Wills, Trusts & Estates Prof Blog

Tax Court Rules on Penalty for Early Retirement Distribution

Ms. Watson was a participant in her employer’s qualified retirement plan. At age fifty-five, Ms. Watson received $30,006 in distributions from the qualified plan and included the amount as income on her income tax return. Ms. Watson paid the tax on the $30,006 but did not include the ten percent additional tax of that amount.

The IRS issued a notice of deficiency and determined that because Ms. Watson had not reached age fifty-nine and half at the time of the distributions, she was liable for the ten percent additional tax of the $3,000.60. Ms. Watson argued she qualified for the exception to the additional ten percent tax because she did not receive the distributions until after she was fifty-five years old.

In Watson v. Commissioner, T.C. Summary Opinion 2011-113 (Sep. 28, 2011), the U.S. Tax Court held that Ms. Watson was required to pay the additional ten percent penalty on the retirement distributions under section 72(t) because she “was obviously less than 59-1/2 years of age when she received $30,006 in distributions.”

See Adam Bair, Taxpayer Required to Pay Penalty for Early Retirement Distribution, Wealth Strategies Journal 2.0, Sep. 29, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for brining this article to my attention.

Keeping Control of Irrevocable Trusts

Settlors typically want to keep control over the trusts they create, especially when the settler is a parent creating a trust for the benefit of a child. Since a trust must be irrevocable for estate tax and asset protection planning purposes, many settlers fear that this control is lost. However, a list of ways settlors can retain (some) control of the trust are below:

• The Settlor can change the trustee. Rev. Rul. 95-58 state that a settlor’s right to remove the trustee and name a new trustee does not result in estate tax inclusion if the new trustee is not “related or subordinate.”
• Section 411 of the Uniform Trust Code allows a court to modify an irrevocable trust if the settler and all beneficiaries petition to court to do so.
• A settler can name one or more protectors as a means of modifying the trust (however, only a few states have codified provisions regarding Protectors). Protector powers generally include the ability to change the manner of distribution and allocations among beneficiaries.
• A settler can keep substantial control by creating a single member LLC with an irrevocable trust as a member and the settler as the non-member manager.

Other options that allow the settler to keep control over trust assets include private trust companies, grantor trust flip switches, powers of appointment, decanting powers, charitable foundations, and extended distributions clauses.

See Owen Kaye and Bruce Givner, How Do Parents Keep Control: Irrevocable Trusts, Aug. 24, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

New Living Will Rule For “Systemically Significantly” Companies

The federal financial services regulators have approved a new final living will rule that will implement Section 165(d) of the Dodd-Frank Street Reform and Consumer Protection Act. The Federal Reserve Board and the FDIC will issue the rule jointly.

Section 165(d) requires companies designated as systemically significant by the Financial Stability Oversight Counsel to give regularly updated living wills or plans for the companies’ “rapid and orderly resolution in the event of material financial distress or failure” to the Federal Reserve Board and the FDIC. Under the new law, a company’s resolution plan must include a strategic analyses of the plan’s components; an analyses of the company’s organization, material entities, management information systems, interconnections and interdependencies; and a description of the range of specific actions to be taken in the resolution.

Companies operating mainly as banks must submit plans before December 31, 2013 and update their living wills annually.

See Allison Bell, Feds to Big Nonbanks: So, What if You Die?, National Underwriter, Sept. 9, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

The IDGT Loophole

Daniel Ricks (attorney, Costa Mesa, CA) recently published his article entitled, I Dig It, But Congress Shouldn’t Let Me: Closing the IDGT Loophole, 36 ACTEC L. J. 641 (2010). The abstract available on SSRN is below:

By combining three tools that independently are beneficial to taxpayers, clever estate planners have devised a transaction - the installment sale of discounted assets to an intentionally defective grantor trust - that saves their ultra-wealthy clients millions of dollars in estate and gift taxes. This transaction, which is a foundational part of many estate plans, takes advantage of rules that Congress never intended to be used in this way. Because the Internal Revenue Service has conceded its inability to challenge the transaction based on current law, any solution lies with Congress. This Article proposes an amendment to § 2036 that would close the hole in the transfer tax base by eliminating taxpayers’ ability to form intentionally defective grantor trusts. Because this simple, targeted proposal leaves intact nearly all of current law, it could be adopted quickly as an interim solution in anticipation of fundamental tax reform.

