eGiftLaw Newsletter
| November 1, 2010 Dear Professional Advisor, Greetings from University of Northern Colorado. I am pleased to share with you the latest news from Washington, tax law updates, PLRs, Case Studies and timely articles. We provide this weekly eNewsletter and web site to our professional advisor friends as a free service. Please feel free to call me at 970-351-1380 if I can run a proposal or be of assistance to you. |
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| University of Northern Colorado | November 1, 2010 |
GiftLaw eNewsletter - November 1, 2010
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WASHINGTON HOTLINE Taxes and Lame Ducks Following the election on November 2, 2010, Congress will reconvene in a lame duck session on November 15th. A prime topic for the lame duck session will be taxes – income, capital gain and estate taxes. What direction will the Congress take? The House will convene with the current Democratic and Republican members. Speaker Nancy Pelosi (D-CA) has repeatedly supported extending the middle-class tax cuts first passed in 2001 and 2003, but increasing the 33% and 35% brackets to 36% and 39.6%. This increase would affect single persons with incomes over $200,000 and married couples with incomes over $250,000. In an interview on October 22nd, Vice President Joe Biden indicated that the Administration may be open to negotiation with Congress during the lame duck session. The White House continues to favor a permanent extension of tax cuts for middle-income individuals. However, several Democratic Senators have suggested that a compromise might include an extension of all of the current tax rates for 2011. Vice President Biden noted, "We're open to speak to the Republicans, if they really mean it, if they are talking about deficit reduction, if they're willing to move." The Senate may change in membership immediately after the election. The new Senators elected in West Virginia, Illinois and Delaware will immediately replace the existing Senators due to the rules on vacancies. As a result, the votes needed to pass legislation in the Senate could change. Under Senate rules, 60 votes are required to pass permanent tax cuts. The items that commentators consider to be "must pass" bills include an AMT patch or exemption for 2010 and the tax extenders bill. Editor's Note: In the lame duck session, it is difficult to foresee the exact course of action. Because there remain significant differences between the White House, Speaker Pelosi, Majority Leader Reid (D-NV) and the Republican Senators, it is still possible there could be a Senate deadlock on income and estate taxes. If the Senate deadlocks, Congress may defer action on the income tax and estate tax until 2011. However, most observers are hopeful that a compromise in both areas can be passed during the lame duck session. Estate Basis Adjustments Guidance AwaitedWith the apparent repeal of the estate tax for 2010, attorneys and executors for decedents with estates over $1.3 million are faced with a challenge. Estate taxes may be repealed for 2010, but there is a new and difficult allocation of basis problem for larger estates. At the American Institute of Certified Public Accountants meeting in Washington on October 27, Catherine Hughes, Attorney-Advisor in the Treasury Office of Tax Legislative Counsel, discussed the forthcoming Treasury guidance on basis allocations. Attorney-Advisor Hughes noted that Treasury has received multiple requests from estate attorneys for this guidance and that it is a top priority. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, Sec. 6018 requires an information return to be filed by April 15, 2011 for large estates. Estates with assets over $1.3 million, as referenced in Sec. 1022(b)(2)(B), are required to file the information return. Ms. Hughes noted that the guidance has not yet been published by Treasury because it addresses very complex issues. Because the new rules are likely to apply only for year 2010 and many decedents have very minimal records to show the cost basis of assets purchased decades earlier, this is likely to be a very difficult area for executors and estate attorneys. Ms. Hughes acknowledged that the IRS may need to extend the April 15, 2011 deadline. The IRS faces significant issues in trying to estimate the number of returns that will be filed, whether they should be permitted to be filed electronically and how the IRS will administer the program. The IRS also is responding to requests for clarifications on rules for determining basis. Ms. Hughes noted that there already are rules for determining basis in the income tax and capital gains sections of the code. It is uncertain whether the IRS will create additional basis determination rules for estate information returns. 2011 Treasury Inflation AdjustmentsBecause there has been very low inflation in the past year, there will be no increase in Social Security payments for 2011. In addition, numerous tax-related numbers that are adjusted each year will largely remain unchanged. However, the IRS has published Rev. Proc. 2010-40; 2010-46 IRB 1 (27 Oct 2010) to cover many of the adjusted tax numbers. There will be further guidance to specify the tax rate tables under Sec. 1, the standard deduction under Sec. 63, the limit on itemized deductions under Sec. 68, the personal exemption under Sec. 151 and various other items. The published ruling covered the amounts for several items for 2011. These include the following. 1. Kiddie Tax – The reduced unearned income amount will be $950. 2. Token Charitable Gifts – A low cost item will be $9.70 or less. For gifts of $48.50 or more, the low cost item may be distributed to donors with no tax impact. The token gift value may be increased for larger donor gifts and must be less than 2% of the gift or a maximum of $97. 3. Special Use Valuation – The Sec. 2032A maximum reduction in value amount is $1,020,000. 4. Annual Gift Exclusion – The Sec. 2503 gift amount is $13,000. 5. Non-Citizen Spousal Gifts – The 2011 limit is $136,000. 6. Installment Estate Tax Interest – The "2% portion" under Sec. 6601(j) is $1,360,000. 2011 Inflation-Adjusted Pension LimitsIn IR-2010-108 (27 Oct 2010), the IRS announced cost-of-living adjustments for various pension related amounts. Because there has been minimal inflation during the past year, most of the amounts remain the same as the 2010 limits. 1. 401(k), 403(b) or 457(b) Contributions – $16,500. 2. Catch-Up for Age 55+ – $5,500. 3. Deferred Contribution Plan Limit – $49,000. 4. Annual Compensation Limits – $245,000. 5. Key Employee Top-Heavy Plan – $160,000. 6. Phase Out Limits for a Regular IRA – For a single person, $56,000 to $66,000; for a married couple, $90,000 to $110,000; for the spouse of a person in an active plan, $169,000 to $179,000. 7. Phase Out Limits Roth IRAs – Single person $107,000-$122,000; married couple filing jointly, $169,000-$179,000. Applicable Federal Rate of 2.0% for November – Rev. Rul. 2010-26; 2010-44 IRB 1 (18 Oct. 2010)The IRS has announced the Applicable Federal Rate (AFR) for November of 2010. The AFR under Sec. 7520 for the month of November will be 2.0%. The rates for October of 2.0% or September of 2.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2010, pooled income funds in existence less than three tax years must use a 4.6% deemed rate of return. Federal rates are available by clicking here.
