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.

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IRS Issues Instructions for Estate Tax Returns for Decedents Dying in 2011 and 2012

This month's Alert examines the IRS’ recent release of instructions regarding how to ensure portability of the applicable exclusion amount at the death of the first spouse. Many surviving spouses may see an estate tax return at the death of the first spouse to be unnecessary. This alert shows why advisors should document that they advised the filing of an estate tax return.

A "Do-It-Yourself" Mystery: The Case of the Neighbor Girl and the Well-Meaning Widow

Clients occasionally attempt do-it-yourself estate planning. Sometimes they use software assistance, borrow from others’ documents, or amend their professionally prepared documents themselves. This month’s Alert looks at one such story and the havoc it wrought. In the end, the client’s goals were not achieved and her loved ones were pitted against each other in court.

Failure to Review Estate Plans Periodically Can Lead to Unintended Consequences

The estate tax law is a moving target, both at the federal and state level. This month’s Alert examines a case which illustrates how the changing laws can result in unintended results in your plan. Now, more than ever, it is important to review your estate plan periodically to ensure the outcome you want.

Doing It Yourself Can Sometimes Lead to Disaster

Nowadays, a growing number of consumers attempt to prepare estate planning and other documents of legal significance without professional assistance. These do-it-yourselfers are penny-wise and pound-foolish. This Alert examines several cases in which the decedent attempted to create or modify his own estate plan, with disastrous results.

Creditor Protection Extended to Inherited IRAs by More Courts

IRAs and Qualified Plans are an increasing portion of our clients’ wealth. The advantages of the income tax deferral are well-known. This month’s Alert looks at developments regarding the creditor protection such plans provide, not only for the contributor, but also for those who inherit them.

Elizabeth Taylor's Estate Could Exceed $1 Billion – Much of It Could Benefit AIDS Charities

Elizabeth Taylor died recently with a $1 billion estate. This month’s Alert focuses on her estate, her philanthropy, and various advanced estate planning techniques with a charitable component. Read this month’s Alert to find out how charitable giving can help you and your clients meet estate planning goals.

Annuity Maximization

This Alert examines how a tax-deferred annuity may not be the best solution for senior clients. It demonstrates how a single premium immediate annuity, or “SPIA” may be a better alternative for clients, especially if the client is in a lower tax bracket than the children who will inherit it.

TRA 2010 Creates Opportunity for New Planning Strategy - The FlexTrust

The question of whether to fund a credit shelter trust has long been a central question in estate planning. With the new tax law and it’s temporarily increased exemption, the question is all the more relevant. This month’s alert discusses a new method of adding flexibility to your clients’ trust. The FlexTrust allows an independent Trust Advisor to decide whether and to what extent the credit shelter trust should be funded.

Congress Passes New Estate Tax Law as Part of Compromise Package --- the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA 2010)

This Alert discusses the new tax law – TRA 2010, and its impact on estate planning. The estate and gift tax exclusion is going up to $5 million. However, TRA 2010 applies for only 2 years. After that, we’re back to the $1 million exclusion.

Unseen Perils Often Lurk in Estate Plan Changes

The Alert examines how care must be taken when an estate tax plan is modified. In the subject situation, the client wanted to change an irrevocable GRAT because of changed circumstances. The Alert examines the risks involved in the change and the prudence of advice from a qualified estate planning attorney prior to any such change.

IRS Issues Another Private Letter Ruling Regarding Retirement Assets Paid to Trusts

This month's Alert examines a private letter ruling concerning IRAs paid to a trust. In the facts of the PLR, the trust paid outright to the beneficiaries. There is much misinformation out there about using trusts as the beneficiary of IRAs and qualified plans. In this case, the beneficiaries were able to defer the income taxation of the assets by taking distributions over their life expectancies.

With Taxes on the Rise, Charitable Remainder Trusts May Again be an Important Tool

This month's alert examines the likely increase in estate taxes next year and the potential increase in income taxes. It examines one strategy which may be of great help if that is the case: the CRT or Charitable Remainder Trust. A CRT provides benefits to you during life and to the charity you designate when the trust ends.

Basics of Gift and Estate Tax Reduction

This Alert examines the three general categories of strategies to reduce the impact of estate and gift taxation. Since it looks like the estate tax is returning next year with only a $1 million applicable exclusion, this refresher in advanced planning is especially timely. In particular, the Alert examines the Stewart case and how the taxpayer in that case used fractional interest discounts to remove value from her estate.

