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ESTATE TAXES

Applying Estate Tax Retroactively Increasingly Unlikely, Baucus Says

(July 28th, 2010)

It is increasingly unlikely that the estate tax will be reinstated retroactively to the start of 2010, Senate Finance Committee Chairman Max Baucus (D-Mont.) told BNA July 27, but lawmakers could permit heirs with modest inheritances to elect to benefit from stepped-up basis rules and other expired provisions.

“Practically speaking, the later that we take up and pass the estate tax law or provision, the more difficult it is to make it retroactive. However, it's possible there could be an election for the executor which would, in effect, make that question moot,” Baucus said.

The 45 percent estate tax expired at the start of 2010, greatly benefitting the heirs of very wealthy individuals, but the expiration also meant that rules created to simplify the treatment of capital gains taxes for heirs also expired, creating a larger tax burden on many middle-class heirs.
Giving individuals the ability to elect to choose between the current expired laws or follow whatever estate tax law is passed would make it easier for many taxpayers and benefit both wealthy and middle-class households, but the proposal would represent a defeat for Democrats like Baucus who have insisted since the start of the year that making the estate tax retroactive would be the best and most consistent tax policy.

Republicans, meanwhile, have been trying to make the repeal of the estate tax permanent but lack the votes for such a plan. An amendment for permanent repeal from Sen. Jim DeMint (R-S.C.) garnered only 39 of the 60 votes needed to add the provision to a bill (H.R. 4213) to extend unemployment benefits.

Another proposal billed as a compromise by Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) would lower the estate tax rate to 35 percent and raise the exemption level to $5 million for individuals. Kyl has also proposed giving taxpayers an option of whether to follow current 2010 law or whatever is passed for 2011. For 2009, the estate tax rate was 45 percent and the exemption level was $3.5 million. Democrats—including President Obama—have said they would prefer to make the 2009 levels permanent.

Estate Tax Tied to Broader Tax Bill

Baucus told BNA that he expects the final estate tax language to be settled as a part of the broader legislation to extend the rest of the roughly $3 trillion in 2001 and 2003 tax cuts. It remains unclear whether a draft of that bill will be released prior to the Senate's August recess, scheduled to begin Aug. 9.

“I don't know for sure. We're at that stage where there were a lot of discussions and a lot of points were raised,” Baucus said.
Sen. Charles Grassley (R-Iowa), ranking member of the Finance Committee, also confirmed that the estate tax language is likely to be part of the bigger tax bill.

“I expect it to happen around the same time as the rest of their tax increases,” Grassley said, referring to Democratic plans to allow the top tax rate on individuals earning more than $200,000 per year ($250,000 for couples) to return to its pre-2001 level of 39.6 percent.

Grassley also said he believes there would be constitutional issues with enacting a retroactive estate tax—especially since Congress has waited for most of the year already before trying to take it up—but said the final decision rests with Democratic leaders.

Split Over 2001, 2003 Tax Cuts

Extending the rest of the tax cuts is even more problematic for Democrats, who are split over whether the 2001 and 2003 tax cuts should be extended only temporarily and whether the extension should also apply to the current top individual income tax rate of 35 percent.
Senate Budget Committee Chairman Kent Conrad (D-N.D.) has said he believes that the economy is still too weak for Congress to be raising taxes on anyone, regardless of their income level, and lawmakers can focus on reducing the deficit once the economic recovery has gained a firm foothold.
But Sen. Byron Dorgan (D-N.D.), chairman of the Senate Democratic Policy Committee, said Conrad's plan “doesn't make any sense at all.”

“The tax cut was put in place in order to pay back the surplus that was going to be collected over the next 10 years. Problem was, there wasn't any surplus. To give someone who makes $1 million, $80,000 in tax cuts? I mean that's what happened. I don't support it,” Dorgan told BNA.
After a 90-minute meeting with Baucus, Senate Finance Committee Democrats said it was still unclear how the committee would try to deal with the split in opinions.

Committee member Tom Carper (D-Del.) declined to offer his thoughts on the tax cuts for top-earning households, but did say, “We've doubled our nation's debt between 2001 and 2008 and if we're not careful enough, we'll double it again by the end of this decade.”
Carper also said he sees merit in suggestions that Congress should wait to make any long-term changes to tax policy until the president's Deficit Reduction Commission has completed its report.

“With that in mind, maybe [Congress should] do less rather than to do more at this point in time,” Carper said. Carper said there is broad agreement on the middle-income tax cuts and warned that individuals and businesses need certainty for planning.
Sen. Ron Wyden (D-Ore.), another Finance member, declined to offer his opinion about how the Senate should cope with the impending expiration of the 2001 and 2003 tax cuts, but said it is important for Congress to not “just tinker here and there.”

Kyl, Lincoln Introduce Long-Awaited Estate Tax Plan; Vote Prospects Unclear

Senate Finance Committee members Blanche Lincoln (D-Ark.) and Jon Kyl (R-Ariz.) unveiled a long-awaited estate tax plan July 14 that would allow the estates of taxpayers who die in 2010 to choose between the current rate of zero with a modified carryover basis or their plan establishing a top rate of 35 percent.

The plan was filed as a motion to commit a small business lending bill (H.R. 5297) back to the Finance Committee for one day for the tax-writing panel to return the bill to the Senate with their estate tax plan.

Asked if the estate tax language would be brought to the Senate floor, Majority Leader Harry Reid (D-Nev.) said, “We'll see.” He previously said Democrats will not pursue any estate tax changes as part of the small business bill (121 DTR G-2, 6/25/10).

The bipartisan proposal would set the top rate at 35 percent with a $5 million exemption level for individuals ($10 million for couples) phased in over 10 years and indexed for inflation. It also would provide a stepped up basis for inherited assets. It also would require Finance to offset the revenue loss between the proposal and a permanent 45 percent estate tax rate with a $3.5 million exemption level.

