Irony

I remember a gift tax case I worked back in '05 or '06. The taxpayer had been instrumental in the development of a local corporation that became quite large. When his business was taken over by a publicaly traded company, he got a LOT of stock in the big company. A LOT OF STOCK. For the sake of numbers, we'll say his holdings (in one, publically-traded company) had a street value of $10 million.

He couldn't sell the stock and realize $10 million. If he had attempted to sell off even half of it, the value on the daily market would likely have plunged.

He was, in effect handcuffed by gold. He owned the stock, he received VERY nice dividends, but he couldn't sell enough stock in a brief time to give himself full liquidity.

He was not a young man. The stock would be valued at it's trading price on the day he died, and his estate would be taxed on that $10 million dollars.

Not a financially comfortable picture.

The gentleman was no fool. He met with his attorneys, and they developed a plan to minimize the estate tax effect of his stock ownership.

First, he transferred the stock from himself to a corporation. This corporation held two classes of stock - common and prefered. Each class of stock was divided into two characteristics - voting and non-voting.

There were further restrictions on the ability of any share holder to sell their stock to anyone outside of the corporation.

I was charged with auditing the gift tax returns for the gifts of stock in the corporation that he made to his children and grandchildren.

Now, when you take stock that trades on the public market for %10 million dollars and pays a regular dividend, and you manage, through expensive planning to put that stock into a corporation where it does not necesarily pay a dividend, where it cannot be sold outside of the corporation, and may or may not have any voting rights, the stock becomes worth less than $10 million. A minority interest in a non-liquid asset may be worth less than 50% of the fair market value of the asset on an unrestricted basis.

Yes, this gentleman had planned, and planned well to avoid a large portion of the estate tax that might otherwise be due upon his demise.

His plan was sufficiently sophisticated that after spending a considerable amount of time attempting to find it's weak points, I decided NOT to propose any adjustments to the gift tax returns.

The gentleman had probably payed between $150,000 and $500,000 to set up the plan. He probably payed another $10,000 for the gift tax returns that I was examining. In addition, there was another fee for the appraisals of the various classes of stock that were gifted.

Now recognize that the estate tax on $10 million would have been approximately $4.5 million. Of course, he owned other assets beyond the stock. H may have paid as much as one million dollars to avoid a portion of the $4.5 million.

I had the first year he had set up the complicated structure. He probably made more gifts of stock in the subsequent years.

Of course, the corporation he set u had to file annual returns also.

Irony?

He died in 2010. I saw his obituary in the newspaper.

In 2010, there is/was NO estate tax. His heirs could have recieved the stock unrestricted and tax free. Instead, they receive the stock subject to the corporate structure he established in order to avoid estate taxes. They will likely pay the attorneys another quarter of a million dollars to un-do the structrue he set up.

All that very, very expensive work gave no benefit to his heirs. In fact, it has cost them more to un-do it. They received the stock as a gift, which means that the value in their hands is NOT the value as of his death, but a lesser amount.

Irony. He planned well, and Congress disposed of matters in a different way.

RIP