3 Basis Adjustment :4 Taxable Distributions :4.1 Requirements for Taxable Distributions :4.2 Taxable Amount :4.3 Income Tax Consequences :5 Direct Skips :5.1 Requirements for Direct Skips :5.2 Crummey Withdrawal Powers :5.3 No Trust Look-Through :5.4 Taxable Amount :5.5 Basis Adjustment :6 Skip Persons and Generation Assignments :6.1 General Rules :6.2 Persons with a Deceased Parent :6.3 Trusts As Skip Persons :7 Interest in Property :7.1 Statutory Rules :7.2 Charitable Split-Interest Trusts :8 Excluded Transfers :9 The Rate of Tax :10 The GST Exemption :10.1 Separate Trusts :10.2 Exemption for Both Spouses :10.3 Allocating the GST Exemption :11 The Inclusion Ratio :11.1 General Rules :11.2 Charitable Lead Trusts :11.3 Recalculating the Inclusion Ratio :12 Estate Tax Inclusion Period :13 When There Are Multiple Skips :14 Planning for the Generation-Skipping Transfer Tax :14.1 Protecting Exempt Trusts :14.2 Exploiting the GST Exemption :14.3 Choosing Between the GST Tax and Estate Tax :14.4 Drafting Concerns :15 Nonresident Aliens xvi

17 Table of Contents Chapter 7 Grantor Retained Interest Trusts, Combined Purchases, and Sales of Remainder Interests 7:1 Introduction :2 Historical Perspective :3 Overview of Section :3.1 Chapter 14 Generally :3.2 Grantor Retained Income Trust :3.3 Section :4 Grantor Trusts with Retained Payments :4.1 Qualified Interests :4.2 Satisfying the Annuity or Unitrust Obligation with Notice [A] Prior to Regulations [B] Regulations Proscribing Payment of Annuity with a Note :4.3 Valuing the Retained Interest :4.4 Measuring the Effectiveness of a GRAT :4.5 Selecting the Term of the GRAT :4.6 Estate Tax Consequences :4.7 GST Tax Consequences :4.8 Income Tax Consequences :4.9 Comparing a GRAT to Other Planning Techniques [A] Outright Gift [B] Loan [C] Sale to Family Member [D] Sale to Intentionally Defective Grantor Trust :5 Qualified Personal Residence Trust :5.1 Personal Residence :5.2 Other Assets :5.3 Conversion to a GRAT :5.4 Estate and Gift Tax Consequences :5.5 Practical Considerations :5.6 Prohibition Against Reacquisition :5.7 Joint Ownership :5.8 Measuring the Effectiveness of a QPRT :6 Joint (Combined) Purchases :7 Sales of Remainder Interests :8 The Private Annuity Appendix 7A Qualified Personal Residence Trust... App. 7A-1 (Manning, Rel. #4, 3/18) xvii

18 MANNING ON ESTATE PLANNING Chapter 8 Life Insurance 8:1 Introduction :1.1 Impact of the 2012 Tax Law on the Use of Life Insurance in Estate Planning :1.2 Life Insurance Products :2 Transfer the Policy? :2.1 Collecting the Proceeds :2.2 Transferring the Policy :3 Insurance Trusts :4 Payment of Estate Tax :5 Second-to-Die Insurance :6 Owner of Policy Dies :7 Premium Payments and Estate Tax :7.1 Premium Payments As Gifts :8 Loans :9 Dissolving Old Borrowing Plans :10 More About Borrowing Against the Policy :11 Group Policies and Premiums :12 Corporate-Owned Insurance :13 Split-Dollar Policies :14 Life Settlements Chapter 9 Retirement Benefits 9:1 Introduction :2 Estate Tax :3 Income Tax Rules :3.1 Rollovers [A] Rollovers by Participant or Surviving Spouse [B] Rollovers by Nonspouse Beneficiary :3.2 Lump-Sum Distributions Capital Gains and Averaging Rules (applicable to participants born before January 1, 1936) :3.3 Lump-Sum Elections (Pre-1987 Rules) :3.4 Taxable Amount of Lump-Sum Distributions (Pre-1987 Rules) :3.5 Income Tax Treatment of Employee Contributions :3.6 Roth IRAs :3.7 Income in Respect of a Decedent :3.8 Penalty Taxes on Premature Distributions, Failure to Make Minimum Distributions, and Excess Distributions and Accumulations xviii