A Lincoln aide said the senators are still waiting for legislative language and a score from the Joint Committee on Taxation. JCT has previously said that a similar plan would cost the federal government $332 billion over the first 10 years, while extending the 45 percent tax rate and $3.5 million exemption level of 2009 would cost $253 billion (95 DTR G-6, 5/19/10).

The pay-as-you-go budget law exempts an extension of the 2009 estate tax levels from a requirement that the tax cuts be paid for, but the Senate would need to find an additional $80 billion in offsets if it chooses to adopt the lower 35 percent tax rate and $5 million exemption level.
“If the Small Business Lending bill is intended to help small business create jobs, wouldn't it make sense to provide small business owners with the certainty that their tax rates aren't going to skyrocket at the beginning of next year?” Kyl said in a release (see related report in this issue).
Lincoln added that now is the “time to take decisive action on the estate tax, and provide the permanent solution that Arkansas's hardworking farmers and small businesses are desperately seeking.”

Other Major Competing Plans

Lawmakers are looking to address the estate tax, which expired Dec. 31, because absent congressional action the tax will rebound to 55 percent in 2011, with an exemption level of $1 million.

Speaking on the Senate floor about the list of “long and difficult” items the Senate must address this year, retiring Sen. Byron Dorgan (D-N.D.) discussed the current zero estate tax rate and called 2010 the “ ‘Throw Momma From the Train' year,” a reference to the 1987 movie starring Billy Crystal and Danny DeVito.

“If you have a lot of money and you're going to go, this is the year, I suppose those who are related to you might say there's some divine providence here,” Dorgan said, mentioning the July 14 death of billionaire and New York Yankees Owner George Steinbrenner. According to Forbes magazine, Steinbrenner's estate is valued at $1.1 billion. If he had passed away during 2009, when the rate was 45 percent and the exemption was $7 million for married couples, his heirs would have paid as much around $500 million in estate taxes.

The nation's estate tax policy is “goofy” and “nutty,” Dorgan concluded.

The House passed legislation (H.R. 4154) last December that would make permanent the current estate tax rate of 45 percent and the non-indexed exemption levels of $3.5 million for individuals ($7 million for couples) (231 DTR GG-1, 12/4/09).

That idea is not too popular in the Senate, particularly with key tax writers, such as Finance Committee Chairman Max Baucus (D-Mont.), who introduced legislation (S. 7222) that would permanently freeze the 2009 rate of 45 percent and index to inflation the $3.5 million exemption level (59 DTR G-5, 3/27/09).

Grassley Urges Reid to Act on The Estate Tax

(June 8, 2010)

Sen. Chuck Grassley (R-Iowa) on Wednesday (June 2, 2010) urged Senate Majority Leader Harry Reid (D-Nev.) to act on making changes to estate tax law before it reverts back to pre-2001 levels in 2011.

The senator warned that no action would mean thousands of small business owners and farmers would be subjected to the tax.

"I hope that the Democratic leadership will soon reveal their hand so that those thousands of small businesses and farmers aren't hung out to dry," he told reporters.
The tax currently is repealed, but – barring congressional action – it returns next year to pre-2001 levels by socking estates worth more than $1 million with a tax that tops out at 55 percent.

Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) have hatched a bipartisan plan that would create a permanent 35 percent tax on estates worth more than $5 million. But without Reid backing the proposal, Grassley said the Senate Finance Committee is unlikely to bring the bill forward.

"The Finance Committee would like to consider the legislation, but we aren't assured by the majority leader that the bill passed out of committee would be taken up on the floor," he said.

Grassley is the ranking member on the Finance Committee and has conferred with Kyl and Senate Finance Chairman Max Baucus (D-Mont.) on the estate tax. Both men say Reid is playing his cards close to the vest when it comes to the levy.

"Reid will not really give us a clear direction," Grassley said, adding, "I think that there's going to be a tremendous upheaval at the grassroots of America – and more rural America than big city America – if it looks like we're going to revert to the million-dollar level."

Lawmakers were supposed to be close to a deal on the tax a few weeks ago, but that agreement apparently fell apart. During those negotiations, Kyl said there was some disagreement on how to pay for the bill. However, today, Grassley said offsets were no longer an issue, but did not say what offsets were being used to pay for the bill.

"We can find the offsets, that's no problem," he said. "It's not easy and one of the offsets was in another bill, but I don't think offsets is the problem."

Grassley could not say when the estate tax would be addressed.

"It's difficult, particularly when Republicans with only 41 members, [don't] have much push to make the majority do such-and-such," he said.

Kyl Says Estate Tax Deal Has Fallen Apart
Posted May 18, 2010, 1:01 P.M. ET

Senate Minority Whip Jon Kyl (R-Ariz.) said May 18 that a bipartisan group of senators are no longer close to a deal on the substance of a proposal to deal with the expired estate tax.

“We had an agreement on the substance of the proposal, subject only to certain offset limitations; other than that, we were in agreement,” Kyl said before the Senate Republicans' weekly luncheon. “I'm not sure that that agreement still exists.”

Speaking May 11, Kyl had said that he, Finance Committee member Blanche Lincoln (D-Ark.), Finance Committee Chairman Max Baucus (D-Mont.), and ranking member Charles Grassley (R-Iowa) had reached an agreement on moving forward. Lobbyists said they believed the deal would result in a top tax rate of 35 percent with a $5 million exemption level for individuals ($10 million for couples), with both figures indexed for inflation.

Asked May 18 about whether he prefers a retroactive proposal, or one with a choice for 2010, or an option to prepay, Kyl would only say that he believed there was an agreement one week ago and “that may not be the case anymore.”

Baucus agreed, saying, “There is no agreement on the estate tax in either substance or process. None whatsoever.”

Kyl also said a legislative vehicle and the timing for consideration are still up in the air.

