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Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P.

901 Main Street, Suite 3700
Dallas, TX 75202

Phone: (214) 744-3700
Fax: (214) 747-3732
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Stress Testing the Estate Plan

By Joel N. Crouch on June 18, 2020

In a previous blog post we discussed the Tax Court’s recent decision in The Estate of Howard V. Moore v. Commissioner. An important take away from Moore for tax professionals and their clients is the importance of stress testing the estate planning to avoid being “low hanging fruit” for the IRS.

Moore is an aggressive bad facts case, fraught with issues that were easy pickings for the IRS. No planning was commenced until after the decedent was diagnosed as terminal with six months to live.  In the last six months of his life, the decedent established a family limited partnership, foundation, charitable lead trust, and revocable and irrevocable trusts, as well as transferred assets and made large intrafamily loans.  In addition, the decedent transferred his interest in the family farm, where he lived and continued to live until his death, into the FLP.   The Tax Court cited both IRC Sections 2036(a)(1) and 2036(a)(2) in deciding against the estate on all issues.  IRC Section 2036 is the most litigated transfer tax issue, with the IRS arguing that although assets are transferred, there is an implied agreement of retained enjoyment or control and the assets should be included in the estate.

For those readers who, like me, are old enough, you will remember the Fram Oil Filter commercial  regarding regular car maintenance that had the catch phrase “pay me now or pay me later.” The same principle applies to any tax planning, especially estate planning.  Regularly reviewing the tax and estate planning goes a long way at the end of the day.  Below are some of the questions that should be asked and issues that should be addressed to avoid being “low hanging fruit” for the IRS.

  1. Have gift tax returns been filed and do they adequately disclose the gifts?
  2. Have all the income tax returns been filed?
  3. Do the tax returns, transfer documents and appraisals match?
  4. Are the entities in good standing?
  5. Are the clients respecting the legitimacy of the entities and following formalities?
  6. Did the clients retain adequate assets for their own support and maintenance?
  7. Is the client relying on distributions from the entity for living expenses or are there disproportionate distributions?
  8. Is the client commingling personal assets with entity assets or using partnership assets (vacations at the Aspen condo and Maui pad) without adequate consideration?
  9. Are there transfer documents evidencing contributions to the entity?
  10. Are the non-tax purposes for the entity documented and being followed?
  11. Is there documentation to establish adequate and full consideration for the issued entity interests?
  12. Does the client have books and records for the entity? Contribution schedules? Ownership percentages? Capital account ledgers?
  13. Are utilities in name of entity?
  14. Are property taxes and other expenses being paid by the entity?
  15. Is property liability insurance being paid by the entity?
  16. Do the partners conduct annual meeting and prepare minutes?
  17. If children or trusts own entity interests, have gift tax returns been filed and do they adequately disclose the gifts?
  18. Are there prior sales or other non-gift transactions that have not been disclosed on prior returns or zero-gift protective gift tax returns?
  19. Are parents supporting adult children?
  20. Does the client have Crummey letters for gifts? If not, can the beneficiaries’ actual knowledge of gifts be established?
  21. Does a buy-sell agreement set a value or contain a put or call right?

The IRS tends to try bad-fact cases, where they know they have a very good chance of winning, see the Moore case. The better the facts, the more likely the IRS will look for a settlement to avoid a potential loss.  Taking steps on a regular basis to review the tax and estate planning will help avoid being the bad-fact case, i.e. the low hanging fruit. 

For any questions on this or any other tax-related matter, please feel free to contact me at (214) 749-2456 or jcrouch@meadowscollier.com.