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Estate Planning
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Urgent 2012 Year-End Tax Planning Opportunity: Charitable Remainder Trusts And 3.8% Surtax |
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Monday, December 03, 2012 18:45
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Tags: charitable giving | estate planning | trusts
The U.S. Treasury Department Friday issued proposed regulations for the 3.8% surtax, creating an urgent and immediate planning opportunity for existing charitable reminder trusts (CRTs).
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Proposed. Regulation Section 1411-3(c)(2) addresses the application of the surtax to charitable remainder trusts. Under Internal Revenue Code Section 664, charitable reminder trusts are taxed under the four-tier accounting rules.
While CRTs are exempt from the new 3.8% surtax, distributions of post-December 31th, 2012 net investment income will be subject to the 3.8% surtax.
In other words,, distributions of income and capital gains realized and recognized before December 31th, 2012 will not be subject to the surtax.
Accordingly, harvesting gains and income in calendar year 2012 will likely reduce the surtax burden on future CRT distributions. Likewise, deferring losses and expenses until 2013 will also reduce the tax burden on distributions.
ACTION STEPs
- Harvest long-term capital gains in 2012
- Accelerate interest, dividends and other income into 2012
- Defer harvesting losses into 2013
- Defer expenses into 2013
EXAMPLE
The Smith CRT has a total value of $2,800,000; including accrued interest of $75,000 and unrecognized gains of $325,000 and unrecognized losses of $100,000. The total of the income, gain and losses totals $500,000 (on a gross basis). By harvesting the gains and income and by deferring losses the trustee shifts gain and income into 2012 and defers substantial losses into 2013. The net savings will be 3.8% of $500,000 for a total saving of $19,000.
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Supreme Court To Hand Down Decision That Will Allow Same-Sex Couples To Benefit From Estate And Income Tax Deductions |
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Friday, August 10, 2012 11:12
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Tags: estate planning | tax law | tax planning
A US Supreme Court decision is in the making that will affect advisors to same-sex couples. The question is of extending the marital estate tax deduction to same-sex couples in states where it is legal for them to be married. This Website Is For Financial Professionals Only
The case is Windsor vs. US and the judge ordered that Edith Windsor be refunded $363,000 that was taken from her because she was not allowed to take the marital deduction from her recently deceased female spouse. Their union was recognized by the state of New York. The case was sent to the Supreme Court without waiting for an appellate court decision.
The Declaration of Marriage Act (DOMA) was declared to be unconstitutional by a New York federal court. If the Supreme Court upholds that DOMA is unconstitutional, the 1996 law will no longer be able to keep same-sex spouses from receiving income and estate tax marital deductions or, for that matter, Social Security or pension benefits.
It is practically a certainty that the law will be brought before the Supreme Court within two years. The Windsor case is cited as being groundbreaking. Despite the federal ruling, many advisors are counseling same-sex couples not to change their planning for now.
But they don’t think such couples will need to wait much longer since the current administration is no longer defending DOMA from legal challenges
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IRS Releases Rules On How A Surviving Spouse Can Use A Deceased Spouse's Unused Estate Tax Exclusion |
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Wednesday, June 20, 2012 18:05
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On December 17, 2010, via the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Congress amended the Internal Revenue Code to allow portability of the applicable exclusion amount between spouses. On June 15, 2012, the IRS released temporary regulations that provide long awaited guidance on the applicable requirements for electing such and on the applicable rules for the surviving spouse's use of the deceased spousal unused exclusion (DSUE) amount.
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Following is a summary of select points covered in the regulations.
Making the Portability Election
· An executor electing portability is required to make that election on a timely-filed estate tax return. The last return filed by the due date of the return, including extensions actually granted, will supersede any previously-filed return. Thus, an executor may supersede a previously-filed portability election on a subsequent timely-filed estate tax return if the executor satisfies the requirement in the regulations. A portability election is irrevocable once the due date (as extended) of the return has passed.
