HOME > Financial Advisor Education Corner > Educational Alerts

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.

REGISTER TO VIEW eALERTS ARCHIVE

The Law Offices of Cheryl K. David releases important estate planning and related articles on a regular basis. Please take a moment to register to receive full access to our Educational Alerts and FYIs.  CLICK TO REGISTER  - OR - Enter the password that was given to you:

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.

Congress Passes Economic Stimulus Package - Future of the Estate Tax Will Not Likely Be Resolved Until After the Presidential Elections
This month's alert highlights the recently enacted Economic Stimulus Act. The Alert covers the rebate provisions for individuals as well as the incentives for small business owners and closes with a comment that is unlikely we will see any "fix" of the current estate tax regime until after the election of a new President.

Retirement Asset Update - Non-Spousal Rollovers
The Alert examines two issues. First, it examines Congress' attempt to mandate allowing non-spousal rollovers and how the IRS continues to interpret the law to allow but not mandate such non-spousal rollovers. Second, it examines how new "wash sale" rules do not allow you to get the benefit of a loss if you sell an asset and then quickly re-purchase it in your IRA.

2008: The Calm Before the Storm
The article examines the upcoming uncertainties and scheduled changes in the laws concerning estate and gift taxation.

The Estate That Would Not Die
The recent litigation surrounding the publicity rights of the remainder beneficiary of the estate of Marilyn Monroe illustrates some of the problems with probate administrations and how a trust can help avoid some of these entanglements.

Court Approved Reformation Fails to Gain Approval from the Internal Revenue Service
The article looks at a recent reversal by the IRS on the issue of allowing non-spousal rollovers of retirement plans into IRAs. Then the article examines one private letter ruling in which the IRS did not allow the mistaken omission of a contingent beneficiary to be corrected. The primary beneficiary had predeceased. The result was that the assets in the retirement plan had to be withdrawn more quickly, thus depriving the beneficiary of the full extent of the tax deferral which would have been allowed had the contingent beneficiary been named.

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.

Lame Duck Congress Passes Last Minute Tax Act
The Alert discusses the Tax Relief and Health Care Act of 2006. It lists the various provisions and highlights the most important one: the modification of the rules of Unrelated Business Taxable Income for a CRT. If a CRT had UBTI prior to the act, it lost tax exempt status. Beginning January 1, 2007, it does not lose tax exempt status, but faces an excise tax equal to 100% of the UBTI. This is often better and can make contributing business assets to a CRT more attractive.

IRS Finds Pecuniary Gift of IRA to Charity is Taxable
The Alert examines ILM 200644020 which involved an IRA payable to a trust. The trust used the assets to pay pecuniary bequests to charities. The Service held that, under the Kenan rule, there was a sale or exchange, and thus the trust recognized the income on the asset. Further, the trust did not get a charitable deduction. The Alert states that careful planning could have avoided this outcome.

IRS Curtails Use of Private Annuities for Income Tax Purposes
The article examines the IRS' recent issuance of proposed regulations cracking down on Private Annuity Trusts used for income tax avoidance. The article looks at why PATs are still a viable tool in estate planning.

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

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

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

Congress Passes Income Tax Bill - Estate Tax Repeal is Up Next The Internal Revenue Service Again Approves Spousal General Power of Appointment Planning Strategy
This article contains an update on The Tax Increase Prevention and Reconciliation Act of 2005, comments from leading Senators on the potential of estate tax repeal in the coming months, and a commentary on the third in the series of PLRs dealing with granting a testamentary general power of appointment over a surviving spouse's assets in order to more fully utilize the deceased spouse's applicable exclusion amount.

Proper Drafting of Trust Protects Trust Assets from Creditors, Including the Internal Revenue Service
This article examines recent IRS guidance concerning the ability of the IRS to attach a beneficiary's interest in a trust. The article provides options for greater creditor protection by not using typical HEMS language.

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

Window of Opportunity for Medicaid Planning
This Alert informs advisors of the window of opportunity that still exists for planning for Medicaid eligibility under the old law, and encourages them to take action while planning under the old Medicaid law still exists. The Alert also briefly reviews once again the changes that are brought about by the Deficit Reduction Act of 2005.

Passage of the Deficit Reduction Act Will Not Mean the End of Medicaid Planning
On February, 8, 2006, the President signed into law the Deficit Reduction Act of 2005 (“the Act”). There have already been challenges to the Act but it appears it will be valid law. When the Senate and the House of Representatives voted in favor of passing the Act, many people were predicting the end of Medicaid planning.

