Educational Alerts

Educational Alerts are written on topics that effect various aspects of estate planning and the laws that govern it. They are usually published and posted to this site at the end of each month. Occasionally newsworthy events will initiate the release of additional alerts at the time the news breaks. The purpose of an Estate Planning Update is to bring important information to the financial advisors in the community. Our hope is that this information better equips you to assist your clients.

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Doing It Yourself Can Sometimes Lead to Disaster

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

Creditor Protection Extended to Inherited IRAs by More Courts

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

Annuity Maximization

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

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

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

Basics of Gift and Estate Tax Reduction

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

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

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

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

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

Congress Passes a CLASS Act

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

Eighth Circuit Upholds IRS Victory in FLP Case

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

Federal Court Denies Annual Exclusions Due to Restrictions in Entity

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

Defective Grantor Trusts for Beneficiaries?

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

Congress' Inaction Creates Need to Review Estate Plan

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

Estate Tax Update and a Major Taxpayer Court Victory!

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

IRS Allows Rollover of IRA Payable to a Trust

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

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

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

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

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

New Jersey Court Upholds Asset Protection Trust

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

Estate Tax Reform Update

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

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

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

Legacy Wealth Planning for Blended Families

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

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

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

Tax Law Changes for 2009

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

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

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

Turbulent Economic Times Can Lead to Estate Planning Opportunities

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

IRS Issues Favorable Grantor Retained Annuity Trust Ruling

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

News of Financial Crisis Brings Concerns Regarding Protection of Financial Accounts

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

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

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

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

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

Estate Planning Update

The Alert examines legislation pending in Congress which would extend 2009's $3.5 million applicable exclusion. The Alert goes on to discuss how the Service is handling estate and gift tax audits.

To download the referenced report Description and Analysis of Alternative Wealth Transfer Tax System, use the link below.

Description and Analysis of Alternative Wealth Transfer Tax System Report: http://www.house.gov/jct/x-22-08.pdf

Tax Court Issues Favorable Family Limited Partnership Ruling!

In a recent decision, the Tax Court sided with the taxpayer in a case involving a Family Limited Liability Company and a transfer near death.

Two Rulings of Interest on Retirement Assets PLR 200807025 and PLR 200811028

This Alert examines several private letter rulings in which the Service examines the complicated area of beneficiary designations for qualified plans and IRAs.

Charitable in Death: Will Leona Helmsley's Testamentary CRTs Qualify for an Estate Tax Charitable Deduction?

This article examines Leona Helmsley's Will and the Trusts which it creates. It examines some of the oddities involved, including gifts to her dog and the disinheriting of some grandchildren.

IRS Rules That Tuition Paid for Special Needs Child is a Deductible Medical Expense

The Alert examines a recent private letter ruling which allowed the taxpayer to deduct school tuition for a special needs child as a medical expense.

Court Reformation of Irrevocable Trust Does Not Cause Trust Assets to be Included in Grantor's Estate

This month's Alert discusses PLR 200730015, which dealt with the judicial reformation of an irrevocable trust and an IRS finding that the changes to the trust did not cause inclusion of the irrevocable trust in the trustor's estate. Often, trustors want to change the terms of their irrevocable life insurance trust, irrevocable trust for gifting to children and/or grandchildren or other irrevocable trusts for advanced estate planning purposes. Depending on whether the trust is a grantor trust or not, this may involve substituting the old trust for a new one, or a judicial reformation, as is the subject of this month's Alert.

Planning for Retirement Assets Requires Special Care--Bad Advice by Financial Planners Causes Tax Penalty to Client

This alert examines a new private letter ruling in which the taxpayer accidentally triggered penalties. The penalties occurred due to a violation of the rules for the "series of substantially equal periodic payments" exception for distributions prior to age 59 1/2.

IRS Uses Payment of Estate Tax to Win Family Limited Partnership Case

This article examines the Tax Court case of Estate of Erickson v. Commissioner. In this case, the IRS prevailed, including a Family Limited Partnership in the estate of the decedent under Section 2036. Various factors led to this defeat for the taxpayer, including the fact that the partnership was used to pay estate taxes, at least indirectly.

Drafting Spousal Trusts to Reduce Estate Taxes

This article examines various strategies using a marital trust and bypass trust. It also looks at using a marital trust to preserve assets of the pre-deceasing spouse in a second marriage situation.

Technical Amendment to Deficit Reduction Act of 2005 Causes Immediate Annuities to Further Lose Their Luster for Medicaid Planning Purposes

This article examines technical corrections to the DRA. The article sets forth that while the technical corrections made annuities less attractive, they are still a viable option in Medicaid planning. It offers examples of how one might structure an annuity differently to avoid rule changes from the technical corrections to the DRA.