Two Recent Cases Illustrate the Importance of Proper Asset Protection Planning as Part of an Estate Plan

This Alert examines two recent legal cases which highlight the importance of considering asset protection concerns when arriving at an estate plan. In both cases, an estate planning attorney knowledgeable with asset protection could have achieved their clients' goals. For example, in one case the integration of a fully discretionary trust for the beneficiary into the plan could have insulated the beneficiary from asset protection concerns.

House Passes Bill Affecting Advanced Strategy; Fate of the Estate Tax Remains Uncertain

Do not delay! This Alert examines recent legislation which would reform GRATs, an advanced estate planning strategy, making them less attractive. The legislation has passed the House but not the Senate. As the legislation would only apply to GRATs created after enactment, there is still time to act if your clients do not delay. The Alert also examines prospects for estate tax legislation in 2010.

Congress Passes a CLASS Act

This Alert examines the Community Living Assistance Services and Support ("CLASS") act, which was part of the large health care reform measure passed in March of 2010. The Alert examines how the program will work when it is implemented in 2012, though many questions remain.

Eighth Circuit Upholds IRS Victory in FLP Case

A recent decision by the Eighth Circuit affirmed an IRS victory in the Tax Court. This Alert examines the decision in Holman and why the taxpayer lost this case. This case is instructive in structuring FLPs.

Federal Court Denies Annual Exclusions Due to Restrictions in Entity

This Alert examines another case which held that a gift of part of an entity with stringent restrictions is really a gift of a future interest. This is significant since a gift of a future interest does not qualify for the $13,000 present interest annual gift tax exclusion. This case follows the precedent set in the Hackl case.

Defective Grantor Trusts for Beneficiaries?

Most of us have heard of intentionally defective grantor trusts which make the income of the trust taxed to the grantor. A PLR recently released by the IRS shows that it is possible to make a defective grantor trust as to the beneficiary. In other words, the income of the trust can be taxed to the beneficiary rather than to the trust. This Alert examines how this status is achieved and how it may be used to further your clients' goals.

Congress' Inaction Creates Need to Review Estate Plan

Congressional inaction on the estate tax has led to its temporary repeal. The bad news is that there is no step-up in basis. This unexpected scenario causes two potential problems: 1) the estate tax formula allocation clause in your clients' documents may have unintended consequences, and 2) your clients' documents may not be drafted to take advantage of the new "carryover" basis regime. Read the full Alert to find out more about these problems and their solutions.

Estate Tax Update and a Major Taxpayer Court Victory!

This Alert examines the current estate tax uncertainty and prospects for the resolution of that uncertainty. Also, the Alert examines a taxpayer victory in a Court of Appeals case regarding a formula clause. In the event of a disclaimer, the clause gave the excess over a set amount to charity. Such formula clauses are a disincentive to the IRS to audit because it results in no additional tax, even if the value of the assets is increased on audit. This is a significant taxpayer victory as the IRS has consistently challenged these clauses.

IRS Allows Rollover of IRA Payable to a Trust

Maximizing the stretch of distributions from IRAs and qualified plans can provide significant income tax savings due to tax-deferral. This Alert examines a Private Letter Ruling in which the IRS allowed a surviving spouse to do an advantageous spousal rollover, even though the IRA was payable to an estate or trust. Ordinarily, if a trust or estate is the designated beneficiary of an IRA or qualified plan, no spousal rollover is allowed. Learn how they achieved a spousal rollover in this case.

Court of Appeals Affirms Recognition of Social Security Disability Income Assigned to a First Party Special Needs Trust for Purposes of Nursing Home Share of Cost Calculations

This Alert examines a case involving the use of a Special Needs Trust (SNT). SNTs can be very useful in allowing individuals to keep the benefit of some assets and yet still qualify for Medicaid or other resources. Unfortunately, the Court of Appeals in this case held that the SNT could not be used to shelter the individual's Social Security Disability Income (SSDI). The case illustrates the importance of seeking assistance from a qualified estate planning and elder law attorney when planning for clients with current or future special needs (of themselves or their beneficiaries).

No Estate Tax Reform in 2009 - Large Tax Bill Likely in 2010

Where are estate taxes headed from here? This Alert discusses the latest news regarding estate taxes. While nobody knows for sure what is going to happen, this Alert examines the diminished likelihood of permanent estate tax legislation in 2009 and the likelihood of a one-year extension of the current estate tax exemption. The Alert also discusses potential developments in 2010 and 2011.