Estate Tax Deal Crumbles as Democrats Balk at Tax Decreases for Wealthy Payers

(Posted May 18th, 2010)

Senate negotiators said May 18 that a deal to cut estate taxes is on the verge of collapse after a majority of the Democratic caucus expressed concerns about voting for an expensive tax cut for wealthy families.

“There is no agreement on the estate tax in either substance or process. None whatsoever,” Senate Finance Committee Chairman Max Baucus (D-Mont.) told reporters, countering news reports that a deal was imminent.

Senate Minority Whip Jon Kyl (R-Ariz.) had previously announced that talks with a bipartisan group of negotiators on the estate tax had brought them close to an agreement that would eliminate the chances of a retroactive estate tax increase and eventually cut the estate tax rate while raising the exemption levels.

Lobbyists said they believed the deal would result in a top tax rate of 35 percent with a $5 million exemption level for individuals ($10 million for couples), with both figures indexed for inflation. The Joint Committee on Taxation has estimated that the tax cut would cost the federal government $332 billion over the first 10 years, while extending the 45 percent tax rate and $3.5 million exemption level of 2009 would cost $253 billion.

Animated' Talks in Democratic Caucus

Sen. Bob Casey (D-Pa.) described a May 18 caucus discussion about the estate tax as “animated,” calling the group of 59 Democrats and independents “split” on how to move forward.

“I think it would be a big mistake when everybody is yelling about spending and deficits to have very wealthy people get off the hook,” Casey said. “We did a lot of that in the eight years prior to [2009]. A lot of wealthy people did really well and others paid the freight.”

Kyl said even though the agreement—reached with Baucus, Finance Committee member Blanche Lincoln (D-Ark.), and ranking member Charles Grassley (R-Iowa)—would have garnered the support of more than 60 senators, he was told the estate tax deal would not proceed because it lacked enough support from Senate Democrats.

The requirement to get at least half of Democrats to sign on to a bill before it can proceed “is a standard we haven't seen yet,” Kyl said, expressing disappointment.

Vehicle, Timing Up in the Air

Kyl also said a legislative vehicle and the timing for consideration are still up in the air and negotiations are continuing.

Casey said most of the Democratic caucus is concerned about what will happen with the estate tax and “there are some who would probably agree with Sen. Kyl, but I think it's a small number.”

While Casey said lawmakers are not yet at a point where they are “drawing lines” over the estate tax issue, he said he has a problem with providing a significant tax cut to the roughly 2,000 estates per year that pay the estate tax.

“The idea that we're going to give an incredible economic advantage to less than 1 percent of the population is really offensive to me, to understate it dramatically,” Casey said.

MEMO TO OUR CLIENTS

(January 27, 2010)

Estate Tax Repeal and The New Carryover Basis Regime

I. Two Main Problems:

A. Existing Documents Need to be Reviewed for Estate and Generation Skipping Tax Exemption Formulas that No Longer May Work or Achieve Client Objectives. Formulas used to promote asset protection (in-law divorce protection and third party liability risk) are often driven by these formulas.

B. Carryover Basis Regime:

(1) $1.3 million step up allocation may be made to anyone by executor.

(2) $3 million step up allocation for spouses, if done in a qualified manner by executor.

(a) e.g. Some documents provide for a 6 month survivorship for assets to pass to a spouse.

(b) Credit Shelter Trusts will often not qualify for the $3 million basis step-up and may receive the entire estate.

C. Result and Recommendations

(1) Existing documents should be reviewed and likely need to have additions made because of A or B.

(2) More clients are impacted by the results of these changes than under old law:

(a) During 2010, Congress estimated 6,000 estates would be impacted by the estate tax.

(b) During 2010, 70,000 estates are estimated to be impacted by the carryover basis regime.

(3) Special language and a disinterested executor should be added for basis exemption allocation, to avoid adverse income or gift tax result.

(4) Advanced Planning and Asset Division Should be Considered.

II. Asset Division Planning between Spouses

A. Where One Spouse's Death is Expected before Other's:

(1) As a priority, this spouse should own sufficient assets to achieve step-up in basis under the exemptions to carry-over basis.

(2) Where the estate of both spouses exceeds the exemptions, the prospects for retroactive application of the estate tax needs to be considered.

B. Where Order of Death is Unclear:

(1) Hedge by balancing the estates, as under prior law.

III. Advanced Estate Tax Reduction

A. Consider traditional tools in light of proposals to curtail some

B. For those more aggressive, consider an interpretation of 2511(c) that tax free gifts can be made, but under formula that mitigates adverse estate tax consequence.

HOSPITAL RIGHT TO TEMINATE LIFE

What is Sure to be an Evolving Issue
Posted May 5, 2010

A New Jersey appeals court heard arguments Tuesday over whether a hospital can end life-sustaining treatment for a patient in a persistent vegetative state contrary to his family's wishes.

A year ago, a Union County, N.J., judge said no, granting an injunction requested by the comatose patient's guardian despite hospital doctors' opinion that further treatment would be futile.

The hospital appealed, and though the patient has since died, the state Appellate Division proceeded to invite briefs and schedule arguments in the case, Betancourt v. Trinitas Regional Medical Hospital, A-3849-08.
The hospital's lawyer, Gary Riveles of Dughi & Hewit in Cranford, N.J., insists judicial guidance is needed because the case's circumstances are not uncommon and a similar situation is bound to recur.

Equally interested are amici representing disabled patients, who fear a ruling in the hospital's favor would pave the way for caregivers to freely pull the plug in the interests of expediency and cost savings.

Spectators who jammed into the small New Brunswick, N.J., courtroom included half a dozen people in wheelchairs bearing orange stickers with the logo of Not Dead Yet, a disability-rights group that is among the amici.

Ruben Betancourt, who was 72 at his death, had been unconscious and unable to communicate since suffering complications from a January 2008 operation at Trinitas Hospital in Elizabeth to remove a malignant thymus gland. After being shuttled to various facilities, including a nursing home, he was readmitted to Trinitas in July 2008 with a diagnosis of renal failure. He received dialysis treatments, breathed through a ventilator, and was nourished through a feeding tube.

