Starting with the year 2004, the following numbers will be applicable:
· The applicable exclusion amount for estates (that is the amount of your estate that will not generate an estate tax) increases to $1,500,000.00. So, if you have an estate of $1,100,000 and were thinking you needed to get rid of $100,000 to avoid an estate tax, you have solved your problem by living until January 1, 2004. Of course, if you don't live until 2004, your estate will owe some tax.
· Starting with 2004, the Generation Skipping Transfer Tax exemption tracks the applicable exemption amount so those reverse QTIP marital trusts that you never understood the reason for, are no longer necessary for almost all clients.
· Starting with 2004, the QFOBI deduction for qualified family owned business interests is repealed. This is because the $1.5 million applicable exemption amount is now greater than the $1,300,000 QFOBI deductible amount. The QFOBI boondoggle that would have required probably more attorneys and accountants fees to determine how it should be applied than would be available under the deduction to the estate.
· The annual gift tax exclusion amount per donee remains at $11,000 and the gift tax exemption amount over lifetime remains at $1,000,000. It is still the case that you exceed $11,000 in gifting to a particular individual in a year, then you will have to file a gift tax return and apply the amount of the excess to your lifetime gift tax exemption amount. When you cumulatively go over $1,000,000 in taxable gifts, then you will have to pay gift taxes on the excess and subsequent gifts at the then current rates, which until 2009 or changed by Congress and the President, will be 41%. Remember, gift taxes are taxed on the gift not the gift plus the tax on it as estate taxes are. Generally speaking, gift taxes are payable by the donor.
In January of 2001, the United States Treasury issued proposed
regulations on the Minimum Distribution requirements for IRAs.
These proposed regulations substantially simplified what had been a
compendium of complex and confusing rules that had many practitioners and IRA
owners confused. In April 2002, the
regulations, with some further changes, were made final.
All breathed a sigh of relief and went to work crafting beneficiary
designations that met the new regulation requirements.
Part of the rules deal with what are known as "separate
shares." Under the rules regarding separate shares, if you have three
children that will take your IRA by way of a trust, it was believed that if you
were sufficiently clear in delineating the shares and the trust shares were
assigned to the beneficiary by the end of the year following the year of death,
then each share beneficiary's life expectancy will determine the period over
which the payments must be made and hence the fractions of the IRA payable in
each year, i.e. a 40 year old son would take his share out over 43.6 years and a
60 year old sister would take her share out over 25.2 years.
The IRS, in PLR 200234074, subscribed to this view and in so doing
announced its policy. Now, in 3 PLRs recently issued it has recanted that policy
and announced that its new rule is that all "shares" will have the
distribution period of the shortest life expectancy. Then, the son must take out his share in the same number of
years as his aunt.
These rulings require all of us to rethink our beneficiary designations
if they involve trusts and there are substantial age differences among the
persons who will "inherit" the IRA.
It is still the case that the preferred beneficiary designations are
directly to the individuals that are to "inherit" the IRA but if it
must pass through a trust to get to the beneficiaries it would be a good idea to
consider the problem referred to above. Complex
beneficiary designation forms may resolve some of the problems but IRA
custodians are not always very happy to see them and in fact, sometimes refuse
to honor them.
By 264 to 163, the House voted to Extend the repeal of the estate tax beyond 2010. The bill is not expected to pass the Senate.
My mother was very given to apothegms and since she
often counseled caution, I often heard her say: "If something seems too
good to be true, it probably isn't." This
would have been good advice for the 3,000 or so unfortunates that were duped by
the "pure-trust" schemes parlayed by 9 individuals from Arizona and
Texas doing business under the name of "Innovative Financial
Consultants" (IFC).
They were indicted in the Federal District Court in Arizona by a federal
Grand Jury for conspiracy to defraud the Internal Revenue Service. According to
the indictment, the Defendants sold "onshore" and "offshore"
trust packages falsely claiming that taxpayers could legally avoid income taxes
by the use of the same to shelter income and assets.
According to the indictment, IFC falsely claimed that clients could
retain the use control and dominion of the income and assets that they placed in
the "pure trusts" while making it difficult if not impossible for the
IRS to track the true owners of the assets or income.
Apparently these tax avoidance schemes were sold at
presentations throughout the US and internationally through telephone conference
calls, and an Internet website.
Not to be outdone by their southern confreres, 5
gentlemen from Utah (including 2 lawyers and 2 CPAs) were indicted in Federal
District Court for Utah, charging them with conspiracy to commit mail and wire
fraud and to defraud the IRS in connection with a similar fraudulent trust
scheme supposedly representing that by placing businesses, homes, investments,
and other assets in the names of the trusts individuals would lawfully and
substantially reduce their income taxes even though they continued to maintain
control over and enjoyment of such assets and income, and that personal expenses
related to assets placed in trust could be deducted on federal income tax
returns. They also caused false and
fraudulent U.S. Individual Income Tax Returns to be filed omitting all or
substantially all of their client's income and taxes owed.
While the Defendants are presumed innocent until
proven guilty, if you are approached by someone selling such "pure
trust" devices, it would be well to remember what mom said.
