Most people are familiar with the use of a Section 1031 tax-deferred exchange as a way to handle the disposition of real estate. Some people are familiar with the use of a charitable remainder trust as a way to handle the disposition of unmortgaged real estate and stock in a “C” corporation. However, Section 1031 exchanges have undesired time constraints; CRTs are disliked because (i) the taxpayer can’t use the sales proceeds and (ii) nothing is left to go to the children (not necessarily true).
The best approach is to talk to clients years in advance of a sale. The safest approach is to set up a structure far in advance of the disposition of an asset. For example, IRC Section 453(e) provides an attractive structure to sell an appreciated asset to a children’s trust, which increases the basis if the children’s trust waits at least two years and a day before selling the asset.
Planning a transaction far in advance is helpful for other reasons as well. There is a 40% excise tax for transactions that lack economic substance under federal law and are not disclosed on the tax return. IRC Section 7701(o); Section 6662(b)(6); Section 6662(i). California has its own 40% excise tax for transactions that lack economic substance. R&T Code Section 19774. The IRS also has non-statutory arguments it can use to disallow the benefits of a structure. These arguments include the step-transaction doctrine, assignment of income doctrine and economic substance doctrine.
In order to plan sufficiently ahead of time, you need to know that there are at least 7 approaches worth discussing with a client that do not involve a Section 1031 exchange or a charitable remainder trust. There is also much to be discussed about a charitable remainder trust that might make it more attractive to many clients. For example, instead of the CRT being only for the life of the parents, we can often make it last for the lives of the children as well, depending upon their ages. This works well when the parents are 75 and 70 and the children are 50 and 48.
There is much to be learned about structuring capital gain transactions from the IRS attack on estate tax planning structures. So a review of the IRS tactics in the recent Woelbing and Davidson audits is helpful. Also a review of the step-transaction doctrine and the scary 9th Circuit decision in Ferguson is appropriate. In that case the IRS taxed to the taxpayer stock which had already been contributed to a charity, a tax disaster of epic proportions.
You can provide a great deal of benefit to your clients by becoming familiar with the process of advising clients about capital gain techniques. The rules are highly technical. But the rewards are significant.
ABOUT THE AUTHOR
Bruce Givner, Esq. is an estate and tax planning attorney of the Law Firm of Givner and Kaye, located in Los Angeles, California. Mr. Givner graduated from U.C.L.A., Columbia University Law School, and N.Y.U.’s Graduate Tax Law Program and specializes in the area of asset protection and advanced estate planning. He has personally worked with Mr. Philip Kavesh for over 30 years and continues to serve “of counsel” to Mr. Kavesh’s law firm, Kavesh, Minor and Otis, Inc.
Mr. Givner has been cited as a “tax expert” by the U.S. Tax Court, the California Court of Appeals, and the Wall Street Journal. He’s also written books on estate tax planning for the California CPA Society and the AICPA, and has co-authored three for the California Bar Association. He represented the winning taxpayers in the 1994 Tax Court case L&B Pipe and Supply, in which the IRS sought almost $2,000,000 in back taxes and interest due to alleged unreasonable compensation. The U.S. Tax Court awarded the IRS nothing.
OTHER ARTICLES IN THIS ISSUE
- PRACTICE-BUILDING: “Multiple Financial Advisor Referral Relationships May Be a Big MISTAKE!” by Philip J. Kavesh, J.D., LL.M. (Taxation), CFP®, ChFC, California State Bar Certified Specialist in Estate Planning, Trust & Probate Law
- SUPPORT & ADMINISTRATIVE STAFF: “Top 10 E-mail Etiquette Rules for Estate Planning Professionals (and Their Assistants and Staff)” by Kristina Schneider, Executive Assistant
- FINANCIAL PLANNING: “Knowing What You Don’t Know: What an Effective Financial Plan Anticipates” by Jason Oshins, Financial Advisor, MBA
- ESTATE TAX PLANNING: “Feeling the Burn: The Importance of the Tax Burn in Estate Tax Planning” by Steven J. Oshins Esq., AEP (Distinguished)