EMPLOYMENT CANNOT BE DEVISED [FLORIDA]

Estate planners often have clients that want to include directions in their wills and trusts that don’t directly relate to dispositions of assets. Such “dead hand” attempts to control events from the grave can at times be challenged on public policy grounds.

In a recent 4th DCA case, a decedent included a provision in a codicil to his last will, requiring employment of his son after the decedent dies by a corporation controlled by him (he owned 100% of the stock). Besides ruling against the son that the language relating to lifetime employment was only precatory, the court found that even if it was not precatory it was unenforceable since it conflicts with the fiduciary duties of the officers and directors of the corporation.

A testamentary direction to guarantee Thomas employment within the company, regardless of circumstances or detriment to the corporation, could compel the violation of fiduciary duties of the officers and directors to the corporation. This would be a violation of statutory duties and the public policy behind them.

Interestingly, in support of its conclusion the DCA noted two Florida cases that voided directions in a will to a personal representative to hire a specific lawyer and to hire a specific real estate agent to assist in estate administration - In re Estate of Marks, 83 So. 2d 853 (Fla. 1955) and In re Estate of Fresia, 390 So. 2d 176 (Fla. 5th DCA 1980). These cases provide that a will provision cannot compel a personal representative to hire a specific person who would be acting in a fiduciary capacity because of the confidential relationship between the personal representative and a fiduciary. How many last wills have you seen that direct appointment of an attorney for the estate? I know I’ve seen more than one!

THOMAS GRANT, Appellant, v. BESSEMER TRUST COMPANY OF FLORIDA, INC., as personal representative of the Estate of Milton Grant, Appellee. 4th District. Case No. 4D11-3614. July 3, 2013

IRA BENEFICIARY SUFFERS TRANSFEREE ESTATE TAX LIABILITY 12 YEARS AFTER FORM 706 FILED

Notwithstanding failing to assess estate tax against an IRA beneficiary wihin the Code §6901 four year transferee statute of limitations, in U.S. v. Maureen G. Mangiardi et al, the IRS was permitted to collect estate taxes under its estate tax lien more than 12 years after estate taxes were assessed.

FACTS: Joseph Mangiardi died on April 5, 2000. He died owning assets through a revocable trust of about $4.57 million and an IRA worth $3.85 million. Estate taxes were determined to be approxmately $2.47 million.

The estate received four years of payment extensions under Code §6161, claiming inability to pay due to reductions in the value of publicly traded securities from a declining market. Only $200,000 in estate taxes have been paid, and there are inadequate assets in the revocable trust to pay the estate taxes. The IRS now seeks to collect against Maureen Mangiardi as a transferee owner of IRA assets of the decedent under the 10 year estate tax lien of Code §6324, in an amount equal to the value of the IRA assets she received.

Maureen asserts two defenses. First, Code §6901 provides for the assessment and collection of taxes from a transferee with the same three year statute of limitations on assessment applicable to the estate under Code §6501, plus one extra year. Code §6901(c). The IRS did not assess taxes against Maureen within this period and never assessed under Code §6901. Instead, the IRS sought to collect the tax directly under the Code §6324 10 year estate tax lien against all gross estate assets. Maureen claimed that an assessment against her within the Code §6901 four year period was required. Unfortunately for her, other courts have previously held that the IRS can proceed to collect under Code §6324 without having to assess the transferee under Code §6901 (including one involving the same estate as the instant case, but which the court did not cite). These cases included Mangiardi , Joseph Est v. Com., 108 AFTR 2d 2011-6776 (2011, CA11), aff’g (2011) TC Memo 2011-24; United States v. Geniviva, 16 F.3d 522, 525 (3d Cir. 1994); Culligan Water Conditioning of Tri-Cities, Inc. v. U.S., 567 F.2d 867, 870-71 (9th Cir. 1978); United States v. Russell, 461 F.2d 605, 606 (10th Cir. 1972); U.S. v. Motosko, No. 8:12-cv-338-T-35-TGW, 2012 WL 2088739; United States v. Matzner, No. 96-8722-CIV, 1997 WL 382126.

Maureen also argued that the 10 year lien had expired by the time the IRS sought to collect from her. While more than 10 years had expired since assessment of the estate tax, the IRS countered that the 10 year lien period was extended by the four year extension of time to pay granted to the estate which extended the statute against the estate. The court nonetheless ruled that since Maureen’s liability, as a transferee, was derivative of the estate’s liability as transferor, the four year extension granted to the estate also extended the statute for collections against her, citing United States v. Kulhanek, 755 F. Supp. 2d 659 (W.D. Pa. 2010).

COMMENTS. The above result is bad for IRA and other beneficiaries for many reasons. First, it allows beneficiaries to be hit with estate taxes many years after death, and without knowledge that taxes were never paid and thus that the potential liability existed.

Second, this extended time period can be more than 10 years, since extensions granted to the estate extend this 10 year period. Presumably, if estate taxes are extended for 10 or 15 years under Code §6166, this extension can be tacked on to the 10 year estate tax lien period.

Lastly, it would appear that an IRA beneficiary is liable as a transferee for the full amount of IRA assets that are inherited. However, the IRA beneficiary really does not benefit by the full amount, since income taxes will have to paid by him or her on amounts withdrawn from the IRA. This is unfair – the beneficiary will be liable for more in estate taxes than the net amounts received from the IRA. While Code §691(c) may provide an income tax deduction for the estate taxes attributable to the IRA, mismatched tax years between deduction and income may void or limit the benefit of this deduction to the IRA beneficiary.

United States v. Maureen G. Mangiardi et al., No. 9:13-cv-80256 (USDC So.D.Fla.)

529 PLANS–NOT ALWAYS THE BEST ALTERNATIVE

Section 529 plans offer many advantages in regard to funding education. Key among these are tax-free growth, tax-free distributions for educational purposes, and the ability to use up five years of annual exclusion gifts in one year. Nonetheless, the use of such a plan is not always a no-brainer, especially when compared to other vehicles, such as irrevocable gift trusts.

A recent article highlights some of the negative aspects of Section 529 plans. The following summarizes many of these, both from the article and from my own analysis and research notes:

• The plans have limited investment choices, especially as compared to trusts. These choices are dictated by the rules of the state in which the plan is located;
• The plans will typically be used to pay tuition costs. However, since individuals can make tax-free gifts of tuition costs directly, this reduces the ability of donors to deplete their estates by make such tuition gifts – instead, they use up some of their annual exclusion amounts to fund the plan and thus payments that could have been made free of estate tax anyway;
• Earnings withdrawn for non-qualified (i.e., noneducational) expenses are subject to income tax and a 10% penalty tax;
• The unused portion of the annual exclusion will be included in the donor’s taxable estate for estate tax purposes if the donor dies within 5 years of the funding, if more than one year’s funding is undertaken at one time;
• It is difficult to get any tax benefits from losses;
• “Educational” uses are limited to college and post-secondary school expenses;
• Once a maximum account size is reached, no additional contributions are permitted; and
• Spouses cannot be beneficiaries.

Therefore, planners should always compare the use of a Section 529 plan to other available alternatives, including irrevocable gift trusts.

Liss, Stephen, Rethink the Use of 529 Accounts for Funding College Costs, WG&L Estate Planning Journal, August 2013