New Jersey Court Upholds Asset Protection Trust

This Alert illustrates the importance of incorporating Asset Protection planning when doing Estate Planning. The client in the case prepared a fully discretionary trust for her son, thus keeping it from being attached by his creditors. Make sure your clients consider whether their estate plan will protect the assets they intend to leave to their family.

Estate Tax Reform Update

What's happening with estate tax reform? This Alert examines the various estate tax proposals pending in Congress. Many of the proposals under consideration would curtail the effectiveness of many popular estate planning strategies. It concludes that it is unlikely that there will be major estate tax changes this year, but, that changes could be forthcoming next year.

IRS Issues Two New Revenue Rulings Dealing with the Taxation of Proceeds on the Surrender or Sale of Life Insurance

This article examines two interesting rulings recently released by the IRS. The rulings examine the intricacies of the income taxation of the surrender or sale of a life insurance policy.

Legacy Wealth Planning for Blended Families

Blended families, where the parties have remarried or have children from other relationships, are increasingly common. This Alert examines the unique issues arising in the blended family context and ways to avoid the many pitfalls which may exist.

IRS Scores another FLP Victory with Jorgensen Case

The Alert examines a case involving a family limited partnership in which the IRS scored another victory. The Jorgensen case underscores the necessity of the proper management of the partnership if valuation discounts are to be obtained. Your FLPs should be reviewed by an experienced estate planning attorney in light of these cases.

Another Proposal for Estate Tax Reform is Introduced to Congress - Where Does It Appear We Are Heading?

This months Alert examines a yet another estate tax reform proposal and the prospects of its passage.

Tax Law Changes for 2009

This year (2009) brings several changes to tax laws. This Alert keeps you abreast of the most important of these changes and even gives you a sneak peak at some proposed legislative changes that may be in the works.

Congress Provides Relief for Required Minimum Distributions in 2009 and Proposes Estate Tax Reform

This alert examines two pieces of legislation. The first passed last year and provides that there are no Required Minimum Distributions for 2009. The second piece of legislation is a bill which has been introduced in the House which would provide for estate tax reform by freezing the applicable exclusion at $3.5 million and denying discounts for non-business assets in an entity like an FLP.

Turbulent Economic Times Can Lead to Estate Planning Opportunities

This article examines several ways to take advantage of the current economic conditions, from an estate planning perspective. Historically low interest rates combined with depressed asset values make many strategies more effective. The article explains how these challenging economic times can work to your client's benefit.

IRS Issues Favorable Grantor Retained Annuity Trust Ruling

This alert examines the use of Grantor Retained Annuity Trusts or "GRATs." Specifically, the article examines a recent private letter ruling which approved the use of a "substitution of assets" clause in the trust. GRATs can be an effective way to freeze the transfer tax value of assets and get appreciation of the assets out of the taxable estate without using gift tax exemption.

Recent Law Changes of Note to Financial Professionals

This Alert examines changes the recent expansion of FDIC insurance coverage and how it applies to accounts in revocable trusts. The Alert also examines how the extension of the allowance of the IRA "charitable rollover" can help your client achieve their philanthropic and tax goals.

News of Financial Crisis Brings Concerns Regarding Protection of Financial Accounts

Our alert of a few months months ago examined protection under FDIC. This alert examines protection for brokerage accounts under the SIPC and ways to expand that protection.

New Case Demonstrates the Importance of Professionally Drafted Buy-Sell Agreement

This article looks at a business arrangement between two friends and the importance of a well-drafted buy/sell agreement between them.

Recent News of Bank Failures Gives Rise in Concern Regarding Security of Bank Deposits -- Ownership of Bank Accounts in a Revocable Living Trust Can Help

Several financial institutions have failed recently. Trusts can provide expanded FDIC protection for bank accounts. This Alert explains how to calculate FDIC protection.

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.

Congress Passes Income Tax Bill - Estate Tax Repeal is Up Next The Internal Revenue Service Again Approves Spousal General Power of Appointment Planning Strategy

This article contains an update on The Tax Increase Prevention and Reconciliation Act of 2005, comments from leading Senators on the potential of estate tax repeal in the coming months, and a commentary on the third in the series of PLRs dealing with granting a testamentary general power of appointment over a surviving spouse's assets in order to more fully utilize the deceased spouse's applicable exclusion amount.

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.

