MSBA Probate & Trust Law Section

Federal Tax Committee Monthly Update - 2009

     November 2009

     Inflation Adjustments. The IRS released inflation adjustments and the information that applied to more than three dozen tax items for tax years beginning in 2010. Of note to Probate and Trust practitioners is confirmation that the annual gift tax exclusion will remain at $13,000 for 2010. Rev. Proc. 2009-50, IR-2009-93.

     FLP and LLC Assets Not Included in Gross Estate. The Personal Representative of the Estate successfully sued for a refund of estate taxes assessed and paid by the IRS in district court when the court overturned the IRS determination of the gross estate by including assets decedent had transferred to a family limited partnership and the LLC which served as its general partner. Although the decedent had transferred a significant amount of assets to the two entities and died owning a 49% interest in the LLC and a 95% interest in the FLP, decedent had retained other significant assets outside of both entities. The court found in favor of the estate on all factors supporting the establishment and operation of the separate entities and ruled that the individual assets transferred by the decedent to the entities were not included in his gross estate because of the bona fide sale exception to Section 2036. Additionally, the court found the estate’s experts more convincing on almost all accounts over those of the IRS and the opinion of the Art Advisory Panel for the art contributed to the entities. C.H. Murphy Estate (DC Ark.) 2009-2USTC, Par 60,583.

     IRS Finalizes Regs Relating to Deductible Claims Against the Estate. The IRS announced finalized amendments to Regs 20.2051 and 20.2053 regarding amounts deductible from a decedent’s gross estate under IRC Section 2053. These Regs in part were issued to resolve inconsistencies among the courts to provide that post-death events are to be considered in the determination of deductible amounts on the estate tax return, including contingent, unmatured, contested, multiple party and claims involving family members or beneficiaries of the estate. The final Regs include many changes to the proposed Regs previously authored, including a provision to allow the executor to certify that no reimbursement is available for certain claims or expenses, eliminating the present value limitation for non-contingent reoccurring payments, etc. In addition, the IRS announced in Notice 2009-84, IRB 2009-44, that it will not examine/re-examine items that are past the statute of limitations that are unrelated to issues related to a protective claim that now has become ready for consideration. T.D. 9468 and Notice 2009-84.

     House Bipartisan Estate Tax Introduced. The Estate Tax Relief Bill of 2009 (House File 3905) was introduced by four members of the House Ways and Means Committee on October 22, 2009. The two Democrats (Berkley and Davis) and two Republicans (Brady and Lunes) takes effect January 1, 2011 and keeps the exemption at $3.5 Million Dollars, having it gradually increase to $5 Million Dollars by 2019. During that same period of time, the estate tax rate would decrease from 45% to 35%. (As of November 18th, there are now 20 co-sponsors.)

     Worker, Home Ownership and Business Assistance Act of 2009. The House of Representatives passed the Worker, Home Ownership and Business Assistance Act of 2009 (HR 3548) on November 5, 2009. This provision extended the unemployment compensation insurance benefits for workers coming to the end of their current benefits, extended the first-time home owner tax credit and expanded it and had other provisions. One provision potentially affecting estate planners is a requirement that tax preparers reasonably expected to file more than ten returns in a calendar year must file electronically. Included in the definition of return are estate and gift tax returns. This becomes effective for all returns filed on or after 1/1/2011.

     Tax Court: Single-Member LLC Must Be Respected for Gift Tax Purposes. The full Tax Court ruled that the IRS could not ignore a single-member LLC even though such an entity is otherwise ignored for tax purposes under the “check-the-box” regulations. Therefore, gifts and subsequent sale of interests in the LLC to trusts set up by the taxpayer were properly valued using a 30% discount to the underlying value of the LLC assets. Specifically, taxpayer set up a single-member LLC and formed two trusts a few days later for family members. After two months, taxpayer transferred cash and marketable securities to the LLC and twelve days later gifted and then sold all of her interest in the LLC to the two trusts. The US Tax Court (an Opinion issued by the full Court) rejected the IRS’ attempt to ignore the LLC and value the transfers on the basis of proportionate shares of the underlying assets. The Tax Court noted that they specifically were not addressing the step transaction doctrine as it relates to this case. Pierre v. Commissioner, 133 T.C. #2 (four opinions: 10 judge majority, 9 judge concurrence, 6 judge dissent, 3 judge separate dissent).