Although family members said he seemed to respond to their presence, doctors said he was in a persistent vegetative state, His treating physician tried to convince the family to end dialysis, but they refused. Then, notifying the family that Betancourt's bill was more than $1.6 million, the hospital said it intended to cease dialysis.

Superior Court Judge John Malone first entered a restraining order against terminating dialysis and, after two days of hearing, enjoined the hospital on March 4, 2009, from withdrawing life support without the consent of Betancourt's daughter, Jacqueline, who was appointed his guardian. Betancourt remained at Trinitas, where he was fed, kept on a ventilator and given thrice-weekly dialysis until his May 29 death.

At Tuesday's arguments, the three-judge panel seemed primarily interested in what compelled a decision on the merits, given the case's facial mootness.

"How do we know [the situation] comes up frequently?" Judge Victor Ashrafi asked Riveles "Unfortunately, the record is relatively barren on that issue," observed Judge Philip Carchman.

Judge Anthony Parrillo answered for Riveles, saying, "we haven't seen it before but will see it in the future."
"We may see it in the future," Carchman corrected him.

Carchman added that the case carries "baggage," namely the large, outstanding bill for Betancourt's treatment and the potential for his family to sue the hospital for malpractice.

"There are all sorts of issues floating around which say maybe this case is not the case to decide this issue," he said.

John Jackson, representing the amici Medical Society of New Jersey, New Jersey Hospital Association and other healthcare organizations, said the numerous parties that were allowed to join the case on both sides illustrated the "vibrancy of the issue" and weighed against mootness.

But the lawyer for Ruben Betancourt's family, Todd Drayton of Martin, Kane & Kuper in North Brunswick, N.J., asked the court to find the appeal moot, saying the hospital failed to provide support for its premise that the circumstances of the case were likely to recur.

The number of amici "does not portend whether an issue is of great public importance," he said. "That's not an appropriate basis for this court to determine whether this issue is moot or not."

Carchman asked attorneys on both sides what they would like the court's holding to be if it ruled on the merits.
Riveles said the patient and his family "should not have the unfettered right to dictate the standard of care."
Carchman asked whether that meant the ultimate decision on continuing treatment should rest with the doctor and hospital. Riveles said yes, but that another option would be to have a panel of outside medical experts decide.

Carchman asked Drayton whether a patient has a unilateral right to decide what treatment he receives. Drayton said the Supreme Court addressed the issue in In re Jobes, 108 N.J. 394 (1987), which held that a court's role is not to decide on removal of treatment but to respect the patient's right to self-determination.
Though Jobes presented the opposite situation from the case at bar -- one of a family seeking the right to remove a vegetative woman's feeding tube despite doctors' objections -- the principle is the same. "It is a fundamental right of the patient to direct his or her own healthcare," Drayton said.

"What is your position in terms of who makes the ultimate decision?" Carchman asked.

"I think the courts are clear. In that narrow circumstance, if the hospital is unable to find a suitable alternative, they have to continue providing care," Drayton said.

One of the amici who argued, Thaddeus Pope, a professor at Widener University School of Law, said it would be "helpful if [the court] restates what the current law is: that physicians have a duty to comply with patients' preferences."

Pope said the court could provide for a hospital's right to relocate the patient to a different facility or seek removal of the patient's guardian in cases where treatment is futile.

ROTH IRA CONVERSIONS

(December 8, 2009)

A Roth individual retirement account, unlike a traditional IRA, allows for tax free growth of the capital base and tax free distributions (after the account has been in existence at least five years). Effective January 1, 2010, The Tax Increase Prevention and Reconciliation Act of 2005 will eliminate the existing income threshold governing conversions of existing individual retirement accounts to Roth accounts. Under the current law, many taxpayers are not eligible to execute a ROTH IRA conversion because their modified adjusted gross income exceeds $100,000. Starting on January 1, 2010 the $100,000 limitation will no longer apply. Taxpayers may choose to convert all or a portion of their individual retirement accounts to a Roth account. The conversion requires the taxpayer to recognize the value of the converted individual retirement account as ordinary income and pay current income tax on that income. The income tax burden can be spread over two years.

When considering a Roth conversion, a taxpayer must be cognizant of current income tax rates, estate tax rates and his current estate tax exposure, life expectancy, and cash flow needs. Future income tax rates and estate tax rates should also be considered. The benefits to a conversion not only include the tax free growth of the capital base along with tax free distributions inherent to all Roth accounts, but also that required minimum distribution rules do not apply. This latter benefit may appeal to individuals looking to accumulate funds for their heirs. After the taxes have been paid on the amount converted, taxpayers may experience lower income taxes in future years due to the elimination of a taxable required minimum distribution. This may result in a reduction in the amount of social security being taxed and also reduces the income base for purposes of medicare premiums, possibly resulting not only in lower income taxes but also reduced medicare premiums.

Taxpayers who can pay the tax due upon conversion with funds outside of their IRA accounts stand to benefit the greatest from a conversion. By utilizing outside funds to satisfy the tax due upon conversion, a greater amount of the capital base is maintained in the newly formed Roth IRA account. Because Roth IRA accounts allow for tax free growth and are not subject to the required minimum distribution rules, a greater amount of wealth could be generated and ultimately preserved for the taxpayer’s heirs. Conversely, if a taxpayer does not have adequate funds available outside of his IRA account, and plans to use IRA funds to pay the tax due upon conversion, a ROTH IRA conversion becomes a less attractive option. Taxpayers in this situation may still benefit from a conversion or a partial conversion to a Roth account, but further considerations will need to be given to the taxpayer’s life expectancy, current and future marginal tax rate and cash flow needs.

