Week(s) in Review: May 25-June 7; 2024
A recent development, a (perhaps controversial) business opinion, and article summaries
Intro and Recent Development
Today, I have a bit of a soapbox on fee structures for the business roundup. Before getting there, however, note that it is rare to have U.S. Supreme Court opinions that affect estate planning. Yesterday, one of those opinions was issued.
In Estate of Connelly v. U.S., at issue was the question of whether the death benefit of corporate-owned life insurance which is used to satisfy a redemption buy-sell obligation is included in the estate tax value of shares of such corporation. Treas. Reg. 20.2031-2(f) says that it is, but there was an argument that the corporation’s value should nonetheless be reduced by the obligation to use the life insurance for the redemption of shares. Previously, in 2005 the 11th Circuit had held that there was no increase to share value for such life insurance in Estate of Blount v. Commissioner, as the life insurance was a “nonoperating” asset that, while usually included in a corporate valuation under Treas. Reg. 20.2031-2(f), was not in the nature of assets contemplated by that Treasury Regulation.
But, in the estate tax refund claim in Connelly, the 8th Circuit split from Blount in holding that such life insurance does get counted in the value of the corporate stock, with no reduction for the “obligation” of the corporation to use the life insurance to redeem shares. The Supreme Court’s decision in Connelly affirmed this treatment, while effectively overruling Blount.
To simplify this ruling, the following is an excerpt from a template of a redemption buy-sell agreement. The effect of Connelly is to render the highlighted language unenforceable:
Business Roundup
Perhaps to a fault, I try to remain neutral in my analyses in this newsletter and my other public content. On occasion I have attempted to write controversial articles, and thus far only two of them have seen the light of day (luckily without much fanfare in the process). However, there is one topic in particular where I have written, and re-written, my thoughts multiple times but I find it difficult to do so in a way that won’t create a knee-jerk reaction in a huge chunk of my reader base.
Then, as I listened to a recent interview with Scott Galloway and Josh Brown, the topic of controversy came up – with the recommendation being that it is perhaps it is better to wait to be controversial until after you are wealthy and/or well-known. So, I am partially tabling some of the critical elements on this subject because I do not yet have the “clout” to do so. That being said, some who I count as mentors and peers (who are indeed on a more stable foundation to be controversial) are about to come to the table with their own thoughts, and I want to make sure I go on the record.
So, the topic I keep tip-toeing around is the shift of estate planning to the wealth management side – particularly what that means for estate planning attorneys going forward. After all, we are no strangers to constant pronouncements (and occasional glee from others) about our “inevitable extinction” – whether as part of tech innovations, increases to the estate tax exclusion amount, or other circumstances.
In this vein, the elephant in the room that I want to call out is the notion that estate planning attorneys are charging too much. I am not disputing that notion, nor am I agreeing with it. Likewise, I am not here to argue that other professionals, like financial advisors, are charging too much or too little – there are enough fee debates in that space already.
What I have a problem with is not the substance of this criticism itself. It is instead who is regularly making or perpetuating this criticism. And, the adage of “follow the money” stands. In my opinion, the weight of (at least recent) criticism is coming from non-attorneys who stand to make money from estate planning.
So, this is where I will (perhaps unfairly or out of context) call out a difference I have not seen anybody else address.
In my unscientific research, the average fees in the U.S (depending on location) for an attorney-drafted estate plan appear to run between $2,500 - $3,000. This is a one-time fee. (Updates tend to be less than this.)
But, wealth advisory fees for an AUM practice appear to run between $7,500 - $10,000 per year for each $1,000,000 under management (assuming fees charged between 75 and 100 basis points per $1,000,000, which I realize is scaled in many cases). Estate planning (including in-sourced or out-sourced document preparation) is routinely charged as part of this higher fee, or even as a separate additional fee. If you want a clear example of what I am calling out, listen or read between minutes 48-54 of this interview, or start around minute 11 in this interview.
I have nothing else to say, other than to point out that difference. I will let you read between the lines. If you want to take that as criticism, please note that was not my intention, but I can’t stop you from thinking that way.
My takeaway for the estate planning attorneys, however, is the clear evidence that subscription-based revenue can work for estate planning. Perhaps news of your demise is greatly exaggerated. Perhaps it is time to decouple your value proposition from the preparation of documents and administration of those documents. This may even allow you to serve the ~67% of people who lack an estate plan, without having to convince them to prepare documents. I have more to come on the substance of creating a subscription-based estate planning law practice, but it will be behind a paywall.
Article Summaries
Why Today’s Practitioner Should Care About Generation-Skipping Transfer Tax
In this webinar recording for paid subscribers, I introduce the three Dickensian-“ghosts” of generation-skipping transfer (GST) tax – past, present, and future – while playing the role of Jacob Marley to warn you that the ghost of past or deferred GST tax is coming to visit you soon.
This webinar recording and slides give you the foundational knowledge to deal with this ghost if and when it does appear.
C and S Corporations for Estate Planners: The Qualified Subchapter S Trust (QSST)
This article for paid subscribers goes into detail on many of the procedural and time-sensitive requirements for making a QSST election.
To set the stage, eligible S corporation shareholders are usually just individuals. However, some trusts are eligible to be S corporation shareholders – one being the qualified subchapter S trust, or QSST.
To be a QSST, a trust must be structured a certain way. Then, within a certain amount of time after S corporation stock is transferred to the trust (if not done sooner), the beneficiary of that trust must file a QSST election statement with the IRS.
Is a Marital Trust Termination a Gift?
This article analyzes the recent Tax Court opinion in Estate of Anenberg v. Commissioner. This case involved a QTIP marital trust that was terminated, with assets being distributed outright to the beneficiary spouse. The beneficiary spouse later gifted some of these assets and sold others.
But, the IRS tried (unsuccessfully) to argue that, under IRC Section 2519, the terminating distribution from the QTIP trust itself was an event generating gift tax. The Tax Court did not agree. The article dives into some of the broader valuation differences between a traditional life estate and a QTIP trust, to illustrate why the IRS was way off in its argument.
From the Archives: Don’t Get Rid of That Trust!
Many clients don’t like it when trusts are imposed on them. But, they like it even less when the benefits of that trust are lost.
At least, that is the premise of my argument in this article – where we walk through some of the common benefits that can be achieved by leaving inheritances in trust instead of distributing them outright.
Contained in this article is a caution for the future. It is easy to look like a “hero” to your clients by working with them to terminate a trust created for their benefit. But, the trade-off is significant tail liability – or at least damage to reputation and the client relationship – if things go south after the trust is terminated.