Los Angeles County California Estate Planning, Probate and Living Trusts Attorneys The Hayes Law Firm

Educational Alerts
Educational Alerts are written on topics that effect various aspects of estate planning and the laws that govern it. They are usually published and posted to this site at the end of each month. Occasionally newsworthy events will initiate the release of additional alerts at the time the news breaks. The purpose of an Estate Planning Update is to bring important information to the financial advisors in the community. Our hope is that this information better equips you to assist your clients.

The Hayes Law Firm releases important estate planning and related articles on a regular basis. Please take a moment to register to receive full access to our Educational Alerts and FYIs.

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Tax Court Unanimously Validates Formula Clause
The Alert examines a powerful planning tool, valuation clauses, the use of which was recently approved by the Tax Court.

Estate Planning Update
The Alert examines legislation pending in Congress which would extend 2009's $3.5 million applicable exclusion. The Alert goes on to discuss how the Service is handling estate and gift tax audits.

To download the referenced report Description and Analysis of Alternative Wealth Transfer Tax System, use the link below.

Description and Analysis of Alternative Wealth Transfer Tax System Report: http://www.house.gov/jct/x-22-08.pdf

Tax Court Issues Favorable Family Limited Partnership Ruling!
In a recent decision, the Tax Court sided with the taxpayer in a case involving a Family Limited Liability Company and a transfer near death.

Two Rulings of Interest on Retirement Assets PLR 200807025 and PLR 200811028
This Alert examines several private letter rulings in which the Service examines the complicated area of beneficiary designations for qualified plans and IRAs.

Congress Passes Economic Stimulus Package - Future of the Estate Tax Will Not Likely Be Resolved Until After the Presidential Elections
This month's alert highlights the recently enacted Economic Stimulus Act. The Alert covers the rebate provisions for individuals as well as the incentives for small business owners and closes with a comment that is unlikely we will see any "fix" of the current estate tax regime until after the election of a new President.

Retirement Asset Update - Non-Spousal Rollovers
The Alert examines two issues. First, it examines Congress' attempt to mandate allowing non-spousal rollovers and how the IRS continues to interpret the law to allow but not mandate such non-spousal rollovers. Second, it examines how new "wash sale" rules do not allow you to get the benefit of a loss if you sell an asset and then quickly re-purchase it in your IRA.

2008: The Calm Before the Storm
The article examines the upcoming uncertainties and scheduled changes in the laws concerning estate and gift taxation.

The Estate That Would Not Die
The recent litigation surrounding the publicity rights of the remainder beneficiary of the estate of Marilyn Monroe illustrates some of the problems with probate administrations and how a trust can help avoid some of these entanglements.

Court Approved Reformation Fails to Gain Approval from the Internal Revenue Service
The article looks at a recent reversal by the IRS on the issue of allowing non-spousal rollovers of retirement plans into IRAs. Then the article examines one private letter ruling in which the IRS did not allow the mistaken omission of a contingent beneficiary to be corrected. The primary beneficiary had predeceased. The result was that the assets in the retirement plan had to be withdrawn more quickly, thus depriving the beneficiary of the full extent of the tax deferral which would have been allowed had the contingent beneficiary been named.

Charitable in Death: Will Leona Helmsley's Testamentary CRTs Qualify for an Estate Tax Charitable Deduction?
This article examines Leona Helmsley's Will and the Trusts which it creates. It examines some of the oddities involved, including gifts to her dog and the disinheriting of some grandchildren.

IRS Rules That Tuition Paid for Special Needs Child is a Deductible Medical Expense
The Alert examines a recent private letter ruling which allowed the taxpayer to deduct school tuition for a special needs child as a medical expense.

Court Reformation of Irrevocable Trust Does Not Cause Trust Assets to be Included in Grantor's Estate
This month's Alert discusses PLR 200730015, which dealt with the judicial reformation of an irrevocable trust and an IRS finding that the changes to the trust did not cause inclusion of the irrevocable trust in the trustor's estate. Often, trustors want to change the terms of their irrevocable life insurance trust, irrevocable trust for gifting to children and/or grandchildren or other irrevocable trusts for advanced estate planning purposes. Depending on whether the trust is a grantor trust or not, this may involve substituting the old trust for a new one, or a judicial reformation, as is the subject of this month's Alert.

