A Potpourri of Estate & Tax Planning Ideas, Strategies ...



A Potpourri of Estate & Tax PlanningIdeas, Strategies, Traps & Helpful ResourcesJohn J. Scroggin & Lauren DetzelUniversity of Florida Tax Institute, April 24, 2015 TABLE OF CONTENTSTax Complexity2 TOC \o "1-1" \u Tax Basis3Defective Grantor Trusts12Pre-Mortem Planning14Incapacity Issues19Income Taxes and Estates and Trusts25Federal Gift Taxes29Federal Estate Taxes32Probate and Disposition Issues34Charities and Charitable Deductions41Family and Dependents47Marriage and Divorce49Residency, Domicile and Forum Shopping59Federal Income, Deductions & Credits65Retirement Funds68The Elderly and Entitlement Programs73State Taxes and Dispositions76Self-Employment and Payroll Taxes80Tax Compliance83Practicing in Complexity88Conclusion……………………………………………….………………………………………89 SEQ CHAPTER \h \r 1A Potpourri of Estate & Tax PlanningIdeas, Strategies, Traps & Helpful ResourcesCopyright 2015, FIT, Inc. and Lauren Detzel. All Rights Reserved.University of Florida Tax Institute, April 24, 2015"For every Tax Problem there is a Solution which is Straightforward, Uncomplicated and Wrong"Speaker: John J. “Jeff” Scroggin holds a B.S.B.A. (accounting), J.D. and LL.M (tax) from the University of Florida and serves as a member of the Board of Trustees of the Law Center Association at the University of Florida Levin College of Law. He is a founding member of the Board of Trustees of the University of Florida Tax Institute. Jeff was Founding Editor of the NAEPC Journal of Estate and Tax Planning from 2006-2011 and served on the NAEPC Board of Directors from 2002 to 2010. Jeff is the author of over 250 published articles on tax, business and estate planning issues and is a nationally recognized speaker. Jeff has been quoted extensively in the media, including in the Wall Street Journal, Forbes magazine, the New York Times, Fortune magazine, Kiplinger’s, Money, Smart Money, the New York Times International Herald Tribune, the Chicago Tribune, the South China Post, the LA Times, and the Miami Herald.Speaker: Lauren Y. Detzel is the chair of the Estate and Succession Planning Department at Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A. in Orlando, Florida. Lauren is Board Certified in Wills, Trusts and Estates by the Florida Bar. She is a former Chair of both the Tax Section of the Florida Bar and of the Certification Committee for Wills, Trusts and Estates of the Florida Bar. She is the 2005 recipient of the Gerald T. Hart Outstanding Tax Attorney of the Year, presented by the Florida Bar. She currently is a member of the Executive Council for both the Tax and the Real, Property, Probate and Trust Law Sections of the Florida Bar. Lauren graduated from the University of Florida College of Law, where she has also served as an adjunct professor for the Graduate Tax Program since 1989, teaching the Estate Planning course and an Ethics Seminar. Lauren is a Fellow of the American College of Trust and Estate Counsel where she is Chair of the Asset Protection Committee and a member of the Estate and Gift Tax Committee. She has been recognized by Best Lawyers, Chambers, Florida Trend and Superlawyers. Lauren has written and spoken extensively in the estate planning and transfer tax areas. EXECUTIVE SUMMARY: Deductions, credits, exclusions, exemptions, exceptions, phase-outs, limitations to exceptions and exceptions to the limitations - it can drive you crazy. This article will provide a partial list of interesting and often unexpected tax and estate planning opportunities, potential traps and resources. By no stretch of the imagination is this list complete.The purpose of this article is to quickly describe relatively straightforward traps and opportunities, while also providing helpful resources that tax professionals may not be aware of. As any tax professional knows, there are almost always exceptions, limitations, and exclusions to just about every tax rule. Unexpected practical or non-tax issues can often complicate the client’s decision making process. This presentation will primarily focus on the general rules, rather than the details, limitations and exceptions. Before relying on any of the ideas discussed in the article, readers are strongly advised to do further research using the unique facts of their client’s situation. COMMENT:Tax Complexity. The complexity of the Internal Revenue Code is mind boggling. CCH reported in 2012 that there were 73,608 pages of federal tax rules. According to the IRS Taxpayer Advocate Service (“TAS”) in its 2012 report (issued on January 9, 2013): “The tax code has grown so long that it has become challenging even to figure out how long it is. A search of the code conducted using the “word count” feature in Microsoft Word turned up nearly 4.0 million words.” That is a rather significant departure from the federal income tax code that became law in 1913. It only contained 27 pages. The growth of the federal tax laws was shown in a report by the Tax Foundation on the number of words in the tax rules (reported in the thousands): 195519651975198519952005Increase in 50 yearsEntire Tax Code409548758133217912139523%Regulations98729603148440758616958705%Total 139635073906573976529097652%According the 2012 TAS report: “There have been approximately 4,680 changes to the tax code since 2001, an average of more than one a day.” These changes do not include the 154 pages of the American Taxpayer Relief Act of 2012 (“ATRA”) that was enacted on January 2, 2013. CCH has indicated that between 2000 and 2010, Congress made 4,428 changes to the Tax Code, including 579 in 2010. In 2006 the IRS Commissioner testified to Congress that since the tax reform in 1986, "Congress has passed 14,400 amendments to the tax code. That's an average of 2.9 changes for every single working day ... for the last 19 years." In light of this ever-changing complexity, tax practitioners are on a constant learning curve. Moreover, tax practitioners are increasingly working in narrowed niches of tax law to keep abreast of the applicable tax rules. Trying to memorize the minute details of state and federal tax law, even on a general basis, has become increasingly impossible. Tax Basis“This [preparing my tax return] is too difficult for a Mathematician, it takes a philosopher.” Albert EinsteinPerspective: A Congressional Research Service report estimated that approximately 0.2% of all estates would be subject to an estate tax in 2013. As a result, the tax component of estate planning has largely shifted to income tax planning and tax basis planning. Unknown Gift Bases. In many cases, the donee has received no information from the donor on the basis of a gifted asset. Normally, the taxpayer bears the burden of proving any positions taken on a tax return. However, Internal Revenue Code (Code) §1015(a) provides: "If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner." (emphasis added). Opportunity: In James E. Caldwell & Co. v. Commissioner, the Sixth Circuit Court of Appeals ruled that if neither the donee nor the IRS could make a basis determination, then neither gain nor loss was recognized upon the sale of the gifted asset.Trap: There are no federal tax rules mandating that donors, testators or fiduciaries provide tax basis records to transferee/heirs. Revise your documents to require such disclosure and provide supporting materials to any asset recipient to the extent available.Determining Fair Market Value. Treasury Regulation §1.1014-3(a) provides: "For purposes of this section... the value of property as of the date of the decedent's death as appraised for the purpose of the Federal estate tax or the alternate value as appraised for such purpose, whichever is applicable, shall be deemed to be its fair market value. If no estate tax return is required to be filed under section 6018..., the value of the property appraised as of the date of the decedent's death for the purpose of State inheritance or transmission taxes shall be deemed to be its fair market value and no alternate valuation date shall be applicable." (emphasis added).However, in Revenue Ruling 54-97, the IRS noted: "For the purpose of determining the basis ... of property transmitted at death (for determining gain or loss on the sale thereof or the deduction for depreciation), the value of the property as determined for the purpose of the Federal estate tax shall be deemed to be its fair market value at the time of acquisition. Except where the taxpayer is estopped by his previous actions or statements, such value is not conclusive but is a presumptive value which may be rebutted by clear and convincing evidence." (emphasis added).In TAM 199933001, the IRS concluded: "The Taxpayer is not estopped from claiming a basis in the stock different from the fair market value of the stock used on the decedent's estate tax return. Thus, under?Revenue Ruling 54-97... the taxpayer may rebut the presumptive value of the stock by clear and convincing evidence." In this ruling, the heirs wanted a higher basis for inherited stock than was reported on the estate tax return. Opportunity: Particularly with non-taxable estates, heirs (who are not involved in the value decision making) and their advisors should closely review the appraisals of non-readily marketable assets and determine if they believe the values are understated. If the values appear low, the clients should consider promptly obtaining new appraisals of the property. Waiting until either a later sale or an audit may diminish the taxpayer's chance of successfully sustaining a higher basis. Caution: The Obama Administration has proposed an elimination of potential differences between the value reported for estate tax purposes and the basis used for income tax purposes in its 2016 Budget proposal. Gift Statute of Limitations. Code § 6501 provides that if there is “adequate disclosure” of a gift, then a three year statute of limitations (from the date of gift tax filing) applies. IRS form 709 provides for a disclosure of the donor's adjusted basis. Trap: Advisors should thoroughly review the disclosure requirements contained in Treasury Regulation §301.6501-1(c) before filing a gift tax return. Failure to meet those standards may result in the IRS arguing that the statute of limitations never closed. Trap: Code §6501 does not close the statute of limitations for tax basis purposes, Code 6501(a) provides: “the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed.” There is nothing in section 6501 or supporting regulations that deals with the statute of limitations for purposes of determining the donee’s basis in a gifted or bequeathed asset. It appears that the IRS could challenge the basis until the statute of limitations expires for the income tax return that reflected a sale, depreciation or other tax-related event with regard to the gifted asset—an event that could occur decades after the original transfer. As a consequence, obtaining and maintaining tax basis information is critical. Opportunity: What happens if the taxpayer files an income tax return in which the tax basis is overstated? The U.S. Supreme Court has ruled that the overstatement of tax basis effectively has a three year statute of limitations and cannot be extended to a six year period, even if there is a resulting substantial understatement of income. No Return Required. The § 1014 fair market value basis determination on bequeathed assets does not require the filing of an estate tax return. Appraisals. Notwithstanding the high estate tax exemptions there is still a need to obtain appraisals of non-readily marketable assets in many of the techniques we use (e.g., gift to a charity). Even if an estate is not taxable, advisors need to obtain appraisals of non-readily marketable assets to properly substantiate the tax basis for the recipient heirs. Trap: Unlike other tax records (which a taxpayer should generally keep for seven to ten years), appraisals and supporting financial and other basis related information should be retained until the statute of limitations has expired. The problem is that it may not be clear when the statute closes on non-sale related tax applications.If an asset is gifted, then the donees will still need that information to sustain their carryover basis (e.g., for depreciation or sale purposes). If the fair market value of the asset is less than its tax basis, for purposes of computing a loss on sale, then the fair market value is considered the basis. If the asset is bequeathed and a federal estate tax return is not filed, then the statute of limitations on the step-up in basis will not close until some later event. Retention of adequate basis-related records by the recipient heir is an absolute necessity if the recipient is later a part of an income tax audit. Trap: The decedent’s dispositive documents need to require the appraisal of non-readily-marketable assets and provide for how those costs will be paid. For example, assume a family business passes to a son from a prior marriage, with the remaining estate assets passing to trust for a second wife who is executrix of the estate. Will the executrix be willing to reduce her inheritance by the cost of an appraisal that does not benefit her?Valuation Discounts. For years, tax professionals have designed elaborate structures to provide for the discounted value of assets of a taxable estate. The Congressional Research Service reported that less than 0.2% of all estates were expected to be taxable. Tax practitioners should expect that the IRS will begin to use the tax community’s prior valuation adjustment victories to reduce the tax basis of assets passing in a non-taxable estate. Opportunity: Does it make sense to reverse strategies that were designed to discount estate values if the client now has a non-taxable estate? A significant part of estate planning over the last several years has been the use of techniques designed to reduce the fair market value of gifted or bequeathed assets. However, techniques which reduce the fair market value of an asset may also reduce its potential tax basis. Opportunity. Years ago, the owner of a family farm created a family limited partnership (“FLP”) to own the farm and made significant gifts of LP units over time. He also gave all of the general partner (“GP”) units to his children. The client is in poor health and owns 60% of the limited partner (“LP”) units. Terminating the FLP before the client’s death could result in a higher basis in the farm for the heirs. Trap: This issue creates an interesting potential problem for advisors. If the client expects to be subject to a state or federal estate tax in the near term, the use of discounting techniques may be advisable. However, with the high exemptions of the American Taxpayer Relief Act (“ATRA”), indexed for inflation, what happens if the estate is not taxable and the discounting technique reduces the tax basis of the underlying asset? If the practitioner has not advised the client about the possible adverse income tax results of a loss of basis, heirs could hold the practitioner liable for the use of a technique which, in hindsight, was unnecessary for estate tax purposes and actually produced an unacceptable income tax cost to the heirs.Estate Basis Planning. Basis planning (in the absence of a taxable estate tax) takes on a new significance. While in the past, the primary focus in estate tax-driven valuations has been to minimize the value of the bequeathed or gifted asset, now, driving up the value of assets may make more sense. Meanwhile, the IRS may use tax practitioners’ previous arguments that support a lower, discounted value. And then we may all go back to our old positions whenever Congress changes the rules again Opportunity: Assume that in 2015, a terminally ill, unmarried client owns 40% of a business having a fair market value of $4.0 million. The estimated valuation adjustments for minority interest and lack of marketability are 30%. The client’s sole heir owns the remaining 60% of the business. The client’s remaining assets are $500,000. When the client dies, the tax basis in the 40% business interest would become $1,120,000. Assume instead, the client obtained an additional 15% interest from the heir. At the client’s death, his 55% interest is worth at least $2.2 million (perhaps more if a control premium is applied). The client's assets would produce a non-taxable estate of $2,700,000, while providing a step up in basis for the 55% interest to $2.2 million. Assuming the heir sold the business after the client’s death, the step-up in basis would save up to $144,000 in income taxes, assuming a 30% state and federal effective income tax rate (i.e., 40% undiscounted ownership equals $1.6 million, less $1.12 million, times the 30% tax rate).Gain on Part Sale Transactions. How do you compute the taxable gain from a part sale/part gift transaction (e.g., a net gift)? Treasury Regulation §1.1001-1(e)(1) provides that “Where a transfer of property is part a sale and in part a gift, the transferor has gain to the extent that the amount realized by him exceeds his adjusted basis in the property.” Opportunity: As confirmed by the examples in the above regulation, the entire basis is used to compute the recognized gain—not an amount proportionate to the sale portion of the transaction.Trap: However, Code §1011(b) provides for a different rule for charitable bargain sales. It reads: “If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determining the gain from such sale shall be that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property.” (emphasis added). If a charitable deduction is not allowed for the bargain sale (including a denial of a carryforward), then the tax basis is not apportioned. Cross-Purchase Agreements. One of the particular oddities of the Tax Code is how two transactions that create the same economic result can be taxed differently. Trap: Assume there are two owners of a C corporation. One of them dies, and his estate sells his 50% interest to the other shareholder for $500,000. In that transaction, the purchaser's tax basis in the corporation increases by $500,000. But assume the transaction was a corporate redemption for $500,000. Although both transactions result in the surviving shareholder owning 100% of the corporation, in the redemption, the surviving shareholder's tax basis is $500,000 less than it is in a cross-purchase. At a state and federal capital gain rate of 30%, the difference in the form of the transaction could cost the purchaser $150,000 when the business is sold. FLPs & Retained Control. In Estate of Schauerhamer v. Commissioner, the Tax Court ruled that when the creator of a general partnership retained effective control over the partnership assets by “implied” consent with the donees of 66 annual exclusion gifts, a completed gift had not occurred, and the value of the “gifted” assets was included in the donor’s taxable estate. In Estate of Strangi v. Commissioner, and Estate of Turner v. Commissioner, the Tax Court ruled that the decedent retaining control over the partnership resulted in the application of Code §2036 and the inclusion of partnership assets in the donor’s taxable estate. In TAM 9751003, the IRS took the position that the gift of a limited partnership interest in a family limited partnership was not a “present interest” for purposes of the annual exclusion. In the TAM, the donor retained virtually all power as general partner and a donee/partner’s ability to transfer his interest and receive distributions was subject to the donor/general partner’s approval. This TAM limits TAM 9131006, where the IRS indicated that a limited partnership interest in an FLP was a present interest. Although TAMs are not binding, they do provide insights to the IRS’s views. Opportunity: A client created a FLP 20 years ago. The document has not been reviewed or revised since its execution. The client has been giving away limited partnership units of the FLP for years to family members. The assets of the FLP have substantially appreciated over the years. Unfortunately, the client’s control over the FLP clearly violates the above rulings and could result in the gifted assets being included in the donor’s taxable estate pursuant to Code §2036. Assume the client’s estate is not subject to an estate tax. The Personal representatives could argue that the retained control violated section 2036 and pull the gifted FLP units into the taxable estate. Why? The basis of the gifted FLP units will step up to their fair market value and the basis of assets in the FLP can also step up. If those FLP assets are depreciable, then the FLP partners will obtain an increased income tax basis to support deductions for depreciation. Basis Planning & Equalization of Gifts and Bequests. How many clients compare the potential net-after-tax value of their gifts and bequests? Without prodding from their tax advisors, few would enter into such an analysis. However, this review should be a part of their planning. Example: A donor gifts asset to each of his two children. The son receives 100% of an LLC holding real property having an estimated value of $2.0 million, but with a basis of $300,000. The LLC has a potential depreciation recapture of $300,000. The daughter receives $1.7 million in cash. Assume the son sells the property of the LLC immediately after the gift when his state and federal capital gain tax rate is 30%, and the state and federal depreciation recapture tax rate is 35%. While the daughter might complain, she actually received the better gift for tax purposes. The son's net-after-tax value (ignoring any sales commission) would be:Sales Proceeds $2,000,000Ordinary Income Tax Cost (35%)- $105,000Capital Gain Tax Cost (30%)- $420,000Net After-Tax Value$1,475,000Trap: Fiduciaries who use discretionary authority to distribute assets having different tax bases may have some liability exposure, particularly to the extent that a family member of the fiduciary benefits from the distribution to the perceived detriment of other beneficiaries. Section 1014(e). When dealing with gifts to a person who is terminally or chronically ill, give careful consideration to impact of Code §1014(e). Code §1014(e) provides an exception to the step-up in basis rule of Code §1014(a), designed to eliminate a step-up in basis when a donee dies within one year of a gift of an appreciated asset. Unfortunately, Code §1014(e) is a classic example of appropriate legislative intent coupled with horribly ill-conceived legislative drafting—creating a mess of uncertain terms and unknowable limits for taxpayers and their advisors.??Even though §1014(e) was adopted 34 years ago, to date the IRS has not issued any Treasury Regulations regarding section 1014(e). In IRS News Release 86-167, the IRS announced that it was closing its project to create regulations interpreting section 1014(e). No Revenue Rulings or Revenue Procedures have ever referenced section 1014(e). There do not appear to be any court decisions which interpret section 1014(e). The only guidance on the application of section 1014(e)(1) comes from four IRS rulings. There are four triggers to the application of section 1014(e) to fits to a person who is terminally or chronically ill. The first trigger requires an appreciated asset at the time of the gift. For non-readily marketable assets, this generally requires the donor to obtain an independent appraisal if the donee dies within one year of the gift and makes a bequest back to the donor.The second trigger is whether the gift of an appreciated asset occurred within a year of the donee's death. It does not matter whether the death was unexpected. The third trigger requires that the asset was reacquired by the donor or the donor’s spouse. This is where the confusion generally begins, particularly when you start dealing with an “indirect” reacquisition (e.g., beneficial interests in trusts) and try to determine the reach of "indirect" benefits to the transferor. Unfortunately, there are few definitive answers. The fourth trigger is activated when there is a sale by a trust or estate of the appreciated asset "to the extent" the donor is "entitled" to sales proceeds. Unfortunately, there are no definitions for these operative words in section 1014(e)(2)(B). There is not a single PLR, TAM, Revenue Ruling, court decision or Treasury Regulation that even mentions section 1014(e)(2)(B). That makes it a bit hard to know how it applies to particular fact patterns. However, section 1014(e)(2)(B) is, in many ways, more dangerous for taxpayers than 1014(e)(1). Why? Because its application is not triggered until a sale of the appreciated property occurs and a determination is made of whether the original donor was entitled to any of the sales proceeds. As long as the appreciated property remains in the donee's trust or estate, the donor/beneficiary remains alive and the donor/beneficiary has not renounced or otherwise lost a beneficial interest in the trust or estate, section 1014(e)(2)(B) remains in the shadows, patiently waiting to be applied retroactively. Trap: The lack of substantive authority on section 1014(e) and its imprecise language makes it virtually impossible to determine the reach of 1014(e). How far do 1014(e) phrases such as "acquired from the decedent" and "entitled to the proceeds" reach? How are "indirect" transfers to the donor to be treated? While we can logically speculate, no one really knows. Adjust your Basis—or Else! Barnes v. Commissioner raised an interesting issue on S corporation losses. The Court noted: “Is a taxpayer’s basis in an S corporation reduced by the amount of any suspended losses in the first year the basis is adequate to absorb those losses, regardless of whether the taxpayer claims a tax deduction for those losses in that year? The Barneses, who in 1997 failed to claim a deduction for a suspended loss even though they had adequate basis to absorb it, say ‘no: no deduction claimed, no basis reduction.’” (emphasis added)The Court’s conclusion: “Unfortunately for the Barneses, the IRS and the Tax Court correctly concluded that the Internal Revenue Code says otherwise. Section 1367, which specifies the effects of various losses on a shareholder’s basis, states that basis “shall be decreased for any period,” …., by “the shareholder’s pro rata share of the corporation’s . . . items of . . . loss.” Section 1366 provides that any S-corporation losses a shareholder lacks sufficient basis to absorb “shall be treated as incurred by the corporation in the succeeding taxable year.”