A Roth conversion is not a “one size fits all” solution for taxpayers. Each individual’s circumstances are unique and can greatly impact the effectiveness of a Roth conversion. A financial analysis should be performed that considers all of the factors above before a Roth conversion is pursued. Further, various estate planning techniques should also be considered with any proposed Roth conversion to maximize its benefits, and should become an important component of this analysis.

What to do now: inter vivos reverse qtip marital trust worth considering now

Timely Estate Planning Tool Facing Tax Reform
Posted December 1, 2009

An intervivos reverse QTIP Marital Trust is a timely tool to use now in light of potential estate tax reform. It offers a way of preserving the current $3.5 million generation skpping tax ("GST") exemption now, without adverse gift tax. The technique offers substantial flexibilitiy if undertaken at this time, since actual decisions on the planning don't have to be made until April 15, 2010. Consider the following:

You decide to fund the trust in 2009, but want to avoid a taxable gift? You would file a QTIP election for the marital deduction on the 2009 gift tax return by the return due date. You have until 4/15/2010 to decide (or 10/15/2010, if on extension).
What if Congress doesn't extend the $3,500,000 exemption beyond 2009 and you want to allocate the 2009 GST exemption to the trust? You would include a reverse QTIP election on the 2009 gift tax return. You have until 4/15/2010 to decide (or 10/15/2010, if on extension).
What if Congress extends the $3,500,000 GST exemption before it expires or enacts permanent estate tax reform with a $3,500,000 GST exemption? Then, you might want to do your GST exemption allocation planning differently, in which case you wouldn't make a reverse QTIP election. You have until the gift tax return due date to monitor legislative developments and decide (4/15/2010, or 10/15/2010 if on extension).
What if Congress re-unifies the estate and gift tax, resulting in an increased gift tax exemption? If Congress increases the gift tax exemption (e.g., to $3,500,000) so that the gift no longer results in gift tax payable, then you would likely not make the QTIP election to use the marital deduction. Advantage: the value of the gifted asset and future growth avoids estate tax at both spouses' deaths. You have until the gift tax return due date to monitor legislative developments and decide (4/15/2010, or 10/15/2010 if on extension).

An intervivos QTIP trust is drafted to benefit both spouses during their lives, with the result that wealth is removed from the wealth transfer tax system while remaining an available means of cash flow and financial security for you for life.

CLIENTS SECURE FAVORABLE IRS RULINGS ON QPRTs, PRESERVING HOMESTEAD STATUS

Timely Action Can Substantially Reduce Property Tax Increases on Expiration

Many clients with taxable estates undertake to reduce their estate tax exposure by using qualified personal residence trusts ("QPRTs" or "RITs"). QPRTs are trusts that offer an exception to normal estate and gift tax laws. They are used to remove the value of homes from a taxable estate in a favorable manner. Traditionally, the most common approach to their use would cause loss of Florida homestead status after a set term of years has passed. We have recently established a process that has been approved by the IRS, on behalf of several clients, that permits the successful use of QPRTs while also preserving homestead status after that set term expires. The result of this process is a client’s ability to maintain continued use of their home while removing its value from their taxable estate, and while qualifying the home for favorable Florida homestead status.

The law on which QPRTs are based was made statutory under the Revenue Reconciliation Act of 1990. QPRTs thus began to be created as far back as 1990, and their stated terms are maturing in more frequent numbers. With the value of a typical home placed in a QPRT having appreciated substantially from its creation date, the prospect of having a home's earlier assessed value adjusted to current fair market value presents a risk of substantial property tax increase. This is because the traditional IRS sanctioned approach to maintaining continued use of a home after the QPRT term has expired involves renting the residence. Renting a home that was previously classified as homestead property violates Florida homestead rules, permitting the county property appraiser to readjust taxable value to current market value and to deny further homestead status. We have secured the first rulings of their kind on alternative methods that have been approved by the IRS and county property appraiser's offices that preserve continuity of homestead status. We would be happy to discuss whether these alternatives are feasible in your circumstances, without cost or obligation.

"MADOFF" CASE MAY FOLLOW PATH OF "BARLOW CLOWES," TWO DECADES LATER

- Participants Who Turned A "Blind Eye" May be Chased for Years -

The Madoff ponzi scandal is strikingly similar to the largest financial fraud in United Kingdom history, two decades ago in 1988 - yes, the year after the 1987 stock market crash and exactly twenty years prior to one of the worst recessions and market corrections in U.S. history (2008). The criminal activities of both Madoff and Barlow Clowes were exposed as a result of the collapse of financial markets, when their ponzi schemes could no longer be maintained, spiraled down, and then out of control because no means existed to cover their activities with future gains. In 2000, and as part of my (Joe Kempe's) second post doctorate studies program in tax law, I was able to investigate and chase certain participants of the Barlow Clowes scandal as part of an Offshore Financial Center class I was taking at St. Thomas University. Coincidentally, my chase for Peter Henwood ended in Mauritius, an island in the Indian Ocean off of the coast of South Africa, where he was recently found to have established residency. Mr. Henwood was chased for almost 20 years because of his participation in creating certain offshore structures that facilitated Barlow Clowes' fraud. The courts found that Mr. Henwood had turned a "blind eye" on, or possessed "Nelsonian knowledge" of, the illegal activities of Peter Clowes. Nevertheless, the courts in 2007 found that an English bankruptcy law judgment could not be enforced against him as a resident of Mauritius, because of that State's independent bankruptcy protection laws. Mr. Henwood's £ 10 million was therefore protected from attachment by the United Kingdom bankruptcy court.

Where a participant in fraudulent activities bears a fiduciary relationship with those wronged, statutes of limitation may be extended for many years until their involvement is uncovered. Like in Barlow Clowes, how many tentacles there are and how far they extend have not yet been determined. Once found, normal statutes of limitations may not be sufficient to protect them from claims by those wronged. The chase is on and will likely continue for many years.