IRS Offers Favorable Rulings Regarding Transfers of Life Insurance Policies to an Irrevocable Life Insurance Trust

The article looks at two recent revenue rulings which confirm that transfers of life insurance policies to ILITS that are grantor trusts do not run afoul of the "transfer for value rule."

IRS Disappoints With Guidance for Rollovers of Inherited Company Plans

The article examines Notice 2007-7 which undermined the non-spousal rollover provisions of Retirement Protection Act of 2006.

Three Planning Gems Contained in The Pension Protection Act of 2006

The alert examines significant aspects of the Pension Protection Act of 2006 and briefly examines recent failed attempts at estate tax repeal.

Recent IRS Ruling Spawns Retirement Planning Strategy

The article examines a PLR in which the taxpayer got approval to treat a (d)(4)(A) Special Needs Trust as a "conduit" trust rather than an "accumulation" trust for purposes of minimum required distributions. In other words, they were allowed to ignore remainder beneficiaries and use the primary beneficiary's life expectancy to calculate required distributions.

Creating a Trust to Protect from Future Unknown Creditors is a Fraudulent Transfer in Washington

This month's alert reviews United States v. Townley, a case in which a District Court in Washington held that the creation and transfer of assets to an irrevocable trust was a fraudulent transfer with respect to future creditors. The IRS was not a foreseen future creditor at the time the trust was created, but the trustors testified that one of the primary reasons the trust was established was concerns about liability associated with a different identified potential future creditor.

Proper Drafting of Trust Protects Trust Assets from Creditors, Including the Internal Revenue Service

This article examines recent IRS guidance concerning the ability of the IRS to attach a beneficiary's interest in a trust. The article provides options for greater creditor protection by not using typical HEMS language.

IRS Issues Favorable Life Insurance Private Letter Ruling

This month's Alert covers a PLR in which the IRS approves a transfer of life insurance policies from one Irrevocable Life Insurance Trust structured as a grantor trust for income tax purposes to another Irrevocable Life Insurance Trust structured as a grantor trust. The Alert explains how this planning strategy avoids recognition of gain, the transfer for value rule and the three year rule. Call our office if you have clients with insurance trusts that might need to be re-thought.

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

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

Katrina Emergency Tax Relief Act Offers Short-term Charitable Tax Planning Opportunity - But Be Careful!!

The article examines the charitable planning aspects of the hurricane Katrina legislation. It provides a strategy for charitable gifting of retirement plan assets.

Enrollment Period for Medicare Part D on the Horizon

This article gives a brief explanation of Medicare Part D, the new prescription drug plan. Seniors will begin receiving information about this plan between mid-October and year-end.

Potential Changes to Medicaid Laws May Warrant Taking Action Now

This article addresses many of the proposals being set forth by the Department of Health and Human Services Commission and the National Governor's Association for Medicaid Reform. Many of these proposals will change the manner in which Medicaid planning will be done in the future and how your clients may want to accelerate their planning before any changes are made.

Fifth Circuit Releases Long Awaited Strangi Opinion

This month's alert highlights the findings of the Strangi 4 FLP case. This is the second appeal to the 5th Circuit. The opinion is a partial victory for the IRS, but the key points of the case are the issues regarding implied agreements (and use of FLP assets to pay estate administration expenses, debts of the decedent and estate taxes) and what is business and non-business purposes are sufficient to meet the "bona fide transfer for fair value" exceptio under IRC 2036.

Taxpayers Using FLPs Continue to Trip Over Section 2036

The article examines three new FLP cases in which the Service was victorious. It stresses the need for clients to have their FLP agreements and practices reviewed.

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

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

Taxpayers Fight and Win State Estate Tax Battles

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

Joint Committee on Taxation Proposes Tax Law Changes Effecting Estate Planning

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

Court Upholds Trust Nominee Clause and Finds No Revocation Where the Formalities of Revocation and Amendment Were Not Followed by the Surviving Trustor

During the course of a long marriage, George and Barbara Heaps executed a joint revocable living trust with both spouses acting as co-trustees. It provided that the trust would split into two trusts, a "family trust" and a "marital trust," after the death of the first of them. The surviving spouse would act as co-trustee over the "family trust" with George and Barbaras son and son-in-law. The surviving spouse would serve as the sole trustee over the "marital trust."

Disclaimer Proves Fatal to Estate Plan

Mr. Katz executed a will in 1991 that called for the creation of a "pecuniary credit shelter trust" equal to the amount of the "aggregate federal estate tax exemption equivalent." The will language further provided that the credit shelter trust "shall not be reduced on account of any disclaimer by my wife." Finally, another provision in the will stated conflicting provision in this will, "if my wife disclaims any interest in any portion of the property otherwise passing outright to her under this Article of my will, such portion shall be added to the [credit shelter] trust." The purpose of the credit shelter trust created under Mr. Katz's will was to place an amount equal to the amount that can pass free of estate tax into trust so that it would eventually pass to his children without being subject to estate taxes in his wife's estate.