     District Court Uses Step Transaction to Disallow Discounts in Two Cases. The district court in the Western District of Washington (state) recently found in favor of the IRS in two separate cases, both on the basis of the step transaction doctrine, where assets were transferred into a newly formed LLC and interests of the LLC were promptly gifted to the respective taxpayer’s children. In both cases, the Court treated the transaction as a proportionate gift of the underlying assets to the beneficiaries for gift tax purposes. Linton v. US, #C08-227Z, 2009 U.S. Dist.; LEXIS 56604 (W.D. Wash. July 1, 2009) and Heckerman v. US, #C08-0211-JCC, 2009 U.S. Dist.; LEXIS 65746 (W.D. Wash. July 27, 2009).

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 3905 (Berkley, et al)— Referred to House Ways & Means Committee.

(link to top)

     October 2009

     Tax Court Upholds Valuation Discount for Single-Member LLC Transfer. In Pierre v. Commissioner, Dec. 57,910, 133 TC ____, the Tax Court rejected the IRS arguments revolving around the check-the-box regulations and held that a 30% valuation discount of gifts to two separate trusts of interests in a single member LLC was appropriate. The LLC was set up by the taxpayer to which she transferred cash and securities after receiving a large gift. Taxpayer set up two trusts for the benefit of family members and gave partial interest to each of the trusts to use a portion of her applicable credit and sold the balance of the interest in the LLC to the two trusts in exchange for a secured Promissory Note. The appraiser determined that a 30% discount to the value of the LLC’s assets was appropriate for the valuation of the interest in the LLC. The IRS challenged the valuation by ignoring the LLC and attempting to value the underlying assets. The Tax Court found that state law establishes property rights and interests and that federal law only defines the treatment of those rights. In this case, state law gave the taxpayer ownership rights only of the interest in the LLC and she could therefore not transfer any property rights or interest in the underlying assets themselves. Two judges dissented and would have upheld the regulations, a third judge dissented on the basis that the taxpayer should have elected to have the LLC treated as a corporation to arrive at this result.

     CCH Projects Minimal Increase in Inflation Adjusted Tax Figures. With the low inflation rate and the rounding requirements (both up and down) CCH is projecting that many thresholds will not change in 2010 or change only nominally. Included is no change in the $13,000 per person annual gift tax exclusion. Excludable gifts to non-citizen spouses are expected to increase by $1,000 to $134,000 in 2010.

     60 Day Rollover Limit Waived for 2009 RMDs. In Notice 2009-82 (September 24, 2009), the IRS announced that plan participants and spouse beneficiaries may re-contribute or put back 2009 required minimum distributions that they took earlier this year. The IRS announced in December 2008 that the 2009 required minimum distributions would be waived (with some exceptions) because of the financial markets. For participants and their spouses who took distributions anyway, this Notice extends the deadline for rolling those distributions over to November 30, 2009 (or 60 days from the date the funds are received, whichever is later). This does not apply to non-spouse beneficiaries nor does it abrogate the one rollover per year rule.

     Co-PR Personally Liable for Estate Taxes; Not Discharged in Bankruptcy. A taxpayer who was co-personal representative with his siblings on their father’s estate was personally liable for the estate’s unpaid taxes where he and his siblings actively transferred assets from the estate to themselves or their closely-held corporations. The Court found an intentional disregard of the outstanding tax liability and, as a result, the debt is not dischargeable in bankruptcy. Carroll v. US, N.D. Ala, 2009-2 USTC Par. 60,577.

     Special Note for Minnesota Estate Tax Returns. The Minnesota legislature in this last session amended Minn. Stat. Sec. 289A.19, subd. 4 to remove the need to request an extension and providing for an automatic extension of time of either six months or the amount of time granted by the IRS, whichever is longer. This is effective for estates of decedents dying after December 31, 2008. 2009 Minnesota Laws Chapter 88.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)— nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)— nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.