· Every estate electing portability, regardless of estate size, must file a Form 706 within 9 months of death (or by extended due date).
· The estate of a decedent (survived by a spouse) makes the portability election by timely filing a complete and properly-prepared estate tax return for the decedent's estate. Executors of estates that are not otherwise required to file an estate tax return (because of the size of the estate) do not have to report the value of certain property that qualifies for the marital or charitable deduction. If an executor chooses to make use of this special rule in filing an estate tax return, the executor must estimate the total value of the gross estate (including the values of the property that do not have to be reported on the estate tax return under this provision), based on a determination made in good faith and with due diligence regarding the value of all of the assets includible in the gross estate. The instructions issued with respect to the estate tax return will provide ranges of dollar values, and the executor must identify on the estate tax return the particular range within which falls the executor's best estimate of the total gross estate. An amount corresponding to this range will be included on line 1, part 2, of the estate tax return, along with an indication of whether the line 1 total includes an estimate under this special rule. By signing the return, the executor is certifying, under penalties of perjury, that the estimate falls within the identified range of values to the best of the executor's knowledge and belief.
· If the executor of the estate of a decedent with a surviving spouse does not wish to make the portability election, the executor must make an affirmative statement on the estate tax return signifying the decision to have the portability election not apply. If no estate tax return is required for that decedent's estate, not filing a timely return will be considered to be an affirmative statement signifying the decision not to make a portability election.
· An appointed executor, not the surviving spouse, may file an estate tax return to elect portability or to opt to have the portability election not apply. If there is no appointed executor, any person in actual or constructive possession of any property of the decedent may file the estate tax return to elect into or out of portability.
Computing the DSUE Amount
· An executor must include a computation of the DSUE amount on the estate tax return to allow portability of the decedent's DSUE amount. A complete and properly-prepared return contains the information required to compute a decedent's DSUE amount. Once the IRS revises the prescribed form for the estate tax return expressly to include the computation of the DSUE amount, executors that previously filed an estate tax return pursuant to the transitional rule will not be required to file a supplemental estate tax return using the revised form.
· The temporary regulations confirm that the term “basic exclusion amount” referred to in section 2010(c)(4)(A) means the basic exclusion amount in effect in the year of the death of the decedent whose DSUE amount is being computed. The preamble to the regulations state that the “basic exclusion amount” is properly interpreted to mean the applicable exclusion amount.
· Amounts on which gift taxes were paid by a decedent are excluded from adjusted taxable gifts for the purpose of computing that decedent's DSUE amount.
Use of the DSUE Amount by the Surviving Spouse
· If the decedent is the last deceased spouse of the surviving spouse on the date of a transfer by the surviving spouse that is subject to gift or estate tax, the surviving spouse, or the estate of the surviving spouse, of that decedent may take into account that decedent's DSUE amount in determining the applicable exclusion amount of the surviving spouse when computing the surviving spouse's gift or estate tax liability on that transfer. This rule applies only if the decedent's executor elected portability.
· A portability election made by the executor of a decedent's estate is effective as of the date of the decedent's death. Thus, the DSUE amount of a decedent survived by a spouse may be included in determining the applicable exclusion amount of the surviving spouse, subject to any applicable limitations, with respect to all transfers occurring after the death of the decedent, if the executor of the decedent's estate makes a portability election and the election is not superseded by the executor of the decedent's estate before the due date of the return, including extensions.
· The term “last deceased spouse” means the most recently deceased individual who was married to the surviving spouse at that individual's death, except that an individual dying before calendar year 2011 cannot be considered the last deceased spouse of such surviving spouse.
· Remarriage alone does not affect who will be considered the last deceased spouse and does not prevent the surviving spouse from including in the surviving spouse's applicable exclusion amount the DSUE amount of the deceased spouse who most recently preceded the surviving spouse in death.