.... Taken together, these two provisions are clear: A shareholder’s basis is decreased “for any period” by the amount of that shareholder’s pro rata share of the corporation’s losses, and a shareholder incurs previously unabsorbed losses in the first year the shareholder has adequate basis to do so.”Even though the tax period to take the loss had closed, the loss was still deducted from the shareholder’s tax basis in calculating the recognized gain upon a subsequent sale. To add insult to injury, the Court also affirmed a substantial understatement penalty against the taxpayer. ******Resources: Howard M. Zaritsky and Lester B. Law, Howard M. Zaritsky & Lester B. Law, Basis. Banal? Basic? Benign? Bewildering? in 2015 Heckerling Inst. on Est. Plan. 153 (a 245 page review of basis issues). James Edward Maule, Income Tax Basis Overview and Conceptual Aspects, 560-3rd Tax Mgmt. (BNA).Defective Grantor Trusts“A society which turns so many of its best andbrightest into tax lawyers may be doing something wrong.” Hoffman F. FullerPerspective: Although federal estate taxes are now largely irrelevant to most taxpayers, income defective grantor trusts still have a number of useful purposes. Substituting Assets in Grantor Trusts. Income-defective grantor trusts (“IDGT”) have been an effective estate planning tool for decades. Most IDGTs are defective for income tax purposes, but not for transfer tax purposes. Therefore, the assets of the trust will not be included in the grantor's taxable estate. But in many cases, the assets held in the defective grantor trust have significant unrealized gain. Opportunity: If the trust instrument uses a power of substitution to create the defective component, then a grantor whose passing may be imminent should consider replacing the appreciated asset in the IDGT with higher basis assets, such as cash. At the donor’s passing, the asset that was pulled back to the estate will generally step up to its fair market value. Using Grantor Trusts to Reduce Income Taxes. The combined state and federal income tax rate on trusts and estates can push the top tax rate over 50% when the taxable income exceeds as little as $12,300 (in 2015). Opportunity: If a trust is being created and the grantor is in a lower tax bracket than the trust is expected to be in (i.e., the trust is expected to accumulate income), then consider creating the trust as an IDGT. Not only is the IDGT not depleted by paying income taxes during the donor’s life, but the overall tax rate can be reduced. Liability in Excess of Basis Assets. A grantor may be able to transfer an asset which has a secured liability in excess of its basis to an IDGT without creating a current income tax liability. Trap: However, if the trust ceases to be an income-defective trust during the grantor's life, then the grantor may be treated as transferring the asset, and taxation may occur. There is disagreement among commentators on whether the death of the grantor would trigger an income tax. Grantor Trusts and a Step Up. Code §1014(e) limits the ability of a donor to obtain a step-up in basis by the donor’s gifting of appreciated assets to a donee who dies within one year and passes the asset back to the donor or the donor’s spouse. See the more detailed discussion of 1014(e) in this material. Opportunity: However, there may be ways of getting around section 1014(e). Assume a donor gifts $1.0 million in cash into an IDGT in which the donor is the deemed grantor and the donor's dying spouse is the sole lifetime beneficiary. Low-basis property owned by the grantor is sold into the trust during the spouse's lifetime. The donee/spouse holds a testamentary general power of appointment over the entire trust and exercises the power of appointment in favor of the donor or a trust for the donor's benefit. As a result: The sale by the grantor to the grantor trust is not recognized for income tax purposes. 1014(e) would not apply because the gifted cash was not "appreciated."The entire trust fund would be included in the donee/spouse's estate pursuant to Code §2041(a)(2).Pursuant to Code §1014(b)(9), a step-up in basis would be allowed because the trust assets were included in the donee/spouse's estate. Because the donor did not retain any powers over the trust that would cause the gift to be incomplete for transfer tax purposes, none of the four IRS rulings on Code §1014(e) would apply. Caution: The IRS is attacking sales to grantor trusts. See Estate of Donald Woelbing v. Commissioner, Estate of Mario Woelbing v. Commissioner, and Estate of Jack Williams v. Commissioner. Moreover, the Obama Administration has proposed an elimination of the tax benefits to a grantor making a sale to a defective grantor trust. ******Resource: Samuel A. Donaldson, Burning Questions (and Even Hotter Answers) About Grantor Trusts, 60th Annual Georgia ICLE Estate Planning Institute (2015).Pre-Mortem Planning“Life is pleasant. Death is peaceful. It’s the transition that’s troublesome.” Jimi Hendrix Perspective: Jimi Hendrix’s comment is evocative of the issues surrounding the slow fade to death that so many Americans are facing. With the higher income tax rates for trusts, estates and beneficiaries, pre-mortem tax planning is becoming increasingly critical. Travel Perks. The rules governing the disposition of airline miles, hotel points, rental car perks and other similar travel programs vary significantly from company to company. However, many companies do not provide for the inheritance of such perks. For example, the Delta Air Lines website reads: “Miles are not the property of any member. Except as specifically authorized in the Membership Guide and Program Rules or otherwise in writing by an officer of Delta, miles may not be sold, attached, seized, levied upon, pledged, or transferred under any circumstances, including, without limitation, by operation of law, upon death, or in connection with any domestic relations dispute and/or legal proceeding.” (emphasis added) Opportunity: When a client is terminally ill or incapacitated, consider transferring all of their frequent flyer miles and other travel and credit card perks to their heirs by making direct transfers from the client to the heirs. Make sure any General Power of Attorney authorizes the transfer. Control of Personal Property. A client often intends that an item of personal property be “transferred” to an heir, but the client keeps control of it “for now” (e.g., a grandmother’s heirloom silver set). If an asset remains in the decedent’s home, the IRS provides that in the absence of evidence to the contrary, the asset is treated as a part of the decedent’s taxable estate. Other heirs may use the same argument. The decedent retaining enjoyment or possession of the property may result in its inclusion in the donor’s taxable estate pursuant to Code §2036(a). Retention of the item by the donor means that the gift was never completed, and the asset remains an asset of the donor’s estate. The burden may rest on the Personal Representative and/or others to prove that ownership did not rest in the decedent. The solution? If a gift is intended, get the asset out of the donor’s control and have a written, dated, and notarized document providing for the conveyance.Opportunity: However, in a tax environment in which over 99% of decedents pay no federal estate tax, clients should consider using Code § 2036(a) to retain the asset in the taxable estate in order to obtain a step-up in basis at death. For example, a mother could allow a valuable piece of art to stay in her son’s house, subject to a written agreement allowing the mother to recover the art whenever she wants it. The dispositive documents may specifically pass that asset to the son.Opportunity: On the other hand, where a decedent with a taxable estate has valuable but difficult to value personal property, consider making a lifetime gift of the property. While the heir loses the step-up in basis, assuming adequate disclosure on a timely filed gift tax return, the IRS will have three years to challenge the appraisal. If the client waits until death, the risk of audit in a taxable estate significantly increases, and the likelihood is that an IRS appraiser will disagree with the valuation. However, be aware of the state contemplation-of-death rules discussed later in these materials. Trap: A client, who is in his second marriage, dies. His will indicates that all of his personal property should pass to his second wife. The Personal Representative finds a safety deposit box in the husband’s name that contains his deceased former wife’s jewelry. The husband’s daughter (who has joint signature authority on the box) says that her father always intended that her mother’s jewelry go to her (and had gifted the items in the box to her), but she has no written evidence of that gift. The second wife demands the jewelry and argues that the daughter was just a co-leasee of the safe deposit box, not an owner of its contents. In the absence of strong evidence of the decedent’s intent, the Personal Representative could be in a difficult conflict.Gifting by the Terminally Ill. At first blush, it would appear that gifting by or to a terminally ill client would not be advisable, but this is not necessarily the case. Gifting may still make sense in a number of situations. For example, clients with potentially taxable estates should consider annual exclusion gifts and non-taxable gifts using their gift exemptions as long as the gifts do not create significant basis problems. Gifting of assets with unrealized losses can make sense.Opportunity: Assume a terminally ill, married client owns an asset with a basis of $500,000 and a fair market value of $200,000. If the client dies, the asset’s basis will step down to its fair market value, resulting in the termination of any tax benefit of the unrealized loss in the asset. Instead, the terminally ill client could gift the asset to either:(1) A spouse. If the spouse subsequently sells the asset the spouse will receive the same gain or loss as the donor would have received during life.(2) To non-spousal family members or a trust for their benefit. If the donee subsequently sells the asset for a price between $200,000 and $500,000, then neither gain nor loss is incurred. Gifting to the Terminally Ill. With the right fact pattern, gifting to a terminally ill family member can make sense. Opportunity: Assume a client owns a tract of land that has a fair market value of $2.1 million, a basis of $200,000 and secured debt of $1.5 million. If the client sells the property, the recognized gain is $1.9 million. The first $1.5 million of sales proceeds pays off the mortgage. Assuming a state and federal effective income tax rate of 30%, the taxes on the sale are $570,000, leaving the client with $30,000 before the sales commission is paid. But assume the client's husband was terminally ill. The client gifts the property directly to the husband, who specifically passes the real property to a trust for the benefit of the couple's children. Not giving any beneficial interest in the trust to the donor/wife avoids any possible application of section 1014(e). The gift to the husband does not create an income taxable event to the wife, even though the liability on the asset exceeded its basis. When the husband passes away, the tax basis increases to $2.1 million. Assume the property is sold. The trust would have no recognized gain from the sale, netting $600,000 (less closing costs and commissions) for the children's trust, after payment of the mortgage. In the alternative, the wife could have a beneficial interest in the trust and if the husband dies within a year of the gift to the husband, the wife could disclaim any interest to that trust to avoid the application of section 1014(e). Charitable Gifts. Many clients provide for charitable bequests, but there may be no income tax benefit for their estate or trust by the charitable bequest.Opportunity: To obtain lifetime income tax benefits, consider making the charitable gift before the client’s death and take advantage of the charitable income tax deduction to reduce the client’s income taxes. Part of this plan might include accelerating income (e.g., assets that would constitute income in respect of a decedent (“IRD”) in the estate) into the client’s final income tax return to take advantage of the charitable contribution and the potentially lower income tax bracket of the client. Replacing a $50,000 charitable bequest with a gift could save up to $21,700 in federal income taxes (i.e., $50,000 times a 43.4% top federal income tax rate in 2015). Trap: Make sure the dispositive documents are changed to remove the charitable bequests, or the charity might have a claim against the estate. Also make sure the client can fully use the charitable income tax deduction, because charitable deduction limitations or itemized deduction limits could reduce the tax benefit. Trust Distributions. Opportunity: A dying client is a beneficiary of a trust that will not be included in her estate when she passes, but which provides for broad Trustee discretionary distribution powers. The trust owns assets with significant unrealized gains. If it does not create exposure to a state or federal death tax, consider making discretionary principal distributions to the dying client of the appreciated assets. Leave any assets with unrealized losses in the trust to avoid a step-down in basis. If the gifts come from a non-grantor trust, then they generally should not be subject to Code § 1014(e), permitting a step-up in basis as a result of their inclusion in the recipient/decedent's estate.Trap: In the above example, if the trust making the distribution is a grantor trust and the distributed asset will pass directly or indirectly back to the grantor, then section 1014(e) might deny a step-up in basis. It might be possible for the grantor to renounce any defective grantor powers before the distribution and avoid the application of 1014(e). Marital Trust and Loss Assets. When the surviving spouse dies with assets in a marital trust, the assets are included in the spouse’s estate, and the basis becomes the asset’s date-of-death fair market value. Opportunity: A terminally ill client is the beneficiary of a marital trust with substantial unrealized losses in the trust assets. Upon the client’s death, the assets will step down to their lower fair market value. However, if the trust sells the assets before the spousal/beneficiary’s death, the losses can be preserved for remainder beneficiaries. Retirement Plans. Many clients have significant assets in retirement plans. Opportunity: Clients with taxable estates should evaluate the tax cost of taking distributions from retirement plans (particularly if they are in low income tax brackets), paying the related income tax, and then gifting or bequeathing the resulting cash or securities to donees before they pass. Opportunity: Clients with a limited life expectancy (particularly those with a taxable estate) should consider converting existing IRAs and retirement plan accounts to Roth IRAs. Suppose that a terminally ill client has a $500,000 IRA. The client could convert the IRA to a Roth IRA and pass the Roth to heirs, who can make future tax exempt withdrawals. While the conversion will create an immediate income tax cost to the IRA owner, the tax cost is not paid from the Roth account. If the client has a taxable estate for state or federal tax purposes, the owner’s income tax liability effectively reduces the taxable estate. Plan for Loss Carry-Forwards & Deductions. A pivotal part of the planning for any terminally ill client starts with examining their most recent federal income tax returns, and other transactions that are not yet reflected on an income tax return (e.g., charitable contributions and capital losses) and the unrealized losses in the client’s current assets. Look for tax carryforwards, because a decedent’s unused tax carry-forwards are not carried over to the estate or to heirs. Instead, they simply vanish. Opportunity: There are at least three ways that expiring losses and carryforwards could be used:The client could take actions to use any expiring losses (e.g., accelerating taxable income to offset the expiring carryforwards) before the client dies.In the case of a married client who files a joint return, the spouse might take pre-mortem actions to create taxable income to offset the soon-to-expire losses. A surviving spouse who is entitled to file a joint return in the decedent's year of death could take year-of-death, postmortem steps (e.g., accelerating income) to offset the losses. For example, assume the deceased Husband left a $400,000 net operating loss (NOL) from his failing business. In the year of the Husband's death, the Wife could convert $400,000 of her IRA to a Roth IRA to take advantage of the expiring NOL.******Checklist: See for a Pre-Mortem Planning Checklist.Incapacity Issues“The fastest-growing segment of the total population is … those 80 and over. Their growth rate is twice that of those 65 and over and almost 4-times that for the total population. In the United States, this group … will more than triple from 5.7 million in 2010 to over 19 million by 2050.”Perspective: According to a 2013 report from Alzheimer’s Association, by 2050 the number of Americans subject to Alzheimer’s and other types of dementia will increase by 300% to 13.8 million, with costs increasing by 500% to $1.2 trillion. Incapacity planning and its related conflicts are going to create family issues at all levels of wealth.Filial Support Laws. According to the Statute of Frauds, one generally cannot be held liable for the debts of another without agreeing to such liability. However, as many as 28 states have adopted filial support statutes in which family members can be held legally liable for the support obligations of parents and other family members, particularly health care and long term care costs, even if the family member has not signed a document guaranteeing those liabilities or received any assets from the needy family member. According to a 2014 article in Forbes, the following states and territories have adopted such statutes: AlaskaKentuckyNew JerseyTennesseeArkansasLouisianaNorth CarolinaUtahCaliforniaMarylandNorth DakotaVermontConnecticutMassachusettsOhioVirginiaDelawareMississippiOregonWest VirginiaGeorgiaMontanaPennsylvaniaIndianaNevadaRhode IslandPuerto RicoIowaNew HampshireSouth DakotaIn Health Care & Ret. Corp. of Am. v. Pittas, the Pennsylvania Supreme Court required a son to pay a $93,000 nursing home bill of his mother, even though there was no fraudulent conveyance to the son and he was not accused of hiding assets of his mother. Trap: Recent studies show that most baby boomers have not saved enough money to plan for their retirement. The increased life expectancy of Americans and their lack of adequate preparation for their long term care will cause increased enforcement of filial support laws against family members. Opportunity: On the other side of the coin, if you represent an impoverished elder or incapacitated client, do you raise the specter of Filial Support Laws to family members?Opportunity: If your state of residency has a strong Filial Support statute, consider obtaining a Long Term Care policy to insure over that cost.General Powers of Attorney. As Americans live longer, incapacity is becoming a growing issue. Guardianship is an expensive and time consuming process which can often be replaced by a well-drafted General Power of Attorney (“GPOA”). Opportunity: Clients and their advisors need to spend more time discussing the terms of their GPOA. Among the terms clients should consider in their GPOA are: The GPOA should permit the advancement of personal and charitable bequests if the remaining assets are sufficient to support the maker. The document may require an acknowledgement/waiver from the recipient that the distribution is in lieu of comparable bequests under the client’s dispositive documents. To assure that a conflict does not develop between the power holder and a potential adverse guardian (e.g., a second spouse), provide in the document that the power holder is also intended to be the guardian over the client’s property if one is ever appointed. Even if the state statute provides that the GPOA survives incapacity of the principal (i.e., it is “durable”), place survival language in the document so that there is no question of enforceability in those states which require durable language in GPOAs. To ensure that the death of the named power holder does not force the grantor’s family into guardianship, name one or more successor power holders (i.e., do not have spouses as the sole power holders for each other). Provide the power holder specific authority to open any safe deposit box. Provide