Planning for Retirement Assets Requires Special Care--Bad Advice by Financial Planners Causes Tax Penalty to Client
This alert examines a new private letter ruling in which the taxpayer accidentally triggered penalties. The penalties occurred due to a violation of the rules for the "series of substantially equal periodic payments" exception for distributions prior to age 59 1/2.

IRS Uses Payment of Estate Tax to Win Family Limited Partnership Case
This article examines the Tax Court case of Estate of Erickson v. Commissioner. In this case, the IRS prevailed, including a Family Limited Partnership in the estate of the decedent under Section 2036. Various factors led to this defeat for the taxpayer, including the fact that the partnership was used to pay estate taxes, at least indirectly.

Drafting Spousal Trusts to Reduce Estate Taxes
This article examines various strategies using a marital trust and bypass trust. It also looks at using a marital trust to preserve assets of the pre-deceasing spouse in a second marriage situation.

Technical Amendment to Deficit Reduction Act of 2005 Causes Immediate Annuities to Further Lose Their Luster for Medicaid Planning Purposes
This article examines technical corrections to the DRA. The article sets forth that while the technical corrections made annuities less attractive, they are still a viable option in Medicaid planning. It offers examples of how one might structure an annuity differently to avoid rule changes from the technical corrections to the DRA.

IRS Offers Favorable Rulings Regarding Transfers of Life Insurance Policies to an Irrevocable Life Insurance Trust
The article looks at two recent revenue rulings which confirm that transfers of life insurance policies to ILITS that are grantor trusts do not run afoul of the "transfer for value rule."

IRS Disappoints With Guidance for Rollovers of Inherited Company Plans
The article examines Notice 2007-7 which undermined the non-spousal rollover provisions of Retirement Protection Act of 2006.

Lame Duck Congress Passes Last Minute Tax Act
The Alert discusses the Tax Relief and Health Care Act of 2006. It lists the various provisions and highlights the most important one: the modification of the rules of Unrelated Business Taxable Income for a CRT. If a CRT had UBTI prior to the act, it lost tax exempt status. Beginning January 1, 2007, it does not lose tax exempt status, but faces an excise tax equal to 100% of the UBTI. This is often better and can make contributing business assets to a CRT more attractive.

IRS Finds Pecuniary Gift of IRA to Charity is Taxable
The Alert examines ILM 200644020 which involved an IRA payable to a trust. The trust used the assets to pay pecuniary bequests to charities. The Service held that, under the Kenan rule, there was a sale or exchange, and thus the trust recognized the income on the asset. Further, the trust did not get a charitable deduction. The Alert states that careful planning could have avoided this outcome.

IRS Curtails Use of Private Annuities for Income Tax Purposes
The article examines the IRS' recent issuance of proposed regulations cracking down on Private Annuity Trusts used for income tax avoidance. The article looks at why PATs are still a viable tool in estate planning.

Fifth Circuit Reverses Tax Court in McCord: Gifting Using Formula Clauses
The article examines the appeal of the McCord decision, in which the Fifth Circuit reversed the Tax Court decision and allowed formula value clauses. The decision allows you to tie the amount of the gift to the value of the underlying asset, such as an FLP interest. So, it could say, I give $1 million worth of my FLP to my children and the amount over that to charity.

Three Planning Gems Contained in The Pension Protection Act of 2006
The alert examines significant aspects of the Pension Protection Act of 2006 and briefly examines recent failed attempts at estate tax repeal.

Recent IRS Ruling Spawns Retirement Planning Strategy
The article examines a PLR in which the taxpayer got approval to treat a (d)(4)(A) Special Needs Trust as a "conduit" trust rather than an "accumulation" trust for purposes of minimum required distributions. In other words, they were allowed to ignore remainder beneficiaries and use the primary beneficiary's life expectancy to calculate required distributions.

Creating a Trust to Protect from Future Unknown Creditors is a Fraudulent Transfer in Washington
This month's alert reviews United States v. Townley, a case in which a District Court in Washington held that the creation and transfer of assets to an irrevocable trust was a fraudulent transfer with respect to future creditors. The IRS was not a foreseen future creditor at the time the trust was created, but the trustors testified that one of the primary reasons the trust was established was concerns about liability associated with a different identified potential future creditor.