In the interim, it is important for Madoff investors to monitor the case, perfect their rights, evaluate SIPC and other recourse, and evaluate tax reporting and refund positions. Prompt and timely evaluation and reporting may be important in given cases. Many Madoff investors have commented to us that their current standards of living and wealth were built off of Madoff and, without Madoff, they wouldn't be where they are in life today. This position, however, complicates relief where a contrary position by the government could be that no loss was realized for SIPC or tax purposes, since the returns over the years amounted to the return of their original investment. For example, a Madoff investor for seven years will have received back his entire investment and, if longer, an actual return on that investment. This position has not yet been taken by the government for tax or SIPC purposes and investors are encouraged to take contrary reporting positions, at least until differing guidance or direction is issued by the government.

NEW FLORIDA HOMESTEAD AND PROPERTY TAX LAW

- “Amendment One” Criticized and Controversial -

Florida voters this year approved Amendment One, a significant change to Florida's "Save Our Homes" ("SOH") assessment cap. It was promoted as an attempt to stimulate the real estate market in Florida and to deal with perceived unfairness in the taxing scheme. Amendment One does three primary things: (1) it raises the homestead exemption from $25,000 to $50,000, (2) it allows you to transfer the SOH benefit cap associated with your present exemption to a newly purchased home (this is known as “portability”); and (3) it offers some relief for nonhomestead property.

The most significant of the changes is portability of your exemption from one home to another. This benefit applies to homes sold in 2007 or later, as long as the homeowner purchases a new home within two years. Unlike many other provisions of Amendment One, portability is also applicable to school taxes. The method of calculating the benefit conferred on a newly purchased home depends on whether it costs more or less than the prior homestead. With a more expensive newly purchased home, the assessed value differential from market value that can be transferred is the difference between the former home’s market value and the SOH assessed value, not to exceed $500,000. For example, if a former homestead had a value of $1,000,000 but an assessed value of $500,000, the $500,000 differential may be transferred to the new home. If the new home cost $1,500,000, its initial SOH assessed value should not exceed $1,000,000. If, however, the existing homestead was sold for $1,500,000 and had an assessed value of $1,000,000, and the new home cost $1,000,000, a ratio must be determined and is applied to the differential between the old home’s value and SOH assessed value. The ratio is the value the new home bears to the value of the old home or two-thirds $1,000,000/$1,500,000 (66.67%) in this example. This ratio is applied to the differential between the assessed SOH value ($1,000,000) and the market value ($1,500,000) of the old home (a differential of $500,000). Thus, the preserved SOH that can be transferred to the new home, of lesser value, is $333,350 (66.67% of the $500,000 differential). Note: The higher the market value the more differential that can be transferred to the new home, creating a second matter of potential contest with the property appraiser’s office.

Amendment One also added an assessment cap for non-homestead real property. It is not applicable to certain tangible personal property, which affects some business real property more so than others. The cap is set quite high (10%), and does not apply to school taxes, so few may actually benefit from it. Non-homestead real property is broken-down into two groups for purposes of permitting a reassessment over and above the cap. If non-homestead residential property (9 or fewer dwelling units or residential land) is involved, a change of ownership or control (a change of more than 50% of the ownership of an entity that owns the property) will result in a reassessment. With business or investment property (including nonresidential land and rental properties with more than 9 dwelling units), either a change of ownership or control, or an improvement that increases the value of the property by at least 25%, will result in resetting the assessed value. The legislation implementing this law requires a property owner seeking protection under this non-homestead cap to file an application before March 1st of each year, but significant penalties are provided if you are not entitled to the cap. In light of the minimal potential benefit and penalty exposure, most would be advised not to apply for protection.

Lastly, Amendment One provides a $25,000 tangible personal property exemption for businesses. The exemption can generally be used on a per county basis if a person has operations in multiple counties, thus potentially substantially increasing the exemption. Certain property, however, is excluded for this purpose.

DISPARITY BETWEEN STATE AND FEDERAL ESTATE TAX EXEMPTIONS RISE

- Effects of Decoupling Increases in Many States -

The disparity between the federal and state death tax exemptions has increased substantially, causing significant exposure to state death taxes where no federal death tax otherwise exists. In states such as Massachusetts, New Jersey, New York, Connecticut and others, the potential negative impact caused by states who have decoupled from the federal exemption scheme has grown greater. With the federal estate tax exemption in 2009 at $3.5 million, and the state tax exemption in New Jersey, for example, at only $675,000, the potential cost of fully utilizing the federal exemption is $229,200 of state tax. The benefit of full use of the federal estate tax exemption for a married couple and incurring this $229,200 cost on the death of the first spouse, however, is less tax on the surviving spouse's estate, at possibly a much later date. Therefore, a time value of money analysis is generally undertaken to determine whether to incur the state tax prematurely in order to preserve the full federal exemption, or to waste a portion of the federal exemption in order to avoid the premature payment of state death taxes. Employing the use of QTIP trusts within estate plans can provide flexibility in many cases so that different courses can be taken by election based upon the facts and circumstances existing at that time.

CLEARING AWAY CONFUSION ON FDIC AND SIPC PROTECTION

What You Need to Know and How You Can Enhance Your Protection

With recent bank failures, the goverment’s take over of Fannie Mae, Freddie Mac, and AIG, and the collapse of Bear Stearns and Lehman Brothers, clients are understandably concerned and questioning their exposure to institutional failure. We have therefore compiled a summary of the relevant law and how protection can be enhanced. Proper planning can significantly multiply the extent of coverage that is generally offered by the FDIC and SIPC, but steps need to be taken. Enhancing protection often involves use of certain trusts and methods of titling accounts, but the most significant protection (100%) can sometimes be gained for securities (stocks and bonds) through a particular account type held with the financial institution.

The Federal Deposit Insurance Corporation, or FDIC, is an agency of the U.S. government that insures accounts with banks and thrift institutions. It does not insure investment securities which, therefore, excludes from FDIC coverage, mutual funds, stocks, bonds, annuities, and non-FDIC insured money funds. FDIC coverage does insure qualified certificates of deposit (CDs) and FDIC insured money market accounts. In general, each account owner is insured for up to $100,000, and certain retirement accounts are insured for up to $250,000.