the power holder specific authority to sign and file any state or federal tax returns on behalf of the maker, listing years which can be signed.It is generally better to appoint only one power holder at a time. If multiple power holders are appointed, it may lead to confusion (e.g., must all power holders agree, or is a majority sufficient? Can one power holder act without approval of the others?) and conflict (e.g., a child wants to make annual exclusion gifts to reduce the taxable estate of the parent, but the third wife wants to retain assets in the estate to fund a qualified terminal interest property (QTIP) at death). Serving as the power holder of an incapacitated person can be very time consuming. Consider providing specific language in the GPOA on how the holder is compensated and reasonable expenses are paid. Trap: The IRS takes the position that an annual exclusion gift cannot be made unless the GPOA or state law specifically allowing such gifts. The authority to make annual exclusion gifts almost always makes sense and the power could be restricted to require that the gifts do not reduce the estate below the taxpayer’s remaining applicable exemptions (i.e., the tax benefit of annual exclusion gifts cease if there is no taxable estate). The maker may also want to place other conditions on gift giving, particularly with regard to the agent. For example, require that gifts to the agent and/or family members must be made by an independent agent. Trap: Practitioners should be careful about how broadly they draft the grant of power to a holder of a GPOA. If the agent has the ability to make unfettered gifts to herself or to satisfy her obligations, then the GPOA may constitute a General Power of Appointment. Provide in the GPOA that the power holder has no powers over any life insurance on the agent’s life to avoid having the policy included in the agent’s estate pursuant to Code §2042. Give that power to a different uninsured power holder. Trap: A January 26, 2015 article in the New York Times noted that it has become “routine” for nursing homes to attempt to gain guardianship over residents and to use that power to pay bills to the nursing home. Moreover, other family members may attempt to gain control of an incapacitated person if they disagree with the actions of the person holding the GPOA. In some states, appointment of a guardian revokes or limits the agent holding the GPOA (e.g., Florida, Texas, Virginia, and Washington). To minimize this risk, provide in the GPOA the identity of the person who should be named as guardian over the person and assets of the maker of the document. State laws governing GPOAs vary widely, creating a potential trap for clients who change residency or own real property or other assets in other states. Trap: Under Florida’s new power of attorney law, effective October 1, 2011. an agent may only exercise authority specifically granted to the agent in the document. General provisions purporting to give the agent authority to do “all acts” don’t grant any authority to the agent. Further, to prevent a potential abuse of power by the agent, there are certain abilities that can only be granted if the principal signs or initials next to each specific enumeration of authority, such as:creating an inter vivos trust;amending, modifying, or revoking a trust created by or on behalf of the principal;making a gift;creating or changing rights of survivorship;creating or changing beneficiary designation;waiving the principal’s right to be a beneficiary of a joint or survivor annuity or retirement plan; anddisclaiming property and powers of appointment. Trap: Some states do not require a witness to a GPOA (but a notary may be required), while other states requires two witnesses and a notary. As a consequence, attorneys should be proactive in the manner that they draft their powers of attorney in case they needed to be used in other states. For example:Even in states which require a lower number of witnesses, use two witnesses and a separate notary to make sure the GPOA is enforceable in other states. None of the witnesses or the notary should be related to the maker of the GPOA or be named as the agent under the GPOA.In many cases, the client is uncomfortable about giving someone the ability to act on the client’s behalf before incapacity occurs. In such a case, if permitted by state law (e.g., Georgia, Oregon), the Power of Attorney may be a “springing” Power of Attorney—becoming operative only upon the client’s incapacity. The manner in which incapacity is determined should be defined in the document. Be aware that some states do not recognize springing powers of attorney. For example, Florida does not permit springing powers of attorney that were executed after October 1, 2011.Trap: As if the state issues were not complicated enough, there are vast differences in the foreign rules governing the use of powers of attorney and Medical Directives of Americans living overseas. Always have clients who are moving overseas execute Medical Directives and GPOAs, and tell them to consult with local counsel in their new country of domicile.Trap: Executing GPOAs (and other notarized documents) overseas can be a problem because of the absence of a U.S. licensed notary. While embassies may have notaries on staff, there may not be any embassies that are close to the client’s location. However, federal law provides a process by which non-notaries can authenticate documents signed by military personal and those working with the military while serving overseas. Medical Directives. Terri Schiavo, Karen Ann Quinlan, Nancy Cruzan—all women in their late 20s and early 30s whose incapacity and life support issues created tremendous cost and pain to families. No matter the age, every adult should have a Medical Directive providing for how life support should be withdrawn and who will make medical decisions upon incapacity. Always name 2–3 successor decision-makers. Court Orders. Many states have laws permitting guardians, generally with court approval, to adopt an estate plan for an incapacitated resident. Trap: In TAM 9731003, the IRS ruled that when a court ordered annual exclusion gifts to the family of an incapacitated taxpayer, the gifts would remain in the taxpayer’s taxable estate. The IRS noted that under applicable state law the gifts could have been rescinded by the taxpayer if she recovered capacity (even though she had irreversible Alzheimer’s). ******Resources: For information on how European countries deal with Medical Directives, see: Susanne Brauer, University of Zurich, Country Reports on Advance Directives (2008), available at Andrew H. Hook, Durable Powers of Attorney, 859-2nd Tax Mgmt. (BNA)Robert B. Fleming & Rebecca C. Morgan, Planning for Disability, 816-2nd Tax Mgmt. (BNA).Checklists: Cornellius J. O’Reilly, Erica J. Goldberg, & Jay E. Rivlin, The Estate Planner's Checklist for Planning for Incapacity, 39 Est. Plan. 17 (2012).Robert B. Fleming & Rebecca C. Morgan, Planning for Disability, 816-2nd Tax Mgmt. (BNA), at Worksheet 1: Checklist for Planning and Disability, Worksheet 4: Nursing Home Checklist.Income Taxes and Estates and Trusts“Try not to think of it as your money” IRS AgentPerspective: At $12,300 (in 2015) a trust or estate reaches the top federal ordinary income tax rate of 39.6%, plus the 3.8% Affordable Care Act (“ACA”) surtax. The income taxation of trusts, estates, and beneficiaries has become an expanding area of tax planning, particularly when the top combined state and federal income tax rate for trusts and estates can quickly exceed 50%. Disclaimers and Income Taxes. Traditionally, the use of disclaimers in post-mortem planning has focused primarily on minimizing estate taxes. Now that federal estate taxes are less of an issue, tax planning will refocus on using disclaimers to minimize income taxes. Opportunity: A grandparent dies with an IRA worth $50,000. The sole heir has a daughter who is getting married. The grandchild is in a 10% income tax bracket, while the parent is in a 40% income tax bracket. If the parent took the IRA funds and used them for the wedding, the parent would generate $20,000 in income taxes. If the parent disclaimed the IRA and it passed to the daughter, the tax would be $5,000, saving $15,000 to help cover the cost of the wedding and honeymoon. Investment Theft Losses. What happens when an investment theft loss (e.g., a stock fraud, Ponzi scheme) occurred during the decedent’s life, but is discovered during the administration process?Code § 2054 only allows an estate tax deduction for theft losses “incurred during the settlement of estates.” Therefore, it appears the theft loss would be ignored in computing the taxable estate of the decedent. However, if the loss was discovered during the first six months, it might be possible to use alternative valuation to reduce the tax value. Moreover, the standard for discovery is whether the theft was known or reasonably foreseeable at the moment of the decedent’s death.Code §165(e) provides that “any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss.” Therefore, if the decedent was unaware of the theft, the estate cannot amend the decedent’s income tax return to take the pre-death losses.Revenue Ruling 2009-9 provides that in certain circumstances, “a theft loss in a transaction entered into for profit is deductible under § 165(c)(2), not § 165(c)(3), as an itemized deduction that is not subject to the personal loss limits in § 165(h), or the limits on itemized deductions in §§ 67 and 68.” Revenue Procedure 2009-20 provides a safe harbor process for income tax losses created by Ponzi schemes.These rules are subject to an array of limitations and fact-driven exceptions. For example, is there the potential for recovery from the Ponzi scheme? Is there a potential claw-back against the taxpayer? Is the taxpayer a “qualified investor”?Opportunity: When an investment loss is discovered, consider where the loss will create the greatest tax benefit and then try to marshal sufficient facts under the law to sustain that argument, recognizing that there is a high probability of audit. For example, with so few estates being subject to an estate tax, should the executor take the position that the value of the invested assets were not discounted by the theft and take the deduction on the estate income tax return?Investment Decisions. With the high rate of taxation for trusts and estates, investment and tax advisors need to focus their attention on a number of issues. For example: Evaluate the net after-tax return of the client’s fiduciary investments instead of the gross return. For example, advisors should examine the issue of whether a trust will be in a mode of accumulating income for a period (e.g., while the children are young) and adopt an investment strategy that provides for the greatest after-tax return. In making decisions on a decedent’s estate’s allocation of assets between trusts (particularly generation skipping trusts) and heirs, take into account not only the expected appreciation of the relative assets, but the type of income they will generate. For example, having an heir receive a rented commercial property instead of a trust could use the lower marginal tax rates of the heir (as compared to the trust) to reduce the net after-tax return from the rental income.Recognize that the tax cost of using spendthrift trusts to accumulate income just went up substantially. To the extent a martial trust is created (e.g., as a consequence of a second marriage), consider funding the trust with assets with a significant rate of return, but nominal appreciation. Executor’s Fees. In many cases having an executor waive the executor’s fee can reduce the overall tax cost (i.e., the estate is not taxable and the executor is the primary beneficiary). Opportunity: Assume the executor’s fee is $100,000, but the estate is not subject to any state or federal death taxes. Waiving the executor’s fee could save an executor/beneficiary in a 39.6% tax bracket up to $39,600 in federal income taxes. Decedent’s Final Return. With so few estates being taxable, obtaining income tax deductions for the decedent’s final return become a more important part of estate planning, particularly when there is a surviving spouse. See the prior discussion in this article on pre-mortem planning. Opportunity: There are a number of other deductions which may be available for a decedent’s final return, including: Unamortized mortgage loan costs are deductible.The entire standard deduction, notwithstanding the point in the year in which the decedent died (i.e., there is no partial year proration).The decedent’s final medical expenses, even if paid after the decedent’s death, but they must be paid within one year of death. If an individual with a lifetime annuity dies before recovering their investment in the annuity contract, the unrecovered basis may be deductible on the decedent’s final return.Opportunity: There are also opportunities to accelerate income into the decedent’s final return. For example, Code § 454(a) permits the acceleration of interest in series E and EE savings bonds, even if the bonds are not redeemed. Deduction in Respect of a Decedent. Code § 691(b) provides: “The amount of any deduction specified in section 162, 163, 164 , 212, or 611 (relating to deductions for expenses, interest, taxes, and depletion) or credit specified in section 27 (relating to foreign tax credit), in respect of a decedent which is not properly allowable to the decedent in respect of the taxable period in which falls the date of his death, or a prior period, shall be allowed… .” Note that the carryover deductions are limited to only certain listed code sections. For example, there is no carryover of the charitable deduction provided for in section 170. These deductions are generally those which are not deductible on the decedent’s final income tax return. NOLs for Estates and Trusts. The timing of payment of deductible expenses is a critical income tax planning issue. Most estate administration deductible expenses are not considered business expenses. Therefore, they cannot generate an NOL for the estate. Consequently, to the extent that such deductions exceed income, they are not carried over to future years. Opportunity: If an estate anticipated having large income tax deductions early in its first year, the estate might consider using a longer fiscal year to allow the estate to earn sufficient income to offset the early deductions. Opportunity: Code § 642(h) provides that to the extent estate deductions exceed the estate's income in the final year of the estate, the excess deductions can be carried over to the estate beneficiaries. Hence, Personal Representatives of cash basis estates with substantial deductible expenses (such as commissions and legal fees) should consider delaying the payment of non-business deductions until the final year of the estate, so that heirs can receive the benefit of the pass-through of the excess deduction. Personal Representatives should also be careful about paying too many non-business expenses in any year in which the estate has insufficient income to offset the deduction of such expenses. Post-Mortem Estimated Income Taxes. Estimated income tax payments are not required after a taxpayer's death. Estates and certain trusts do not have to pay estimated income taxes for two tax years after a decedent’s passing. ******Resources: Howard Zaritsky, Tax Planning for Family Wealth Transfers During Life: Analysis With Forms (WG&L), ? 3.02 Taxation of Trusts, Grantors, and Beneficiaries.Jim Weller & Andrew Moore: A Primer on Fiduciary Income Tax Planning, Income Tax Plan. Newsletter (LISI), no. 10, June 13, 2011. Alan S. Acker, Estate and Trust Administration — Tax Planning, 855-3rd Tax Mgmt. (BNA).Federal Gift TaxesThe first Federal Gift Tax was imposed in 1862 to fund the Civil WarPerspective: While gifting is less of a planning issue in the environment of large transfer tax exemptions, there are a number of unexpected traps for unwary donor and opportunities for the planner and his client. Intent to Make a Gift. The IRS takes the position that the transferor’s donative intent is largely irrelevant in determining whether a gift tax is applicable. Treasury regulation § 25.2511-1(g)(1) provides: "Donative intent on the part of the transferor is not an essential element in the application of the gift tax to the transfer. The application of the tax is based on the objective facts of the transfer and the circumstances under which it is made, rather than on the subjective motives of the donor.”Spouse not a U.S. Citizen. If the donee is not a U.S. citizen, a gift tax marital deduction is not allowed. Moreover, gifts cannot be made to a qualified domestic trust as is allowed for estates. Instead, the annual exclusion for gifts to non-U.S. citizen spouses is increased to $100,000. The exclusion amount number is inflation adjusted and (effective for 2015) has increased to $147,000. Opportunity: Where a client is married to a non-U.S. citizen, the transfer of more than $147,000 each year to the spouse may provide significant tax savings. However, if the spouse is a U.S. resident, the assets may still be taxable when the spouse dies. Moreover, the spouse’s home country may also impose a death tax on the assets at the spouse’s death.Gift Splitting. If gift splitting is elected, the spouses have joint and several liability for any gift tax which may be due. Because of this rule, consenting spouses should be very careful to ensure that the value of the gifts are accurate. If neither spouse has filed a gift tax return for the applicable year, then the consent may often be filed late, without an adverse impact. Annual Exclusions. In this time of large federal gift and estate tax exemptions, do not forget to consider the unique benefits of the annual exclusion. Opportunity. A husband is substantially older than his wife and the long-term marriage is stable. The husband has 19 descendants from a prior marriage. He wants to reduce estate taxes, but he does not want to benefit descendants to the detriment of his wife. Consider creating a lifetime trust, with his spouse and his descendants as beneficiaries. The spouse may be a Co-Trustee. Contribute $280,000 to the trust using the annual exclusion (e.g., 20 donees using Crummey withdrawal rights). During the wife’s lifetime, the income is held in a “pot trust” for all beneficiaries, but at her passing, benefits accrue to all of the descendants, possibly by family group. Effectively, you used $280,000 in annual exclusion to remove assets from the taxable estate without potentially reducing the lifestyle of the couple (i.e., the trust income could be currently distributed to the wife). The growth in the contributed assets will not be subject to estate taxes. Assets could be invested in low income investments which generate growth and capital gains—with the spouse taking distributions at capital gains rates only when needed. A “spray power” could allow the Co-Trustees to make income or principal distributions to other family members when needed. Deathbed Transfers. Deathbed annual exclusion gifts can be a significant planning tool. Trap: In Revenue Ruling 96-56, the IRS ruled that if the donor dies before the check clears his or her account, then the gift is not removed from the estate. In Estate of Newman v. Commissioner, the Tax Court agreed with the IRS’s position. The law distinguishes between charitable and non-charitable deathbed payments. In general, charitable deathbed checks do not have to clear the decedent's accounts before death, while non-charitable gifts do have to clear.Year End Gifts. Gifts to individuals at year end should be given early enough for the donees to deposit the checks—or use certified checks. The IRS has taken the position that the gift will be considered made in the year in which the funds cleared the donor’s account. Gifting a Note. Did you know that a client may be able to make a completed gift of a note or a promise to transfer property? Revenue Ruling 84-25 provides: “In the case of a legally enforceable promise for less than an adequate and full consideration in money or money's worth, the promisor makes a completed gift under section 2511 of the Internal Revenue Code on the date when the promise is binding and determinable in value rather than when the promised payment is actually made.”Trap: As the research sources shown below indicate, there is a significant debate on how to properly interpret Revenue Ruling 84-25. Research Sources: There has been a fair amount of controversy on this issue, including:Austin W. Bramwell, Donative Promise Can Lock in 2012 Gift Tax Exemption, 39 Est. Plan. 03 (August 2012).Austin W. Bramwell & Lisi Mullen, Donative Promise can use up Gift Tax Exemption, Est. Plan. Newsletter (LISI), no. 2001, August 23, 2012.Jeffery N. Pennell & Jeffery A. Baskies, Does the Gift by Promise Plan Work?, Est. Plan. Newsletter (LISI), no. 2022, November 6, 2012.Austin W. Bramwell, The Gift-by-Promise Plan Works as Advertised, Est. Plan. Newsletter (LISI), no. 2033, December 3, 2012.Kim Heyman, Carlyn McCaffrey & Pam Schneider, The Gift by Promise Plan SHOULD Work-At Least in Pennsylvania, 2034 Est. Plan. Newsletter (LISI), no. 2034, December 4, 2012.Jeffery N. Pennell & Jeffery A. Baskies, Final Words on Gift-by-Promise Technique, Est. Plan. Newsletter (LISI), no. 2036, December 10, 2012.Federal Estate TaxesThe first Federal Estate Tax was imposed in 1797 to fund a Naval Buildup during John Adam's AdministrationPerspective: Although there are few decedent estates subject to a federal estate tax, there remain interesting planning issues, opportunities and unexpected traps for the affluent client. Right of Publicity. An inheritable right of publicity can create a significant estate tax liability. For example, the Estate of Michael Jackson and the IRS have significant differences in the deemed value of his image, name and likeness. The Estate provided a value of $2,105, while the IRS thought the value was closer to $434 million. See the more detailed discussion of Right of Publicity in this article. Business Opportunity. A great way to build value in younger generations is to allow younger generations (or trusts for them) to take advantage of business opportunities, using the parent’s business knowledge. But when does this amount to a gift of the “business goodwill” to the younger generations? There have been a number of cases in this area that give us some guidance. Recent cases on business goodwill versus personal goodwill have been generally favorable to taxpayers.Opportunity: Many clients make the mistake of growing the business in the wrong estate. A parent has a very successful business and is considering branching off into new areas. Suppose a client has an estate which will be taxable in a 40% transfer tax bracket. Have the parent help their adult child create this new business opportunity, and have ownership of the entity solely in the name of the child or in a Dynasty Trust. The older generation should not control or have the economic risk for the new business opportunity. Combining the two business entities together may be possible at some time in the future and (with proper valuation) give the heirs a larger part of the total business. Arguably, the following facts could strength the client’s case (i.e., court or IRS determinations will be fact-specific): No assets or contracts are gratuitously transferred to the new entity. In the Cavallaro case, the taxpayer made the mistake of not transferring the technology to the son’s company and therefore a large gift occurred later when