Proper Drafting of Trust Protects Trust Assets from Creditors, Including the Internal Revenue Service
This article examines recent IRS guidance concerning the ability of the IRS to attach a beneficiary's interest in a trust. The article provides options for greater creditor protection by not using typical HEMS language.

IRS Issues Favorable Life Insurance Private Letter Ruling
This month's Alert covers a PLR in which the IRS approves a transfer of life insurance policies from one Irrevocable Life Insurance Trust structured as a grantor trust for income tax purposes to another Irrevocable Life Insurance Trust structured as a grantor trust. The Alert explains how this planning strategy avoids recognition of gain, the transfer for value rule and the three year rule. Call our office if you have clients with insurance trusts that might need to be re-thought.

Window of Opportunity for Medicaid Planning
This Alert informs advisors of the window of opportunity that still exists for planning for Medicaid eligibility under the old law, and encourages them to take action while planning under the old Medicaid law still exists. The Alert also briefly reviews once again the changes that are brought about by the Deficit Reduction Act of 2005.

Passage of the Deficit Reduction Act Will Not Mean the End of Medicaid Planning
On February, 8, 2006, the President signed into law the Deficit Reduction Act of 2005 (“the Act”). There have already been challenges to the Act but it appears it will be valid law. When the Senate and the House of Representatives voted in favor of passing the Act, many people were predicting the end of Medicaid planning.

Upcoming Estate Tax Reform May Bring Changes
This provides a look at proposed estate tax reform and how it may affect planning.

Katrina Emergency Tax Relief Act Offers Short-term Charitable Tax Planning Opportunity - But Be Careful!!
The article examines the charitable planning aspects of the hurricane Katrina legislation. It provides a strategy for charitable gifting of retirement plan assets.

Enrollment Period for Medicare Part D on the Horizon
This article gives a brief explanation of Medicare Part D, the new prescription drug plan. Seniors will begin receiving information about this plan between mid-October and year-end.

Potential Changes to Medicaid Laws May Warrant Taking Action Now
This article addresses many of the proposals being set forth by the Department of Health and Human Services Commission and the National Governor's Association for Medicaid Reform. Many of these proposals will change the manner in which Medicaid planning will be done in the future and how your clients may want to accelerate their planning before any changes are made.

Fifth Circuit Releases Long Awaited Strangi Opinion
This month's alert highlights the findings of the Strangi 4 FLP case. This is the second appeal to the 5th Circuit. The opinion is a partial victory for the IRS, but the key points of the case are the issues regarding implied agreements (and use of FLP assets to pay estate administration expenses, debts of the decedent and estate taxes) and what is business and non-business purposes are sufficient to meet the "bona fide transfer for fair value" exceptio under IRC 2036.

2036 Is Not Just for Family Limited Partnerships
In past alerts we have informed you how the IRS has had successes in using IRC § 2036 to pull back transferred partnership assets into the estate of a decedent, thwarting the taxpayer's plans to obtain a discount. These victories have emboldened the IRS to apply the requirements of IRC § 2036 against other types of intra-family transfers.

Taxpayers Using FLPs Continue to Trip Over Section 2036
The article examines three new FLP cases in which the Service was victorious. It stresses the need for clients to have their FLP agreements and practices reviewed.

Court Upholds Trust Nominee Clause and Finds No Revocation Where the Formalities of Revocation and Amendment Were Not Followed by the Surviving Trustor
During the course of a long marriage, George and Barbara Heaps executed a joint revocable living trust with both spouses acting as co-trustees. It provided that the trust would split into two trusts, a “family trust” and a “marital trust,” after the death of the first of them. The surviving spouse would act as co-trustee over the “family trust” with George and Barbara’s son and son-in-law. The surviving spouse would serve as the sole trustee over the “marital trust.”

