For regular folks, the current estate tax threshold is not a big concern. After all, a single person must have more than $5.43 million and married couples must have twice that.
Such is not the case if you have more that can be protected from the IRS ... especially if you have a lot a lot more.
Enter the case of the Bill Davidson estate.
Davidson was the owner of the NBA Detroit Pistons and other ventures when he died in 2009 at age 86.
Did you hear about the recent $388 million settlement between the IRS and his estate?
That is hard to fathom.
So, what is the back story?
For the scoop we turn to Forbes and its article titled "IRS Grabs $388 Million From Billionaire Davidson Estate."
It seems about two years ago Davidson's estate took the IRS to U.S. tax court in an attempt to challenge the agency's assessment of additional taxes.
The IRS claimed that the estate owed $187 million in gift taxes, $152 million in estate taxes, and $49 million in generation-skipping taxes, plus a $133,000 gift tax penalty bill.
Two problems factored into to these deficiencies.
First, the IRS claimed that the Davidson estate undervalued some corporate stock and improperly valued the self-cancelling installment notes (SCINs).
On top of the, the IRS claimed that the estate also underestimated the value of privately held stock held in trust for Davidson's children and grandchildren.
So, what are SCINs?
SCINs are legitimate tax planning devices, but there is some gray area in the way they are structured.
In this instance, the IRS questioned the calculations used and said the basketball team owner was, in effect, making taxable gifts he should have reported.
The IRS requires a "fair exchange" of assets for the notes.
This case is interesting and instructive.
On large estates, "valuation" issues tend to be the Achilles heel.
Even if you are not a billionaire NBA owner, you may have hard-to-value assets.
Teaching point: If you are wanting to take advantage of cutting edge estate planning techniques (like SCINs), then tread very carefully and make sure you have your valuation ducks in a row.
Contact an experienced estate planning attorney if you are considering the use of SCINs or other advanced techniques as part of your estate plan.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
Reference: Forbes (July 8, 2015) "IRS Grabs $388 Million From Billionaire Davidson Estate."