(link to top)

     September 2009

     Proposed Regs re: GRITs and GRATs. Responding to comments received to the earlier proposed Reg. Section 20-2036-1, the IRS issued two new Notices of Proposed Reg. in that same series. The new proposed regs provide the method for determining the portion of a trust includable in the Grantor’s gross estate if the Grantor dies holding a retained interest. In general, the proposed regs require calculating the dollar amount required to generate the pay-out to the Grantor had the Grantor survived without dipping into the principal. See Notice of Proposed Regs 119097-05 and 119532-08.

     Income Recognized on Surrender or Sale of Life Insurance Policy. In Revenue Ruling 2009-13 the IRS specified treatment of the taxation of gain on the sale or surrender of a life insurance policy. (Revenue Ruling 2009-14 discusses the taxable income issue from the point of the purchaser of the matured life insurance contract.)

     1.  On the surrender of a policy, the gain is treated as ordinary income to the extent the amount received exceeds the aggregate premiums paid on the contract.

     2.  Where there is a sale of a policy that has a cash surrender value, the gain realized on the amount of the cash surrender value over the premium paid minus the amount of the cost of insurance charges equals ordinary income. Any again over the cash surrender value is treated as capital gains.

     3.  Where there is no cash surrender value (i.e. a term policy) the amount received exceeding the total premiums paid minus charges for provision of insurance over the sales price is taxed entirely as capital gain.

     New Actuarial Tables. New actuarial tables are now available on the IRS website www.irs.gov. The new tables now totally supersede the prior tables except for estates of mentally incompetent decedents who were under a mental incapacity that existed on May 1, 2009 and continued uninterrupted until at least 90 days prior to death, in which case the estate may elect to use either the prior tables in effect at the time of the onset of the mental incapacity or the date of death. Treasury Decision 9448 implementing new Section 7520 (c) tables based on Life Table 2000 CM. Notice of Reg. 107845-08.

     Retirement Plan Experts scratching theirs heads over Benz decision. The tax court in G.T. Benz, 132 TC #15, Dec. 57,810, ruled that a withdrawal from taxpayer’s IRA for higher education expenses satisfying the statutory exception for penalty was not a modification of her plan of a series of substantially equal periodic payments previously made for withdrawals from the same IRA and therefore did not trigger the penalty tax under Section 72(t)(4). Commentators warn that this does not follow either the statute nor the normal construction followed by other court decisions regarding similar issues and therefore should be used with caution.

     Proposed Reg requires disclosure of certain GST transactions. Proposed Reg Section 26.6011-4 provides rules for the required disclosure of listed transactions and transactions of interest regarding the generation-skipping transfer tax. Under the proposal, if a transaction is identified as either a listed transaction or a transaction of interest by the IRS and the transaction involves the GST, the transaction must be disclosed. Any transaction purporting to reduce or eliminate the GST would be such a transaction, however, the IRS has no current plans to identify any such transaction. Also proposed are regs that modify rules regarding list maintenance requirements of material advisors under Code Section 6112. See Reg Section 301.6112-1(b) for a description of the list requirements. Written or electronic comments are requested through December 10, 2009.

     Procedures for gift tax litigation finalized. The proposed regs specifying the circumstances under which a donor may petition the Tax Court for a judgment regarding the value of a gift has been finalized in Reg Section 301.7477-1. A donor is able to petition the Tax Court for determination of a value of a gift even though the IRS’ proposed adjustment does not result in a gift tax deficiency because an increase in the valuation is off-set by the donor’s applicable credit. The reg also specifies when the taxpayer’s administrative remedies are considered to be exhausted.

     Watch List

• H.F. 436 (Pomeroy)— nothing new reported. Referred to House Ways & Means Committee.
• H.F. 498 (Mitchell)—nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722 (Baucus)—nothing new reported. Referred to Senate Finance Committee.
• H.F. 96 (Conaway)— nothing new reported. Referred to House Ways & Means Committee.

(link to top)

     May 2009

     2010 Budget Resolution.  The Senate and House passed their 2010 budget resolution on April 29. Bypassing pay-as-you-go requirements, it continues many of the income tax provisions from the 2001 and 2003 tax bills for families making under $250,000, would provide three years of AMT relief and continues the 2009 Federal estate tax exemption of $3.5 Million, among other things. The budget resolution is non-binding but sets the course that Congress is expected to follow in the upcoming budget season.