Disclaimer Proves Fatal to Estate Plan
Mr. Katz executed a will in 1991 that called for the creation of a "pecuniary credit shelter trust" equal to the amount of the "aggregate federal estate tax exemption equivalent." The will language further provided that the credit shelter trust "shall not be reduced on account of any disclaimer by my wife." Finally, another provision in the will stated conflicting provision in this will, "if my wife disclaims any interest in any portion of the property otherwise passing outright to her under this Article of my will, such portion shall be added to the [credit shelter] trust." The purpose of the credit shelter trust created under Mr. Katz's will was to place an amount equal to the amount that can pass free of estate tax into trust so that it would eventually pass to his children without being subject to estate taxes in his wife's estate.

President Signs the Working Families Tax Relief Act and the American Jobs Creation Act
President Bush signed into law the Working Families Tax Relief Act of 2004. It provides for approximately $146 billion in tax breaks aimed primarily at middle-income taxpayers and businesses of all sizes.

Bank and Trust Officer Held Liable for Estate Tax
Learn the facts as well as lessons that should be learned from the case of Hatleberg v. Norwest Bank Wisconsin, 678 N.W.2d 302 (Wis. App. 2/24/2004)

Mistake in Preparing Estate Tax Return Costs Taxpayer:IRS Provides No Relief
The facts in PLR 200422050 are as follows: a decedent’s will left her estate in trust for the benefit of her husband. The trust provided that the husband was to receive all income from the trust and he could compel the trustee to make trust assets productive. As a result of these provisions, the trust would qualify for the federal estate tax marital deduction under IRC § 2056 as a qualified terminable interest property (“QTIP”) trust if the executor made an election under IRC § 2056(b)(7).

IRS Suffers Big Blow in Fifth Circuit Reversal of the District Court Holding on Kimbell FLP Case
On May 20, 2004, the Fifth Circuit Court of Appeals reversed the grant of summary judgment for the government in the U.S. District Court case of Kimbell v. United States, 244 F. Supp.2d 700, 91 AFTR.2d 2003-585 (N.D. TX 5/14/2003).

Failure to Qualify for Marital Deduction Can Cost Hundreds of Thousands
The amount that can be given at death free of estate taxes in 2004 is $1.5 million. With proper planning, a married couple can double that amount to $3 million. Where an estate is greater than $3 million, the estate tax on the excess can be deferred until the death of the surviving spouse, but only if proper planning is put in place. This is because of the unlimited federal estate tax marital deduction. Where the first spouse to die wants to control where the excess assets go after the death of the surviving spouse (by giving the surviving spouse only a life estate in the excess assets), a special kind of trust, known as a Qualified Terminable Interest Property Trust (or QTIP Trust) must be used.

Ninth Circuit Court Affirms Asset Protection for Trust Beneficiary
One of the advantages of establishing trusts for beneficiaries as opposed to outright distributions is asset protection. In the case In re John and Holly Coumbe, Debtors, a Bankruptcy Trustee sought to include the assets of a testamentary trust created by the debtor’s mother in his Chapter 7 bankruptcy estate. The Court held the trust assets were unavailable to the debtors’ creditors.

Limited Liability Company Provides Answer to Trust Termination

It is becoming more common to leave assets at death in trust for children and other beneficiaries. In many instances, this strategy affords the beneficiaries protection from creditors and protection of their inheritances from divorcing spouses. When trust assets consist of business holdings, real estate or a diverse portfolio of securities, it also provides for centralized management and potential economies of scale.

Distributions from Retirement Plans or Individual Retirement Accounts Can Reduce or Eliminate Estimated Tax Underpayment Penalties
Seniors and self-employed individuals often complain about having to make quarterly estimated income tax payments. Failure to make the payments can lead to underpayment penalties and interest (calculated using the federal short term rate plus an additional three percent) having to be paid on income taxes due.

Circumstances Surrounding Drafting, Execution, and Administration of a Prenuptial Agreement Determine Its Effectiveness
The planning done before marriage is often as important as planning after marriage in assuring that a client’s estate planning wishes are carried out. Laws governing prenuptial agreements vary somewhat from state to state, but often the circumstances surrounding the drafting, execution, and administration of a prenuptial agreement are crucial to the effectiveness of the agreement.