the son’s company merged with the parents’ entity. A sale of this technology for fair value would have probably prevented this resultThe old business continues to operate.The owner of the existing business does not work in any capacity for the new business when it is created.The economic risk of the venture should rest solely on the new business owners. The parent and the old business should not directly or indirectly guarantee the obligations of the new owners and their business. Minimize transactions between the two businesses. The children worked in the business for a period of time and by doing so acquired their own business goodwill through the relationships they created or broadened. The new business owners are not subject to any non-compete, non-solicitation, confidentiality or trade secrets limitations. A significantly different name is used for the new business.Trap: The recent taxpayer success in providing that personal goodwill of an owner or employee of a business cannot be included in the value of the business has the risk that the IRS will use that argument when tax practitioners are trying to get a larger step-up in basis for a decedent’s business (e,g., the IRS argues that the goodwill rested with the decedent not the business and the death of the owner eliminated that value).Opportunity: Instead of moving the business goodwill out of the parent’s estate, keep it there and obtain a greater step up in basis. If the business is an LLC or partnership, the fixed assets of the business may also step-up and allow a greater depreciation deduction to the heirs who take over the business. Cemetery Plots. Treasury Regulation § 20.2033-1(b) provides that while a cemetery plot owned by a decedent is included in the gross estate, the value is limited to the saleable value of the part of the plot that is not designed for internment. So your own cemetery plot escapes estate tax, but not those you purchased for other family members. The “saleable value” could be a problem when most potential buyers will not want to be buried in your family cemetery plot. Probate and Disposition Issues“I will continue to continue to pretend that my life will never end…” Paul Simon, Flowers Never Bend with the RainfallPerspective: With most clients not being subject to a federal estate tax, increased attention is being paid to creative planning for how assets pass to heirs. Right of Publicity. Individuals generally have a right to control their publicity, personal image, and persona (commonly called a ‘Right of Publicity” or “ROP”). The earnings of dead celebrities can be impressive. In 2014, Forbes magazine reported that Michal Jackson was the top annual income earner among deceased celebrities, earning $140 million. Forbes reported that the next four deceased top income earning celebrities were: Elvis Presley ($55 million), Charles Schulz ($40 million) Elizabeth Taylor ($25 million) and Bob Marley ($20 million). In many cases, the voice, images, and persona of long dead celebrities can still be worth millions. For example, according to the Forbes article, two celebrities who died in 1955 still had significant annual earnings: Albert Einstein earned $11.0 million and James Dean earned $7.0 million. A number of states (e.g., California, Tennessee, Virginia, Florida, Nevada, Kentucky, Indiana, and Oklahoma) have statutes that permit a deceased celebrity’s right of publicity to be inherited. The period heirs can control the Right of Publicity varies widely from state to state. Moreover, the aspects of the decedent’s persona that can be inherited also vary widely. An inheritable ROP can create a significant estate tax liability. For example: The Estate of Michael Jackson and the IRS were reported to have significant disagreements in the deemed value of his ROP. The Estate gave a value of $2,105, while the IRS thought the value was closer to $434 million. In Andrews v. United States, a deceased bestselling author’s name was used on ghost-written books and the IRS concluded that the author’s name had an estate tax value of $1,240,000. The Court reduced the value by the expenses of the venture and provided a 33% discount for the inherent risks of the publication. Opportunity: Determining the state of residency of the decedent is critical to whether the celebrity’s heirs can inherit their persona and how long that inheritance will last. For example:In 2012, the Ninth Circuit Court of Appeals ruled that the Estate of Marilyn Monroe could not stop others from using her image and likeness because she was a resident of New York, which terminates any publicity rights at death. Her other potential state of residence, California, has a statute that provides for the inheritance of publicity rights. However, the estate had argued for years that Marilyn Monroe was not a resident of California in order to reduce taxes and defeat an inheritance claim of an alleged daughter. According to the recent Forbes magazine article, in 2014 Marilyn Monroe was the sixth highest annual income earner among deceased celebrities, earning $17 million. California allows a right of publicity to extend 70 years. In a recent decision regarding Albert Einstein’s ROP, a federal court ruled that the New Jersey based rights held by Hebrew University of Jerusalem should reasonably expire after 50 years. It is not just the ROP that adds value to a deceased celebrity’s estate. Personal property associated with celebrities (particularly deceased celebrities) can obtain premium values when sold. For example, the assets of Elizabeth Taylor sold for substantially more than was expected.This is a growing area of the law and is an aspect of property disposition that needs to be thoroughly understood by those representing celebrities and be properly dealt with in their dispositive documents and tax domicile declarations. Research Sources: Laurie Henderson, Protecting a Celebrity's Legacy: Living in California or New York Becomes the Deciding Factor, 3 J. Bus. Entrepreneurship & L. 165 (2009).See: Brief History of RoP, Right of Publicity, (last visited Apr. 11, 2015). Spousal Elective Share. While a changing of residency often makes sense, beware of the rules governing the rights of spouses and children to inherit, especially in community property states. Georgia appears to be the only state that does not permit a spouse to make a spousal elective share claim. Therefore, in Georgia a decedent can disinherit a surviving spouse who will only be entitled to some estate funds using a concept called “Years Support.”Opportunity or Trap? Depending upon which side of the inheritance you are on, moving an incapacitated spouse to a jurisdiction with greater benefits for the surviving spouse may be a method of increasing the surviving spouse’s inheritance. For example, a couple in their second marriage with children from the prior marriages resides in Georgia. Each spouse executed a Will that disinherits the surviving spouse in favor of the testator’s descendants. The husband is now in an Alzheimer unit and the wife (who holds a GPOA and Medical Directive) wants both of them to “retire” to Florida. Under Florida law, the change of domicile could result in the wife being able to claim an elective share of at least 30% of the deceased spouse’s shares.Opportunity. When a couple marries, each of them acquire significant rights to the assets of their spouse. There are ways to reduce such rights. For a more detailed review of this topic, see the following: Pennell, Minimizing the Surviving Spouse's Elective Share, ALI Estate Planning in Depth (2014); Tax Management Portfolio, Spouse's Elective Share, No. 841 T.M, section VI., Planning to Minimize an Elective Share; Laura Rosenbury, Two Ways to End a Marriage: Divorce or Death, Utah Law Review, 2005.?Intestacy and a Deceased Spouse’s Family. While the general rule is that step-children (or other blood relatives of a deceased spouse) cannot inherit from a step-parent, a number of states permit such an inheritance by intestacy if the decedent’s remaining statutory intestate heirs are more remote. For example, the language of the Florida statute provides: “If there is no kindred of either part [i.e., lineal descendants of the blood line of the maternal and paternal grandparents of the deceased], the whole of the property shall go to the kindred of the last deceased spouse of the decedent as if the deceased spouse had survived the decedent and then died intestate entitled to the estate.” Note that the use of the word “kindred” would appear to include all intestate heirs of the pre-deceased spouse, not just the spouse’s lineal descendants.Trap: Wills should always have a common disaster provision that dictates how the assets will pass. However, in the above states, a final passage “to my intestate heirs” could result kindred of a deceased spouse inheriting. Clients should be advised of this fact and consider adding a Will provision that overrides the local intestate inheritance law. For example, “Notwithstanding applicable state law, under no condition shall my deceased spouse’s blood family members be considered to be my intestate heirs.”Resource: BNA Portfolio 858-1st: Family, Kinship, Descent, and Distribution, III.F. Stepchildren.Bequests of Firearms. The distribution of any firearm has unique issues for both the Personal Representative and recipients of the arms. Federal and state laws impose restrictions on the type of firearms (e.g. “NFA” weapons) that may be owned and who may own firearms. It is important that the Personal Representative review relevant federal law and state law in both the decedent’s and the beneficiary’s state of residence prior to transferring any firearm. Below is a brief list of general recommendations. In the planning stages, the client should conduct some due diligence on whether the Personal Representative is allowed to legally possess the firearm. For example, if the Personal Representative has ever been dishonorably discharged from the military or has been found guilty of domestic abuse, it could be illegal for the Personal Representative to take possession of any firearms. Additionally, for any “NFA” weapons, the client could consider setting up a “Gun Trust” to reduce future transfer issues.As with all tangible personal property, upon taking possession of any firearm, it is important the Personal Representative take proper safety measures in order to avoid theft and/or inadvertent use. The Personal Representative should rely on experts in evaluating and appraising the firearm. If any weapon is a “NFA” weapon, the Personal Representative will need to ensure the decedent had proper registration and tax documentation and that any intended recipient has the same. Mere possession of an unregistered “NFA” weapon is a federal crime and could subject to confiscation the house or vehicle in which the weapon is stored. Since small distinctions in firearms can lead to vastly different valuations, the Personal Representative should ensure that any appraiser is qualified to value the firearm and/or obtain multiple opinions. A Personal Representative should conduct the necessary due diligence on the recipient of the weapon. For example, if the Personal Representative distributes a firearm to an individual with a history of substance abuse issues, could the Personal Representative be subject to third party liability for any torts committed by the recipient?If the Personal Representative is looking to sell the firearms and/or distribute to an out-of-state beneficiary, then it may be prudent to engage the services of a licensed firearm dealer to effectuate the transfer. Reproductive Personal Property. Given the modern post death reproductive possibilities with frozen eggs and sperm, clients who have stored their reproductive personal property should specifically provide whether the assets are to pass to family members, be donated to science or charity or be destroyed. Equally interesting is how the courts are handling children conceived by assisted reproductive procedures, particularly after the parent is dead.Digital Ownership and Transfers. Estates are increasingly dealing with the manner in which digital assets (e.g., websites and stored documents) are disposed of. Facebook recently provided for a process for the treatment of accounts of deceased customers. To the extent the asset has tangible value, the estate plan should deal with how it will pass. The Rules Governing Valid Wills Vary Widely. The rules on the validity of a Will vary widely from state to state. For example: In Georgia, fourteen year olds can sign Wills. It appears that every other state requires the testator to be an adult under state law.In some states, a person who lacks the capacity to enter into a valid contract may still have the ability to make a will. Many states do not recognize Holographic Wills (i.e., wills drafted by the testator that fail to meet the required statutory formalities). Some states permit Holographic Wills with varying requirements for enforcement.While many states do not permit Nuncupative Wills (i.e. Oral Wills), they are valid in some states to varying degrees and with varying requirements. Trap: Whenever a client changes the state of their residency, they should have all of their estate documents reviewed by a local attorney to ensure they are enforceable in the new domicile and that there are not local issues that need to be addressed in the documents (e.g., Florida homestead rules). Personal Property. It is the authors’ experience that the single greatest source of conflict among surviving family members is over the decedent’s tangible personal property. For example, on February 3, 2015, the front page of the Arts section of the New York Times reported that Robin Williams’ widow and his three children from his two prior marriages were in conflict over the issue of how his assets, particularly his “cherished belongings that include his clothing, collections and personal photographs” should be passed. The personal property conflict is often exacerbated by the trauma of a loved one’s death, sibling and in-law issues, and the emotional attachment to a loved one’s intimate assets (there is not much intimacy tied to a stock certificate). In many cases, disputes over the disposition of personal property begin early in the administration process and can severely taint future dealings between the disputing parties on other estate issues.Trap: Immediate family members (and sometimes in-laws, other remote family members and occasionally neighbors) have a tendency to start taking things out of the residence when someone passes. The explanation can include: “When I was ten, your dad said I could have his shotgun.” Often there is no evidence of such intent. In most cases, oral declarations, if they occurred, are legally unenforceable. Descendants from prior marriages have gone into the residence without talking to the surviving spouse or looking at the dispositive documents because “I know mom wanted me to have all of her jewelry,” or some similar justification. These takings can constitute criminal theft. Moreover, it can create ill will with the surviving spouse who wanted time to grieve and handle the transfer.The solution? As soon as the client becomes disabled, or immediately upon death, the Personal Representative (perhaps even before an appointment) should change the locks on any residence or other location holding personal property. Change any security codes. ******Checklists: Andrew L. Whitehair, Post-Mortem Administration Checklist for the CPA Financial Planner, NAEPC J. Est. & Tax Plan. (2014). Bridget J. Crawford, Estate Planning for Authors and Artists, 815-2nd Tax Mgmt. (BNA), at Worksheet 12: Checklist for a Decedent's Fiduciary (focused on Authors and Artists).Charles E. Rounds, Fiduciary Liability of Trustees and Personal Representatives, 853-1st Tax Mgmt. (BNA), at Worksheet 3: Post Mortem Trust Administration Checklist.See the personal property checklist and the married and single decedent personal property disposition forms at Resources: ABA State Attorney List. The ABA has created a listing of attorneys who will help out of state attorney prepare local deeds (i.e., generally for estate planning purposes). The cite states: “This list was prepared as the result of a discussion on ABA-PTL, an e-mail discussion group sponsored by the ABA Section of Real Property, Trust and Estate Law. It is a compilation of information supplied by persons who have indicated a willingness to prepare deeds, for a fee, to assist out of state counsel in estate planning and estate administration engagements.” Charities and Charitable Deductions“If the Lord Loveth a Cheerful Giver, How He Must Hate the Taxpayer.” John Andrew HolmesPerspective: Charitable contributions increased 4.4% to a total of $335.17 billion in 2013 with charitable bequests increasing by 8.7% over bequests in 2012. Gifts by individuals increased by $9.69 billion, while corporate gifts decreased slightly. A 2010 Center on Philanthropy Study of High Net Worth Philanthropy estimated that between $6.6 trillion and $27.4 trillion in charitable bequests would be made from 1998 to 2052. Charitable giving remains an active part of the tax and estate planning process and does not appear to be negatively impacted by the large estate exemptions.Private Inurnment. Making contributions for the benefit of a deceased police officer’s family or providing aid to a neighbor is a common practice in most communities. Churches and other charities often set up funds for that particular purpose. But is the payment to the charity deductible if it is earmarked to a particular person? The earmarking of the gift to a particular person is not generally entitled to a charitable deduction and in fact may be a taxable gift (though it is generally covered by the gift tax annual exclusion). However, the “Slain Officer Family Support Act of 2015” provides that cash contributions to charities which are given for the relief of the families of slain New York Police Department Detectives Wenjian Liu and Rafael Ramos made between January 1, 2015, and April 15, 2015, will be treated as if such contribution was made on December 31, 2014, and not in 2015. Moreover, the private inurement rules will not apply for any such payments made on or after December 20, 2014, and on or before October 15, 2015.Charitable Babysitting. If you hire a babysitter so you can do your charitable volunteer work, you may be entitled to a charitable deduction for the payment. According to Kingsley vs. Commissioner, the deduction is valid. The Tax Court rejected the IRS’s contrary view contained in Revenue Ruling 73-597. Charitable Deductions Versus Advertising/Marketing. Charitable deductions by individuals and businesses are subject to numerous limitations and deduction requirements (e.g., aggregated gross income (AGI) limits on the amount of the deductions, phase-out of itemized deduction, etc.). Opportunity: Business owners should consider having their business make payments which qualify as marketing and advertising, rather than taking a deduction as a business or personal charitable deduction. The central issue in distinguishing the two is the financial value that the payer expects to receive from the payment. Charitable Deductions for Estates and Trusts. Code §642(c)(1) reads: “In the case of an estate or trust…. there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a)…. any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c)…. If a charitable contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year….”(emphasis added)Opportunity: Unlike individuals, trusts and estates have unlimited charitable income tax deduction.Parsonage Deduction. Code §107 provides: "In the case of a minister of the gospel, gross income does not include: (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home and to the extent such allowance does not exceed the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities." This income exclusion applies even if the minister receives the non-taxable parsonage allowance to cover real estate taxes and mortgage interest that the minister deducts on a personal income tax return. Effectively this is a double benefit. The income for the parsonage is not taxable, but the costs attributable to the parsonage are deductible to the extent normally permitted.It should be noted that the Parsonage Allowance is under attack and over the long term may not survive. Ultimately Congress and/or the Supreme Court will probably step in. In November 2014 in Freedom from Religion v. Lew, the Seventh Circuit Court of Appeals dismissed a complaint from the plaintiff because they had not attempted to obtain the parsonage allowance. The Seventh Circuit Court of Appeals noted: “…absent any personal denial of a benefit, the plaintiffs’ claim amounts to nothing more than a generalized grievance about [the parsonage allowance’s] unconstitutionality, which does not support standing.” The plaintiffs have indicated that they will be back in court, probably after they apply for their own parsonage allowance. However, the ultimate resolution of this issue will take some time because:The rules governing the parsonage allowance require that the amount of the allowance be set before the funds are paid – it cannot be done retroactively. Therefore, the plaintiffs may only start their parsonage allowance in 2015.The return for the plaintiffs will be due April 15, 2016. The IRS will need to review and decide whether to challenge the exclusion from income. The audit could be lengthy followed by a protracted litigation that could take years to get to the U.S. Supreme Court. Parsonage Allowance After Retirement. Any parsonage allowance provided to a minister after retirement is not subject to self-employment or social security taxes. Income Exclusion for Elderly. Code § 408(d)(8)(F) permits certain individuals over age 70? to make direct IRA payments to charities, without having to include the income in their taxable income or take a charitable deduction. The benefit was retroactively extended at the end of 2014 and expectations are that it will be extended in 2015 (perhaps for the current year only). Trap: The exclusion is not permitted for donor-advised funds and supporting organizations. Clients wanting to retain some control over their charitable gifts must consider the tax impact of avoiding this limitation. Opportunity: If the IRA had non-deductible contributions and deductible contributions, the amounts passing to charity first come from taxable funds, effectively preserving the tax-free savings of the non-deductible contributions. UBTI, CRTs and the 100% Tax. Code § 664(c)(2) provides for a 100% excise tax on the Unrelated Business Taxable Income (UBTI) of a Charitable Remainder Trust (CRT). Trap: This can create a trap for business owners who want to transfer their active business interests to a CRT before a sale. If the business owner signs the sale contract or perhaps a letter of intent before transferring the business interest into the CRT, the IRS can argue that the transferor, not the CRT, is the taxable party, defeating the benefit of the CRT. If the business owner waits to negotiate the transfer until after the CRT is the owner and the deal is either delayed or collapses, 100% of the business income can pass to the IRS.There are some other complications, including: The CRT fiduciary needs to examine state laws and the trust agreement and determine whether the tax is payable from income or principal. However, if 100% of the income is passing to the IRS, there is no income left to distribute the payout to the life beneficiary. A similar problem can happen if the contributed asset (e.g., an