Enhancing FDIC coverage is not difficult. Commonly used revocable living trusts can be drafted, in many cases, consistent with estate planning objectives to increase coverage into the millions. Trust coverage is based upon the number of "qualified beneficiaries," and qualified beneficiaries can include a spouse, children, and grandchildren, who are the customary objects of estate plans. Making them qualified beneficiaries is a function of how the trust is drafted, which should always take into consideration federal and state estate, gift, and generation skipping tax laws. To an experienced estate planner, this is generally not a difficult task. Furthermore, additional account title planning and use of other family entities can increase coverage.

SIPC, or the Securities Investor Protection Corporation, is a private nonprofit corporation that is capitalized by its members. It is not a U.S. government agency, and is privately funded by member broker-dealers. Each customer of a participating broker is protected against loss as a result of broker-dealer’s insolvency for up to $500,000 in securities, which may include $100,000 in cash. However, this is misleading and may be irrelevant in the event of an institution’s collapse, where 100% protection may be available if your accounts are properly qualified.

Most standard form brokerage and investment firm account agreements have a provision that allows them to register all of your securities in "street name," which means their own firm name. They then essentially owe you the securities reflected in your account. The securities are not separately vested in you. This is typically desired by brokerage and investment firms, as it permits them to conduct margin and futures trading activities using your securities as collateral. Even if a financial institution suffers financial loss with your securities, they owe you what is stated in your account agreement. You are ostensibly no different than any other creditor in the event of a failure of the institution and would be exposed to the extent the firm is insolvent. However, if your account is in street name, certain rules and laws enhance your position in the case of a failure or bankruptcy over and above general creditor status. But, risk is not completely removed as it is with customer name securities status. Accounts that are classified as "customer name securities” (bankruptcy law terminology), or those "registered in the name of customers" (SIPC terminology), provide a complete form of protection.

If a SIPC member firm collapses and is either liquidated under the Securities Investor Protection Act of 1970 (“SIPA”) or the Bankruptcy Code, your recovery of your investments will depend on the type of account you have and, in general, a three-tier recovery process. Customer named accounts offer a status that is superior to all others, since your securities remain yours. Securities in customer name are returned to you or, upon your direction, transferred to another member firm in the event of insolvency. No loss should therefore be incurred. Cash and other securities held for customers (including stocks and bonds that are, for example, held in "street name") by an insolvent investment firm are divided among all such customers on a pro rata basis. This leaves the possibility for a shortfall if all available securities in street name do not adequately cover the total of street name account positions. Any shortfall in what is owed to street name account owners places them in the position of a general creditor, and this is where SIPC coverage provides protection. Protection offered by SIPC is $500,000 for securities, which may include $100,000 in cash per customer. Like with FDIC rules, proper use of trusts and multiple forms of ownership can enhance and multiply coverage, in many cases exceeding millions where family circumstances and estate plans permit.

If an institution were to fail, and your accounts did not possess customer name securities, and your loss exceeded available SIPC insurance coverage, many financial institutions possess private insurance. This coverage would compensate you for losses above the statutory limits under SIPA. (Remember, the SIPA limits can be multiplied with proper planning.) Some well known firms obtain this insurance from Lloyd's of London, while some have formed a captive insurance company known as Customer Asset Protection Company or CAPCO. This coverage, however, is not per account, as sometimes customers are lead to believe, but is cumulative coverage for all accounts having losses. Furthermore, the level of protection is subject to the solvency of these insurers.

Although securities held by a broker-dealer in a customer's name are largely without risk, most securities are held by broker-dealers in street name and would be available to satisfy other customers' claims in the event of a broker-dealer's insolvency. As a practical matter, it may not always be possible to hold any significant percentage of securities in customer name, which therefore encourages planning to multiply the extent of coverage. Most broker-dealers or investment houses will resist customer name security accounts. Therefore, and where this is the case, steps should be taken to enhance protection using trusts and other vehicles, such as family partnerships. Nevertheless, a customer should closely monitor the financial condition of broker-dealers. Inasmuch as securities that are registered in the name of a customer would be transferred to another firm in the event of a broker-dealer’s failure, customers with significant portfolios should consider establishing accounts with several different broker-dealers. This will facilitate the expeditious transfer of customer name securities in the event of failure, and will have the important benefit of further enhancing and multiplying coverage.

As a further option, most custodial or trust accounts held with trust companies are in the nature of customer name securities. Stocks and bonds are generally segregated from the bank or trust company’s assets and are vested in the trust or account owner. Generally, there is an added cost with the use of a trust company for this purpose, but some investors choose to do so even when discretionary management is undertaken by outside money managers.

FDIC Coverage on Bank Accounts

- A Focused Look at Expanding Coverage -

With the recent news of bank failures and the prospect of more on the horizon, we have been receiving many inquiries regarding FDIC insurance coverage on bank accounts. As such, we took this opportunity to study the area and we offer this advice to you. Specifically, this article addresses how your revocable living trust can be used to increase your FDIC insurance coverage. You should also understand, however, that there are additional ways of increasing your FDIC coverage that are not explained in this article.