     Appraiser's work file protected under attorney-client privilege and work product doctrine.  The Idaho US District Court quashed an IRS Summons seeking the appraisal work file of an appraiser who submitted valuation of a conservation easement. The court found that the work file was protected under both the attorney-client and work product doctrine as the file was prepared at the direction of the taxpayer's law firm in an anticipation of future litigation regarding the value of the easement and to aid in providing legal advice to the taxpayers. Filing the final appraisal report with their tax returns did not open the work file to discovery by the IRS. The court additionally found that the IRS was not acting in good faith. M Richey, District Court, Idaho, 2009-1 USTC 50,274.

     IRS Gets Second Chance re Work Paper Privilege in a different court.  The pro-taxpayer three judge panel decision in Textron, Inc. (CA-1 2009-1, USTC Para 50,167) was vacated pending rehearing. The First Circuit Court of Appeals has decided to re-hear the case en banc.

     IRS Sets Sight on Off-Shore Account Holders - 6 month period for voluntary disclosure.  The IRS on March 26 announced a 6 month program for US taxpayers with undisclosed foreign bank accounts to voluntarily come clean. In exchange for coming clean, paying back taxes for the last six years plus interest and penalties, the IRS promises to waive the 75% fraud penalty and criminal charges.

     Obama announces overseas enforcement proposals.  President Obama announced a series of proposals to strengthen enforcement of U.S. tax laws for citizens with off-shore accounts on May 4th.

     Baucus proposes wide-ranging tax legislation.  Senator Baucus proposed wide-ranging tax legislation which would make permanent most of the middle class tax cuts from 2001 and 2003, the AMT "Patch," the $3.5 Million federal estate tax exemption and the 45% estate tax rate. Baucus is the Senate Finance Committee Chairman. Senate File 722.

     Method provided to determine taxable portion of Grantor retained interest Trusts and CRTs.  IRS Proposed Reg. 20.2036-1 has been amended/supplemented by the IRS to provide the methodology for calculating the amount of corpus required to satisfy a grantor retained interest which must be included in the grantor's taxable estate. The existing reg. would be amended to include the six steps required to calculate the amount included in the decedent's estate where the decedent retained a right to receive an annuity or other payment that was not income after the death of the current recipient. Reg—119532-08 adding to proposed Reg. 20.2036-1.

     Amount and type of income recognized upon surrender of life insurance policy.  In Revenue Ruling 2009-13 the IRS clarified the character and amount of income recognized upon the surrender of a life insurance policy.

     The IRS ruled that the surrender of a policy for the cash surrender value generates ordinary income to the extent the amount realized exceeds the basis in the policy (the aggregate premium paid on the contract). However, if a policy is sold to a third-party, the inside build up value would be ordinary income and the excess would be treated as long-term capital gain.

     IRS Updated Section 7520 Actuarial Tables.  Pursuant to the mandate of Internal Revenue Code Section 7520(c)(3), the IRS revised the actuarial tables (Tables S and U(1)) to reflect data compiled from the 2000 Census. IRS Pub. 1457, 1458 and 1459 which contain the complete sets of tables are updated. The new tables are effective on and after May 1, 2009, however, for gift tax purposes and decedents dying after April 30, 2009 and before July 1, 2009, either the old or the new table may be used. The full text of these publications are available on the IRS website at www.irs.gov. Reg—107845-08.

     IRS reminds small tax-exempt organizations to file e-Postcards.  The IRS released a news release to remind small tax-exempt organizations (gross annual receipt of $25,000 or less) to file Form 990-N, commonly known as e-Postcard. May 15, 2009 is the second annual deadline for filing this newly required simple report for small tax-exempt organizations after its introduction by the IRS. www.irs.gov IR 2009-49.

     IRA distribution for Higher Education Expenses does not violate Section 72(t)election.  The Tax Court ruled that a distribution for higher education expenses from taxpayer's IRA was not an impermissible modification of taxpayer's election to receive a series of substantially equal periodic payments under IRC Section 72(t)(4) so as to defeat the latter exception to the early withdrawal penalty. G.T. Benz, 132 TC 15 (Dec. 57,810).