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PLR THIS WEEK PLR - 201042012 Reformation of Trust Will Not Constitute Self-Dealing With the assistance of an accountant and attorney, A created Trust with the intent of it qualifying as a fixed percentage charitable remainder unitrust (CRUT) under Sec. 664. Due to a drafting error, Trust was drafted as a single-life CRUT rather than a two-life CRUT. Because Trust is irrevocable, Trustee sought to correct the scrivener's error by an order from the Court authorizing an amendment, ab initio, of Trust. Court ordered the reformation of Trust to a two-life CRUT, subject to the Service issuing a ruling that the reformation will not disqualify Trust as a CRUT. The Service ruled that judicial reformation of the trust did not violate Sec. 664 and that the trust would be treated as a valid CRUT under Sec. 664(d)(2). Additionally, the judicial reformation of the Trust would not be an act of self-dealing under Sec. 4941. Trust, A and B were required to file any necessary income or gift tax returns within 120 days of the ruling. Failure to file necessary amended returns would result in the ruling by the Service being null and void. To view the full PLR Click Here.
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CASE OF THE WEEK Grizzly Gordon and the Ranch LLC Grizzly Gordon grew up in the Big Sky country. He loved the mountain and plain vistas of this beautiful ranching country. During his youth, Grizzly acquired his nickname by discovering a grizzly bear that had gotten too near his cattle. Grizzly felled the bear with one well-aimed shot and all his neighbors called him Grizzly after that experience. Grizzly is now 72. He has been a bachelor rancher all of his life. Grizzly loves the freedom and openness of the ranching lifestyle. He also likes the fact that he is a long way from both the state and national capital. Grizzly is not a tax protestor, but he is interested in saving taxes. Grizzly has supported his favorite charity with a $25 gift every year for the last 30 years. He decides that perhaps it's getting time to think about deciding what to do with his 20,000 acre ranch when he passes away. So after having received 42 letters and postcards from his friendly gift planner, Grizzly finally placed the call. He invited the gift planner to come out and visit him on the ranch and promised the world's finest steak dinner. The gift planner visited Grizzly out on the ranch. It was a 90-mile trip on a paved road and then a 3-mile trip up a gravel road to the ranch house. The ranch dogs were friendly to the gift planner and Grizzly quickly answered his knock at the door. Grizzly and the gift planner enjoyed a great steak dinner and talked late into the evening. Grizzly mentioned that he had a CPA in town and his CPA had encouraged him to take the ranch and put it into a single-member LLC, whatever that was. The gift planner responded that probably the CPA had created a limited liability company to own the ranch. So Grizzly responded, "Yes, I guess that Ranch LLC now owns the ranch. But I own Ranch LLC." Grizzly wondered whether he could put Ranch LLC in one of those trusts that would allow him to sell tax-free. The only hitch is that Grizzly was not ready to hang up his stirrups and wanted to continue to run the ranch until it sold. Is there a way for Grizzly to live on the ranch and still fund a unitrust? To view the solution to this Case of the Week Click Here.
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ARTICLE OF THE MONTH Charitable Business Planning – The Sole Proprietorship Many successful business owners start out with nothing more than an idea and a few dollars. The first years are generally lean, but after a lot of hard work and dedication, the fruits of their labor are realized. Because most small business owners start with relatively little capital, they usually do not form the business as a corporation or limited liability company, but rather report the business profits on their own personal income tax return. This type of business, a sole proprietorship, does not have a legal existence apart from the owner. The owner holds title to all of the business assets and is personally liable for any outstanding debts or legal obligations. Among the owners who operate as sole proprietors are many real estate investors, small retail storeowners, consultants, farmers, ranchers and authors. When these sole proprietors enter retirement, it is quite common for them to plan to convert some of the value of their business into an income stream. This is an excellent opportunity to consider a charitable gift plan that maximizes income and reduces taxation. To view the full Article of the Month Click Here.
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| Note:Case studies, articles, commentary and other materials in the GiftLaw system are included solely as educational information. Articles and editorial comments are offered as an educational service to friends of this organization, and may not always reflect our official position on any issue. Since case studies or articles may not always reflect the current AFR or tax law, it may be necessary to run any illustration with a current version of Crescendo to obtain updated information. If professional services are required, all persons shall consult with their qualified professional advisors. Tax Quotes are courtesy of Jeffery L. Yablon, Washington, D.C.
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| University of Northern Colorado | November 1, 2010 |
| Thank you for your interest in gift planning. To access any of this updated GiftLaw information, please select our web page by clicking here. Cordially yours, George O. Pickell University of Northern Colorado If you do not wish to receive future emails, please click here to unsubscribe. Thank you. |
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