FDIC insurance coverage for certain trusts can be significantly greater than for individuals. If appropriate, revisions to your revocable living trust(s) can substantially increase FDIC coverage. If an institution where you hold a revocable trust account fails, your coverage will be determined based on the number of “qualifying” beneficiaries or “nonqualifying” beneficiaries entitled to an interest in the trust upon your death. Qualifying beneficiaries include your spouse, children, grandchildren, parents and siblings. 12 CFR §330.10(a). Any other beneficiary is a nonqualifying beneficiary, including charitable organizations. Your combined revocable trust accounts at any one institution will be insured up to $100,000 per qualified beneficiary. 12 CFR §330.10(f)(1). For purposes of determing insurance coverage, qualified beneficiaries that hold a life estate interest are deemed to hold an equal share to that of any remainder beneficiary, unless the trust agreement provides otherwise. 12 CFR §330.10(3). All interests attributable to nonqualifying beneficiaries are cumulatively insured to the extent of $100,000. 12 CFR §330.10(f)(2). The easiest way to demonstrate the application of these rules is by way of examples:

Example 1: Revocable Trust to Spouse Outright

Husband creates a Revocable Trust. Upon his death the assets of the trust are to go to Wife outright and free of trust. This trust is insured to the extent of $100,000, because there is only one qualifying beneficiary.

Example 2: Revocable Trust to Spouse in Trust, Remainder in trust for Children

Husband creates a Revocable Trust. Upon his death, the assets of the revocable trust pass to a newly created trust for the benefit of Wife. Wife will receive all of the income from this trust for her life and discretionary distributions of principal. Upon her death, the assets will pass to her two children. This trust has three qualifying beneficiaries and is thus insured to the extent of $300,000.

Example 3: Revocable Trust to Spouse in Trust, Remainder in Trust for Children and Grandchildren.

Husband creates a Revocable Trust. Upon his death, the assets of the revocable trust pass to a newly created trust for the benefit of Wife. Wife will receive all of the income from this trust for her life and discretionary distributions of principal for her needs. Upon her death the assets will continue in trust for the benefit of their two children and five grandchildren, who can receive discretionary distributions of income and principal for their needs. This trust has eight qualifying beneficiaries and is thus insured to the extent of $800,000.

Who’s Minding the Crummeys and Are They Hanging?

- A Lapse of Judgment and Other Gifting Nuances involving Irrevocable Trusts-

The 1968 Ninth Circuit Court of Appeals case of D. Clifford Crummey v. Commissioner of Internal Revenue established the strategy that is relied on today to permit tax free gifts to certain trusts using the donor’s annual $12,000 gift tax exclusion. Providing "Crummey Notices" to trust beneficiaries establishes the requisite rights to property or cash gifted to qualify it for the "present interest" requirement of the Internal Revenue Code. Many accountants and lawyers stop there and do not assess the gift tax consequences to the holder of the Crummey Notice, who has a temporary right to withdraw trust property. A lapse or release of that right, which almost always occurs because beneficiaries are encouraged not to withdraw the trust property contributed, often has unintended gift and generation skipping tax consequences and proper accountings should be maintained for many years to monitor these consequences.

When a holder of a Crummey Notice fails to exercise the power to withdraw property contributed to a trust or releases it, an unintended gift by the power holder is deemed to occur. For example, if in 2008 parents make a gift of $24,000 to a trust in which two children are beneficiaries and that is their only gift for the year, the gift will not be taxable if the two children are provided with a Crummey Notice, or a notice of right to withdraw the gifts for 30 days. Upon their release of the power to withdraw, or the expiration of the 30 days, the children too are deemed to be making a gift of the same amount to the trust. It is as if they received the $24,000 and then made a gift back to the trust. The problem with failure to recognize this is that the children may have future unintended gifts for which they must account and unintended generation skipping tax consequences may result to the original donor. For example, since the children are making gifts back to the trust and are also beneficiaries, an allocation of the generation skipping tax exemption to the trust would often waste that exemption because the property gifted back will be taxed in their estate. What is important to recognize is that sometimes this allocation of generation skipping tax exemption is automatic, unless a timely filed gift tax return is filed opting out of the automatic allocation. Some trusts or Crummey Notices are designed to minimize the impact of a lapse of the right to withdraw property provided by a Crummey Notice using what are called hanging powers. In general, a lapse (distinguished from a release) is not deemed a transfer of property by gift back to the trust by the Crummey power holder to the extent the amount that lapses does not exceed the greater of $5,000 or 5% of the property over which the power exists. Hanging powers are designed to provide power holders with an indefinite annual right to withdraw using this 5 & 5 rule until no gift will be made as a result of a lapse.

As hopefully can be seen from this explanation, accounting records should be kept of Crummey Notices and hanging powers. This should be done as part of annual gift tax compliance, as more often than not gift tax returns should be filed. Many are unaware of this, which complicates future planning and tax compliance for both senior family members, as donors, and junior family members, as beneficiaries. Both are potentially adversely impacted by relatively small gifts to irrevocable insurance or gifting trusts, and this oversight or “lapse in judgment” should be cured.

STANFORD BROKERAGE ACCOUNT CLAIMS PROCEDURE NOW OPERATIVE

Effective April 6, 2009, holders of frozen Stanford Group Company customer brokerage accounts may submit information to the Receiver which may lead to the release of their accounts. Clients affected by the Stanford scandal may submit their request through our firm or directly through the Receivership website: https://stanfordselfcert.ftitools.com/selfcert/

FIRM'S WORK ON HOMESTEAD AND QPRTs RECEIVES NATIONAL ATTENTION

The Firm's series of private letter rulings authorizing so called "reverse qtips" have been recognized by commentators on a national basis as "startling," in that the IRS approved the strategy. Our efforts in this area were highlighted April 6, 2009 in a regarded national estate planning journal published by Steve Leimberg. See LISI Estate Planning Newsletter # 1440 (April 6, 2009) at http://www.leimbergservices.com/ . The results of this work for our clients is substantial estate tax savings, while preserving homestead status for their homes.


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The content of this site is general and should not be relied upon without review of your specific circumstances by competent legal counsel. Reliance on the information herein is at your own risk, as it expresses no opinion by the firm on your specific circumstances or legal needs. An attorney client relationship is not created through the information provided herein. This site and its content is meant to alert you to legal services, issues, and planning measures that may be appropriate for you, and is not a substitute for an attorney client relationship where specific advice is provided. Calculations and exemption amounts illustrated are changing and should be considered inaccurate and only examples of results that may be achieved.