· The identity of the last deceased spouse of the surviving spouse for purposes of portability is not affected by whether the estate of the last deceased spouse elects portability of the deceased spouse's DSUE amount or whether the last deceased spouse has any DSUE amount available.
· The temporary regulations create an ordering rule by providing that, when a surviving spouse makes a taxable gift, the DSUE amount of the decedent who is the last deceased spouse of such surviving spouse will be considered to apply against the amount of the surviving spouse's taxable gifts for that calendar year before the surviving spouse's own basic exclusion amount will apply.
· A spouse who has survived multiple spouses may use each last deceased spouse's DSUE amount before the death of that spouse's next spouse, and thereby may apply the DSUE amount of multiple deceased spouses in succession. However, this does not permit the surviving spouse to use the sum of the DSUE amounts of those deceased spouses at one time, and a surviving spouse may not use the remaining DSUE amount of a prior deceased spouse following the death of a subsequent spouse.
Authority to Examine Returns of Deceased Spouses
· In determining the allowable DSUE amount, the IRS may examine any one or more returns of each deceased spouse of the surviving spouse whose executor elected portability. Upon examination, the IRS may adjust or eliminate the DSUE amount reported on a return; however, the IRS may make an assessment of additional tax with respect to the deceased spouse's return only within the period of limitations under IRC Sec. 6501.
Availability of DSUE amount for estates of nonresidents who are not citizens.
· The estate of a nonresident surviving spouse who is not a citizen of the United States at the time of such surviving spouse's death cannot utilize portability except to the extent allowed under any applicable treaty obligation of the United States.
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Mohamed v. Commissioner: Deductions On Donations To Charitable Remainder Trust Denied By IRS In Harsh Catch-22 Decision By Tax Court |
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Thursday, June 07, 2012 19:05
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In Mohamed, the Tax Court denied a substantial charitable deduction, in full, because the taxpayers failed to follow the regulations in making donations to a Charitable Remainder Trust.
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FACTS
The Mohameds (Taxpayers) donated real estate to charity, but did not properly report the transaction. The IRS subsequently denied the charitable deduction. This dispute eventually proceeded to the Tax Court.
Taxpayers made the donations in 2003 and 2004 through a charitable remainder trust (CRUT). A CRUT provides a taxpayer with an immediate deduction for the donation, while retaining the right to receive income from the donation for a term of up to 20 years. Thereafter, the donated property, the corpus of the trust, passes to charity.
Taxpayer’s CRUT was designed to provide this immediate deduction for donated real estate. Taxpayer planned to receive income for life from the CRUT and for the corpus to pass to several worthy charitable organizations.
Taxpayers complete their 2003 and 2004 returns themselves. They found the pertinent form confusing. The Tax Court agreed the form was unclear. Taxpayers therefore failed to obtain a third party appraisal of the properties and instead made their own best estimate – which was later found to be quite accurate.
The IRS audited the returns and found a deficiently, claiming that the Taxpayers overstated the value of the donated real estate. Even after the properties were valued by an appraiser and sold by the trust for more than the deduction claimed by Taxpayers, the Commissioner continued to assert the properties where overvalued. The Service then realized Taxpayers had incorrectly completed the relevant forms and moved for summary judgment.
LAW
The Code provides that charitable deductions must conform to the regulations. 170(a)(1). With respect to the Taxpayer’s donation, the code requires that: (1) a qualified appraisal must be obtained; (2) the appraisal summary must be attached to the return; and (3) records of the appraisal must be maintained by the taxpayer. 1.170A-13(c)(2)(i)(A)-(C).
The qualified appraisal must be made no more than 60 days before the donation and before the return is filed. 1.170A-13(c)(3)(i). A qualified appraiser cannot be the taxpayer/donor. 1.170A-13(c)(5)(iv)(A), (C). Taxpayers clearly were not qualified appraisers.
The appraisal statement, which is to be attached to the return, also must include a laundry list of information. 1.170A-13(c)(4)(ii). Taxpayers failed this requirement as well.
