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    Wisconsin Lawyer
    February 01, 1999

    Wisconsin Lawyer February 1999: Wisconsin: An Estate Planning Paradise 2

     


    Vol. 72, No. 2, February 1999

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    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

    Stange/Willms

    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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