eGiftLaw Newsletter
| March 30, 2009 Dear Professional Advisor,
|
||
| University of Northern Colorado Foundation, Inc. | March 30, 2009 | |
GiftLaw eNewsletter - March 30, 2009
|
||
WASHINGTON HOTLINE Baucus Bill Freezes Estate Taxes Tax Quote of the Week "Our tax code is so long it makes War and Peace seem breezy." -- Steven LaTourette
Baucus Bill Freezes Estate Taxes Senate Finance Committee Chair Max Baucus (D-MT) introduced the Taxpayer Certainty and Relief Act of 2009 on March 26, 2009. The tax bill includes a $2.3 trillion middle class tax cut package and also creates a freeze on estate tax rates and major estate planning modifications. Sen. Baucus indicated, "By guaranteeing a little extra cash in the pocket of working moms and dads and by making sure that the AMT and the estate tax can move with the economy, we avoid sweeping tax increases for millions of American families." The bill would make permanent many of the provisions enacted for tax relief during the past decade. Several of the provisions are intended to reduce income taxes for low and middle income taxpayers. The bill would not change the scheduled increase in the top two tax brackets in 2011 to 36% and 39.6%. The middle class reductions: 1. For taxpayers in the 10%, 15%, 25% and 28% brackets, the rates are continued. 2. The alternative minimum tax exemption is indexed for inflation. 3. The zero percent long-term capital gain rate for taxpayers in the 10% and 15% bracket is continued. 4. The child tax credit is refundable for incomes below $3,000. 5. The marriage penalty relief for taxpayers in the 15% bracket is continued. 6. The adoption and exclusion caps of $10,000 per eligible child are continued. Sen. Baucus proposes significant changes in estate taxes. Rather than repealing the estate tax in 2010, the exemption is frozen at $3.5 million per person ($7 million per couple), with the estate tax rate set at 45%. The exemption would be increased for inflation in $10,000 increments starting in 2011. Farmers and ranchers would benefit from an increase in the special use valuation from $750,000 to $3.5 million. This would permit transfer of very valuable farms and ranches from parents to children who are actually operating the farm or ranch. A change that will require modifications to most large estate plans is the proposal to pass "marital deduction portability." If a surviving spouse passes away with an estate larger than the applicable exemption, he or she will be able to use the "aggregate deceased spousal unused exclusion amount." In order to use a portion of the first decedent spouse's exclusion, his or her executor must make an election on that estate tax return. If the "Spousal Unused Exclusion" election is made, the surviving spouse may then use the remaining unused exemption. If this bill becomes law, the full estate could be transferred to surviving spouse and he or she will have an estate exemption of $7 million. Editor's Note: The concept of portability has been widely discussed. With the significant change in valuation of the estates, the major increase in the size of the exemption and portability of the marital exemption, there will need to be significant planning changes in most large estates. Foundation Bill May Remove the "Katrina Penalty" Sen. Charles Schumer (D-NY) and several other senators have introduced a bill to eliminate a tax that discourages private foundations from making large grants when there is a natural disaster such as Hurricane Katrina. Private foundations are exempted from federal income tax, but pay an excise tax on net income. The excise tax is normally two percent and is intended to cover the cost of the IRS oversight of private foundations. However, if the private foundation continually makes larger gifts than the average for the past five years, the excise tax is reduced to one percent. If a private foundation were making grants each year of $100,000 plus small increases, it would pay the one percent excise tax. However, if in year two it makes a grant of $1 million for Hurricane Katrina relief efforts, then the resumption of grants at $100,000 plus small increases would result in a two percent annual excise tax. The increased excise tax is due because the Katrina grant raises the five-year average grant. In effect, the private foundation is penalized for making a generous grant to benefit Katrina survivors. Sen. Schumer indicated, "In today's economy, the need for charitable gifts is greater than ever and we should be encouraging foundations to increase giving. The tax code should thank foundations for these efforts, not tax them for their generosity." Under the new proposal, the excise tax on private foundations' income would be a flat rate that will not change based upon distributions. The Michigan Council on Foundations estimates that the fixed excise tax rate will be 1.32 percent. Editor's Note: This is an example of a complex provision in the tax code that achieves a result exactly opposite to that intended. The excise tax provision was intended to encourage charitable giving, but it clearly discourages major relief gifts. The proposed change has bipartisan support and is likely to be enacted. FLP Assets Fully Valued In Estate In Estate of Erma V. Jorgensen et al. v. Commissioner; T.C. Memo. 2009-66; No. 21936-06 (26 Mar 2009), the Tax Court determined that no valuation discounts are permitted for a family limited partnership (FLP). Colonel Gerald Jorgensen was a career Air Force Officer. He served as a pilot in World War II, as counsel with the Judge Advocate General's Office and, after retirement, was an aide to a U.S. Congressman. Colonel Jorgensen married Erma Jorgensen after World War II and they raised their children Jerry Lou and Gerald. Colonel Jorgensen was an avid investor and acquired a portfolio of securities of over $2 million in value. Colonel and Mrs. Jorgensen signed