President Signs the Working Families Tax Relief Act and the American Jobs Creation Act

President Bush signed into law the Working Families Tax Relief Act of 2004. It provides for approximately $146 billion in tax breaks aimed primarily at middle-income taxpayers and businesses of all sizes.

Bank and Trust Officer Held Liable for Estate Tax

Learn the facts as well as lessons that should be learned from the case of Hatleberg v. Norwest Bank Wisconsin, 678 N.W.2d 302 (Wis. App. 2/24/2004)

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

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

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

The facts in PLR 200422050 are as follows: a decedents will left her estate in trust for the benefit of her husband. The trust provided that the husband was to receive all income from the trust and he could compel the trustee to make trust assets productive. As a result of these provisions, the trust would qualify for the federal estate tax marital deduction under IRC § 2056 as a qualified terminable interest property ("QTIP") trust if the executor made an election under IRC § 2056(b)(7).

Failure to Qualify for Marital Deduction Can Cost Hundreds of Thousands

The amount that can be given at death free of estate taxes in 2004 is $1.5 million. With proper planning, a married couple can double that amount to $3 million. Where an estate is greater than $3 million, the estate tax on the excess can be deferred until the death of the surviving spouse, but only if proper planning is put in place. This is because of the unlimited federal estate tax marital deduction. Where the first spouse to die wants to control where the excess assets go after the death of the surviving spouse (by giving the surviving spouse only a life estate in the excess assets), a special kind of trust, known as a Qualified Terminable Interest Property Trust (or QTIP Trust) must be used.

Ninth Circuit Court Affirms Asset Protection for Trust Beneficiary

One of the advantages of establishing trusts for beneficiaries as opposed to outright distributions is asset protection. In the case In re John and Holly Coumbe, Debtors, a Bankruptcy Trustee sought to include the assets of a testamentary trust created by the debtors mother in his Chapter 7 bankruptcy estate. The Court held the trust assets were unavailable to the debtors creditors.

Limited Liability Company Provides Answer to Trust Termination

It is becoming more common to leave assets at death in trust for children and other beneficiaries. In many instances, this strategy affords the beneficiaries protection from creditors and protection of their inheritances from divorcing spouses. When trust assets consist of business holdings, real estate or a diverse portfolio of securities, it also provides for centralized management and potential economies of scale.

Distributions from Retirement Plans or Individual Retirement Accounts Can Reduce or Eliminate Estimated Tax Underpayment Penalties

Seniors and self-employed individuals often complain about having to make quarterly estimated income tax payments. Failure to make the payments can lead to underpayment penalties and interest (calculated using the federal short term rate plus an additional three percent) having to be paid on income taxes due.

Circumstances Surrounding Drafting, Execution, and Administration of a Prenuptial Agreement Determine Its Effectiveness

The planning done before marriage is often as important as planning after marriage in assuring that a clients estate planning wishes are carried out. Laws governing prenuptial agreements vary somewhat from state to state, but often the circumstances surrounding the drafting, execution, and administration of a prenuptial agreement are crucial to the effectiveness of the agreement.

Walking Through the "Basic" Estate Plan

Start your clients off with the very basics so that they appreciate the value of each planning strategy you employ.

HIPAA Protected Health Information Provisions Become Effective - Clients Need to Take Action Now

On April 14, 2003, the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 45 CFR §§ 160-164, affectionately dubbed HIPAA, went into effect. The new regulations have caused much turmoil among "covered entities" (e.g., doctors, hospitals, nursing home facilities, and insurance companies), as they will now, for the first time, be subject to federally imposed sanctions and monetary fines for unauthorized disclosure of "private health information." The new law has caused many health care providers to clamp down on the release of medical records and other health care information to anyone other than the patient.

Ninth Circuit Includes Gift Tax Paid by Wife in Husband's Estate

The opinion in Brown v. United States, 91 AFTR.2d 2003-2085 (9th Cir. May 1, 2003) opens with the following truism: "The estate tax combines into one sad transaction the only two certainties in life." Brown is very important because it applies the step transaction doctrine to defeat an estate tax planning strategy between husband and wife.

Tricks and Traps Concerning Annuities

Because there are many tax traps concerning annuities, it is important for the financial advisor to know the treatment of annuities when advising clients.

Care Must Be Taken When Disinheriting an Heir

It is not uncommon for a person to place provisions in his or her will or trust to exclude an heir from receiving an inheritance. Such was the desire of Mary Bartels, who wished to disinherit her daughter, Deborah Smith, and whose will was the subject of dispute in the case In the Matter of the Estate of Mary Alberta Bartels, Deceased, 184 Or. App. 448, 56 P.3d 501 (October 23, 2002).