LLC or partnership) distributes less cash then the taxable income that was allocated to the CRT. If this is expected before the sale, the CRT grantor should consider also making gifts of cash to pay the applicable 100% excise tax.There is no income tax deduction for the UBTI paid by the CRT. Therefore, the UBTI income remains within the four-tier system of the CRT and upon distributions to the lifetime beneficiaries, will be subject to tax a second time at the beneficiaries’ highest marginal tax rate.If the business entity’s assets are subject to acquisition indebtedness, then a sale of the asset may trigger unrelated debt-financed income, which is a form of UBTI and create the excise tax. If the business owner is personally liable for the debts of the contributed business entity, the contribution of the entity might be a prohibited act of self-dealing. Gift of CRT Income Interest. In PLR 9721014, the IRS ruled that the gift of a lifetime income interest in a CRT to a charity created a charitable deduction for the life tenant and a charitable gift tax deduction.Opportunity: Where a taxpayer no longer wants to retain the income interest of a CRT and is growing his or her taxable estate, this PLR may be an excellent tool for reducing the overall estate and save income taxes. Because PLRs only apply to the person making the ruling request, a new ruling should probably be obtained before implementing the strategy.Year-End Contributions. Payment by check and mailing of charitable contributions are deductible in the year of mailing. While the date shown by U.S. Mail postmark is conclusive as to the date of mailing, postage meter dating can be challenged by the IRS. Contributions by credit card are deemed made in the year that the charge is applied to the card. Charitable Deduction Appraisals. Treasury Regulation §1.170A-17(a)(9) addresses the issue of how long you need to retain an appraisal used for a charitable deduction by providing: "The donor must retain the qualified appraisal for so long as it may be relevant in the administration of any internal revenue law." In other words, figure it out for yourself, we're not going to tell you. Charitable Disclosure. Effective for tax years beginning after January 1, 2007, Congress revised Code § 6104(b) to require the IRS to disclose information for various types of charitable trusts as reported on IRS form 5227. While taxpayers generally have an expectation that information with regard to any trust that they have created is not subject to public disclosure, this form is available to the public, and as a result, clients are receiving solicitations for selling their interests in their charitable trusts. IRS form 990 for charities and private foundations has been public for some time.Resources: If a client is considering making a gift to a public charity that you and they do not have much knowledge about, then pull the charity’s form 990, and determine whether the IRS has recognized the charity as tax-exempt. In addition, there are a number of web-based sources that evaluate public charities, including: ******Checklists: Edward J. Beckwith & Natanya H. Allan, Estate and Gift Tax Charitable Deductions, 839-2nd Tax Mgmt. (BNA), at Worksheet 1, Checklist for Estate and Gift Tax Charitable Deductions. Barbara L. Kirschten & Carla Neeley Freitag, Charitable Contributions: Income Tax Aspects, 863-3rd Tax Mgmt. (BNA), at Worksheet 2 Filing and Appraisal Requirements for §170 DeductionJane Nober, A Compliance Checklist for Private Foundations, Council on Foundations, . Family and DependentsWhen the IRS started requiring Social Security numbers for dependents, roughly 7,000,000 dependents mysteriously disappeared.Perspective: The tax determination of who constitutes a member of the family and who constitutes a dependent is a confused morass, with a few unexpected opportunities thrown in. Adopting Your Significant Other. Divorce can throw a wrench into planning expectations, particularly the pre-divorce creation of inflexibly drafted irrevocable trusts. Opportunity: However, there can be creative opportunities. For example, in Goodman v. Goodman, a Florida resident and creator of a 1991 irrevocable trust for the benefit of “my children” adopted his 42-year-old girlfriend so she could gain access to a portion of the $300 million in trust funds. The ex-wife, as legal guardian of the two current trust beneficiaries, objected. The court terminated the adoption on a procedural basis (i.e., lack of notice to the other trust beneficiaries), but did not rule on the core issue of whether the adoption was legal and entitled the girlfriend to benefit from the trust. It is not clear what Mr. Goodman did next. Florida’s like many states, specifically permits the adoption of adults. Florida statute § 63.042(1) provides: “Any person, a minor or an adult, may be adopted.” The core issue is whether public policy should override a state statute because of the illegal incestuous relationship that such an adoption creates. Authorities differ in their perspectives.Dependency Deduction. Most people assume that the dependency deduction is limited to family members, but this is not the case. A non-blood member of the household can be a dependent. The definition of a "qualifying relative" in Code §152(d)(2)(H) includes "[a]n individual .... who, for the taxable year of the taxpayer, has the same principal place of abode as the taxpayer and is a member of the taxpayer's household." The person must be a member of the taxpayer's household for the entire year, with partial year residency disqualifying the deduction.Interestingly, while the head of the household may qualify for a dependency deduction for someone who is not a blood relation or a relation by marriage, they will not qualify for head-of-household income tax filing. Family. The federal Tax Code defines family members and related parties in at least 16 different ways. The definitions of a family member or related party can get interesting. For example:In-Laws. Code §4946 provides that" "For purposes of subsection (a)(1), the family of any individual shall include only his spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren." This ironically means that you are a member of your spouse's parents' family, but they are not a member of your family. Try explaining that to your in-laws.Related Party. Code §672(c) says that: "For purposes of this subpart, the term “related or subordinate party” means any non-adverse party... who is the grantor's spouse if living with the grantor." So if your spouse lives across the country or moves across the street, the application of the definition changes? Qualifying Relative. The definition of a "qualifying relative" in Code §152(d)(2)(H) can include someone who is not related to you by blood or marriage. Spouses. Code §7701(a)(17) reads: “As used in sections HYPERLINK "" \t "_top" 682 and HYPERLINK "" \t "_top" 2516, if the husband and wife therein referred to are divorced, wherever appropriate to the meaning of such sections, the term ‘wife’ shall be read ‘former wife’ and the term ‘husband’ shall be read ‘former husband’; and, if the payments described in such sections are made by or on behalf of the wife or former wife to the husband or former husband instead of vice versa, wherever appropriate to the meaning of such sections, the term ‘husband’ shall be read ‘wife’ and the term ‘wife’ shall be read ‘husband.’” Crystal clear—right?Child. The useable definition of a "child" varies widely due to the particular benefit Congress was trying to create. Differences particularly have to do with age. Children under age 19 count in defining earned income tax credit (EITC) benefits, those under 17 qualify for the child credit, and only those under 13 are eligible for the child and dependent care credit. Meanwhile, a "child" for purposes of the "kiddie" tax age stops at age 24 for full time students.Kidnapped Dependent. For purposes of the dependency deduction, child care credit and earned income credit, the Tax Code provides that parents of kidnapped children can continue to claim the child as a dependent until they reach age 18 or are found dead. But, if the kidnapper is a family member, the child is not considered a dependent. Dependent Child Care Credit and Summer Camps. The cost of summer camps incurred by parents so they can continue to work may qualify for the child care credit.Marriage and Divorce“Marriage is often due to lack of Judgment, Divorce to lack of Patience and Remarriage to lack of Memory”Perspective: Roughly 49% of all U.S. marriages end in divorce. According to a March 3, 2012 article in the Wall Street Journal, entitled “The Gray Divorces,” the divorce rate for baby boomers is skyrocketing, even while it is diminishing for other demographic groups. According to the article, “Among divorces by people ages 40–69, women reported seeking the split 66% of the time.” The tax and practical components of divorce are often not a major focus of divorce attorneys. Dad’s New Girlfriend. As married couples age, one of them will pass first. According to a 1996 University of California study, 61% of widowers are engaged in a new romantic relationship within 25 months of their wife’s death, while only 19% of the widows have a new relationship. The Census Bureau reports that over 10 times as many widowers as widows over age 65 remarry. According to an AARP report, at age 70, men are twice as likely to have a current or recent sexual partner as women. Dad’s marriage to a woman 20 years his junior has created heartburn for a lot of children who have been anticipating a larger and quicker inheritance. The children may attempt to aggressively insert themselves into their parent’s estate planning process, creating new ethical and legal complexities for estate planning attorneys. Having watched their friends’ experiences, wives are increasingly raising the issue of how to prevent their husband’s new spouse from obtaining the family assets when the wife is dead.Income Tax Trap in Lifetime QTIPs. Code §682 provides that upon divorce, the donee-spouse pays tax on distributed income from a trust that was a grantor trust as to the donor-spouse. For gift tax purposes, a qualified terminable interest property trust is a trust in which the donee spouse has a qualifying income interest for life and to which a gift tax QTIP election has been made. An interest subject to termination upon a divorce will not qualify for the gift tax QTIP election. Therefore, post-divorce income must continue to be distributed to the donee spouse. But for §682 this income would be includable in the gross income of the donor spouse pursuant to Code §672(e)(1)(A). Therefore, §682 overrides the grantor trust rules and taxes income to the divorced donee spouse. But Code §682 doesn’t shift income tax on accumulated capital gains from the donor spouse (or the trust) to the donee spouse post-divorce.If the lifetime QTIP is a grantor trust as to principal, the donor spouse will continue to pay income tax on undistributed, post-divorce capital gains during the lifetime of the donee spouse. If the Trustees have discretion to distribute principal to the donee spouse in a lifetime QTIP, then presumably the trust will be a grantor trust as to principal.Trap: This trap for the unwary was brought to light in a LISI article by Barry Nelson and Richard Franklin. Advisors need to consider this prior to executing such a lifetime QTIP. The trust can’t provide for a tax reimbursement clause in the QTIP in favor of the donor spouse because that would disqualify the QTIP trust for the gift tax marital deduction. It might be possible to provide upon divorce that principal is no longer distributable to the donee spouse, which would terminate grantor trust status under §677(a)(1). If there are no other grantor trust triggers then §682 would operate to tax the capital gains to the trust, not the donor spouse. There are other suggested alternatives to deal with this problem as discussed in the LISI article by Nelson and Franklin.Carry-over Basis in Divorce. Pursuant to Code §1041(a), if property is transferred to a spouse or an ex-spouse as a consequence of a divorce, the transfer does not generally create taxable income and the recipient spouse gets the full carry-over basis of the transferor. Unlike gratuitous transfers to non-spouses, the recipient's tax basis is not impacted if the tax basis is higher than the fair market value of the transferred asset. Trap: While property transfers between spouses as a consequence of divorce are not generally taxable, if a property settlement is made with a non-resident alien, Code § 1041(a) does not apply and the transfer may be a taxable event. Liability in Excess of Basis. In general, a pre-death transfer of property secured by a debt that exceeds the tax basis creates a taxable event to the transferor. Code § 1041(e) provides an exception to this rule and a potential trap to the ex-spouse that receives the property. If property is transferred directly (but not in trust) to a spouse or ex-spouse (in a divorce) and has a liability in excess of its basis, no recognition occurs on the transfer and the recipient spouse takes the transferor spouse’s basis.Planning Example: Assume a client owns a tract of land that has a fair market value of $2.1 million, a basis of $200,000 and secured debt of $1.5 million. If the client sells the property, the recognized gain is $1.9 million. The first $1.5 million of sales proceeds pays off the mortgage. Assuming a state and federal effective income tax rate of 30%, the taxes on the sale are $570,000, leaving the client with $30,000 before any sales commission are paid. Opportunity: But assume the above client's husband was terminally ill. The client gifts the property directly to the husband, who specifically passes the real property to a trust for the benefit of the couple's children. Not giving any beneficial interest in the trust to the donor/wife avoids any possible application of section 1014(e). The gift to the husband does not create a taxable event to the wife, even though the liability on the asset exceeded its basis. When the husband passes away, the tax basis increases to $2.1 million. Assume the property is then sold. The trust would have no recognized gain from the sale, netting $600,000 (less closing costs and commissions) for the children's trust, after payment of the mortgage. Trap: But in a less amicable situation, Code § 1041(e) could be a trap for an unwary recipient spouse. Assume in the above example that there was a contentious divorce. The husband receives the property and immediately sells it, thinking that he gets to keep the $600,000 in equity. When his CPA asks him about the tax basis in the transaction, the husband responds with “what’s tax basis?” Instead of getting $600,000, the husband nets $30,000 before payment of commissions. Personal Property in Trust. If the client intends to place the personal property in a marital trust (e.g., “I give my art collection to a QTIP trust for the benefit of my husband, Frank and at his death to the Getty Museum”) it is important to provide language allowing the surviving spouse to sell the property in the trust so it can be converted to income producing property. The failure to give the spouse this power will result in the denial of the federal marital deduction. Installment Sales and Divorce. Code §453B(g) provides that a direct transfer of an installment sale note to a spouse or ex-spouse as a result of a divorce is not treated as a taxable disposition. However, if the transfer is in a trust for the spouse or former spouse, the disposition is taxable to the transferor. Alimony Problems. There are lots of ways to make alimony mistakes in divorces, including: Code §71(b)(1)(D) provides that if there is any obligation to make an alimony payment (or a substitute payment) after the recipient's death, all such payments, including those paid before death, are not treated as deductible alimony.Payments made to a spouse before a divorce or separation agreement is signed may not qualify as alimony payments.The Tax Court has ruled that when a divorced parent cannot pay both alimony and child support, the payments will first be applied to child support, effectively reducing the tax deduction for the spouse making the alimony payment.Alimony is Earned Income. Code §219(f)(1) provides that alimony is considered earned income for IRA purposes. Opportunity: Assume a non-working 51 year old spouse is getting divorced. Allocating a portion of any “property” settlement to long-term alimony (e.g., $6,500 per year) would create an income tax deduction for the payer and allow the payee to fund a tax-deductible IRA contribution. Interestingly, Code §219(f)(7) provides that non-taxable combat pay is also treated as earned income for IRA contribution purposes. Is there a theme here? IRD and Alimony. Alimony which remains uncollected at the recipient’s death is considered income in respect of a decedent and can result in the imposition of both estate and income taxes at the death of the recipient. Legal Fees. In general, the cost of personal, non-tax-related legal advice is not a deductible expense. Thus, most legal expenses incurred in a divorce are not deductible. However, if the legal costs are incurred by the taxpayer in order to obtain or force payment of taxable alimony (or an increase in taxable alimony), then the costs may be deductible. Tax advice obtained in the course of the divorce may also be deductible. If deductible, the legal fees are shown as a miscellaneous itemized deduction on the taxpayer’s Schedule A. Only the expenses in excess of 2% if the taxpayer’s adjusted gross income are deductible and may be reduced by the reduction of itemized deductions for high income taxpayers.Opportunity: If the wealthier spouse is paying the legal fees of the ex-spouse, the fees will generally not be deductible. Therefore, it may make sense to have the soon-to-be ex-spouse be responsible for his or her own legal fees and just increase the alimony payment (a deduction for the paying ex-spouse) to cover the legal costs without making a specific allocation to alimony. Net After Tax Value. Divorce negotiations should take into account the after-tax value (including the satisfaction of any secured debt) of an asset, not just its fair market value. Example: Assume a client has a choice between taking $1.0 million in cash or $1.2 million in stock which has a zero basis. Which is the better option? For tax purposes (assuming an immediate stock sale), the $1.0 million in cash is a better choice. Why? Assuming a combined state and federal capital gains tax rate of 30%, the $1.2 million is stock carries an inherent tax cost of roughly $360,000, meaning the stock has a true after-tax value of only $840,000.Trap: Do not assume that your client’s divorce attorney understands the tax ramifications of the divorce settlement. Many of these engagement letters specifically disclaim the attorney’s responsibility for any tax issues involved in the settlement. If you know a client is going through a divorce or legal separation, advise them in writing that it is in their best interest to have a competent tax advisor be an integral part of any settlement negotiations. Tax Basis Records. The divorce decree should also require that the transferor spouse provide the transferee spouse with sufficient records to support both the basis of the property and its holding period. Without such information, the IRS could challenge the client’s tax filings and an ex-spouse may not be cooperative in providing the necessary information. Although Temporary Regulation 1.1041-1T, Q&A-14 requires that such information be provided at the time of any transfer, there are no penalties for failing to provide the information.Mandatory or Ascertainable Payouts to Beneficiaries. It is the authors’ opinion that most irrevocable trusts should contain a spendthrift provision, limiting the right of divorcing spouses and other potential creditors to make claims against the beneficial interests in the trust. However, a number of states have allowed alimony claims to be paid from distributions from the trust. For example, see: Delaware –? Garretson v. Garretson, 306 A.2d 737 (1973).New Hampshire –?N.H. Rev. Stat. Ann. §564-B:5-503(b)(1)-(2)) (West 2015).Florida –?Fla. Stat. Ann. §§ 736.0503–0504 (West 2015).Opportunity: To minimize this exposure, clients should avoid mandatory trust distributions and ascertainable standards for their heirs, replacing them with discretionary trusts. To the extent that mandatory trust distributions and ascertainable standards are used, consider providing that upon the filing of divorce of an heir, all distributions to the heir become at the sole discretion of an independent Trustee. However, in some states the right to payments of alimony and/or child support may still be made from discretionary trusts. Attorneys should discuss these issues with clients and discuss whether it makes sense to move the situs of trusts to jurisdictions with better asset protection for beneficiaries. Divorce and Charitable Remainder Trusts. Many married clients have created charitable remainder trusts (CRTs) that have a lifetime payouts for the lives of the two couples. So can the CRT be divided if they get divorced? The IRS has approved such divisions. Incapacity Documents. Many clients have drafted powers of attorney to provide for the handling of medical and property issues upon incapacity. Such powers of attorney are not normally revoked by divorce or legal separation. In many cases, the clients do not focus on revising these important documents during or after divorce. Having an ex-spouse or a divorcing spouse in charge of your medical and property decisions is probably not advisable. Either the client should be strongly encouraged upon the first appearance of divorce to change his or her powers of attorney, or the document may provide that in the event that divorce or legal separation proceedings are initiated, then the right of the spouse to serve as power holder immediately terminates and the next named successor is automatically appointed.A number of states revoke an ex-spouse’s agency under Durable Power of Attorney and Medical Directive when the divorce complaint is filed or divorce is finalized. For example in Florida, an agent’s authority under a Power of Attorney terminates when an action is filed for dissolution or annulment of the agent’s marriage to the principal or their legal separation, unless the Power of Attorney otherwise provides, and dissolution or annulment of the marriage of the principal revokes the designation of the principal’s former spouse as a surrogate.Inadvertent Intestacy. Intestacy can create major conflicts among family groups. In some states, marriage automatically revokes all previous Wills which were not drafted in contemplation of marriage (e.g., Kansas, Oregon). This can create some unique legal conflicts. Trap: If the Will is revoked by the marriage and there is no exception for pre-nuptial agreements, the surviving spouse may have elective share claims and intestate share claims against the estate. Trap: In a number of states, (e.g., Georgia and Massachusetts,) the will is not revoked, but the surviving spouse may be entitled to an intestate share. Particularly in marriages in which there are children from a prior marriage, the intestate rights of the second or third spouse can create dispositions that neither spouse intended. Trap: Assume a married couple in their second marriage had no children and no Wills. Both are injured in a car accident. The wealthier wife dies at the scene and the husband dies the next