19 Table of Contents [A] Tax on Premature Distributions [B] Minimum Distributions [C] Excess Distributions and Accumulations :4 Selecting the Beneficiary :5 Funding the Applicable Credit Amount Trust with Retirement Benefits :6 Use of Retirement Benefits for Charity :7 Payment of Estate Taxes Attributable to Retirement Benefits :8 Retirement :9 Nonqualified Plans Chapter 10 Valuation and Other Estate and Gift Tax Issues Relating to Closely-Held Enterprises 10:1 Introduction :2 Preliminary Comments Concerning Valuation :2.1 Penalty for Understatement of Value :2.2 Revenue Ruling :2.3 Statute of Limitations and Adequate Disclosure :2.4 Anticipating the IRS s Response :2.5 Valuation When No Estate Tax Is Due :3 Valuation Discounts :3.1 Minority Discount :3.2 Discount for Lack of Marketability :3.3 Market Absorption/Blockage Discount :3.4 Fractional Interest Discount :3.5 Planning for Discounts and QTIP Trusts :3.6 Key Person Discount :3.7 Discount for Securities Law Restrictions :3.8 Discount for Built-In Capital Gains :3.9 Substantiating Valuation Discounts :4 Valuation Premiums :4.1 Control Premium :4.2 Swing Vote Premium :5 Transfers Soon Before Death to Achieve Minority Position :6 Family Limited Partnerships :6.1 Discounted Gifts with Retained Control :6.2 Economic Substance Doctrine and Section :6.3 Gift on Formation (Manning, Rel. #4, 3/18) xix

20 MANNING ON ESTATE PLANNING 10:6.4 Section 2704(b) :6.5 Section 2704(a) :6.6 Potential Estate Tax Inclusion Section [A] Estate of Powell [A][1] Facts of Powell [A][2] IRS Position and Tax Court Analysis [A][3] Methodology for Estate Tax Inclusion and Application of Section :6.7 Annual Gift Tax Exclusion :6.8 Planning Considerations :6.9 Summing Up FLPs :7 Section 2704 Proposed Regulations :7.1 Disregarded Restrictions :7.2 Applicable Restrictions :7.3 Lapses of Certain Rights and the Three-Year Clawback Upon Death :8 Family-Owned Business Deduction :9 Special Valuation of Farms and Qualifying Real Property :10 Estate Freezes :10.1 Prior Attacks on Estate Freezes :10.2 Overview of Section :10.3 Statutory Prerequisites :10.4 Transfer of Equity Interest :10.5 Family Relationships :10.6 Applicable Retained Interest [A] Distribution Right [B] Extraordinary Payment Rights :10.7 Exceptions to Section :10.8 Valuation of Applicable Retained Interests [A] Extraordinary Payment Rights [B] Distribution Rights [C] Qualified Payment Rights Combined with Extraordinary Payment Rights [D] Ten Percent Threshold :10.9 Subtraction Method of Valuation [A] Step One [B] Step Two [C] Step Three [D] Step Four :10.10 Cumulative, but Unpaid, Distributions :10.11 Adjustments to Avoid Double Taxation :10.12 Income Tax Concerns :10.13 Summing Up Estate Freezes :11 Formula Transfers xx