Recently the Federal Court of Claims considered a California case in which the question was: Did an attorney-in-fact under a Durable Power of Attorney have the right to make gifts to the family of the principal (the person giving the power of attorney)? The Court held that even though the attorney in fact had broad authority and discretion California law does not automatically give an attorney in fact this power. Hence, 38 $10,000 gifts near the time of the principal’s death made by the attorney in fact, presumably in a effort to lower the principal’s estate for federal estate tax purposes, were brought back into the principal’s estate for those estate tax purposes. While this result may not be the same reached in Michigan, certainly it points to what the IRS will look to in order to invalidate gifts.
This case emphasizes how important a seemingly routine document such as a Durable Power of Attorney may be. The form that this office has developed over time gives the attorney in fact the power to continue gifting programs begun by the principal and to make gifts to the natural objects of the principal’s bounty. (Estate of Swanson, 85 AFTR 2d 2000-1196).
Qualified Terminable Interest Property (QTIP) Trusts for surviving spouses have been useful devises and in some cases necessary ones. Such trusts typically provide all income for the surviving spouse from the death of the first dying spouse until the death of the surviving spouse. On the death of the surviving spouse the remaining trust assets are held or distributed as provided for in the trust of the first dying spouse. IRS Regulations also allow for the executor of the first dying spouse's estate to elect to treat only a fraction of a trust as a QTIP. Usually this fraction will result in the smallest amount of the estate qualifying for the marital deduction that will free the estate from federal estate taxes. The catch to such fractional elections has always been that all of the income of the trust had to be payable to the surviving spouse irrespective of whether or not the QTIP fraction was elected by the executor. The IRS lost a number of cases in which it objected to fractional elections which carried rights to income to the surviving spouse which were contingent upon the election being made by the executor. Enough is enough, apparently said the IRS and in its new final Regulations (Reg. §20.2056(b)-7(d)(3)(i)) say that such contingent interests are now okay. However those of us drafters who believe firmly in both belts and suspenders will probably still require the Trustee to pay all trust income to the spouse at least until the QTIP election is made so that income is receivable as is otherwise required from the date of death of the first dying spouse.
The last Flower Bonds matured on November 15, 1998. While none have been issued since 1963, wills and trusts, however, routinely referred to them with directions to make use of them to pay federal estate taxes. These bonds generally could be purchased, if available, at a discount shortly before the time of death and applied towards the payment of federal estate tax at par, resulting in a windfall for the estate. Alas, they are no more.
Persons considering gifting qualified appreciated marketable securities to a private foundation are reminded that the Taxpayer Relief Act of 1997 extended from May 31, 1997 to June 30, 1998 the rule allowing contributions without deducting out the long term capital gain which would have been experienced had the asset been sold. Since, as usual, hoops must be jumped through you are encouraged to see your tax bean counter and broker prontissimo if you want to take advantage of this provision.
The 1997 Taxpayer Relief Act has added yet another book keeping detail for persons engaged in a trade or business. Is this yet another example of the relief we have all been looking for? For years 1998 and hereafter, persons engaged in a trade or business who make payments in the course of such trade or business to a lawyer in connection with legal services (but not necessarily for such legal services), must file a 1099 reflecting such payment in January of the succeeding year with a copy to the payee. A lawyer receiving such payments is required to provide, upon request, the Taxpayer Identification Number for such report.
Some commentators have suggested that there may be an exception for such
payments which total less than $600, I don't think so. Original reports on the statutory change looked like Congress was homing in on business
persons trying to deduct as business expenses their personal attorney's fees. Perhaps not so. It begins to look
more like Congress is engaging in another round of lawyer bashing. Are lawyers for business persons inherently
more likely than lawyers for non-business persons to under report income or stash money away for their clients?
I don't think so.
In August of 1997, Congress repealed the "Granny goes to Jail" Law which was a part of the Kennedy
Kassebaum Health Insurance Portability Act of 1996. That section had provided for criminal penalties to be
imposed on the person who gave away assets in a fashion that resulted in disqualification for Medicaid
benefits. This section was almost universally condemned by attorneys, and advocates for senior citizens and
found no support in the courts, the Healthcare Finance Agency, and in the office of the United States Attorney
General. Congress, however, enacted a new section in 1997, which amended the Social Security Act at the
same time that it repealed the Granny goes to Jail Law. This section provided a Granny's advisor who
counseled her on how to lawfully dispose of assets may be guilty of a misdemeanor if such gifts of assets results
in disqualification. In other words, if Granny makes a mistake in following the lawyers advice, surprise her lawyer
gets a visit from the U.S. Marshall. Now it is "Granny's Lawyer goes to Jail".
In a letter dated March 11, 1998, the Attorney General, Janet Reno, has advised Newt Gingrich that the Unites
States Attorney Generals Office will not defend the constitutionality of this section because she believes it to be
an unconstitutional intrusion on protected free speech by a lawyer to her or his client. She further offered to
provide the assistance of the Justice Department to Congress in writing a law that would be more reflective of
contemporary First Amendment Jurisprudence. The position of the Attorney General on this matter is consistent
with the response made by the Justice Department in an action brought by the New York State Bar against the
Justice Department. Other actions are being considered in other jurisdictions through the National Association
of Elder Law Attorneys to secure the same sorts of rulings in all eleven federal appeals court circuits in order to
assure that this section will be deemed unconstitutional everywhere in the United States.
© John A. Scott, P.C.