Fate of Some Forms of Medicaid Planning in Jeopardy as Planners Await Final Vote on Budget Package from Congress

A look at the current status of the Budget Reconciliation that will enact punitive new transfer rules for gifts in connection with Medicaid planning, as well as other substantive changes. Because of some last minute maneuverings of the Senate Democrats, the Bill will need to win another majority vote by the House before it becomes law. The proposed changes will significantly impact Medicaid planning opportunities in many circumstances, so it is imperative that all Medicaid plans be reviewed in light of the contents of the Bill.

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.

Chances for Repeal of the Estate Tax Lessen -- Congress May Settle for Permanent Increase in Exemption Amount

The article examines pending legislation concerning potential repeal of the estate tax. It discusses the more likely outcome of an increase of the applicable exclusion amount. It concludes that the need for estate planning will remain greater than ever for non-tax reasons.

Taxpayers Fight and Win State Estate Tax Battles

In 2001, the federal government passed the Economic Growth and Tax Reform Reconciliation Act of 2001 ("EGTRRA"). One of the provisions of EGTRRA was the gradual reduction and then elimination (in 2004) of the state death tax credit on the federal estate tax return. About three-quarters of the states limited the amount of the death taxes they received to the amount of the state death credit. With the reduction in the credit, these "pick-up" states started to see their tax revenues decline and as a result about one-third of them "decoupled" from the federal system. The decoupling states implemented their own estate tax regime based on federal law that was in existence prior to EGTRRA. In some circumstances this resulted in taxpayers paying a higher combined federal and state estate tax than they would have paid under the law before the enactment of EGTRRA, even though EGTRRA was heavily promoted as a tax reduction.

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.

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)

IRS Blesses Planning With Grantor Trusts In Revenue Ruling 2004-64

The IRS, with its release of Revenue Ruling 2004-64, has given its approval to the use of grantor trusts as an income and estate planning strategy and it has removed any confusion as to whether the trust must contain a provision for the reimbursement of income taxes paid by the grantor.

Mistake in Preparing Estate Tax Return Costs Taxpayer: IRS Provides No Relief

The facts in PLR 200422050 are as follows: a decedents 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 debtors mother in his Chapter 7 bankruptcy estate. The Court held the trust assets were unavailable to the debtors creditors.

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 clients 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.

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).

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 59.5 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).

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.

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.

Who Pays the Estate Tax When Someone Passes Away?

In 2001, Donald Decedent dies with an estate plan in place which leaves the residue of his estate as follows: a) $500,000 to his children from a previous marriage, b) $500,000 to his children from his current marriage, c) $500,000 to charity, and d) $500,000 to his wife at the time of his death. Who pays the federal and state transfer taxes of at least $125,250 under these circumstances? The answer is, "it depends." Liability for the payment of the estate tax would be governed by the "tax allocation clause" contained in Donald Decedent's trust agreement (or his Will, if that is the governing instrument). If Donald had no trust or Will, or if his Trust or Will was silent about the payment of transfer taxes, then liability for the payment of the transfer taxes would be governed by state law.

Planning for Same-Sex Couples Requires Close Attention

Planning for your client's individual needs is always a task that requires close attention. The techniques most appropriate for a client depend upon a number of factors, including his or her age, health, and whether he or she is married or single. For example, a high-risk investment/technique may be acceptable for an investor at age 30, while it would likely be inappropriate for an investor at age 70. While determining what best suits your client's needs, it is important to not overlook another characteristic that likely will affect your recommendations: whether your clients are a same-sex couple.

A Better Way to Pay For Children's Education

Many parents, until now, have been frustrated by the lack of tax efficient options to save for their children's education. While Education IRAs provide a means to avoid taxation of the earnings/growth on the amount saved, limit the use of the funds to education related matters, and remove the assets from the parent's estate, Congress has limited contributions to $500 annually. With the ability to take tax-free withdrawals of principal and penalty-free withdrawals of earnings for educational expenses, a Roth IRA might be considered as a tax favored education savings vehicle. However, annual Roth IRA contributions are limited to $2,000 and eligibility for a Roth IRA is restricted to taxpayers earning below designated threshold limits.

Trust-Owned Life Insurance: Who's Responsible for What?

A difficult aspect of planning for the future of a client is choosing what vehicle to utilize to realize the client's goals. Once that heavy task is accomplished, and the plan placed in action, it is easy to assume that all the work is complete. However, overlooking the ongoing responsibility for the client's estate plan can prove to be fatal. This Advisor's Fax Alert discusses the ongoing fiduciary responsibility owed specifically when dealing with trust-owned life insurance (TOLI).