Year End Charitable Gifting

As the end of the year approaches, the issue of last minute income tax strategies often arises. One such year-end strategy is charitable giving. When making year-end gifts, donors must time the gift properly to assure the gift creates a charitable deduction in the current year. The Treasury Regulations under Internal Revenue Code ("IRC") § 170, which determine when a charitable deduction may be taken, deal primarily with when the donor has parted with dominion and control over the asset being given to the charity. The specific factors that determine the timing of payment or delivery may depend upon the type of asset being given.

Clients Should Use Attorney-Drafted Powers of Attorney for Property

After the incapacity of an individual, powers of attorney often are used to initiate or continue annual gifting programs to reduce the size of the incapacitated individual's estate for estate tax purposes - or as part of a Medicaid qualification strategy. Using a generic power of attorney obtained off the internet or from the legal forms department of a book, stationery or office supply store can often lead to problems. This is even true of the use of statutory power of attorney language provided by a state's legislature.

Alternative Valuation Provisions and Other Basis Provisions Under the Internal Revenue Code

In our last Fax Alert, we defined basis step-up (or step-down) and discussed how it was calculated with regard to Spousal Joint Tenancy (or Tenancy by the Entireties), Non-Spousal Joint Tenancy and Community Property. In this edition, we will start off by discussing how the use of the Alternative Valuation provisions under Internal Revenue Code ("Code") Section 2032 affects the basis of property; how basis is determined for assets where special valuation has been elected for estate planning purposes, such as with farm land (Code Section 2032A), family business interests (Code Section 2057), and conservation easements (Code Section 2055(f)).

Getting a "Step-Up" Under the Internal Revenue Code

Many people have heard of the "step-up" in basis for property received by inheritance, but don't know exactly what that means. One's "basis" in property is what determines if there is a gain or loss upon sale and Internal Revenue Code (hereinafter "Code") § 1012 generally defines basis as the cost of such property. But what about property that doesn't have a cost to the holder, such as property acquired by inheritance or gift?

Who Pays the Estate Tax When Someone Passes Away?

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

Analyzing the Tax Effects of Deferred Annuities: Part Two

There are three parties to an annuity contract. There is the policy owner who, as the name suggests, owns the annuity and has the authority to name the annuitant and the beneficiary. The owner may also be the party who receives the annuity payments. The annuitant is the party whose life is used to determine the length of any annuitized payments. And finally, there is the beneficiary. The beneficiary receives the annuity proceeds upon the death of the policy owner or the annuitant, depending upon the contract type. The death of these parties, specifically the policy owner and the annuitant, may play a key role as to whether the annuity's tax-deferred status continues.

An Advanced Technique to Remove Life Insurance from the Estate

Unless steps are taken to remove it, the death benefit of a life insurance policy owned by the insured is included in his or her estate under Internal Revenue Code Section ("IRC §") 2042. One way to remove the death benefit from the estate of the insured is to gift the insurance policy to the insured's children or to an Irrevocable Life Insurance Trust ("ILIT"). The value of the gift will be the interpolated terminal reserve ("ITR") of the policy (Treasury Regulation § 25.2512-6(a)), which can usually be roughly approximated from the cash value of the policy.

Planning for Same-Sex Couples Requires Close Attention

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

IRA Strategies for the Younger Surviving Spouse

A young surviving spouse who is named as a beneficiary of his or her deceased spouse's IRA is faced with many planning pitfalls and three basic distribution choices with regard to what to do with the IRA assets.

Lifetime Charitable Gifting of Annuities

Commercial non-qualified annuities are often purchased for purposes such as supplementing retirement income, funding children or grandchildrens education or long term care planning and end up not being fully utilized for such purposes. When this happens, a gift of the annuity to a charity is sometimes considered.

A Better Way to Pay For Children's Education

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

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

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

Walking Through the "Basic" Estate Plan

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

Advanced Estate Planning - A Client Handout

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

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

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

Allocating GST Exemption to Irrevocable Life Insurance Trusts

GST issues arise in an ILIT in two circumstances: Grandchildren as Crummey Demand Beneficiaries and Death of a Child.

Using QTIP Trusts for Valuation Planning

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

Make Sure Your Clients Don't Make These Estate Planning Mistakes

Financial Advisors are often their clients' first line of defense on a whole host of issues. Estate Planning is just one of them. As you work with your clients year after year, help them protect their interests by letting them know whenever they're making one of these estate planning mistakes.

The Special Child: Helping Parents Plan

As tough as it is to consider, all parents have an obligation to plan for the unthinkable: that death or disability may render them unable to care for their children. Parents of children with disabilities have a special challenge. Here's important information that your clients need to know.

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Estate Planning Alerts for Advisors

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These recent developments and case studies address any aspect of the law that touches on estate planning. They offer an interesting perspective and/or warning. View our latest FYI or request to be added to our email distribution list.

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