21 Table of Contents Chapter 11 Business Interests: Family and Partner Concerns 11:1 Introduction :2 Continuing the Business :2.1 Will the Business Survive? :2.2 Instructions to Fiduciaries :3 Family Problems :3.1 Income for Dependents :3.2 Corporate Redemption :3.3 Different Classes of Stock [A] Section 2701 Concerns [B] Satisfying Family Members Not in Business [C] Post-Death Reorganization :3.4 S Corporation [A] Qualified Subchapter S Trusts [B] Electing Small Business Trusts :3.5 Partnership and Limited Liability Company :3.6 Nonbusiness Assets :3.7 Sibling Rivalry :4 The Deceased Co-Owner :5 The Surviving Co-Owner :6 The Buy-Sell Agreement :6.1 Tax Law Requirements [A] Case Law [B] Pre-October 9, 1990 Agreements [C] Three-Pronged Test Under Section :6.2 Price Formula :6.3 Funding Through Insurance :6.4 Basis :6.5 Dividend Considerations :6.6 Partnerships :6.7 Other Considerations Chapter 12 Joint Interests 12:1 Introduction :2 Nature of Ownership Interests :2.1 Property Rights :2.2 State Law :3 Gift Tax :3.1 Creation of Joint Tenancy [A] Annual Exclusion and Gift Splitting [B] Value of Gift (Manning, Rel. #4, 3/18) xxi

22 MANNING ON ESTATE PLANNING [C] Joint Bank Accounts [D] U.S. Savings Bonds [E] Family Residence :3.2 Termination of Joint Tenancy :4 Estate Tax :4.1 General Rule :4.2 Qualified Joint Property :5 Generation-Skipping Transfer Tax :6 Advantages and Disadvantages :6.1 Income Tax Considerations [A] Cost Basis [B] Spousal Joint Tenancies Created Before :6.2 Controlling Disposition of Property :6.3 Exploiting the Unified Credit :6.4 Disclaimers :6.5 Other Considerations Chapter 13 Choosing Executors and Trustees 13:1 Introduction :2 Investment Responsibilities :3 Family Members As Fiduciaries :4 Other Fiduciaries :4.1 Banks As Fiduciaries :5 Multiple Fiduciaries :5.1 Limitation of Powers [A] Sprinkling Trusts [B] Life Insurance :6 Successor Trustees :6.1 Appointment :6.2 Removal [A] Scope of Power Chapter 14 Payment of Transfer Taxes 14:1 Introduction :2 Responsibility for Tax :2.1 Common Law :2.2 Tax Apportionment [A] Broad Tax Clause [B] Marital Deduction Trust [C] Generation-Skipping Tax [D] Trusts and Tax Payment xxii

23 Table of Contents [E] Special Problems/Source of Payment of Taxes [F] Confirming Apportionment :2.3 Filing the Estate Tax Return; Closing Letters; Basis Reporting :2.4 New IRS Procedures Concerning Requests for Discharge of Estate Tax Liens :3 Deferral of Estate Tax Chapter 15 Not to Be Overlooked 15:1 Introduction :2 Costs of Dying :3 Memento Bequests :4 Tangible Property :5 Disclaimers :6 Providing for In-Laws :7 Income in Respect of a Decedent :8 Estate Liquidity :8.1 Life Insurance :9 Care for the Elderly and the Failing :10 IRS Guidance on the 2-Percent of Adjusted Gross Income Floor for Trusts and Estates :10.1 The Basic Rules :10.2 The Special Case of Investment Advisory Fees :10.3 Bundled Fees :11 Proposed Regulations Concerning Basis Consistency and Reporting for Property Acquired from a Decedent :11.1 Consistency of Basis with Estate Tax Return :11.2 Property that Increases Estate Tax Liability :11.3 Final Value of Property Acquired from a Decedent :11.4 After-Discovered or Omitted Property :11.5 Definition of Executor for Purposes of Sections 1014(f) and :11.6 Requirement to Provide Information Return and Statement(s) Under Section :11.7 Circumstances Under which No Form 8971 or Schedule A Is Required Under Section :11.8 Property to Be Reported on the Form 8971 and Schedule A :11.9 Beneficiaries (Manning, Rel. #4, 3/18) xxiii

24 MANNING ON ESTATE PLANNING 15:11.10 Due Date for Information Return and Statements :11.11 Supplemental Form 8971 and Schedule A :11.12 Subsequent Transfers :11.13 Proposed Effective/Applicability Date Index... I-1 xxiv