     Watch List.

• H.F. 436—nothing new reported. Referred to House Ways & Means Committee.
• H.R 498—nothing new reported. Referred to House Ways & Means Committee.
• S.F. 722—Read twice and referred to Senate Finance Committee.

(link to top)

     April 2009

     CRT Early Termination Not Self-Dealing.  The lifetime payout beneficiary proposes to sell her interest to the charitable remainderperson for an amount equal to the present value. The Service ruled that early termination of the trust will not constitute an act of self-dealing under §4941, even though the income beneficiary is both the trustee and a donor to the charitable remainderperson. The Service also ruled that early termination will not result in a §507 termination tax. Although the income beneficiary was a disqualified person, the buyout qualifies for an exception to the self-dealing rules where the interest distributed equals the actuarial value of the income interest and takes into account the net-income provisions of the trust. And because the transaction will vest both the income and remainder interest in the remainder beneficiary, there is no split-interest issue under §507.

     Form 1041 Instructions for 2008 Reflect Numerous Changes.  The IRS has released the general instructions for Form 1041 for 2008 on its website. They reflect numerous law and administrative changes including (1) a schedule for alternative minimum tax, (2) separate instructions for some schedules, (3) automatic extension (five months), (4) sales tax deduction extended, (5) forthcoming regs for the 2% floor for miscellaneous itemized deductions, (6) bankruptcy estates, and (7) qualified disability trusts.

     Shares of Endowment—No UBTI.  A tax-exempt educational organization maintains a diversified endowment, and also serves at no cost as a trustee of a number of charitable remainder trusts. The organization proposes to issue units of its endowment fund to the charitable remainder trust, and the units would pay the trust an amount based on the value of the units as determined by the organization on a monthly basis. The trust could choose either to reinvest part of the payout, or redeem additional units, depending on its cash requirements. All of the income paid to the trusts would 2 be classified as ordinary income. The Service determined that the issuance of units would not result in the issuance of "unrelated business taxable income," but that if the organization was charging a trustee's fee for its services, the income it derived from such services would give rise to unrelated business taxable income and the organization would be required to pay a tax on the income earned from such activity.

     No Charitable Deduction for Gift of Oklahoma City Bombing Papers.  In Sherrel Jones v. Commissioner, No. 08-9001 (March 27, 2009), 129 T.C. 146 (2007), the 10th Circuit determined that attorney Leslie Steven Jones was not entitled to a charitable contribution deduction for gifts of the trial preparation materials he gathered in defense of Oklahoma City bomber Timothy McVeigh. The Tax Court had determined that the deduction was impermissible on two grounds. First, Jones did not own the materials prepared for the McVeigh trial. Second, under §1221(a)(3)(A) the assets were not a capital asset. Therefore, the deduction was limited to the cost basis of taxpayer Jones, which was zero. The 10th Circuit said that the controlling provision was §1221(a)(3)(B) which precludes a charitable deduction or capital gain treatment upon sale of materials that are typically produced by the government without any personal cost to the individual who ends up with the custody of the materials ("prepared or produced for the taxpayer").

     Estate Tax Imposed on Family Limited Partnership by Reduced by Time-barred Overpaid Income Taxes.  In Estate of Erma v. Jorgensen, T.C. Memo 2009-66, the Tax Court held that the assets an individual transferred to family limited partnerships were includable in her gross estate under §2036. However, it applied the doctrine of equitable recoupment to allow the estate to reduce the increased estate taxes by time-barred income taxes that her beneficiaries had overpaid as a result of using the Decedent's original cost basis, rather than the stepped-up basis allowed as a consequence of the Court's decision, in figuring gain on stock sales.

     Trust is Eligible S Corporation Shareholder.  In PLR 200912005, a trust was the sole shareholder of a corporation intending to elect S corporation status. There were a number of income and remainder beneficiaries of the trust, with the remainder beneficiaries including two trusts, one of which is a 501(c)(3) tax-exempt entity. When the last income beneficiary of the first remainder trust passes away, the corpus will be distributed to the other remainder (tax-exempt) trust. The Service determined that the tax-exempt trust is not a CRT (S corporations are not allowed to have CRT's as shareholders). The Service also ruled that the main Trust is eligible to be an "electing small business trust."