morning. Under the intestacy laws of most states, the husband inherits 100% of the wealthier spouse’s assets for the few hours of his remaining life. The only intestate heir of the husband is his family who have a financial incentive (i.e., 100% of the wife’s assets) to argue that the couple’s pre-nuptial agreement did not govern intestate rights, which could not accrue until after the marriage.Gifting and Divorce. The transfer tax exemptions and annual exclusions should be viewed as an asset of a couple’s divorcing estate. Remember when net operating losses used to be sold and traded? Advisors should look at the available transfer tax benefits in the same light when a divorce occurs. The unusable exemption of a less wealthy spouse can be a valuable asset to the wealthier spouse. Opportunity: An entrepreneur wants to begin transferring equity in his family business to children from a prior marriage. He has a pre-nuptial agreement which restricts the rights of the current spouse. The appraiser has provided a discount in value of 40% for the minority interest he will transfer in the business. If the spouse elects gift-splitting, the donor spouse can effectively transfer his and his spouse’s unified credit amount (with an applicable valuation adjustment of 40%) to a generation skipping trust and save up to $3,620,000 in estate taxes (i.e., $5,430,000 (spouse’s 2015 unified credit) discounted at 40% ($9,050,000 in transferred value) times a top estate tax rate of 40%). In effect agreeing to the utilization of the poorer spouse’s unified credit without any actual transfer by that spouse. There are multiple ways to make the trade-off including: The wealthier spouse’s Will could be modified to provide a more generous trust for the benefit of the ex-spouse, or The wealthier spouse could create a life insurance trust that provides a life interest to the ex-spouse, but passes the value at the ex-spouse’s death to the wealthier spouse’s family, or The wealthier spouse might provide a larger property settlement to a soon-to-be ex-spouse. “In return for saving me $3.6 million in transfer taxes, I will agree to increase the property settlement by $2.0 million.”Opportunity: A wealthy wife is required to make a significant property settlement for the benefit of a less wealthy second husband. She wants the funds to eventually revert to her children from a prior marriage. She could create a lifetime marital trust during the marriage for the benefit of the soon to be ex-spouse. Properly created, the trust would create no gift taxes. At the ex-husband’s death, his unified credit (which he might not otherwise have used in full) benefits her children by reducing the overall transfer taxes. Opportunity: The spouses have been married before and both are wealthy. One spouse has 10 potential donees and the other has 20 potential donees. If they both elect gift splitting (and remain married through the date of the gifts), each of them can double the non-taxable annual exclusion of the other, without any adverse impact to either spouse’s estate planning, while saving both families significant estate taxes.Opportunity: The couple must be married on the date the gift is made if they intend to elect gift splitting and neither can marry someone else before the end of the year. This rule effectively means that gifts made before the divorce can be gift split, while the couple can make additional post-marriage gifts without regard to the gift-splitting election. Retirement Plans. Advisors and clients should understand the differences in the tax-treatment of various retirement plans. For example: If a defined contribution or defined benefit plan is transferred to an ex-spouse, the recipient spouse can make withdrawals from the account, without having to pay an early withdrawal penalty of 10%. If an IRA account is transferred, the recipient spouse who withdraws the funds before age 59? may have to pay an early withdrawal penalty of 10%. Thus, if a divorcing couple has both IRA and ERISA retirement plans and one spouse intends to begin taking distributions before age 59? (e.g., a wife intends to take a year off from work), the withdrawing spouse will be better off receiving the ERISA account. The parties might even consider swapping retirement benefits to place the best retirement vehicle in the appropriate ex-spouse’s name. Assume a husband has creditor problems. ERISA plans and some IRAs are not subject to the claims of most creditors. Some state laws provide some protection for IRAs. To provide maximum protection, the husband could retain all the benefit of his own ERISA retirement plan and, possibly, even obtain the wife’s ERISA plan benefits. The wife could receive other assets. Assume a husband is a participant in a defined benefit plan. Based upon his health and family history, the husband believes he will live longer than the mortality tables indicate. By retaining all of the defined benefit account and giving other assets to his wife, the husband might retain a greater financial benefit then actuarially calculated by the plan administrator. Beneficiary Designations. Improper beneficiary designations changes have created huge problems in divorce cases. For example: In Merchant v. Corder, the Fourth Circuit Court of Appeals ruled that a change in beneficiary designation to a retirement plan prior to the issuance of a final judgment of divorce was invalid. Because the ex-spouse had not agreed to the relinquishment of her rights to the plan at the time of the change and there was not a qualified domestic relations order, when the former husband died the ex-spouse received the entire retirement fund.In Hendon v. E.I. Dupont De Nemours & Co., the Sixth Circuit Court of Appeals ruled that even when a divorce decree and martial dissolution agreement provided that a divorced spouse waived rights to a ERISA retirement plan, the ex-spouse was still entitled to the qualified plan assets upon the death of the account participant. The Court ruled that the waiver was not in compliance with the requirements of ERISA. In Schultz v. Schultz, an Iowa court ruled that when a divorce decree did not include any waiver of a spouse’s IRA account and the spouse never removed the ex-spouse as a named beneficiary, the ex-spouse was entitled to the IRA assets upon the death of the account owner, even when the account holder had remarried. In Egelhoff v. Egelhoff , the U.S. Supreme Court ruled that a Washington statute which purported to terminate a divorced spouse’s rights in a retirement plan did not apply to ERISA plans. The state statute was not allowed to preempt the federal rules. The solution? There are a number of actions that clients and their advisors should take, including: Clients should make sure to obtain properly drafted qualified domestic relations orders when plan assets are to be passed to an ex-spouse. These orders should be completed by lawyers with a working knowledge of the related tax issues and statutory requirements. New beneficiary designation should be prepared and filed with the plan administrator immediately after the divorce decree becomes final. If the soon-to-be ex-spouse will agree to sign a waiver, the change can be made prior to the divorce being finalized. ******Research Sources: Boris Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ? 44.6 (2015) (transfers between spouses and former spouses).Cindy Lynn Wofford, Divorce and Separation, 515-2nd Tax Mgmt (BNA). John Scroggin, Planning for Divorce (2 parts), Prac. Tax Strategies (December 2002 and January 2003).M. Jill Lockwood, Britton Mckay, and Michael Wiggins, Tax Planning for Divorce: Avoiding the Pitfalls, 89 Prac. Tax Strategies 106 (2012).Websites: There are some interesting divorce related sites on the Web, including: - calculate your chance of divorce - for child support calculationsFor state information on marriage and divorce rates see: (Interesting fact: Arkansas has the highest percentage of men who have been married 3 or more times). Checklists: See for a Practical Post-Divorce Checklist for the recently divorced. Linda J. Ravdin, Marital Agreements, 849-2nd Tax Mgmt. (BNA), at Worksheet 8 Client Letter — Post-Execution Checklist to Carry out Terms of Agreement.Residency, Domicile and Forum Shopping“…the will of the bicoastal Joan [Rivers]?unmistakably stated from the outset that she was a resident of New York, but then straightaway declared her state of domicile (‘where I intend to reside indefinitely on a permanent basis’) to be in California.”Perspective: In 2009, the National Association of Homebuilders estimated that there were 6.9 million homes that qualify as non-rental second homes. In 2011, 1,011,000 U.S. residents age 18 and older moved to another state and 915,000 moved abroad. Baby boomers are retiring and moving to other states in record numbers. Clients and their advisors need to take affirmative steps to make it clear where the taxpayer’s tax domicile is located. Moreover, the estate and tax issues for migrating clients need to be addressed.LLC/FLP Forum Shopping & Asset Protection. Because some states have much more protection against outside creditors for the owners of LLC and FLP interests, forum shopping for the best jurisdiction for business interests is rampant. But will that planning hold up? Due to complex choice of law issues, it’s not clear. For example, if a Florida resident creates an LLC in Nevada to hold Florida real property, what law applies when a Florida creditor tries to foreclose on a charging order lien? The recent case of Wells Fargo v. Barber certainly calls into question relying on such forum shopping as a creditor shield.In addition, planners should be concerned about whether such charging order protection will be effective if the owner of an LLC or FLP interest files for or is forced into bankruptcy. Is a Trustee in bankruptcy bound by the terms of an operating agreement that limits the right of a creditor to a charging order? The Arizona Bankruptcy Court in In re Ehmann held that charging order protection does not apply once a limited partnership interest is subjected to the jurisdiction of the Bankruptcy Court if the partnership agreement is non-executory. If it is executory then a Bankruptcy Trustee is bound by the operating agreement.So how do you make the operating agreement or limited partnership agreement executory? What is an executory contract? The Bankruptcy Code doesn’t define the term executory contract, but legislative history and case law cite to Professor Vern Countryman’s definition, which is: “A contract under which the obligations of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other.” However, the Bankruptcy Court in In re Warner, a West Virginia case, held that operating agreements do not qualify as executory contracts. In re Denman held that LLC operating agreements are per se not executory contracts under Tennessee law and also not under federal bankruptcy law.Where a debtor is a limited partner in a limited partnership with no affirmative duties to the partnership, the contract may be considered non-executory, and thus not binding upon the Trustee in bankruptcy. On the other hand, if a debtor, as limited partner, has affirmative duties to contribute money and to perform services for the partnership, then the partnership agreement may be considered executory, and may then receive charging order protection in bankruptcy.Opportunity: From a planning perspective, there are several things one can do to bolster one’s argument that an operating agreement is an executory contract and require the provisions of the agreement to be binding on the bankruptcy Trustee, including:Draft the operating agreement so that the bankruptcy of a member does not cause a dissociation of the member or a membership termination triggering a monetization of the member’s interest.Eliminate a member’s right to withdraw or dissociate from the LLC.Make sure the agreement does not allow an assignee to become a member without the consent of all the other members, and perhaps also the manager (except permitted transferees).Avoid ipso facto clauses, which are clauses that are conditioned on insolvency or financial condition of a bankrupt debtor prior to filing bankruptcy, the commencement of bankruptcy or the appointment of a bankruptcy Trustee. Draft the purchase price and terms the same regardless of the cause of the trigger. Include legitimate reasons why you need buy-sell provisions (other than creditor protection) such as keeping ownership in the family or with employees. Draft the provisions for the price and terms of a purchase fairly or based on an objective rationale (such as a longer period to pay if the trigger is due to unexpected circumstances and thus company cannot “plan ahead” for the repurchase obligation).State clearly the business purposes of the entity so that the bankruptcy court is less likely to disregard rights of non-debtor members.Emphasize the personal service aspect as part of the ownership by: Restricting managers to family members of employees; Requiring all owners to serve as managers and attend meetings;Stating that services provided by each owner are critical and unique and failure to perform will excuse the obligation of other owners to perform; Stating that family members have some experience or expertise that makes them uniquely suited to being the managers (but this may not actually apply to all family members);Requiring multiple generations to participate in management in order to transfer knowledge between family members;Including a provision that automatically terminates an owner's voting and managerial rights upon the bankruptcy of that owner, which should be effective since based on personal trust, etc.; andImposing fiduciary duties on the members, such as a duty to provide the LLC with information obtained in the course of the member’s business or affairs. However, be careful that this doesn’t give the bankruptcy Trustee a cause of action against the other members.Use higher percentage or unanimous voting requirements, and also consider requiring consent of the manager of an LLC for actions such as distributions and liquidations.Make the buy/sell price favorable to the other owners. For example, the price could to be determined by a third party appraiser selected by the company, and based on the interest being purchased after taking into account all applicable discounts, and to be paid over 9 years bearing interest at the AFR with no security. If the agreement includes a mandatory purchase or a put, particularly for cash, this may be helpful to the bankruptcy Trustee because it makes it easier to monetize the investment. This is a reason to avoid a mandatory purchase except on circumstances such as death.Is there a drag-along right, which in the hands of a Trustee would let the Trustee sell the entire company? If so consider eliminating this and rely on the sale of assets.Include a capital call provision that can be imposed on all owners. Making a call prior to the bankruptcy filing that the debtor member defaults on must be remedied by the Trustee prior to assumption of the contract.Be careful not to exercise a forfeiture provision which could result in a voidable preference transfer or a fraudulent conveyance.Include a statement that the operating agreement is intended to be an executory contract under 11 U.S.C. § 365(a).Long Haul Trucker. The Tax Court has ruled that a long-haul trucker who did not have a personal residence (he used a friend’s guest room when he was not on the road) was not entitled to deduct his costs on the road, because his permanent home was the back of his cab.Setting Residency. Retirees are increasing as a percentage of our population. The tax burden and cost of living for retirees varies widely from state to state. For example, some states tax Social Security benefits while other states offer special tax breaks for retirees, such as excluding all or part of social security, IRA and/or retirement plan income. With limited disposable income in retirement, will your retiring clients move to states in which their net after-tax income increases – especially states that offer warmer winters? Vacation homes have become a growing asset of U.S. residents. These clients need to deal with planning around ancillary probate and state death taxes for those properties. Moreover, they need to examine whether there are tax benefits to taking affirmative actions to change their tax domicile to the state where the vacation home is located. Trap: There is a potential negative demographic impacting home ownership. In January 2008, the Journal of the American Planning Association published an article by Dowell Myers and Sung Ho Ryu entitled “Aging Baby Boomers and the Generational Housing Bubble.” The article noted that baby boomers have significantly increased the size and value of U.S. housing over the last three decades. Not only have they driven up the value of their primary residences, but many boomers own second homes that have also increased in value. The continuing retirement of 79 million baby boomers could reverse this trend. The article notes: “We also expect that this change will make many more homes available for sale than there are buyers for them.” As baby boomers retire, downsize, or move to their second homes or into long term care facilities, they are expected to drop more homes on the market than it can easily absorb. The resulting oversupply could drive down the price of housing and potentially create blighted areas of unsold housing in areas with large boomer populations. The article notes that this trend has already started in Connecticut, Hawaii, New York, North Dakota, Pennsylvania, and West Virginia, with other states following in the years to come. According to the article, Arizona, Florida and Nevada will be the last to be impacted by this demographic bubble. The homes of U.S. households age 65 and older on average constitute roughly 33.1% of their net wealth. Estate and financial advisors need to encourage their clients to consider the impact on both their retirement and their estate if the value of their homes drops over the next several decades. Domicile Definitions. Domicile definitions for state tax purposes can vary substantially from state to state, and contradictory rules can create conflicts. A number of states are known to be especially aggressive on the issue.Residency and Liquidity Events. The state of tax domicile is particularly important for clients who are anticipating a major taxable liquidity event (e.g., sell of a low basis stock portfolio). Opportunity: Before the liquidity event occurs, consider moving the client’s tax domicile to a state where there is no tax cost or a lower tax cost. Among the elements to be considered in this change are: If possible, make the change of residency in the year before the event. Therefore, the client does not have to file a partial year state income tax return in his former state, with a copy of the federal income tax return being attached and showing the liquidity event, but with no payment to the state. If the taxpayer has localized income that requires filing a non-resident state income tax return, see if the state permits the business entity that generated the income to pay state income taxes on behalf of the non-residents. This can eliminate the requirement that non-residents attach their federal income tax return to the state income tax return.Do not have the taxpayer’s federal income tax return address be in the former state. The state and federal governments share that information. Do not have the client sign any sales agreements or letters of intent before the change in residency has been completed. Expatriates. In 2006, it was estimated that 6.0 million Americans were living abroad, up from 70,000 in 1966. According to a Congressional report, from 2000 through 2009, 2,802,000 people emigrated from the United States. The tax complexities increase when affluent U.S. citizens and resident aliens immigrate to other countries. Moreover, the rules governing wills, trusts, inheritances, Medical Directives and general powers of attorney in other nations are often substantially different than the U.S. rules. Even non-affluent expatriates need to consult with both US-based tax advisors and advisors in their country of residence and make sure their documents are coordinated between both countries and enforceable. Resident Aliens. The United States taxes the worldwide income and assets of its resident aliens, so defining a "resident alien" is a critical definition. For income tax purposes, a "resident alien" is defined in fairly objective terms. However, for transfer tax purposes, Treasury Regulation §20.0-1(b)(1) and 25.2501-1(b) provide: "A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal." (emphasis added). How exactly do you prove your "present intent" of not planning to leave the US?Trap: A person who resides in the United States illegally may still be considered a resident alien for purposes of federal transfer taxes. ******Research Sources: Francis Brogan and A.S Ross, Changing State of Domicile Is Easier Said Than Done, 39 Est. Plan. (WG&L) 03 (July 2012).Louis A. Mezzullo, The Mobile Client: Tax, Community Property, and Other Considerations, 803-3rd Tax Mgmt. (BNA).Checklists:RIA Checkpoint Planning Articles, §40,116, Checklist of points to consider in reviewing estate plan after move is made to another state. for a checklist for changing a client’s state of residence. for a Moving Notification ChecklistFederal Income, Deductions and CreditsThe federal Income Tax Code adopted in 1913 was 27 pages longPerspective: Code § 61 provides that “[e]xcept as otherwise provided in this subtitle, gross income means all income from whatever source derived.” Deductions and income exclusions (“loopholes” to their respective critics) are given by the grace of Congress and the paid urging of Washington lobbyists.Frequent Flyer Miles. In a 1995 technical advice memorandum, the IRS ruled that frequent flyer miles that were paid for by the business and retained by employees constituted taxable income to the employees. There was a bit of a resulting outcry. In IRS Announcement 2002-18, the IRS backtracked and noted that:“The IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively.” Since the announcement was issued the IRS has not adopted a formal policy for taxing miles generated by business travel. However, in a recent case, the Tax Court ruled that “Thank You Points” issued by Citibank for opening a new account would be taxable to recipients. Oscar Gift Baskets. In Internal Revenue Announcement 2006-128, the IRS announced that it had reached an accommodation with the Academy of Motion Picture Arts and Sciences. It settled tax obligations for gift baskets made before 2006, but in subsequent years, the recipient would be provided tax forms by the Academy noting their responsibility to pay income taxes on the value of their basket. It was reported that the top end Oscar gift baskets in 2015 were worth over $167,000. These rules would appear to apply to other event gift baskets and require sponsors of such programs to deliver 1099s to their guests. Whaling Charitable Deduction. Code §170(n) reads: "In the case of an individual who is recognized by the Alaska Eskimo Whaling Commission as a whaling captain charged with the responsibility of maintaining and carrying out sanctioned whaling activities and who engages in such activities during the taxable year, the amount described in paragraph (2) (to the extent such amount does not exceed $10,000 for the taxable year) shall be treated for purposes of this section as a charitable contribution." Service Animal. The