revocable trusts in 1994. On May 19, 1995, they created a family limited partnership, the Jorgensen Management Association (JMA-I). Colonel and Mrs. Jorgensen transferred $227,644 each to JMA-I. Colonel Jorgensen passed away in 1996 and Mrs. Jorgensen funded JMA-II with $1,861,116 in 1997. In November of 1997, she gifted partnership interests in JMA-II to her two children and six grandchildren, but there was no appraisal and no Form 709 Federal Gift Tax return was filed. Mrs. Jorgensen passed away April 25, 2002. Executrix Jerry Lou and Executor Gerald filed her Form 706 Estate Tax return and claimed discounts for both JMA-I and JMA-II. The IRS denied discounts for JMA-I and JMA-II and assessed a deficiency of $796,954. The IRS maintained that there was inclusion of the assets at full value under Sec. 2036(a) and, alternatively, under Sec. 2038. The Tax Court noted that inclusion under Sec. 2036(a) is applicable when "three conditions are met." The conditions are that there is a transfer of property, there is not a bona fide sale for adequate and full consideration and the decedent retained a life interest in the gifted property as described under Sec. 2036(a). The Tax Court determined there were indeed transfers to JMA-I and JMA-II by Mrs. Jorgensen and that since she stood on "both sides of the transaction" there was no bonafide sale for adequate and full consideration. The Tax Court then turned to the "disregard of partnership formalities." There were seven specific failures in the view of the Tax Court. These are as follows: 1. No partnership books and records other than the checkbook were maintained; 2. The checkbook was never reconciled; 3. There were no formal partnership meetings; 4. There were no minutes at any meetings; 5. Partnership checks were used to pay Mrs. Jorgensen's personal expenses; 6. Partnership funds were commingled with her personal funds; and 7. Partnership assets were used for her personal gifts to children; Because the decedent retained multiple and significant rights with respect to the liquid assets in the partnerships, the Tax Court determined that Sec. 2036(a)(1) required full estate inclusion of "the value of the assets" in the FLP's. Because the children had received assets and paid income tax in years 2003 through 2006 on sales of the assets later included in the estate of Mrs. Jorgensen, the Tax Court held that the estate was entitled to an offset for 2003 income taxes overpaid by the children. Editor's Note: This is yet another IRS victory in a "bad facts" family limited partnership case. The value of these cases is that they do present a roadmap for successful FLP operation. By retaining sufficient assets outside the FLP, documenting business purpose, conducting appropriate meetings and maintaining minutes and other records, the FLP discounts will be upheld. Applicable Federal Rate of 2.6% for April -- Rev. Rul. 2009-10; 2009-14 IRB 1 (18 Mar. 2009) The IRS has announced the Applicable Federal Rate (AFR) for April of 2009. The AFR under Sec. 7520 for the month of April will be 2.6%. The rates for March of 2.4% or February of 2.0% 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 2009, pooled income funds in existence less than three tax years must use a 4.8% deemed rate of return. Federal rates are available by clicking here.
|
||
PLR THIS WEEK PLR - 200912005 Trust is Eligible S Corp. Shareholder, Not a CRT Trust1 is the sole shareholder of a C corporation intending to elect S corporation status. There are a number of income and remainder beneficiaries of Trust1. Of the remainder beneficiaries, two are trusts (Trust2 and Trust3). Trust3 is tax exempt under Sec. 501(c)(3). When the last income beneficiary of Trust2 passes away, the corpus will be distributed to Trust3. Trust1 requested rulings that: (1) Trust1 is eligible to be an "Electing Small Business Trust" (ESBT) under Sec. 1361(e) and may hold S corporation shares under Sec. 1361(b)(1)(B); and (2) Trust2 is not a charitable remainder trust (CRT) within the meaning of Sec. 664. Sec. 1361 prohibits certain legal persons from owning S corporation shares or being a beneficiary of an ESBT. Included in this prohibition are CRTs under Sec. 664. Sec. 1361(b)(1)(B) provides that a small business corporation may not have as a shareholder a person that is not an individual, but Sec. 1361(c)(2)(A)(v) allows an ESBT to own shares of S corporations. The regulations under Sec. 1361 declare that any current beneficiary of an ESBT shall be considered a shareholder of the corporation. "Current beneficiary" is defined as a person at any moment in time that is entitled to receive a distribution of principal or income of the trust. No person is treated as a potential current beneficiary solely because that person holds a future interest in the trust. Reg. 1.664-1(a)(2) provides that a trust is a CRT only if it is either a charitable remainder annuity or unitrust in every respect. The Service determined that Trust2 is not a CRT. Trust2 fails to qualify as a CRT because it is not obligated to make payments at least annually of at least 5% of the value of the trust assets upon creation and otherwise does not conform, at all times, to the various requirements of Sec. 664. Therefore, Trust2 is eligible under Sec. 1361 to be treated as an ESBT. The Service also determined that Trust2 is a distributee trust and, therefore, the beneficiaries of Trust2 will be treated as beneficiaries of Trust1 in order to qualify as an ESBT. As a result, Trust1 is eligible to be classified as an ESBT and is a qualified owner of S corporation shares. Editor's Note: If Trust2 had met the requirements of Sec. 664, the "CRT taint" would have flowed through to Trust1. Because CRTs are ineligible to own shares of S corporations, this would have prohibited Trust1's C corporation from electing S corporation status. To view the full PLR Click Here.
