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A "FAME", a Family Asset Management Entity, is a useful, if not necessary, tool in estate planning for larger
estates. The tax objectives are obtaining discounts for minority interests and lack of marketability and using
the interest in the "FAME" to divide interests among family members, usually on an ongoing basis to take
advantage of annual gift tax exclusions and charitable contributions. In the latter case, interests in the "FAME"
can be usefully incorporated into Charitable Lead Trusts, for example, to further leverage the lifetime gift and
estate tax exclusions.
Simply put, the theory is that if a senior family member owns 1000 shares of IBM, there would be no
discounts as pieces of the investment were gifted to family members. However, the same 1000 shares of IBM
in a "FAME", with annual gifts of "FAME" interests within the gift tax exclusion limits would be valued at a
discount, while at the same time the 1000 share block would remain intact and the minority family members
would not be tempted to cash in their investment to buy that new BMW or Humvee.
That is a simplistic example, granted, but becomes much more realistic when a diversified portfolio is split up
through a "FAME" into minority interests which are only an indirect participation in the portfolio management
and performance.
While we know that the IRS looks askance at "FAMEs" that hold only marketable securities (but these are not
necessarily forbidden) the conventional wisdom is that success from a tax standpoint is much more likely to
be obtained when marketable securities are leavened with real estate or other types of businesses such as
family business operations. Nonetheless, some of the leading cases in the area involve family partnerships
or LLCs formed to hold large blocks of publicly traded companies.
In order to succeed in leveraging the annual gift tax exclusion and the lifetime exemptions for gift and estate
tax purposes, one needs care, precision and thorough analysis. This is not a $29.95 off the shelf special.
Coordination between attorney, C.P.A. and financial advisor is essential. From the tax planning standpoint,
observe the following cautions:
A. Choose the type of entity carefully.
B. Give the entity business reality, in following formal procedures for accounting, asset management and
necessary formalities.
C. Have business purposes that are well documented.
D. Plan ahead, don’t wait until the senior generation is on their deathbed.
E. Get a good evaluation opinion every year that there is a reportable transaction. (Remember that a split
gift of $20,000 per donee has to be reported even though no tax is due).
There are other hazards in constructing and implementing a "FAME" for your client. Among these are:
Business Purpose. Is the partnership or LLC really a business entity? Does it manage income producing
property, whether real estate, closely held businesses, or listed securities? For example, what about a
summer residence? In this case, there might be a legitimate concern about whether the summer residence
was, in fact, a business property. Is it held for the production of income? If there is little or no rental income
realized from the property, and if the period of occupancy is dominated by family members, the IRS might, with
justification, determine that the entity is not really a business entity at all, especially if the tests of deductibility
of operating expenses of the second home were not met prior to the transfer to the "FAME". It is well
established in tax law that personal deductions are not transformed into business deductions merely by
changing the form of ownership of the asset.
Gain on Transfer. The transfer of assets to a "FAME" is generally tax-free unless the "FAME" is an investment
company and if diversification occurs. These are technical tests and the purpose of this newsletter is not to
analyze them in detail, but merely to point out that qualified professional assistance should be obtained
before venturing into these waters.
Family Farm. Where a family farm or other real estate investment is to be transferred to the next generation,
possibly with a retained income interest to the surviving spouse, a "FAME" fits the circumstances perfectly. A
"FAME" can facilitate annual gifting and division of ownership to qualify for minority discounts. Securities can
be bundled with the real estate to achieve truly spectacular discounts and tax reductions.
Gift on Formation. The IRS is consistently arguing that the creation of a "FAME" is a taxable gift if, based on
structure, the decedent receives an interest valued less than the assets transferred. The IRS prevailed in
Estate of Trenchard, TCM 1995-121. Since that case, it has not been particularly successful in making this
argument. However, it continues to do so in succeeding cases and the organizational plan must be carefully
drafted so as to counter the IRS position. For example, where a parent transfers significant assets to a
"FAME" and gives up voting control to other family members through division of general partnership interests,
the door is wide open to a successful Trenchard argument by the IRS. The author has seen cases where this
trap has been ignored, to the hazard of clients.
Conclusion. The game is definitely worth the candle in considering planning and organizing a "FAME". As
long as the confiscatory estate and gift tax system is in place, clients need to consider how the organization of
a "FAME" fits into a tax saving, and wealth conservation, strategy. However, it is not a game for the
unsophisticated and tax traps abound.
The tax savings can be fifty to one hundred times larger than the professional fees incurred in careful
planning and implementation.
We will be happy to answer any questions you may have and appreciate referrals for clients who need estate
planning consultations, including the organization of a "FAME".
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| April 2000 IS THERE A FORTUNE IN YOUR "FAME" by James R. Modrall III |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |