eGiftLaw Newsletter

January 2, 2009

Dear Professional Advisor,

Greetings from University of Northern Colorado Foundation. 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.

Happy New Year!  Together let’s make 2009 a great year!

http://www.uncalumni.org/Foundation

    University of Northern Colorado Foundation

December 29, 2008   

  GiftLaw Weekly eNewsletter - December 29, 2008

• WASHINGTON HOTLINE
• Pension Bill Waives 2009 IRA RMDs
• PLR THIS WEEK
• PLR - 200850046 Reformation of a CRT is not Self-Dealing
• CASE OF THE WEEK
• Living on the Edge, Part 3
• ARTICLE OF THE MONTH
• CRTs and CGAs in a Down Market

WASHINGTON HOTLINE

Tax Quote of the Week

Taxation is, in fact, the most difficult function of government and that against which their citizens are most apt to be refractory.

-- Thomas Jefferson

Pension Bill Waives 2009 IRA RMDs

On December 23, 2008, President Bush signed the Worker, Retiree and Employer Recovery Act of 2008. (H.R. 7327). This bill includes a key provision that will waive IRA, 401(k), 403(b) and some other types of required minimum distributions (RMDs) for 2009.

Under the IRS rules, individuals over age 70½ are required to take required distributions each year from their IRAs. For most IRA owners, the distributions are paid out under the following Uniform Table. Payouts equal the balance the previous December 31 multiplied by a factor based upon age. More senior persons must take a larger withdrawal.

Because the value on December 31 of 2007 was used for RMDs in 2008 and the stock markets declined in late 2008, a number of IRA owners had to take larger distributions than would be expected in normal years. In order to enable individuals to rebuild their IRAs and other qualified plans, Congress has created an "RMD holiday" for 2009. During 2009, individuals may choose to not withdraw any amount even if they are over age 70½. Of course, IRA owners over age 59½ may still voluntarily withdraw without penalty and pay income tax on amounts from an IRA.

Several members of Congress also asked the IRS to make changes for year 2008. Because many individuals had already taken withdrawals in 2008, the IRS declined to make any changes for year 2008. The "RMD holiday" applies only to year 2009.

Editor's Note: This provision will be helpful to many persons who are attempting to rebuild their IRA. Hopefully, the markets will also recover in 2009 and IRAs will begin to grow again. While the requirement to take a distribution in 2009 does not exist, it still will be possible for charitably-minded persons to make direct transfers from IRAs to qualified charities in 2009.


Auto Bailout - Holiday Gift Details

On December 19, 2009, the United States Department of Treasury released the terms for the loans to General Motors Corporation and Chrysler, LLC. Both companies and their employees were thankful that the Treasury approved loans of $17.4 billion. The loans are intended to assist the companies in transitioning to a more viable status.

General Motors will receive $4 billion in December, $5.4 billion in January and, with the approval of Congress, $4 billion in February. Chrysler will receive $4 billion by the end of the year.

The loans do include a limit on executive compensation. The companies would only be permitted to deduct executive compensation of $500,000 for senior management.

Both companies are expected to develop and submit plans for viability by February 17, 2009. The plans are expected to include a combination of salary, wage and benefit cutbacks to enable the companies to return to profitability.

Speaker Nancy Pelosi (D-CA), issued a statement and indicated, "The binding conditions contained in today's White House plan largely reflect those negotiated between the White House and the Congress and passed by the House last week."

Sen. Charles Grassley (R-IA) expressed a note of uncertainty and suggested, "I am not sure the Administration's plan passed my test for putting millions of taxpayers at risk, especially given the Department of Treasury's weak enforcement since October of executive compensation restrictions. No one wants to see these American institutions fail, but they need to use this opportunity to make drastic changes in the way they do business."


Failed IRA Rollover - Fully Taxable

In Jacob Jankelovits et ux. v. Commissioner; TC Memo. 2008-285; No. 24615-06 (22 Dec. 2008), the Tax Court determined that a failed IRA Rollover would result in full taxation.

Fern Jankelovits inherited two IRAs from her aunt Miriam Margolis. Her husband, Jacob Jankelovits, indicated that she should seek a "non-taxable" transfer to herself. Mrs. Jankelovits went to both IRA bank custodians in 2004 and stated to the clerk that she wanted a non-taxable transfer. In both cases the clerks issued a check for the IRA balance made out to Fern Jankelovits. Mrs. Jankelovits deposited the $86,004 check and the $39,260 check in her personal savings account. She did not take any required minimum distributions and the funds remained in her personal account until the IRS sent a Notice of Deficiency three years later.

The IRS claimed that the distribution was not a qualified rollover. At trial Mrs. Jankelovits claimed that she had "taken all reasonable steps" to comply with requirements and an IRA rollover should be permitted.

The Tax Court observed that under Shoof v. Commissioner, 110 T.C. 1 (1998), a rollover is defective if it fails with respect to a "fundamental element of the statutory requirements." The failure to transfer an IRA into a qualified account is deemed to be a "fundamental element" and the rollover was not effective. Mrs. Jankelovits is subject to tax plus interest on the full distribution.

Editor's Note: A person who inherits an IRA is normally permitted to take distributions over his or her life expectancy. Distributions commence the year after death and each year the distribution amount is determined by dividing one by the years left in the owners life expectancy. As the years progress, the life expectancy denominator is reduced by one in each succeeding year. For example, a beneficiary age 60 when distributions start will take a withdrawal of 1/25.2, or just under 4%. Each year until age 86, the fraction increases because the denominator is reduced by one (1/24.2, 1/23.2, 1/22.2, etc.). By age 86 the fraction has become 1/1 and the full balance is distributed. Because Mrs. Jankelovits did not make a rollover, she was unable to benefit from the tax free growth with this "stretch" distribution method over her life expectancy.


Applicable Federal Rate of 2.4% for January -- Rev. Rul. 2009-1; 2009-2 IRB 1 (18 Dec 2008)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2009. The AFR under Section 7520 for the month of January will be 2.4%. The rates for December of 3.4% or November of 3.6% 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 at www.irs.gov/businesses/small/article/0,,id=112482,00.html

PLR THIS WEEK

PLR - 200850046 Reformation of a CRT is not Self-Dealing

Husband and Wife (H and W) intended to create a charitable remainder unitrust (CRUT) that would last the longer of a term of twenty years or the lives of both. Some time after the CRUT was created H and W discovered a scrivener's error. The CRUT was actually drafted without the term certain of twenty years. The charitable remainder beneficiary also served as the trustee. H, W and the charitable remainder beneficiary/trustee jointly petitioned the probate court to allow a reformation of the trust. The court agreed to permit the reformation following the receipt of a favorable ruling from the Service.

The charitable remainder beneficiary/trustee requested a ruling that the reformation of the two-life CRUT into a "two-life with a guarantee of twenty years" CRUT would not be classified as an act of self-dealing under Sec. 4941. In support of their claim of a scrivener's error, the Trustee submitted copies of the original trust document, the reformed trust document, a sworn petition of reformation filed with the court, a signed affidavit evidencing the donors' intent to reform. They also provided a court order demonstrating the error, the donors' true intent, consent of all parties to the reformation and the state's attorney general's approval of the proposed reformation.

The Service ruled that the facts presented did not display any characteristics of self-dealing as defined in Sec. 4941. Therefore, the reformation could proceed with no self-dealing excise tax.

To view the full PLR Click Here.

CASE OF THE WEEK

Living on the Edge, Part 3

Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea's home occupies three magnificent acres of bluff property that overlooks the crashing waves of the Pacific. Since her home sits just steps away from the dramatic cliffs, Rhea frequently jokes to her friends about her "living on the edge" lifestyle.

John, Rhea's husband of 50 years, built the custom home ten years ago. It was truly the realization of a lifelong dream of John and Rhea. Unfortunately, John passed away unexpectedly five years ago. Now, Rhea lives alone in the large home. Nevertheless, Rhea is looking forward to spending her remaining days in this lovely home. Not surprisingly, she frequently plays host to her children, grandchildren and friends.

Rhea is an active philanthropist. In fact, she spends three days a week volunteering with local charities. While very wealthy and philanthropic, Rhea makes only modest yearly gifts. However, she intends to make a substantial bequest upon her death. Specifically, Rhea plans on distributing her entire estate to her children and grandchildren, except for her cliff-side home. Rhea's will provides that the home passes to John and Rhea's favorite charity upon her death. The home is worth $3 million.

However, at a recent estate planning presentation, Rhea discovered the benefits of a gift of a remainder interest in a personal residence. In particular, she liked the potential significant tax savings and the home's avoidance of the probate process. Also, because the gift is irrevocable, the local charity would recognize and honor Rhea for her generous gift at the annual fund raising gala. Of course, Rhea would retain the right to live in her home for the rest of her life, which is an absolute requirement to any potential gift arrangement.

Rhea is very excited about this gift arrangement, but she has many questions. Before she commits to the gift plan, she wants to address several issues. In order to compute the charitable income tax deduction, Rhea must apportion the $3 million home value between the land and building value. How does she do this? Are there some guidelines for this apportionment?

To view the solution to this Case of the Week Click Here.

ARTICLE OF THE MONTH

CRTs and CGAs in a Down Market

Charities that serve as trustees of CRTs and issue charitable gift annuities are in the midst of a bear market. The S&P 500 Index is down over 40% and passed the 776.76 low of the 2002 bear market.

The Federal Reserve suggests that the recession will be longer than the typical two quarters and will stretch to three and possibly four quarters. Banks are still struggling to recover from their losses due to collateralized debt obligations (CDOs) and other mortgage-related securities.

The net result is a drop in virtually all trust portfolios and gift annuity reserve funds. The only fortunate news for charities is that during times of adversity, donors remain faithful and giving generally holds up fairly well, especially considering the down market and the national recession.

But what actions should charities serving as CRT trustees and gift annuity reserve custodians take? Should there be specific strategies to manage charitable remainder unitrusts, charitable remainder annuity trusts and charitable gift annuities in a down market?


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 1999-2008 Crescendo Interactive, Inc.

    University of Northern Colorado Foundation

December 29, 2008   

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
Director of Planned Giving
E-mail: George.pickell@unco.edu
Phone: 970-351-1380
University of Northern Colorado Foundation

http://www.uncalumni.org/Foundation



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