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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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.

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.

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

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.

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.

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.

Joint Committee on Taxation Proposes Tax Law Changes Effecting Estate Planning

On January 27, 2005, the Congressional Joint Committee on Taxation (JCT) released a 435 page report entitled "JCS-02-05 Options to Improve Tax Compliance and Reform Tax Expenditures." Assuming that the estate tax is not repealed, the following proposals contained in the JCT report may be enacted in order to tighten up several estate planning strategies the IRS has viewed as abusive.

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 Barbaras 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)

Internal Revenue Service - 1, Taxpayers - 1, Third Set Remains to be Played!!!

On September 1, 2004, the long awaited decision of the Third Circuit on the Thompson FLP case was released (Turner v. Commr., 94 AFTR.2d 2004-5764 (3rd Cir. 2004), affg Thompson v. Commr., TC Memo 2002-246 (The case was appealed by Mr. Thompsons executor, Betsy Turner, and thus the name change). Encouraged by the Fifth Circuits favorable decision in the Kimbell case (reported in our May 2004 Fax Alert), many estate planning attorneys were hoping for another taxpayer victory. But that was not to be with Thompson, as the Third Circuit upheld the Tax Courts decision in favor of the Internal Revenue Service. The score is now tied while estate planners wait for the decision in the appeal of another important FLP case, Strangi v. Commr., to emerge from the Fifth Circuit.

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).

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.

Friday the Thirteenth Bad Luck for Life Insurance in Section 412(i) Plans

Friday the Thirteenth was truly unlucky for certain life insurance arrangements, because the Treasury issued two Revenue Rulings, a Revenue Procedure, and a set of Proposed Treasury Regulations designed to eliminate perceived abuses in the use of life insurance in certain retirement plans described in Section 412(i). Note, however, that the scope of the guidance goes far beyond 412(i) plans - and even beyond retirement plans.

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.

FDIC Simplifies Trust Rules: Expanded Coverage Could Benefit Many Consumers

In 2003, the Federal Deposit Insurance Corporation ("FDIC") solicited comments to its two proposed alternatives for simplifying the rules for insuring bank accounts owned by trusts. After reviewing the comments it received, on January 13, 2004 the FDIC announced a new regulation for trust bank accounts.

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 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.

Estate Planning Alerts for Advisors

Monthly Educational Alerts
Educational Alerts are written for advisors on topics that affect various aspects of estate planning and the laws that govern it. Read our latest Alert and request to be added to our email distribution list.
Educational FYIs
These recent developments and case studies address any aspect of the law that touches on estate planning. They offer an interesting perspective and/or warning. View our latest FYI or request to be added to our email distribution list.

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