eGiftLaw Newsletter
| June 1, 2009 Dear Professional Advisor,
|
||
| University of Northern Colorado Foundation, Inc. | June 1, 2009 | |
GiftLaw eNewsletter - June 1, 2009
|
||
WASHINGTON HOTLINE White House Claims Market Rise Should Permit Major Gifts Deduction Limit Tax Quote of the Week "Our income tax system has been destroyed by complexity -- a complexity caused largely by well-meaning efforts to achieve theoretical purity, eliminate every real and imagined abuse, and address nontax policy objectives." -- Fred T. Goldberg Jr.
White House Claims Market Rise Should Permit Major Gifts Deduction Limit As the Senate Finance Committee considers methods to pay for the proposed major health care reform, the Obama administration continues to seek deduction limits for major charitable gifts. The proposal first made in February by the White House is for high-income persons to be able to benefit from charitable deductions at the 28% level starting in 2011. Because the White House is proposing to increase the top bracket from 35% to 39.6% by 2011, major donors would lose part of the benefit of their charitable gifts in 2011 and later years. The estimated added federal revenue of $266.7 billion over ten years would be used to help pay for universal healthcare. At a lunch meeting on May 27 in Washington, Executive Associate Director of the White House Office of Management and Budget Jeffrey Liebman indicated that the White House still supports this limitation on charitable gifts. He pointed out that the stock markets have now recovered and are anticipated to increase substantially in the future. Because major donors often make gifts of appreciated stock, he suggested that the combined savings from capital gains bypass and income tax reductions will be sufficient for these donors. With the two benefits, he suggests that the reduced value of the charitable income tax savings would not be a significant hindrance to major gifts. The Senate continues to remain cool to this White House proposal to reduce charitable deduction benefits. Sen. Robert Bennett (R-UT) introduced an amendment in April to reject this White House proposal. The Senate overwhelmingly passed that amendment. Independent Sector President Diana Aviv has opposed the limit on charitable giving. She points out that the current year is a "difficult fundraising" time for many charities. All charitable organizations very much need the full level of support from major donor gifts. Split Decision on FLP Discounts In Estate of Valeria M. Miller v. Commissioner; T.C. Memo. 2009-119; No. 5207-07 (27 May 2009), the Tax Court determined that FLP discounts would be permitted for initial contributions, but would be denied for deathbed additions. Decedent Valeria Miller was married to her husband Mr. Miller in 1938. They had four children -- Virgil G., Gordon, Donald and Marcia. Mr. Miller was an architect who retired in 1974 at age 60. He spent the next 26 years managing his portfolio using a personally-developed method of charting stocks. When he passed away in 2000, the securities were worth nearly $7 million. Mr. Miller created a QTIP for decedent Valeria Miller and the balance of his securities were transferred to her revocable trust. In 1994, decedent Valeria Miller created an irrevocable life insurance trust. It was funded with annual exclusion gifts through Crummey powers, and purchased policies that paid approximately $2.75 million to her children when she passed away. In 2001, Mrs. Miller created the Miller Family Limited Partnership (MFLP). She was age 86 and in good health at the time. The partnership was signed on March 6, 2002 and funded in May 2002 with approximately 77% of her estate. Of the 1,000 units that were issued, she gave 20 units to each of the four children and retained 920 units. Son Virgil G. Miller managed the stock portfolio using the charting method taught by his father. He devoted approximately 40 hours per week to that management effort. In May 2003, Mrs. Miller was recovering from a broken hip and had congestive heart failure. Just prior to her death on May 28, 2003, most of the securities in her brokerage accounts were transferred to MFLP. The estate filed Form 706 and the IRS issued a deficiency of $1,019,399. There were two issues to determine. First, the estate claimed that the QTIP trust was not needed by Mrs. Miller and therefore was not taxable in her estate. Second, the estate claimed 35% discounts for lack of marketability on the MFLP contributions in May of 2002 and May of 2003. The IRS opposed both claims and noted that the QTIP qualified for a marital deduction in Mr. Miller's estate. Therefore, it is taxable in the estate of Mrs. Miller. Furthermore, the Service claimed that the MFLP discounts were not valid under Sec. 2036. The Tax Court reviewed facts and law and determined that the QTIP was taxable in the estate of Mrs. Miller. The determining factor was the asset "availability," not the need of Mrs. Miller. Because QTIP assets were available, they are taxable in her estate. Second, the Court determined that the 2002 transfers to MFLP were a valid exercise of the right to continue the 26 year investment strategy of Mr. Miller. This was an active (as opposed to the inactive management strategies that had not been upheld in other cases) management process with 40 hours per week expended by Virgil G. Miller. In addition, Mrs. Miller retained over $1 million in securities outside the MFLP, an amount sufficient to provide for her other needs. Therefore, the 35% discount was permitted. However, the Court determined that the deathbed MFLP additions were simply a tax avoidance device with "no significant nontax purpose." Therefore, the discounts were not permitted on the deathbed transfers. Editor's Note: This was a significant victory for the estate. The key benefit to planners with this decision is the affirmation of the FLP discounts for a plan that does follow FLP best practices. MFLP was in existence for a reasonable period of time, it did have an active investment strategy, and Mrs. Miller retained sufficient assets outside the FLP for her personal needs. If FLPs follow these general rules, lack of marketability discounts should be affirmed. NonProfit Medical Centers' Charity Care As the Senate Finance Committee develops potentially landmark healthcare reform legislation, Chairman Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) have requested comments on policies for charity care. The Senate Finance request suggests four different policy areas that are being considered for new legislation. 