Interesting Funeral Home Name

 
http://www.hollerbachfuneralhome.com/fh/home/home.cfm?fh_id=12948 

Valuating Life Insurance Policy

Katt & Company’s recent newsletter addresses life insurance policy valuations. In the newsletter, the author states that spring-crash-values further complicate the issue of whether a taxpayer should report a policy’s account value or cash surrender value as income when policies are transferred to the insured. The IRS argues that the account value is the appropriate method, while buyers, administrator, and sellers argue for the cash surrender value method.

The newsletter also addresses Schwab v. Commissioner (136 T.C. No. 6 – 2/7/11) where the court faced the issue of deciding the proper valuation for two variable universal life insurance policies. The Court concluded that the policies’ values should be based on the guaranteed cost of insurance to the termination date of the first policy and until the second policy’s premium was paid a few months later. The author fears that the Schwab holding has only “muddied the water” when it comes to setting logical life insurance valuation methods.

See Life Insurance Policy Valuations, 13 Insurance Perspectives 9, Sep. 2011.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.



Lawyer Joke

A local charity office realized that it had never received a donation from the town’s most successful lawyer. The director called him, hoping to get a contribution. “Our research shows that out of a yearly income of at least $500,000, you give not a penny to charity. Wouldn’t you like to give back to the community in some way?”

The lawyer replied, “First, did your research also show that my mother is dying after a long illness, and has medical bills that are several times her annual income?” Embarrassed, the director mumbled, “Um…no.

“Or that my brother, a disabled veteran, is blind and confined to a wheelchair?” The stricken director began to stammer out an apology but was interrupted.

” . . . or that my sister’s husband died in a traffic accident,” the lawyer’s voice rising in indignation, “leaving her penniless with three children?!”

The humiliated director said simply, “I had no idea . .”

“So if I don’t give any money to them, why should I give any to you?

Scott R. Zucker, The Rarity of Lawyer Jokes (With 3 of My Favorites), Estate Planning Info Blog, Oct. 17, 2010; Dan B. Evans, My Favorite Lawyer Jokes (1998).

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.

Testamentary Instructions and The Federal Arbitration Act

David Horton (Professor of Law, Loyola Law School) recently published his article entitled The Federal Arbitration Act and Testamentary Instructions, North Carolina L. Rev. (forthcoming). The abstract available on SSRN is below:

The U.S. Supreme Court’s expansion of the Federal Arbitration Act (FAA) has made arbitration clauses ubiquitous in consumer and employment contracts, and provoked heated debate. Recently, though, arbitration clauses have become common in a different context: wills and trusts. Courts have reached wildly different conclusions about whether these provisions are enforceable under state arbitration law. However, no judge, scholar, or litigant has considered the more important question of whether the FAA governs these terms. In this Article, I fill that gap. I first examine the statute’s text and legislative history, and conclude that Congress intended the FAA only to govern “contracts.” Nevertheless, I show that the Court has stretched the definition of “contract” for the purposes of the FAA. Indeed, the Court has predicated arbitration on the mere fact that the parties have entered into a consensual relationship, even if it does not meet the test for contractual validity. I then argue that estate plans, which arise from mutual assent and feature elements of exchange, are “contracts” under the FAA. Finally, I analyze how some of the most challenging features of the Court’s interpretation of the FAA - including the non-arbitrability doctrine, the separability rule, and the statute’s preemptive ambit - would play out in the field of wills and trusts. By doing so, I seek not only to provide guidance for courts and policymakers, but to illustrate that testamentary arbitration may not suffer from some of the flaws that make contractual arbitration so polarizing.

CPA’s Warnings Harmed Clients in the End

L. Michael Stelmacki was the CPA for Southwest Missouri Bone and Joint Inc. (SMBJ). Brain Ellefsen owned SMBJ and his brother, Mark, was the corporation’s business manager. In 1997, the Ellefsens attended a presentation on the Aegis Business Trust System, which utilizes foreign and domestic trusts to shelter assets from taxes. Stelmacki urged the brothers to not participate in the Aegis system, but the Ellefsens decided to enroll in the system anyway in July 1997.