     Tax Court Resolves Ambiguity in Favor of a Full Marital Deduction.  In Estate of John David McCoy, T.C. Memo 2009-61, the Tax Court determined that the restated trust agreement did not specify how the estate taxes should be apportioned and does not specify which residue those taxes should be paid from, and therefore estate tax apportionment under Utah law applied. The original trust agreement had provided that payment of estate taxes and other debts and expenses were to be charged to the non-marital share of the trust. However, a restated trust agreement provided that the estate taxes and other items were to be paid from the residue of the trust prior to any distributions. There were specific bequests to various relatives, with the residue of the trust to be paid to the surviving spouse. The restated trust agreement did not expressly state how the estate tax burden was to be borne by the beneficiaries.

(link to top)

     March 2009

     No Gain at Vesting of Remainder Interest.  A taxpayer who purchased a remainder interest after a term of years in residential and commercial real estate asked the IRS if they would recognize gain at the time the term of years ended and they came into possession of the property under their remainder interest. The IRS found nothing to trigger recognition of gain at the time the initial possessory interest terminated, but ruled that the taxpayer's holding period began at the time of purchase of the remainder interest. Taxpayer purchased a remainder interest in the real estate from three limited partnerships subject to a 50 year estate owned by an unrelated party. PLR 200901008. (Duh!)

     Retirement Account left to Decedent's Trust, but Spouse allowed to rollover to IRA within 60 days.  In PLR 200905040, the IRS ruled that a surviving spouse was eligible to rollover the distribution from her late husband's qualified plan to her own IRA within 60 days tax free even though the plan beneficiary was the decedent's trust. The surviving spouse was the sole beneficiary and trustee of the trust. The fact that the trust was terminated one day before the distribution occurred and the distribution was made to the decedent's estate by mistake was not fatal. The IRS stated that the amount should have been paid to the trust instead, but the important fact was that the spouse had sole discretion over the disposition of the trust.

     Proposed Legislation for Off-Shore tax havens.  Senate Finance Committee Chairman Max Baucus circulated a preliminary draft of a bill regarding taxation and reporting of off-shore activity. Among other things, it would require additional documentation to be filed with an entity's tax return, increase the foreign trust failure to file penalty, increase the types of property considered to be a distribution from the trust and make other changes.

     Appraiser's Work File Protected from IRS Summons.  The US District Court in Idaho quashed an IRS Summons seeking the work file of an appraiser who valued a conservation easement claimed as a charitable deduction. The work file was protected under the attorney-client privilege and work product doctrine as it was prepared at the direction of the taxpayer's law firm in anticipation of future litigation regarding the value of the easement and to aid the firm in providing legal advice. The court ruled that attaching the final report with the tax return did not open the appraiser's work file to discovery. The court specifically found discovery to clarify the appraisal was not made in good faith because the IRS did not sufficiently explain why the final report was insufficient. Additionally, the IRS continued to seek discovery even after taxpayers consented to the additional assessment of tax that disallowed the deduction based on the appraisal. M. Richey, DC Ida, 2009-1 USTC 50,274.

     Watch List

• H.F. 436—nothing new reported.
• H.R 498—nothing new reported.

(link to top)

     February 2009

     Ex-Spouse may Waive Retirement Benefits through a divorce Decree without a QDRO.  The US Supreme Court resolved a split among the Circuit Courts over whether or not a divorced spouse may waive his/her interest in the spouse's retirement plan through a divorce decree when there is no QDRO. A unanimous Supreme Court rejected the argument that a QDRO was the only exception to the ERISA prohibition against assignment or alienation of retirement benefits. Since the Plan in question did not prohibit a beneficiary's common law waiver of benefits or disclaimer, the Plan properly paid the benefits of the decedent to the ex-spouse since the decedent had not modified his beneficiary designation after the divorce. Under the Court's reasoning, however, had the decedent modified his beneficiary designation to someone other than the ex-spouse, the changed designation would have been effective even though the divorce court did not issue a QDRO specifying that the ex-spouse no longer had an interest in the retirement plan. What the Court did not address, however, was what would happen should the Plan documents prohibit such a waiver or disclaimer or should the beneficiary cause the death of the participant. Kennedy vs. Plan Administrator for Dupont Savings and Investment Plan, et al. (Docket No. 07-636, 1/26/2009)

     Code Section 7520 Actuarial Tables Updated.  The IRS updated the actuarial tables used to value annuities, terms certain, reversions and remainders in Notice 2009-18. The update adds tables for interest rates below 2.2%. This is in response to the historic February 2009 AFR rate of 2% for Code Section 7520. This is a full percentage point below the December 2008 rate and is the lowest ever issued by the IRS since Section 7520 became effective. It is also less than 40% of what it was two years ago. Tables for less than 2% are also provided which may indicate that the rate may go even lower. Note: These low rates particularly favor planning vehicles such as a GRAT, CLAT, or a private annuity.

     Watch List.

All of the focus this past month has been on passing the new economic stimulus bill, however, the Obama White House continues to support retaining the federal estate tax after 2009 at the current $3.5 Million Dollar exemption and maximum estate tax rate of 45%.

     Bills that have been introduced in the House of Representatives that have caught the attention of estate planners include:

• H.R. 436 which would retain the $3.5 Million Dollar exclusion, keep the maximum rate at 45%, phase out the graduated rates in the lower tax brackets covered by the unified credit beginning with estates over $10 Million Dollars, and eliminate valuation discounts on non-business assets. This has been referred to the Ways and Means Committee for consideration.

• H.R. 498 which would gradually increase the exemption rate from $3.5 Million Dollars this year up to $5 Million Dollars in 2015, which exemption then would be indexed for inflation, make adjustments to the gift tax credit, repeal the deduction for state estate tax and allow for carryover of unused unified credit from the first to die spouse to the surviving spouse. This bill has been referred to the Ways and Means Committee for consideration.

     (While not actively reviewing newly proposed bills for inclusion, I will report on relevant bills brought to my attention.)

     Trusts, IRD and Charitable Income Tax Deduction.  In an article "Treacherous Waters" in the January 2009 issue of Trusts and Estates magazine, Christopher Hoyt discusses Chief Counsel Memorandum 200848020 (see January 2009 update) and proposed Treasury Reg 1.642(c)-3 (b)(2) (see June 2008 update) and how these developments signify the need for caution in creating estate documents and in planning for the distribution of assets representing IRD (income in respective of a decedent) to a charity.

     Stimulus Package Passes—American Recovery and Re-investment Act of 2009.  Although containing nearly $300 Billion Dollars in tax relief, it appears that all of the tax provisions relate to income tax and related areas. (Apparently Congress did not find anything in the Federal Death Tax stimulating.) A one year "patch" was passed to give AMT relief for 2009, however.

(link to top)

     January 2009

     Economic Woes focuses efforts on Stimulus Package while New Year brings higher Applicable Credit and lower AFR.  The continuing economic woes has focused the new administration and Congress to focus on the new economic stimulus package, which will likely contain significant income tax provisions. The work on this bill will likely not be complete until some time in mid-February or later. In the meantime, the new year has brought in an increase in the Applicable Credit (f/k/a Unified Credit) rate to be the equivalent of $3.5 Million Dollars for Federal Estate taxes. The Federal Gift Tax exemption still remains at $1 Million Dollars. The new year has also brought in historic low interest rates. The November 2008 applicable federal rate under Section 7520 was 3.6%, which fell to a December rate of 3.4% and now 2.4% for January 2009. Revenue Rule 2009-1.

     Judicial reformation loses charitable deduction for trust.  The Office of Chief Counsel for the IRS denied charitable income tax deductions for a trust after its terms were judicially reformed. The original trust terms in decedent's Will specified annual distributions to charities, however lacked other essential provisions and failed to qualify as a designated beneficiary trust for retirement plan purposes. The Chief Counsel's Office noted that the reformation was sought not because of a conflict, but to obtain other benefits. Since the changes to the original trust terms were not made to settle a bona fide dispute, the IRS will not equate the modified terms of the trust with the original governing instrument and therefore the charitable deduction for the annual payments to the charities will not be allowed for income tax purposes. CCM 200848020.

(link to top)