1. Community Needs Analysis -- A few states currently require that hospitals provide community benefits. They have specific state requirements. It is possible that a federal community needs analysis requirement could be created. However, there are already increased disclosure requirements under Schedule H of the new federal Form 990. A concern is that an ongoing requirement for community needs analysis could be burdensome, especially for smaller medical centers. 2. Minimum Levels of Charity Care -- Most nonprofit medical centers are providing a significant level of charity care. However, there are many questions about charity care. What qualifies as charity care? Who are the needy who should receive it? If the legislation mandates charity care, it will need to define specifically what constitutes charity care and who should be the beneficiary. Medical centers are concerned that a high level of mandatory charity care could result in limitations on ability to provide top-quality care to other patients. 3. Mandatory Services for the Needy -- There is existing legislation that requires emergency rooms to care for patients without regard to ability to pay. If this is expanded, it could have impact on the financial structure of hospitals. 4. Collection of Medical Bills - Most hospitals attempt to be fair and reasonable in collecting bills. If there is a new set of procedural requirements, it needs to be functional for medical centers. There needs to be a balance between the ability of medical centers to collect from those patients who are able to pay and protections for those who do not have resources to pay medical bills. Applicable Federal Rate of 2.8% for June -- Rev. Rul. 2009-16; 2009-22 IRB 1 (18 May 2009) The IRS has announced the Applicable Federal Rate (AFR) for June of 2009. The AFR under Sec. 7520 for the month of June will be 2.8%. The rates for May of 2.4% or April of 2.6% 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 - 200915056 Exempt Status Revoked Organization, a Sec. 501(c)(3) charity since April 13, 19XX, received a letter dated February 1, 20XX from the Service requesting additional information to conduct an examination of Organization's Form 990. The Service also attempted to contact Organization's representative by telephone on March 13, April 28, May 13 and May 28 of 20XX. The Service revoked Organization's Sec. 501(c)(3) tax-exempt status for failure to produce the requested items. Under Sec. 6001, every person liable for tax imposed by the IRC must keep adequate records as the Secretary of the Treasury or his delegate may prescribe. Sec. 6033(a)(1) provides that tax-exempt organizations must file an annual return with items of gross income, receipts and disbursements and other information needed. Regs. 1.6001-1(a) and (c) state that tax-exempt organizations must keep sufficient records to substantiate the information required under Sec. 6033. Reg. 1.6033-1(h)(2) provides that every organization which is exempt from tax shall submit such additional information as may be required by the Service for the purpose of inquiring into its exempt status. In Rev. Rul. 59-95, 1959-1 C.B. 627, the Service held that an exempt organization's failure or inability to provide requested financial information may result in termination of exempt status because the organization has not established it is observing the conditions required for the continuation of exempt status. To view the full PLR Click Here.
|
||
CASE OF THE WEEK Exit Strategies for Real Estate Investors, Part 8 Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion. Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million. The condition of the building turned many buyers away. It was being sold "as-is." But Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place. After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building - a $2 million interest! This was no surprise to Karl. He knew the building was another great buy. After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. It looked like the perfect solution. (See Part 1 for this discussion.) However, there was still one question in Karl's mind. Karl took depreciation on the building for several months. Although the amount of depreciation was not significant, Karl wondered, "What are the tax consequences when transferring depreciated property into a FLIP CRUT?" To view the solution to this Case of the Week Click Here.
|
||
ARTICLE OF THE MONTH Unitrust to Gift Annuity Rollover With major changes in the stock and bond markets the past year, some unitrust donors may prefer the simplicity and stability of a gift annuity. The fixed payouts and knowledge that the full assets of the issuing charity (which often are millions or tens of millions of dollars) stand behind the gift annuity permit the donors to sleep soundly at night. A good solution is to consider taking the income value of a unitrust or annuity trust and exchanging that amount for a gift annuity. But what are the rules or guidelines for a unitrust to gift annuity conversion? In PLR 200152018, a unitrust donor was interested in rolling over the income interest of the unitrust into a gift annuity. The donor had created a standard 5% unitrust that made payments quarterly for his lifetime. Apparently, a single charity was a remainder recipient and held a vested interest. The charity desired to use the remainder value as a current gift. While in the past some charities have borrowed against a vested remainder interest for a current project, the donor and charity proposed a better solution. The donor desired to receive income and was not willing to gift the entire income interest to the charity at present. However, if the income interest from the 5% unitrust could be converted to a gift annuity, the donor could receive a reasonable income stream for life and the charity could use the remainder value immediately for a current project. 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. | June 1, 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.