costs for a service animal and its training, food, grooming, and veterinary care can be deductible as an itemized deduction for medical expense on Schedule A. Gifts to Political Organizations. Code § 84 provides that if appreciated property is gifted to a "political organization" (as defined in Code §527(e)(1)), then the appreciation in the donated asset is taxable to the donor and the political organization takes the donor's basis increased by the gain attributable to the donor. Marijuana Deductions. As of January 1, 2015, four states permit the sale of marijuana and 23 states permit its use for medical purposes. Code §208E was adopted in the 1982 and provides: “No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.” The IRS has generally allowed the direct costs of production to be deducted. It is interesting that this law applies to controlled substances even in states which permit their sale. The IRS has been enforcing this statute in the last several years. Other forms of illegal behavior (e.g., prostitution) can still deduct their reasonable business expenses. Mortgage Interest. Interest on a debt to finance a house is normally deductible only if the debt is secured against the house. The taxpayer taking the deducting taxpayer generally must hold title to the property. Opportunity: However, the Tax Court has ruled that if “equitable title” is held by someone who does not hold legal title, the equitable title holder may be entitled to the deduction. But the taxpayer must marshal sufficient facts to establish that they held sufficient burdens and benefits of ownership to be considered equitable owners. Losses on Annuities. Revenue Ruling 61-201 provides for an ordinary loss on the sale of a variable annuity where the variable annuity was a “refund” annuity originally purchased by the selling taxpayer with the intent to make a profit. There is no deduction for surrender charges. The central issue is not the deduction, but where you take it on the tax return: On Line 14 of 1040 as “Other Gains & Losses”? As a Miscellaneous Itemized Deduction, subject to a number of a potential 2% AGI Limit and Itemized Deduction Phase-out?Hire a Virgin. Code §932 and §934 provide significant tax benefits for U.S. citizens who move to the Virgin Islands and open a business that employs a minimum number of local residents.Breast Enhancement. A professional stripper may be able to deduct the cost of breast enhancement surgery as a business expense. Egg Donation. The Tax Court has ruled that compensation paid to an egg donor was taxed as ordinary income and was not excluded from income as damages for the pain and suffering associated with the harvesting of the eggs.IC-DISCs. An IC-DISC is a special domestic corporation which can significantly reduce a corporation's taxes on its export income.Medical Lodging. Code § 213(d) provides:“Amounts paid for lodging (not lavish or extravagant under the circumstances) while away from home primarily for and essential to medical care referred to in paragraph (1)(A) shall be treated as amounts paid for medical care if…….. there is no significant element of personal pleasure, recreation, or vacation in the travel away from home. The amount taken into account under the preceding sentence shall not exceed $50 for each night for each individual.” It appears that any lodging cost over $50 is automatically considered “lavish or extravagant.”Retirement Funds“Retirement kills more people than hard work ever did.” Malcolm ForbesPerspective: According to the Urban Institute, $9.5 trillion was held in defined contribution plans and IRAs at the end of 2012. Defined benefit plans held $2.3 trillion. Additional retirement and employee benefits are held in deferred compensation plans, stock options and other benefit plans. These benefits will continue to increase and will continue to be a major asset in many estates. The tax and dispositional aspects of such assets can be extremely complex, requiring meticulous planning and administration.Eliminating a Spousal Interest. Changes in beneficiary designations of an ERISA retirement plan generally require written approval of a spouse if the participant is married. However, IRAs do not have a similar requirement. In Charles Schwab v. Debickero, a husband rolled a 401(k) into an IRA after retirement. The husband named his children as the IRA beneficiaries. When the IRA owner passed away, his wife argued that because her husband had rolled his 401(k) into the IRA, she should receive the same protections that his ERISA qualified retirement plan had provided to her. The Ninth Circuit disagreed: “Thus, under both § 401(a) and the accompanying regulations, there is no basis for imposing on the Schwab IRA the automatic survivor annuity requirements of § 401(a)(11) and overriding the beneficiary designations rightfully made by Wilson in establishing the account.”Opportunity: Clients should consider rolling their retirement assets out of an ERISA plan if they want to limit their surviving spouse’s control over and/or benefit from the funds. Trap: Make sure to examine the elective share rules in the couple’s domicile state to make sure there are no direct or indirect statutory rights to the IRA that are given to the surviving spouse. If such potential claims exist, have the spouse waive their rights, but make sure the waiver is in total compliance with any statutory requirements. For example, the state may require “fair disclosure” of the impact of the waiver. Withdrawal Penalty. Be careful in recommending to a surviving spouse who is below age 59? to automatically roll over their deceased spouse’s IRA to the surviving spouse’s IRA account. Trap: If the spouse needs the funds before age 59?, the distribution may be subject to a 10% early withdrawal penalty. Better to maintain the IRA as an inherited IRA.IRAs for Children. Business owners should consider hiring children or grandchildren to do work in the business or to be pictured in advertising. Opportunity: If it is made for ordinary and necessary purposes, a reasonable payment is deductible by the business. The earned income is not subject to the Kiddie Tax and can be used to fund the IRA or Roth IRA for the child. At lower income tax levels, the child may have little to no income tax liability. Self-Directed IRAs and Business Investments. There seems to have been a major growth in advisors recommending that IRA owners invest their IRA funds in closely held business interests. The promoters sometimes brush over the complicated rules and risks that clients should be aware of. Trap: Not only are the small business financial risks a bad choice for most retirement assets like IRAs, but it is easy to inadvertently stumble into major problems. A prime example is the Peek v. Commissioner decision. The taxpayer invested funds from his IRA in a small business and then personally guaranteed the loans of the small business. The Tax Court ruled: “Each of [taxpayers’] personal guaranties of the …. loan was an indirect extension of credit to the IRAs, which is a prohibited transaction; and under I.R.C. sec. 408(e), the accounts that held …. stock ceased to be IRAs. Held, further, the gains realized on the sale of the …. stock are included in [taxpayers’] income. Held, further, [taxpayers] are liable for the accuracy-related penalty under I.R.C. sec. 6662.”Net Unrealized Appreciation. Code § 402(e)(4) provides that when a qualified retirement plan distributes employer stock in a lump sum to a plan participant, the employee is only taxed on the retirement plan's basis in the stock. There are three different basis elements when dealing with employer stock distributed from a qualified plan and each element can have a different tax ramification: The basis of the retirement plan in the stock at time of distribution. This amount is taxable at the time of distribution as ordinary income and adds to the plan participant’s tax basis in the stock. The difference between the fair market value of the stock and the plan’s basis in the stock upon distribution. This is the "net unrealized appreciation" (often called "NUA") in the employer stock upon distribution to the plan participant and is not subject to tax upon distribution from the qualified plan. However, the IRS treats NUA as IRD and does not allow a basis step-up at time of death under Code § 1014. The appreciation which occurs after the stock is distributed. This component of the stock is considered gain from the sale of a capital asset and will be provided a step up in basis at the time of the owner’s death. Trap: The plan participant who does not rollover the employer stock can receive capital gains treatment when the stock is sold. If the employee/participant rolls the entire retirement plan distribution into an IRA, the benefit of section 402(e)(4) rule is effectively eliminated. Opportunity: Section 402(e)(4)(B) permits the plan participant to elect to have the NUA taxable at the time of distribution. Assume a plan participant is terminally ill and has a NOL carry-forward that will expire at the participant's death. By electing to be taxable on the NUA, the loss carry-forward may reduce or eliminate the taxable income created by the election. Moreover, the stock is not treated as IRD when the participant dies.Trap: The use of an S corporation owned in whole or part by an employee stock ownership plan (ESOP) can provide for tremendous tax savings. However, the untaxed S corporation earnings of the ESOP increase the tax basis of the ESOP in the employer stock. If this basis is significant, the tax cost of not making the rollover may be prohibitive. Always run the numbers and have the client acknowledge the tax cost. Opportunity: If the NUA is treated as IRD, how do you reduce the tax on the gain? If the stock is a "qualified appreciated stock" as defined in Code §170(e)(5), the owner could use the stock to fund charitable contributions. The unrealized gain is generally not recognized in such contributions and the donor receives a charitable deduction equal to the fair market value of the contributed marketable security. Similarly, if the donor had charitable bequests in his or her will, a special allocation of the NUA qualified appreciated stock to the charity could wipe out the adverse IRD cost of the stock.Caution: The Obama Administration has proposed an elimination of the tax benefits of NUA in its 2016 Budget proposal. Beneficiary Designations. Advisors should encourage clients to double check their retirement plan and IRA beneficiaries every couple years and make sure the plan administrator has acknowledged receipt of the last designation. Always discuss the pros and cons of each beneficiary designation with clients as a part of the estate planning process. Trap: Clients may directly or indirectly (e.g., by failure to name a beneficiary) name their estates as the beneficiary of their IRA. This mistake can be costly: The client’s heirs lose the right to make stretch-out distribution of the funds over the heir’s life expectancy. If the account is a Roth IRA, all funds must be withdrawn within five years. However if the IRA is a traditional IRA and the deceased owner died after April 1 of the year he or she would have turned 70?, then distributions can be taken out over the deceased account owner’s remaining life expectancy. The IRA funds become a part of the estate and may be accessible to creditors of the estate. If a creditor forces withdrawals from the IRA to cover debts, the estate is responsible for any income taxes and any penalties resulting from the withdrawal. In some states, the lack of a specific beneficiary may open the funds up to a spousal elective share claim. Inherited IRAs & Bankruptcy. In the Clark v. Rameker decision, the U.S. Supreme Court unanimously ruled that an inherited IRA did not have the bankruptcy protection of an ERISA retirement account or a taxpayer’s own IRA. State statutes may offer some partial protections for IRAs and other retirement benefits.Trap: If a creditor seizes funds from an inherited IRA to cover the owner’s debts, the owner is responsible for the income taxes resulting from the withdrawal. Opportunity: To provide some asset protection and create a gate-keeper between the asset and the beneficiary, clients should consider using conduit trusts as designated beneficiaries of retirement accounts and IRAs.No Rollover for Inherited IRAs. Code § 408(d)(3)(C) prohibits rollover treatment in the case of an inherited IRA. There is no 60 day rollover period for inherited IRAs. Once the funds are pulled from the account they are taxable and cannot be repaid to the account to avoid taxation. Appropriate Trustee-to-Trustee transfers of inherited IRAs will not create current taxable to the account holder. Post-Mortem IRA Contributions. A taxpayer’s death terminates the right to make an IRA contribution, including by his estate. However, a surviving spouse may still be able to make a contribution to a spousal IRA.Inherited IRAs and Murder. In PLR 201008049, the IRS provided that an IRA could be inherited by the named beneficiary, even when the beneficiary had murdered the IRA account owner and there was a state statute that denied inheritances from the deceased to the murderer.******Checklist: Fidelity Investments: Retirement Planning Checklist available at Elderly and Entitlement ProgramsThere will be a growing concern of many people to make sure that they can pay their own support expenses rather than transfer planning.? Their main concern is “trying to avoid a cat food diet and a Wal-Mart greeters’ pension.”? Life is forcing our clients into a different paradigm.? They are not as concerned with what happens “when I die” as concerned with “how to get to when I die”. Mark EdwardsPerspective: “The Center for Retirement Research at Boston College estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until 65, two years longer than the average retirement age today.” This demographic will put intense pressure on governmental entitlement programs and increase the likelihood of limitations on federal entitlement programs for affluent Americans. Demographics: There are significant pressures that are continuing to build on entitlement programs and the elderly, including (but certainly not limited to): Americans in their 40s and 50s are being sandwiched in their responsibilities and as result are having a hard time saving for their own retirement. According to the Pew Research Center, 47% of these people have an elderly parent and have a minor child or a dependent adult child. About 15% are supporting both older and younger family members. Their estate planning may reflect the possible support of elderly parents (e.g., will the surviving spouse sacrifice to support a father in law the way a child would?) and the need to create inheritance restraints for children who have failed to launch.One result of the financial, mental, and physical stresses on the elderly is the number of elderly who are moving in with their children. The U.S. Census Bureau reported that in 2000, roughly 2.2 million older parents lived with their children. By 2010, the number was 3.9 million and growing. This demographic raises the potential of conflict among siblings over the care, financial contributions to the resident household and decision making. It is an issue that advisors need to directly address in the planning for the elderly.On the opposite end of the spectrum are elderly who do not live with their descendants and have the financial resources to support themselves. According to a Pew Report, in 1900 57% of adults over the age of 65 lived in a multi-generation household. By 1990 the percentage was only 17%, growing to 20% in 2010. Preserving their independence is often a strong issue for many elderly and they are willing to pay the cost of maintaining that independence, such as obtaining in home nursing care to stay in their home as long as possible. Longer life expectancy is creating other issues. According to an article in the Wall Street Journal, the average 65 year old man has a 60% chance of living to age 80 and a 40% chance of reaching age 85. An average 65 year old woman has a 71% chance of living to age 80 and a 53% chance of reaching age 85. The problem is that many of these folks never expected to live that long and do not have the financial resources to secure their retirement. These destitute elderly will create more work for elder law attorneys and more support pressure on their descendants and the government. According to a study by Allianz Life Insurance Company of North America, 82% of married respondents (ages 40-49) with children have a greater fear of outliving their assets then they did of dying. Estate planning and its costs are not on the front burner of most of these potential clients. This is a largely untapped market of reluctant clients who need basic planning documents for a low cost fee. Trying to deliver that low cost fee without committing malpractice may be difficult, given all of the non-taxable family issues that can occur (for example: a third marriage with children and supported parents on both sides of the family). State Taxation. A number of states have provisions for imposing state income taxes on Social Security recipients, with the rules varying widely. There are four categories of potential taxation: States which have no income tax, States which entirely exclude social security from state income taxes,States which mirror the federal tax rules on taxing social security,States which tax social security subject to local limitations and exceptions. Change in Entitlement Benefits. Contrary to the general perception, social security benefits are not a guaranteed contractual right. In Flemming v. Nestor, the U.S. Supreme Court ruled that Congress retains the ability to reduce or even eliminate Social Security benefits at any time. It should be expected that this ruling would apply equally to any other entitlement benefits, such as Medicaid and Medicare. ******Resources: There is a growing recognition of the unique financial and estate planning issues of the elderly and their wealth-related decision processes. See more information at the American Institute of Financial Gerontology at Information for the Elderly and Caregivers, ACTEC, (last visited Apr. 14, 2015).To estimate your Social Security benefits, go to State Taxes and DispositionsIn 1820, Missouri imposed a tax on all Bachelors between the ages of 21 and 50Perspective: As if the federal rules were not complicated enough, an ever changing mosaic of state, city and local laws are constantly evolving and complicating the lives of taxpayers and their advisors. Gifts in Contemplation of Death. Most tax practitioners have a decent understanding of the few “contemplation of death” rules that remain in the federal estate tax code. Some states have rules that provide that certain “gifts in contemplation of death” are subject to a state death tax (generally an inheritance tax). As of January 1, 2015, these states include Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. The rules vary widely (e.g., the period of “contemplation”) and in some cases are rebuttable. There are a number of states which had contemplation of death inclusions, but the repeal of their state death taxes effectively eliminated the issue. These states include Indiana, Ohio, and Tennessee. Trap: If a gift is taxable after the donor’s death, then a number of issues can arise, including: The client has not eliminated the state death tax on the gifted assets, but for federal tax purposes, they may have lost the potential for a step up in basis of the gifted assets.Can the estate successfully rebut the inclusion in the taxable estate (e.g., an unexpected death)? Does the inclusion of the gift result in an estate becoming taxable for state tax purposes? Does the donee have the funds to pay the inheritance tax?What fiduciary responsibilities does the estate administrator have for determining the gifts that were made and reporting them to the Department of Revenue? Are exceptions made for annual exclusion gifts?Death Bed Gifting. Only Connecticut has a state gift tax. Minnesota adopted a gift tax on June 30, 2013 and then retroactively revoked it on March 21, 2014.Opportunity: For clients facing a tax gap between the state and federal death tax exemptions, making lifetime gifts may be a way to reduce the state death tax.With the shrinkage in the difference in tax rates for gift taxes and income taxes (including capital gains taxes), advisors who are recommending gifts of low basis assets should calculate when the potential transfer tax savings of the gift overcomes the expected income tax cost of a carryover basis. If the donor dies proximate to the time of the gift, with a non-taxable estate, the donees may question the loss of a step-up in basis that would have occurred at the donor's death. Traps: Make sure the transfer is completed before the donor’s passing and make sure the donor’s domicile state or the state where the property is located does not have a “contemplation of death” statute. See the prior discussion.State Income Taxation of Estate, Trusts and Beneficiaries. As if tax planning was not complicated enough, the widely varying state income tax laws are creating a new tax specialty: Professionals who specialize in multi-jurisdictional legal and tax issues for fiduciaries, grantors and beneficiaries. For example, what are the income tax consequences when a grantor living in New York City creates an irrevocable trust owning assets in Georgia, with Florida and Delaware Co-Trustees and beneficiaries living in California, New Jersey and Pennsylvania? Resource: An excellent overview of the state estate income tax rules can be found at Jeffrey A. Schoenblum, CCH Multistate Guide to Estate Planning, Table 12, Contacts Resulting in State Taxation of an Estate’s Income; See also 2013 Trust Nexus Survey - Bloomberg BNA Special Report.Global State Tax Changes. State tax laws are becoming more complex. For example: Historically, states with income and estate taxes relied upon the federal Tax Code as the base of their own tax systems, with various adjustments. However, states have increasingly decoupled from the federal Tax Code in significant ways, increasing the tax compliance and complexity for taxpayers. Tax nexus and apportionment issues are becoming more inconsistent from state to state. For example, New York recently won a case that permitted it to impose sales taxes on sales in which the nexus connection was solely through the internet—the seller did not have a physical presence in the state. A workable national standard for state tax nexus is long overdue. In a search for new tax revenues, states are increasingly trying to find creative ways to tax non-residents (e.g., high hotel and car rental fees; higher real estate taxes on homes of non-residents). In a search for economic benefits, states are creating special tax breaks for "desirable" businesses (e.g., movie and television production) and residents (e.g., retirees). States in increasing number are either eliminating their Death Taxes or significantly increasing the exemption amounts. State Gap Planning. In 2015, the federal estate, gift and generation skipping exemptions each total $5,430,000. With portability, the exemption for a married couple is effectively doubled (recognizing that the portable exemption of the first-to-die spouse does not have a CPI increase). However, many states have much lower estate exemptions, creating a situation in which planning for states Death Taxes becomes increasingly important. Trap: If an Estate incurs a federal estate tax, any state death tax is deductible for federal purposes, which reduces the impact of the state tax by 40% (i.e., the federal transfer tax rate). Effectively any estate that falls between the state and federal exemptions incurs the full cost of the state tax—but estates subject to both state and federal estate taxes receive the benefit of the federal deduction.Portability. As of the end of 2014, it appears that only Delaware and Hawaii have state statutes permitting portability for state estate tax purposes. During 2014, portability bills died in Illinois, Maryland, Minnesota, Rhode Island and Vermont. A Few Interesting State Tax Laws. There is always the interesting array of state tax laws, including these gems: In Alabama you can deduct $1,000 for building a radioactive fallout shelter. In Utah a special 10% tax is imposed on sexually explicit businesses. In Texas, there is a $5.00 tax on admission to strip clubs. In Tennessee there is a "litigation tax" imposed on the filing of "every original civil and criminal case before each court."Arkansas has an extra 6% sales tax on tattoos and body piercings. In Connecticut adult diapers are not subject to a sales tax - but baby diapers are subject to the tax. Guess it's a matter of who's voting. Alabama has a 10% "privilege tax" on any business or person who "sells or stores or uses or otherwise consumes packages of playing cards containing not more than 54 cards." In addition, each retail dealer who sells playing cards pays an annual license tax of $2. California has a 33% sales tax on cold food, hot coffee, hot chocolate and hot tea purchased from vending machines. In over 23 states if you acquire illegal drugs you are required to report the purchase to the state revenue authorities and pay an illegal drugs tax. There appears to have been little voluntary compliance, but it has been a nice revenue sources for many states after drug busts occur. In Vermont (and some other states) funeral charges are not subject to sales taxes. In many states, the sale of the United States flag is not subject to a sales tax. In Connecticut, "[t]he sale, furnishing or service of water, steam and telegraph when delivered to consumers through mains, lines, pipes or bottles" is exempt from sales tax (emphasis added). Mississippi imposed the first state sales tax in 1932 to add revenue during the depression. As of January 1, 2015, the only states without a general state-wide sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon. In Kansas, riding in a balloon that is attached to the ground incurs an amusement tax. If the balloon is untethered, it is considered in transportation and is not subject to the tax.New Mexico residents who are over age 100 are not subject to the state income tax.In Sitka, Alaska residents over age 65 are not subject to most sales taxes.Nevada provides a free deck of cards for each state income tax return that is filed. Meanwhile, Alabama imposes an extra sales tax of 10% on decks of 54 cards or less.