|
||
CASE OF THE WEEK Dying to Deduct, Part 2 Abigail Azah is a wonderful and spirited 80-year-old woman. To this day, she still works in her garden, handles all of her finances and plays golf each weekend. In addition to her busy schedule, she also makes time to help at a local homeless shelter. She believes that whenever you can lend assistance to your fellow neighbor it is your responsibility to do so. Because of this belief, she gives her time, love and money to the shelter. Abigail's normal practice is to give $5,000 each year to the homeless shelter. However, she wants to make a more significant gift to the shelter this year. So, in January of this year, she decided to establish a $100,000 charitable gift annuity for her and her sister. The payments would go to Abigail for life, then to her sister for life. She liked the high fixed payments, large tax deduction and simplicity of the arrangement. Because Abigail funded the CGA with cash, a large portion of each payment was tax-free. But of course, what she loved most was the eventual gift to the shelter. Sadly, Abigail suffered a heart attack in March and died soon after. It was a terrible loss to the community. Now several months have passed and Abigail's family and CPA are winding-up Abigail's financial affairs. The CPA knew he could deduct Abigail's charitable tax deduction on Abigail's final income tax return. He also knew that if a person who funds a gift annuity dies prematurely he or she may claim an additional tax deduction for any unrecovered investment (See "Dying to Deduct, Part 1). However, in this case, Abigail's sister is still remaining on the gift annuity contract. Thus, the CPA wonders how this affects the unrecovered investment issue? Since Abigail died prematurely, does she get another tax deduction? Does the fact that this is a two-life gift annuity affect the outcome? To view the solution to this Case of the Week Click Here.
|
||
ARTICLE OF THE MONTH IRA Unitrusts with a $3.5 Million Exemption President Obama and the Democrat leaders of the Senate have suggested that the estate exemption should remain at $3.5 million, with the estate tax rate fixed at 45%. This year the Senate Finance Committee under the leadership of Sen. Max Baucus (D-MT) will address the estate tax issue. While Republican leaders still prefer a large exemption, the potential for compromise exists because if the present law were not changed, the estate tax repeal in 2010 would be followed by a reinstatement of the $1 million estate exemption in 2011. Therefore, a compromise is quite possible. With the estate exemption increase to $3.5 million, less than ? of one percent of estates will be taxable. In the past years, counsel have been reluctant to fund testamentary unitrusts for persons with taxable estates due to the need to pay the estate tax from other estate assets. The IRS has taken the position that the Sec. 691(c) IRD income tax deduction for prior estate tax payouts does not flow through the unitrust to the income recipient. While some commentators question the validity of the IRS position, most counsel are reluctant to contest this position. However, with the $3.5 million estate exemption and the charitable deduction from the unitrust, it is usually possible to create a unitrust in conjunction with a zero estate tax plan. This plan is well suited to both the inheritance goals and the tax reduction goals of most IRA owners. Because 99.5% or more of estates are not taxable, the door is opened to "Give It Twice" testamentary unitrusts funded with IRAs. To use this plan, the IRA owner may create a unitrust during life for one-life plus a term of years or a unitrust for his or her life and the lives of the children. The designated beneficiary of the IRA is changed to the trustee of the unitrust. When the owner passes away, the trust for the term of years or for lives is then funded. While the unitrust may be a testamentary trust in either a will or a living trust, it is much easier to create the lifetime trust for one life plus a term of years and then change the IRA beneficiary designation to the trustee of that trust. The living unitrust may be unfunded in some states (California and others) or it may require nominal funding but no administration. Check the applicable state law for funding requirements. To view the full Article of the Month Click Here.
|
||
| 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.
© Copyright 1999-2009 Crescendo Interactive, Inc. |
||
| University of Northern Colorado Foundation, Inc. | March 30, 2009 | |
| 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 Foundation, Inc. If you do not wish to receive future emails, please click here to unsubscribe. Thank you. |
||
If you wish to view older versions of this newsletter, click here.