Walking Through the "Basic" Estate Plan

Your client has come in for an estate planning appointment to begin their estate plan. The clients have done well with their family business, mostly rental properties, and have a net worth of $4,000,000. You also learn that they have three children and two grandchildren. Your normal practice is to start with the very basics so that your clients appreciate the value of each planning strategy you employ.

Advanced Estate Planning - A Client Handout

The following text is intended to provide financial professionals with a method to inform their clients of the general principles, and some examples, of advanced estate planning without requiring that you spend non-chargeable time marketing to your client.

IRA vs. Life Insurance: It's A Balancing Act

Estate and financial planners often confront the issue of how to plan for their clients that have large IRAs, some making up most of the clients' estate. However, too often certain types of planning are overlooked in the decision making process. In the case of a client who has a large IRA account and is unlikely to need the funds for living, life insurance may be the answer.

Estate Planning with Family Limited Partnerships Requires Careful Attention to Detail

This Alert discusses the Family Limited Partnership (FLP) valuation discounts that were lost in Adams v. U.S., decided May 17, 1999. FLPs are a popular estate planning tool used to reduce the value of a client's property for gift and estate tax purposes.

Using The Non-Propertied Spouse's Credit - Inter Vivos QTIP Trusts

If the ownership of property by spouses is unbalanced and the propertied spouse does not want to part with control, other than the use of the income for the other spouse's benefit, the provisions of section 2523(f) provide an inter vivos QTIP format that may enable both spouses' credits to be utilized and also accommodate the propertied spouse's testamentary goals.

Qualifying Death Bed Gifts

This Fax Alert discusses a recent case where a failure to properly execute "death bed gifts" resulted in otherwise avoidable estate taxes. What is a death bed gift? One of the fundamental estate planning goals is to remove property from a client's estate in a manner that benefits the client's family.

Using QTIP Trusts for Valuation Planning

A recent case, Estate of Harriett R. Mellinger v. Commissioner of Internal Revenue, 112 T.C. No. 4, has again illustrated the ability to use a QTIP trust to reduce estate taxes. The term QTIP trust stands for Qualified Terminable Interest Property Trust. A QTIP trust bequest to a spouse qualifies for the unlimited marital deduction.

Preserving an S Corporation Election at the Death of the Shareholder

S corporation status is an extremely valuable income tax benefit to S corporation shareholders and is to be carefully monitored. The primary benefit is that the income earned by the corporation is taxed to the shareholder in a "pass-thru" fashion rather than being taxed first to the corporation and then taxed again when transferred to the shareholder as occurs with other corporations. This avoidance of "double taxation" is particularly important when a sale of the business operations is planned. If the corporation is a "C," or regular corporation, the sale of the corporation's assets will be taxed once when the corporation sells and again when the after-tax sale proceeds are distributed to the shareholder in liquidation.

Planning with Qualified Personal Residence Trusts

A Qualified Personal Residence Trust (QPRT) is a form of "split-interest" estate planning. Split interest planning refers to dividing an item of property, a personal residence in the case of a QPRT, into a current use period and a remainder use period.

Disclaimers Provide Flexibility and Can Salvage a Faulty Estate Plan

This Alert discusses the use of "qualified disclaimers" in estate planning. If properly used and understood, disclaimers add considerable flexibility to the estate planning process and, under certain circumstances, enable practitioners to salvage a poorly designed estate plan.

Giving Them the Credit They Deserve

When it comes to estate planning, make use of every available tax credit. You can help your clients to minimize their federal estate tax liability by making sure that both spouses receive the full benefit of the unified credit. Its critical to make the most of this generous tax benefit, especially in the case of married couples.

Joint Tenancy Dangers

Topics include: Tax Problems, Loss of Control & Much More, No Avoiding Probate, Losing Control, A Taxing Issue, A Matter of Risk, The Better Way to Handle Title to Property, The Financial Advisor's Role in the Living Trust and Taxation Alert: The Case of the Double Domicile.

Making the Most of Life Insurance: Irrevocable Life Insurance Trusts

We all know life insurance is important. But buying life insurance alone may be only part of the solution. Depending on how your clients own that policy, it can actually contribute to one of the problems they thought they were solving: estate taxes. An irrevocable life insurance trust can help your clients make the most of their life insurance investment.

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