Is That Your Final Answer? IRS Issues Final Treasury Regulations for Split-Dollar Regulations
On September 11, 2003, the Treasury Department and IRS jointly released the Final Split-Dollar Treasury Regulations. Officially, the Regulations are called Split-Dollar Life Insurance Arrangements, Treasury Decision 9092. The Final Treasury Regulations apply to any split-dollar life insurance arrangement entered into after September 17, 2003. This means that IRS Notice 2002-8 remains the primary source of guidance for split-dollar arrangements entered into prior to September 18, 2003.

Walking Through the "Basic" Estate Plan
Start your clients off with the very basics so that they appreciate the value of each planning strategy you employ.

HIPAA Protected Health Information Provisions Become Effective – Clients Need to Take Action Now
On April 14, 2003, the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 45 CFR §§ 160–164, affectionately dubbed HIPAA, went into effect. The new regulations have caused much turmoil among "covered entities" (e.g., doctors, hospitals, nursing home facilities, and insurance companies), as they will now, for the first time, be subject to federally imposed sanctions and monetary fines for unauthorized disclosure of "private health information." The new law has caused many health care providers to clamp down on the release of medical records and other health care information to anyone other than the patient.

Federal Tax Lien Trumps State Asset Protection Law
Approximately half the states provide that a married couple may take title to real property as tenants by the entireties. This type of ownership, while similar to joint tenancy, offers superior asset protection from many creditor's claims. The question of whether an IRS tax lien can attach to tenancy by entirety property was the subject of U.S. v. Craft, 122 S. Ct. 1414, 89 AFTR.2d 2002-2005 (2002).

Ninth Circuit Includes Gift Tax Paid by Wife in Husband's Estate
The opinion in Brown v. United States, 91 AFTR.2d 2003-2085 (9th Cir. May 1, 2003) opens with the following truism: "The estate tax combines into one sad transaction the only two certainties in life." Brown is very important because it applies the step transaction doctrine to defeat an estate tax planning strategy between husband and wife.

Reformation of Trust Saves Estate Taxes
Joint trusts for married couples have been used in community property states for over a decade. There had been speculation by some attorneys regarding the effectiveness of joint trusts in common law states. However, concerns over recognition of joint trusts by the IRS have largely been put to rest by PLRs 200101021 and 200210051 (see our previous FaxAlert dated April 30, 2001 titled "Joint Trusts in Common Law States" for more on this subject).

Tricks and Traps Concerning Annuities
Because there are many tax traps concerning annuities, it is important for the financial advisor to know the treatment of annuities when advising clients.

Care Must Be Taken When Disinheriting an Heir
It is not uncommon for a person to place provisions in his or her will or trust to exclude an heir from receiving an inheritance. Such was the desire of Mary Bartels, who wished to disinherit her daughter, Deborah Smith, and whose will was the subject of dispute in the case In the Matter of the Estate of Mary Alberta Bartels, Deceased, 184 Or. App. 448, 56 P.3d 501 (October 23, 2002).

IRS Issues Relief for Taxpayers Taking Pre-Age 59½ Retirement Plan Distributions
On October 3, the IRS released Rev. Rul. 2002-62, 2002-42 IRB, substantially modifying Notice 89-25, 1989-1 C.B. 662, with regards to the “series of substantially equal periodic payments” (“SOSEPP) option for avoiding the IRC § 72(t) 10% early withdrawal penalties from IRAs and retirement plans. (All the options were outlined in a previous Fax Alert. Call for our office for a copy).

NUA: A Tax Advantaged Way of Removing Employer’s Stock from a Retirement Plan
Internal Revenue Code ("IRC") § 402(e)(4) provides a special income tax benefit for distributions of employer stock from qualified retirement plans. Any appreciation in value in the stock which has occurred between the date the stock was credited to the employee's account and the date of distribution is characterized as "Net Unrealized Appreciation" or NUA. If properly planned for, the NUA is not taxed on the date of distribution - it is taxed when the stock is subsequently sold. Only the retirement plan's cost basis in the stock is taxed on the date of distribution. This special treatment is only available if the employer stock is distributed as a part of a lump sum distribution, in which case all the NUA is non-taxable at the date of distribution. If the distribution of employer stock is not a part of a lump sum distribution then only NUA attributable to the employee's contributions to the plan is excludable.