For two months Stelmacki asked his clients to reconsider their enrollment in the Aegis system and sent the brothers articles on the IRS’s crack down on abusive trust schemes. Though the Ellefsens did not head their CPA’s advice, they did keep him on as their preparer.

On SMBJ’s 2000 corporate tax return, the corporation deducted the transfers to the Aegis-created entities as management fees. Brian Ellefsens declared that he had no interest or authority over any foreign accounts on his personal tax return. Stelmacki requested that Brian represent in writing that the transferred management fees were legitimate.

In 2001, Stelmacki raised concerns about the corporation’s categorization of the transfers to the Aegis-created entities as management fees. Stelmacki informed the Ellefsens that the expenses would likely not meet the IRS test as being ordinary and necessary business expenses. Stelmacki included a number of articles discussing abusive trust schemes and the possibility of criminal ramifications in his communications with the brothers.

Mark informed Stelmacki in September 2000 that the corporation had hired another individual (an accountant associated with Aegis) to prepare its 2001 return. In 2003, still concerned for his former clients, Stelmacki sent the Ellefsens an IRS press release that listed offshore transactions as one of the "dirty dozen tax schemes.”

Again, the brothers did not heed Stelmacki’s advice and were later convicted of conspiracy to defraud the United States. In U.S. v. Ellefsen (108 AFTR 2d 2011), the appellate court upheld the brothers’ criminal convictions. In the end, though Stelmacki intended for his numerous warnings to help his clients remedy their actions, the warnings actually served to help the government build its criminal case against the Ellefsens.

See Peter J. Reilly, Can a CPA Bury his Client by Trying to Save Him?, Forbes, Sep. 25, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

The Buffett Tax

Denis Kleinfeld recently posted an article on the Newsmax website that addresses Warren Buffet and his credibility on estate and income tax issues. Kleinfeld argues that Buffett’s proposal of raising the estate tax for Americans who have retained enough wealth will not benefit taxpayers or the Treasury and does not serve a positive fiscal purpose.

Kleinfeld also argues that Buffet has vested interests in the tax plan going into effect and opines that Americans can plan for the so-called “Buffet Tax” by following tax structures given by Buffet.

SeeDenis Kleinfeld, How to Plan for the Buffett Tax, Newsmax.com, Sept. 26, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Determining the Beneficiaries of Fisk University's Stieglitz Collection

Alan L. Feld (Maurice Poch Faculty Research Scholar Professor of Law, Boston University School of Law) recently published his article entitled, Who are the Beneficiaries of Fisk University's Stieglitz Collection?, 91 B.U. L. Rev. 873 (2011). The abstract available on SSRN is below:

Most fiduciary relationships determine with specificity the beneficiaries of the fiduciary's activities. Not-for-profit entities, however, serve a class of unspecified beneficiaries and can exercise discretion in determining who to serve and how to serve them. This paper explores the limits of discretion that recent litigation established for Fisk University in balancing its educational mission and its administration of a valuable art collection donated decades earlier. The paper analyzes the case as it addresses respect for donor conditions, changes in circumstance, standing issues, the doctrine of cy pres and the designation of the appropriate class of public beneficiaries. Race and geography also play contributing roles.

Cemetery Worker Takes Guitar From Coffin

Before sixty-seven year old Randall Jourdan of Wisconsin passed away, he informed his family that he wanted to be buried with his valuable Fender guitar. According to Jourdan’s family, the guitar was the man’s pride and joy.

After Jourdan died, the guitar was placed in his casket, as per his directions. Steven Conard, a cemetery worker, was aware of the guitar and decided to take it from the casket before the crypt’s stone face was attached. Another worker, James Lang, realized the guitar was missing and reported it to his supervisor who called the police. The authorities located the guitar in Conard’s living room and returned it to Jourdan’s family.

See Cemetery Worker Stole Guitar From Army Vet’s Casket, The Smoking Gun, Sep. 26, 2011.