******Resources: For an excellent schedule on state death taxes, go the Charles Fox schedule (updated annually) at the NAEPC Journal at or at . Jeffrey A. Schoenblum, CCH Multistate Guide to Estate Planning (2015).Self-Employment and Payroll TaxesDefinition of a Tax Attorney: Someone who solves a problem youdidn’t know you had in a way you don’t understand.Perspective: When the employer portion of payroll taxes are taken into account, most U.S. taxpayers pay more in Social Security and Medicare taxes than they pay in income taxes. Planning for the reduction of such taxes is a relatively unexplored area of tax planning. Fiduciary Earned Income. When a fiduciary receives a payment for performing fiduciary functions, the income is taxable at ordinary income tax rates. However, unless the fiduciary is in the trade or business of serving as a fiduciary, the income is not generally subject to self-employment or payroll taxes. Street Hustling. The courts have ruled that “street-hustling” can be a trade or business subject to self-employment taxes and income taxes. No one escapes the long arm of the revenue collector. Severance Pay and FICA. In United States v. Quality Stores, the U.S. Supreme Court unanimously ruled that most severance payments made to employees who are involuntarily terminated are subject to FICA taxes. In IRS Announcement 2015-8, the IRS provided guidelines for the application of the Court’s decision. Non-Compete Agreements. Non-compete agreements are a protective measure used by many businesses and buyers of businesses. A number of states provide for significant limitations on non-compete agreements. Opportunity. The Ninth Circuit Court of Appeals has ruled that non-compete agreements which are not “tied to the quantity or quality of a taxpayer's prior labor” are not subject to self-employment taxes because the recipient is not in a trade or business. To be careful, do not tie the non-compete to any prior services by the recipient and do not have the same agreement cover consulting or other services being provided to the payer.Refund of Social Security Taxes. If an employer overpays its employees’ Social Security taxes by having more than one source of earnings (i.e., salaries paid to the same employees by separate business entities), then the portion of the taxes paid by the employee can be refunded to the employee. Unlike the employee’s taxes, there is no refund of the employer overpayment of payroll taxes. Common Paymaster. Commonly controlled corporations can reduce their payroll taxes for commonly employed workers using the "common paymaster" rules. Code §3121(s) reads: "For purposes of sections 3102 [Deduction of Taxes from Wages], 3111 [Rate of the Payroll Tax] and 3121(a)(1), if two or more related corporations concurrently employ the same individual and compensate such individual through a common paymaster which is one of such corporations, each such corporation shall be considered to have paid as remuneration to such individual only the amounts actually disbursed by it to such individual and shall not be considered to have paid as remuneration to such individual amounts actually disbursed to such individual by another of such corporations." Trap: The states deal with the common paymaster rules in significantly different ways. For example, for state payroll tax purposes Texas limits the use of common paymaster accounting. Payroll Tax Deficiency. Business owners with less than $25,000 of delinquent payroll taxes can apply for the In-Business Trust Fund Express Installment Agreement without having to provide the IRS a current financial statement. Reimbursement of Health Insurance. The IRS has taken the position that employers who reimburse the health insurance costs of their employees on a tax free or after-tax basis are subject to a $100 per day per employee excise tax. See: FAQs about Affordable Care Act Implementation, Internal Revenue Service (Nov. 6, 2014). Successor Employer. Treasury Regulations provide that in certain circumstances a successor business which purchases substantially all of the assets of another trade or business can apply the annual FICA and FUTA wage limitations using the payroll of both companies. Electing out of Social Security. Pursuant to Code §1402(e)(1) a minister who meets certain qualifications can elect out of the Social Security system by filing IRS form 4361 by the due date of the form 1040 for the second year the minister had at least $400 of ministry-related income. Pursuant to Code §1402(g), members of certain religious faiths can also elect out of the social security system. S Corporations and Earned Income. Advisors have often advised their clients who own S corporations to minimize their personal salaries in order to increase their S corporation dividends—effectively reducing their personal payroll taxes. As a result, the IRS has consistently raised the issue of what should be the reasonable compensation of an S corporation shareholder/employee. A recent decision, Watson v. Commissioner, provides advisors a helpful guide on properly determining a shareholder/employee’s reasonable compensation. Tax Compliance“You did not notice $25 million was missing from your W-2?”Prosecutor Ann Donnelly to former Tyco CEO Dennis Kozlowski at his trial for securities fraudPerspective: The 2012 Taxpayer Advocate Report noted that “The number of civil tax penalties has increased from about 14 in 1954 to more than 130 today.” Continuing tax complexity, coupled with more penalties and an aggressive auditor, can be a recipe for a taxpayer’s disaster. Tax Complexity. In 2007, USA Today provided five tax preparers with a set of facts and asked each of them to prepare an income tax return. The five preparers produced five different tax results and could not agree among themselves on which result was correct. From 1987 to 1998, Money magazine conducted an annual study in which it submitted facts to a group of tax return preparers. In Money's 1998 report, forty-six tax return preparers had forty-six different tax results, with the tax liability ranging from $34,240 to $68,912. This was the 7th time that Money noted that none of the tax return preparers came to the same conclusion. In an April 4, 2006 report, the Government Accountability Office noted that it submitted tax preparation information to nineteen commercial tax preparers around the U.S. to determine how accurate their work was. Every one of the completed returns contained errors and some overlooked common deductions. But it is not just the tax preparers who are confused. In 2002, the IRS reported that 28% of the answers given by its call centers were wrong, 12% were incomplete, and 12% of the time taxpayers' questions were not answered and taxpayers were told to do their own research. If tax professionals don't know how to handle the complexity of our tax laws, what hope does the average taxpayer have? Beware the Ungrateful Tax Cheat. In Thomas v. UBS AG, a proposed class of “tax cheats” tried to sue UBS for the company’s failure to prevent them from evading their U.S. income taxes. The Seventh Circuit noted: “The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties…” In denying a class certification for other UBS-related tax cheats, the court noted: “[The three plaintiffs] argue rather that the bank should have prevented them from violating the law. This is like suing one's parents to recover tax penalties one has paid, on the ground that the parents had failed to bring one up to be an honest person who would not evade taxes and so would not subject himself to penalties.”Lavish Lifestyle as Willful Tax Evasion. The Bankruptcy Code provides that a debtor may not discharge any tax debts “with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax.” In Hawkins v. Franchise Tax Board of California and Internal Revenue Service, the government argued that living a lavish lifestyle was a willful attempt to evade applicable taxes. The Ninth Circuit Court of Appeals noted: “The primary, but not exclusive, theory of the IRS and FTB was that the Hawkinses’ maintenance of a rich lifestyle after their living expenses exceeded their income constituted a willful attempt to evade taxes.” (emphasis added) The court ruled: “[A] mere showing of spending in excess of income is not sufficient to establish the required intent to evade tax; the government must establish that the debtor took the actions with the specific intent of evading taxes.” The Court noted that many of the other Circuit Courts had interpreted the bankruptcy statute differently, but noted that most of those cases involve intentional acts or omissions designed to evade taxes. Trap: Why is this significant? As the Court noted in Hawkins, the above language from the Bankruptcy Code substantially mirrors the language of Code § 7201, which makes “willfully attempt in any manner to evade or defeat any tax” a criminal felony. Could this be a new argument for the IRS?Urban Tax Myths. As you might expect, there are a number of untrue but interesting urban tax myths on tax compliance that have grown up over time, including: Not using the IRS provided pre-printed address label removes you from the potential IRS audit base. Nothing removes you from the long arms of the tax auditor, except perhaps death, and even then you have to wait for the statute of limitations to run.If you write “Unconstitutional” on the front of your income tax return and send it to the IRS, they will never tax you again. It will not work, but it is an assured way to gain “special” attention from the IRS!A similar argument to the above tax evasion idea is that "Filing a tax return violates my Fifth Amendment right against self-incrimination!" Let's just say that the courts have not been sympathetic to the argument, and most of its vocal proponents are eating at the government's expense. A similar argument is that the income tax is a "voluntary" tax. The theory goes that all you have to do is stop volunteering to pay it and the IRS will leave you alone. They will leave you alone—behind some 40 foot barbed-wire-topped concrete plexity and the Paid Professional. Tax preparer penalties and recent rulings have undercut the extent to which clients can rely upon the advice of their paid professionals—adding another layer of complexity to tax planning. For example:In the April 4, 2013 decision of Knappe v. United States, the Ninth Circuit Court of Appeals ruled that an executor cannot abate a late filing penalty based upon advice of their accountant on the proper tax return filing date for an estate tax return, when an extension was filed. The court ruled that because the rules are not ambiguous, the accountant's advice was not substantive and the executor was not reasonable in relying upon the accountant's unequivocal (but erroneous) advice. A number of recent decisions have also provided that reliance upon software tax return programs will not necessarily protect a taxpayer from penalties.The growth of tax preparer penalties has added even greater complexity to the tax system, with tax preparers effectively taking on some liability for their clients' filings. Reliance upon the IRS. Practitioners and their clients are often under the mistaken belief that they can rely upon the opinions provided to them by the IRS. Unfortunately, this is not the case. For example: In Bobrow v. Commissioner, the Tax Court ruled that IRS publications that provided incorrect information are not substantial enough authority for a taxpayer to avoid the 20% accuracy-related penalty. Section 601.601(d)(2)(v)(e), Statement of Procedural Rules, provides: “Taxpayers generally may rely upon Revenue Rulings published in the Bulletin in determining the tax treatment of their own transactions and need not request specific rulings applying the principles of a published Revenue Ruling to the facts of their particular cases. However, since each Revenue Ruling represents the conclusion of the Service as to the application of the law to the entire state of facts involved, taxpayers, Service personnel, and others concerned are cautioned against reaching the same conclusion in other cases unless the facts and circumstances are substantially the same. They should consider the effect of subsequent legislation, regulations, court decisions, and revenue rulings.” (emphasis added)Internal Revenue Manual section 20.1.1.3.3.4.1 provides: “The IRS may provide penalty relief based on a taxpayer’s reliance on erroneous oral advice from the IRS. The IRS is required by IRC 6404(f) and Treas. Reg. 301.6404–3 to abate any portion of any penalty attributable to erroneous written advice furnished by an employee acting in his or her official capacity. Administratively, the IRS has extended this relief to include erroneous oral advice when appropriate.”Accuracy Related Penalty. According to the IRS Taxpayer Advocate Service: “The IRS’s decision not to abate inapplicable penalties illustrates its resource-driven approach to them. As described in prior reports, the IRS continues to propose penalties automatically when they might apply — before performing a careful analysis of the relevant facts and circumstances — and then burdens taxpayers by requiring them to prove the penalties do not apply. For example, in fiscal year (FY) 2012 the IRS sent over 93,000 (CP 2000) letters as part of its matching program, which proposed nearly $100 million in accuracy-related penalties without first contacting the taxpayers to determine the reason for the apparent mismatch. Thus, contrary to congressional intent, the IRS automatically assumes the taxpayer acted negligently and places the burden on the taxpayer to prove otherwise.” Interesting Audit Statistics. For the fiscal year ending September 30, 2012, the IRS reported that the effective audit rate for estates over $10 million was 116%. Overall 30% of all estate tax returns were audited. The 2013 IRS Data Book (covering the period from October 1, 2012 to September 30, 2013) noted that, on an overall basis, individuals and small businesses had roughly a 1% chance of audit. If you are curious about the common IRS income tax audit triggers, go to: Joy Taylor, 15 Reasons You Might Get Audited, Kiplinger (March 2015). In 2012, the IRS reported a 93% conviction rate on criminal tax fraud cases.Substantively Answering the IRS. In Thompson v. Commissioner, Mr. Thompson received an income tax notice of deficiency from the IRS which he apparently ignored. The notice was followed by a notice of levy. He responded to the notice of levy with a letter saying: “I don’t owe you guys anything.” Despite numerous opportunities, the taxpayer never provided any substantive arguments to the IRS on why he did not have a tax liability. The Tax Court ruled that his consistent failure effectively negated any future right to object to the tax lien that was eventually filed against him. Offshore Finances. Over 80 countries and 77,000 financial institutions now share financial data on U.S. taxpayers with the U.S. government. The secrecy of an offshore account is just not what it used to be. Since 2009, the IRS reports that it has collected over $7.0 billion from foreign account disclosures. S Corporation Returns. In addition to the Willful Failure to File Penalty of Code § 7203, Code § 6699(a) imposes a potentially stiff penalty on S corporations for late filing of tax returns without cause. The penalty is $195 per month, multiplied by the number of shareholders.Electronic Filing of IRS form 2848. The IRS has terminated its program that permitted internet filing of form 2848, Power of Attorney. The new rules provide that the form must be filed by mail or fax. See: Form 2848, Power of Attorney and Declaration of Representative, Internal Revenue Service. Private Letter Rulings. Effective as of February 1, 2015, the IRS has increased the cost of private letter rulings. The top fee increased from $19,000 to $28,300. There are a number of different fee levels.Tax Transcript. If you need a taxpayer’s tax transcript, go to for same day delivery.Practicing in Complexity“About half the practice of a decent lawyer consists in telling would-be clients that they are damned fools and should stop.” Eli U. RootAll of this complexity creates a number of tax practice imperatives that tax advisors should consider, including: Never think you know all of the exceptions, limitations, definitions, exclusions and unexpected consequences of any tax matter. Run most client issues through the Code, rulings, and regulations rather, than relying upon your memory. In most instances, it is strongly advisable to run the math and see the final result of any tax advice. There are too many limitations affecting income, deductions, and credits to do it in your head, and the actual results will often surprise you. When the tax law changes, spend the time to review both the terms of the law and their practical implications. Work to understand the practical implications of the changes and how to describe them to clients without going over their In most tax and estate planning, adopt as flexible an approach as possible so that unexpected events or problems can be fixed as well as possible. Narrow your tax practice niches to those areas you know well and can keep current in. Don't cavalierly wander into other tax niches without first doing substantial study and research. Beware of state and local tax complexities, particularly for clients and assets in states in which you do not practice (e.g., the Florida homestead rules are perilous for the uninitiated).Know what you don't know. For example, if you are not going to keep up with the rules governing qualified plans, entitlement planning, or tax controversies, stay out of the niches. Your clients are constantly bombarded with a constant stream of highly questionable tax advice (e.g., Ohio failed to properly ratify the 16th Amendment so you do not need to pay any income taxes). If the client decides to walk down a questionable path, one of the best things you can do it terminate your legal engagement to avoid getting tangled up in the future blowback. According to the Report of the Estate Planning in the 21st Century Task Force at the 2011 ACTEC Annual Meeting, a significant portion of today’s estate planning attorneys are in their 50s and 60s. Like their baby boomer peers, they are getting ready to retire, just there is an expansion of tax and estate planning work. The supply of experienced tax and estate planning attorneys will be diminishing just as the demand is increasing. Not a bad place to be for a trained tax and estate planning attorney in his or her 30s or 40s. ******Checklist: Avi Z. Kestenbaum, A Practitioners Risk Assessment Checklist, Est. Plan. Newsletter (LISI), no. 1636, May 5, 2010.Conclusion:It is the authors’ perspective that the complexity of the Tax Code has effectively broken our tax system. Taxes will never be static. There are too many evolving factors to expect or even encourage an unchanging set of tax rules. But what is needed is a simpler and more consistent system that at least looks like it was designed on purpose. In the interim, there will be plenty of work for tax advisors. HOPE THIS HELPS YOU HELP OTHERS MAKE A?POSITIVE DIFFERENCE!?Lauren Detzel Jeff Scroggin?CITE AS:?LISI?Estate?Planning Newsletter #2307?(May 5, 2015) at? 2015, FIT, Inc. and Lauren Detzel. All Rights Reserved. Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.?All quotes used herein are the property of the respective authors. The quotes contained herein are for the sole use as an educational reference for the readers of this commentary. All other uses are in violation of international copyright laws. This commentary and its use are solely and exclusively for educational reference and falls under the "fair use" sections of U.S. copyright law. As teaching materials, this material is intended to aid readers in obtaining a more through knowledge of the subject matter. Nothing herein shall be deemed to constitute tax, legal or financial advice for any particular client or purpose. The materials are not written for the purpose of avoiding penalties under the Internal Revenue Code, nor to promote any concept, technique or transaction. The materials do not discuss every aspect of a given issue and may omit exceptions, qualifications, or other matters that may be relevant. While we have been diligent to ensure the accuracy of these materials, we assume no responsibility for any reader's or client's reliance on these materials. Particular facts may change the expected outcomes discussed in these materials. The reader bears to sole responsibility for evaluating this material and the relevant facts that lead them to any conclusions. ................
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