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Vol. 72, No. 2, February 1999
 Previous Page
Wisconsin: An Estate Planning Paradise
Estate planning with FLPs and LLCs
| In community property states all community property
receives a full adjustment equal to the value of the property on the death
date of either spouse. |
Because the willing buyer/willing seller test can result in significant
valuation discounts for federal estate and gift tax purposes, Family Limited
Partnerships (FLPs) and Limited Liability Companies (LLCs) have become increasingly
important tools when developing estate plans for affluent individuals.30When FLPs or LLCs are used in connection with estate
planning, senior family members contribute assets to the entity. Limited
interests in the FLP or LLC are then gifted to children or other family
members. Giving limited interests in the FLP or LLC generally removes the
asset from the donor's estate for federal estate tax purposes, while the
donor can continue to maintain control of the property. If properly structured,
the value of FLP or LLC interests that a donor gives to family members can
be discounted significantly for gift tax purposes to reflect: 1) a lack
of marketability for those interests31, 2)
the inability of a limited partner or member to control the FLP or LLC investments
and distributions32, and 3) restrictions that
may be contained in the FLP or LLC agreement on the ability to transfer
the limited interests.33
|
Dean T. Stange (top), U.W. 1993, practices with Neider &
Boucher S.C., Madison.
Andrew J. Willms (bottom), University of Miami 1984, is the sole shareholder
of Willms Anderson S.C., Thiensville. |
Restrictions contained in FLP or LLC agreements are disregarded by the IRS
for valuation purposes if they are more restrictive than state law.34 For example, if state law allows a limited partner
or member to withdraw easily from an FLP or LLC, regardless of the agreement
terms, the IRS will not readily accept valuation discounts for those interests
since the membership units can be converted to cash at the option of the
limited partner or LLC member. In addition, the IRS may be able to disregard
restrictions imposed by an agreement that is more restrictive than state
law.35 Wisconsin's partnership law and limited
liability law both impose restrictions regarding the transferability of
FLP and LLC interests and do not allow a limited partner or member to withdraw
easily from the entity.21 As a result, it should
be more difficult for the IRS to challenge valuation discounts claimed in
connection with FLPs and LLCs established in Wisconsin as compared to many
other states.
Conclusion
Wisconsin residents often flock to warmer climates when they retire.
Many think that by moving they will not only enjoy warmer weather, but a
better estate planning climate. However, Wisconsin is hard to beat when
it comes to state laws that benefit estate planning.
Endnotes
1Wis.
Stat. § 72.02.
2See Wis.
Stat. § 700.16(5).
3The Wisconsin Legislature adopted 1983 Wisconsin
Act 186, known as the "Wisconsin Marital Property Act," in April
1984. It became effective on Jan. 1, 1986.
4Wis.
Stat. § 766.58(3)(f).
5Washington and Idaho provisions are limited
to transfer of assets between spouses only. Section
867.046(1m) of the Wisconsin Statutes allows for the court to issue
a certificate confirming the transfer of the property interest under section
766.58(3)(f).
6 Wis.
Stat. § 766.58(4).
7The inability of a spouse to unilaterally
amend the disposition of property at death may be analogous to the use of
joint and mutual wills, which has been held to incur gift tax liability
under I.R.C. section 2501. See Estate of Jessie L. Grimes v. Comm.,
851 F.2d 1005 (7th Cir., 1988).
8I.R.C.
§ 1014(a). Date of death valuation or alternate value under section
2032. Under I.R.C. section
1014(c), the basis adjustment rule applies to capital appreciation only.
There is no basis adjustment for items considered income in respect of a
decedent.
9I.R.C.
§§ 1014(a), 1014(b)(9).
10I.R.C.
§ 1014(b)(6).
11Id. and Wis.
Stat. section 766.01(2), which states the Wisconsin Legislature's intent
that marital property is a form of community property.
12Wis.
Stat. § 71.05(10)(e).
131983 Wis. Act 186.
14Wis.
Stat. § 766.03(1).
15Wis.
Stat. § 766.31(7).
16Wis.
Stat. § 766.03(1).
17Planners need to discuss the full impact
of reclassifying assets with clients. They also should consider the possible
impact of I.R.C.
section 1014(e), which allows a basis adjustment at the death of the
donee, when the gifted property returns to the donor under the donee's estate
plan, only if the gift is completed more than one year before the donee's
death.
18I.R.C.
§ 2010.
19I.R.C.
§ 2010(c).
20In accordance with the final Treas. Regs.
issued under I.R.C.
section 2518, within nine months of the death of the wife the husband
could potentially disclaim at least a one-half interest in the jointly held
property that is passing to him by right of survivorship. TD 8744 62 Fed.
Reg. 68183 (12/31/97). See Pratt and Hauser, Estate Planning With
Tenancy by the Entireties Property, Vol. LXXII, No. 7, Fla. B. J. p.
46 (1998). See also, Scholtes, Final Disclaimer Regulations Offer
Estate Planning Opportunities, Vol. 12, No. 3, Prac. Tax Law. (Spring
1998).
21The
Employee Retirement Income Security Act
22See Boggs
v. Boggs, 117 S. Ct. 1754 (1997). See also Wis. Stat. §§
766.62(5) and 766.31(3).
23 "Qualified Heirs" are defined
as: 1) a member of the decedent's family, or 2) any individual who has been
actively employed by the business for at least 10 years prior to the date
of the decedent's death. I.R.C. § 2057(i)(1)(B).
24The IRS Restructuring
and Reform Act of 1998 converted what originally was an "exclusion"
into an estate tax deduction.
25For example, if one spouse has significant
qualified retirement plan benefits, consideration should be given to classifying
the family-owned business interest as individual property of the spouse
without retirement benefits.
26Treas. Regs. 20.2031-1(b).
27Estate of Louis F. Bonner v. U.S., 84
F.3d 1005 (5th Cir. 1996). But see Estate of Wayne Utiynnk, 110 T.C.
24 (1988).
28Id. The court in Bonner rejected
the IRS position that assets in the marital trust of the first spouse to
die and the estate of the second spouse to die had merged and therefore
no discount should apply for the second spouse's estate.
29If a fractional interest in marital property
is used to fund a credit shelter trust at the first spouse's death, the
amount of assets protected by the applicable unified credit amount should
be increased by the amount of the discount that can be claimed with respect
to that fractional interest. Likewise, discounts should apply when valuing
the surviving spouse's marital property interest at his or her death and
when valuing marital trust assets includable in the surviving spouse's estate
to the extent the marital trust was funded with a partial interest in marital
property at the first spouse's death.
30See Willms, Family Limited Partnerships
and Limited Liability Companies: New Estate Planning Tools for the 90s,
Vol. 67, No. 3, Wis. Law., 16 (March 1994).
31Rev. Rul. 59-60, § 4.02(g), 1959-1
C.B. 237; Estate of Little v. Comm'r, 51 T.C.M. (P-H) 73 (1982);
Hooper v. Comm'r, 41 B.T.A. 114 (1940); Bardahl v. Comm'r,
34 T.C.M. (P-H) 673, 918 (1965); South Carolina National Bank v. McLeod,
256 F. Supp. 913 (D. S.C. 1966).
32Id.
33Estate of Little v. Comm'r, 51 T.C.M.
(P-H) 73 (1982); MacDonald v. Comm'r, 230 F.2d 534 (7th Cir. 1956).
But see I.R.C.
§ 2703(a); Treas. Reg. § 25.2703-1(a)(1).
34I.R.C.
§ 2704(b).
35I.R.C.
§ 2704(b)(3)(B).
36Wis. Stat. §§
179.53(2), 183.08024.
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