Restricted Management Accounts Now Provide Investors Benefits Of A Different Type

Taxpayers have relied on restricted management accounts (RMAs)

as part of their estate plans for years. Authors William Probus and

Jeremy Noetzel explain why RMAs may no longer be appropriate

vehicles for accomplishing taxpayers' financial goals.

RMAs have been used recently to accomplish a variety of

investment and estate planning objectives, particularly by

taxpayers interested in minimizing gift and estate taxes on the

transfer of assets through the use of valuation discounts. The

Internal Revenue Service (IRS), however, recently ruled that

valuation discounts are not available for interests in RMAs. While

RMAs are no longer a viable method of obtaining valuation discounts

for gift and estate tax purposes, they continue to provide other

investment benefits. Taxpayers and their legal and tax counsel

should consider alternative strategies for minimizing gift and

estate taxes on the transfer of assets. However, RMAs retain

certain benefits that should be considered.

RMA Basics

Under an RMA agreement, an individual transfers assets

– generally marketable securities – to an

investment manager and relinquishes control over the assets for a

fixed term. The investment manager retains the sole right to manage

the account and make investment decisions during that term, which

can generally be extended by the investor. During the RMA term, the

investor is normally unable to make withdrawals unless those

withdrawals were specifically agreed to in the provisions of the

RMA contract, and any income earned by the RMA is retained and

reinvested. The investor can transfer the RMA or interests therein

to family members, but the restrictions on the transferred RMA

remain in place throughout the duration of the RMA term.

RMAs can provide certain financial benefits. For example, with

the investor locked in, the investment manager has an incentive to

focus on long-term strategies rather than short-term results.

Furthermore, because the manager's fees are based on the value

of the portfolio rather than the number of transactions, the

investor might enjoy lower fees.

RMAs also have been attractive to individuals looking to secure

valuation discounts that reduce the amount of gift and estate taxes

on their asset transfers. After forfeiting control of those assets,

an RMA investor might previously have taken valuation discounts of

up to 15 percent of the value of the assets for gift and estate

taxation purposes.

Valuation Discounts For Asset Transfers

Individuals...