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

Upcoming Estate Tax Reform May Bring Changes
This provides a look at proposed estate tax reform and how it may affect planning.

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.

2036 Is Not Just for Family Limited Partnerships
In past alerts we have informed you how the IRS has had successes in using IRC § 2036 to pull back transferred partnership assets into the estate of a decedent, thwarting the taxpayer's plans to obtain a discount. These victories have emboldened the IRS to apply the requirements of IRC § 2036 against other types of intra-family transfers.

Taxpayers Using FLPs Continue to Trip Over Section 2036
The article examines three new FLP cases in which the Service was victorious. It stresses the need for clients to have their FLP agreements and practices reviewed.

Chances for Repeal of the Estate Tax Lessen -- Congress May Settle for Permanent Increase in Exemption Amount
The article examines pending legislation concerning potential repeal of the estate tax. It discusses the more likely outcome of an increase of the applicable exclusion amount. It concludes that the need for estate planning will remain greater than ever for non-tax reasons.

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

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

Court Upholds Trust Nominee Clause and Finds No Revocation Where the Formalities of Revocation and Amendment Were Not Followed by the Surviving Trustor
During the course of a long marriage, George and Barbara Heaps executed a joint revocable living trust with both spouses acting as co-trustees. It provided that the trust would split into two trusts, a “family trust” and a “marital trust,” after the death of the first of them. The surviving spouse would act as co-trustee over the “family trust” with George and Barbara’s son and son-in-law. The surviving spouse would serve as the sole trustee over the “marital trust.”

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

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

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

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

IRS Scores Family Limited Partnership Victory
In a new case, the IRS has had new success in attacking FLPs using Section 2703.

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 decedent’s 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).

IRS Suffers Big Blow in Fifth Circuit Reversal of the District Court Holding on Kimbell FLP Case
On May 20, 2004, the Fifth Circuit Court of Appeals reversed the grant of summary judgment for the government in the U.S. District Court case of Kimbell v. United States, 244 F. Supp.2d 700, 91 AFTR.2d 2003-585 (N.D. TX 5/14/2003).

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

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

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

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

Limited Liability Company Provides Answer to Trust Termination

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

Important Estate Planning Numbers for 2004
Starting in 2004, the estate tax and gift tax systems are no longer in pari materia. How will this affect your clients giving?

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 client’s 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.

Is That Your Final Answer? IRS Issues Final Treasury Regulations for Split-Dollar Regulations
On September 11, 2003, the Treasury Department and IRS jointly released the Final Split-Dollar Treasury Regulations. Officially, the Regulations are called Split-Dollar Life Insurance Arrangements, Treasury Decision 9092. The Final Treasury Regulations apply to any split-dollar life insurance arrangement entered into after September 17, 2003. This means that IRS Notice 2002-8 remains the primary source of guidance for split-dollar arrangements entered into prior to September 18, 2003.

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.

JGTRRA Brings Tax Relief for Businesses
In this e-alert, we summarize how JGTRRA brings tax relief to small businesses and corporations.

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.

Bush Gets Some Temporary Income Tax Relief in New Tax Bill; No Changes to Estate Tax
On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act ("JGTRRA") of 2003. JGTRRA contains tax relief for individuals, business and corporations, although this Fax Alert will focus on the changes for individuals only.The new law accelerates several provisions that were a part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and provides for a reduction in the tax rate for capital gains and dividends. There were no changes to the gift tax or estate tax, so the increasing exemption amount, decreasing rates and sunset provisions of EGTRRA remain in place, at least for now.

Federal Tax Lien Trumps State Asset Protection Law
Approximately half the states provide that a married couple may take title to real property as tenants by the entireties. This type of ownership, while similar to joint tenancy, offers superior asset protection from many creditor's claims. The question of whether an IRS tax lien can attach to tenancy by entirety property was the subject of U.S. v. Craft, 122 S. Ct. 1414, 89 AFTR.2d 2002-2005 (2002).

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.

Reformation of Trust Saves Estate Taxes
Joint trusts for married couples have been used in community property states for over a decade. There had been speculation by some attorneys regarding the effectiveness of joint trusts in common law states. However, concerns over recognition of joint trusts by the IRS have largely been put to rest by PLRs 200101021 and 200210051 (see our previous FaxAlert dated April 30, 2001 titled "Joint Trusts in Common Law States" for more on this subject).

---

Share this Page With a Friend or Colleague

Printer-friendly

---