IRS Releases Final Regs for IRAs and Retirement Plans
The Internal Revenue Service recently released, in T.D. 8987 (April 16, 2002), the long awaited Final Treasury Regulations for Internal Revenue Code ("IRC") § 401. These regulations replace Proposed Regulations dating back to 1987, with modifications. The Final Regulations are effective starting January 1, 2003, but can be used in calculating Minimum Required Distributions ("MRDs") for calendar year 2002, as described below. Some of the key provisions of the Final Regulations are as follows:

New GST Allocation Rules Are Effective for Gift Tax Returns Filed by April 15
With the passage of the Economic Growth and Tax Relief Reconciliation Act ("EGGTRA") last year, the rules governing the automatic allocation of Generation Skipping Transfer Tax ("GST") exemption have been changed for tax years starting in 2001. According, all clients that made gifts in 2001 should have their situation reviewed to determine they may need to elect out of the new automatic allocation rules for gift tax returns due on April 15, 2002.

The Changing Landscape of Split Dollar Insurance: Notice 2002-8
Split Dollar insurance is an arrangement, typically between an employer and an employee, which provides for a split in the funding of the premium payments. See Rev. Rul. 64-328. The employer effectively advances the employee some portion of the premium and has this repaid upon the employee's death or termination of the agreement.

So You Thought Estate Taxes Were Going Down?
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") provides for a gradual decrease in the highest marginal federal estate tax rate between 2002 and 2007. EGTRRA also provides for a periodic increase in the Applicable Exclusion Amount, or the size of an estate that can escape the federal estate tax, between 2002 and 2009. For instance, in 2002, the highest marginal estate tax rate is scheduled to drop from 55% to 50%, and the AEA is scheduled to increase from $675,000 to $1 million. With these changes one would expect that estate taxes paid by all taxpayers will decrease in 2002. Unfortunately, that isn't true.

Year End Charitable Gifting
As the end of the year approaches, the issue of last minute income tax strategies often arises. One such year-end strategy is charitable giving. When making year-end gifts, donors must time the gift properly to assure the gift creates a charitable deduction in the current year. The Treasury Regulations under Internal Revenue Code ("IRC") § 170, which determine when a charitable deduction may be taken, deal primarily with when the donor has parted with dominion and control over the asset being given to the charity. The specific factors that determine the timing of payment or delivery may depend upon the type of asset being given.

Clients Should Use Attorney-Drafted Powers of Attorney for Property
After the incapacity of an individual, powers of attorney often are used to initiate or continue annual gifting programs to reduce the size of the incapacitated individual's estate for estate tax purposes - or as part of a Medicaid qualification strategy. Using a generic power of attorney obtained off the internet or from the legal forms department of a book, stationery or office supply store can often lead to problems. This is even true of the use of statutory power of attorney language provided by a state's legislature.

Liability for Failure to Conduct Post Mortem Estate Planning and Administration
More and more, the failure to properly discharge fiduciary duties and to find and exploit various post-death options and elections to reduce estate taxes have resulted in large damage awards against executors, trustees and their professional advisors.

Joint Trusts in Common Law States
The use of a joint revocable living trust for the estate planning needs of married couples has been quite common in community property states for almost two decades now. In common law states the use of joint trusts for planning for married couples has become increasingly prevalent, but some pundits continue to proclaim that a joint trust cannot be effectively used for estate planning in common law states.

The Death Tax Elimination Act of 2001 Contains Only Moderate Tax Relief for the Next Ten Years
The House Committee on Ways and Means started its markup of the provisions of H.R. 8, "The Death Tax Elimination Act of 2001" on Thursday, March 29, 2001 and approved it the very same day. Unfortunately for taxpayers, the bill as proposed provides only moderate relief for taxpayers over current law until the tax is finally repealed in 2011. And of course, as with all tax reform plans which are phased in over a period of years, the provisions of the proposed law will be subject to the whims of five different Congresses and three Presidencies before actual repeal occurs. We all remember the utterance of the phrase "no new taxes" and other promises of tax cuts in the past that never actually materialized.

Alternative Valuation Provisions and Other Basis Provisions Under the Internal Revenue Code
In our last Fax Alert, we defined basis step-up (or step-down) and discussed how it was calculated with regard to Spousal Joint Tenancy (or Tenan