The Tax Court easily concluded that the Taxpayers did not comply with the regulations. Moreover, the Court would not find the regulations invalid because Congress clearly delegated authority to flesh out the statutes to the Service and the regulations the Service developed where not arbitrary and capricious
The Court also declined to find Taxpayers substantially complied with the regulations. Lastly, the Court declined to rule in favor of the Taxpayer due to the genuinely confusing forms since the forms are not authoritative sources of tax law. The Tax Court denied the deductions.
To its credit, the Tax Court concluded the opinion by admitting the result of its decision was harsh. However, the decision was palatable to the Court because Congress conveyed specific concern regarding the intentional misvaluing of property. The Court would not allow a sympathetic case undermine the rules.
COMMENTS
We have to agree with the Court this was a harsh result. Given the facts known to us, the Mohameds do not seem to be taxpayers aggressively manipulating valuations. However, since valuations are quite subjective and very malleable there is a significant opportunity for abuse, which is often seized upon. Congress’s concern and the regulatory response are appropriate. The Court found itself in a difficult situation: ignore the law or be unfair to the Mohameds. Either decision was justifiable, yet problematic.
We hope in the future, the Service can find a way to work with taxpayers to avoid such Catch-22s. The law undermined both when it is ignored and when it reaches an unfair result. The tax law is already subject to much public contempt. More contempt will only make compliance more difficult all involved.
I hope this helps you help others.
Robert S. Keebler, CPA, MST, AEP
Cites: Mohamed v. Commissioner.Docket Nos. 13947-07, 12882-08. (5/29/2012)
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A Caution To Practitioners About Trying To Use An LLC As A Qualified IRA |
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Friday, May 25, 2012 18:48
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In Re: Pink addressed whether funds “derived from or traceable to retirement funds” are excludable from a bankruptcy estate. The Bankruptcy Court, affirmed by the Northern Illinois District Court, concluded that funds distributed from a qualified retirement plan are not excludable from the bankruptcy estate.
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FACTS – LAW – ISSUE – RULING
The debtors, Mr. Pink and Mr. Porter, initially held traditional IRAs at Merrill Lynch. They then distributed the funds from these accounts and deposited them in accounts in an LLC which was established as a qualified self-directed IRA. A year later, the debtors transferred a portion of these funds to a lawyer in Panama to be held for a real estate deal. This portion the funds were now outside the retirement accounts. These funds were never used to finance a real estate deal and later, at the debtor’s direction, a portion of the funds were transferred to pay for the debtor’s living expenses. Another year later, the debtors filed for bankruptcy.
The debtors argued that the remaining funds held by the Panamanian lawyer were once in retirement accounts, were being held for the accounts, and thus could be exempted from the bankruptcy estate. However, the Bankruptcy court disagreed. The Court noted the relevant statutory language only covers funds held in a retirement plan and the rights to receive pension payments under a retirement plan – funds being held outside a retirement account are not mentioned. [1] The Bankruptcy Court, affirmed by the Northern Illinois District Court, concluded that since the accounts of the Panamanian Lawyer were not a tax-qualified retirement plan the funds could not be excluded from the Bankruptcy estate.
COMMENTS
The Courts come to a seemingly strict legal conclusion: funds derived from a retirement account are not protected from bankruptcy. In this case, the retirement account holder’s behavior was not consistent with their later desire to have the funds exempted from the bankruptcy estate. There are two significant problems with their actions as we see them: (1) they made withdrawals from the funds held outside of the retirement accounts for living expenses; (2) the funds to finance the real estate deal were held outside of the account for over a year. These two facts strongly suggest that the funds outside the retirement account were being treated as personal or business funds, rather than retirement funds. If the debtors had not been so “loose” with the formalities, the Courts might have been more sympathetic.
Like many others, this case is a notice of caution to practitioners; especially those trying to use an LLC as a qualified IRA.
[1] Importantly, these are Illinois statues.
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