Tax Treatment of RDPs and Same-Sex Spouses in Community Property States

Forbes recently published an article that discusses questions and answers on the tax treatment of RDPs and same-sex spouses in community property states. The author uses his hypothetical clients, Robin and Terry, to discuss some of the nineteen questions and answers. The portion of the article that addresses Question Two is posted below, in full:

Don’t Forget About the Constitution

 Q-2: Can registered domestic partners or same-sex spouses whose marriage is recognized under state law file federal tax returns using a married filing jointly or married filing separately status?

A-2: No. Registered domestic partners cannot file using a married filing separately or jointly filing status, because they are not spouses as defined by federal law. Likewise, same-sex partners who are married under state law may not file using a married filing separately or jointly filing status because federal law does not treat same-sex partners as spouses.

I don’t entirely agree with the “likewise”. It is understandable that the IRS would put it that way, but the answer is debatable. Gill v. OPM holds that Section 3 of DOMA is unconstitutional. DOJ has determined that the constitutionality of Section 3 of DOMA is indefensible. I believe that this gives same sex married couples (although not RDP’s) a reasonable basis for filing jointly. At the very least, if joint status would be advantageous, they should be protecting their rights for open years by filing timely refund claims. As RDP’s, Robin and Terry do not have skin in this particular game. If they had married in 2008, they might.

Peter J. Reilly, Registered Domestic Partners and Same-Sex Spouses in California—More Questions Than Answers, Forbes, Sep. 24, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Planning For Incapacitation

Alzheimer’s will affect one in eight baby boomers after they turn sixty-five, and incapacitation can lead to costly and lengthy court hearings if proper estate planning documents have not been created. Four of the most widely used legal documents for incapacitation planning are below:

1. Health care proxy (also known as a health agent or health care power of attorney)—allows someone to make medical decisions in the event of an individual’s incapacitation
2. Living will—addresses end-of-life care, covers pain relief, and details resuscitation wishes
3. Durable power of attorney—authorizes a trusted individual to act as an agent in a number of legal and financial matters
4. Living trust (revocable trust)—a trustee will manage the trust funds and distribute money for the beneficiary’s care

For more information on incapacitation planning, see, Deborah L. Jacobs, Sign a Healthcare Proxy, Living Will and Power of Attorney, Forbes, Sep. 26, 2011.

Protecting Elderly Loved Ones From Illegitimate Financial Services

According to a 2010 study by the Investor Protection Trust, one of five elderly Americans has been a victim of fraud, paid excessive fees for financial services or products, or been sold inappropriate investments. The average household led by individuals who are seventy-five and older has a net-worth of $638,000, so it is no wonder that this class of people is often targeted by both legitimate and illegitimate distributors of financial products.

Distributors use a number of tactics to convince elderly people to invest with them, but loved ones can use the following approaches to help ensure that an elderly relative or friend does not succumb to a bad or fraudulent investment deal:

• Address future financial concerns and solutions before a scheming distributor has the opportunity to addresses them first
• Go with an elderly loved one to seminars or programs that deal with investing
• Put older individuals on the Do Not Call list (donotcall.gov or 88-382-1222) and stop junk mail at dmachoice.org
• Practice a way to end phone calls pitches (“No, I’m not interested”)
• Keep a close watch on new activities and any new friends to ensure that scam artists have not befriended and begun influencing elderly loved ones

For more information on persuasive tactics used and ways to address them, see Ismat Sarah Mangla, Protecting Your Parents: Keep the Sharks at Bay, CNN Money, Aug. 10, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Religious Discussions in a Business Setting

Religion can be a taboo topic in business, but some financial advisors find that discussing religion is a crucial means of understanding their clients’ financial goals. Some financial advisors have clients address their spiritual beliefs in a mission statement, while others broach the topic by first discussing their own religious views.

Some financial advisors have found that even a casual conversation can lead the way to a more in-depth religious discussion. However, some situations may call for a more formal discussion of a client’s religious beliefs and personal values.

Not all advisors agree that discussing religious views should be part of business communications. If an advisor does decide to have a religious based discussion with a client, he or she may want to address the topic carefully.

See Veronica Dagher, Where Religion and Business Do Mix, The Wall Street Journal, Sep. 23, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.

Scientists Create Digital Video by Reconstructing Brains’ Visions

Scientists at UC Berkeley have developed a system that can capture a person’s visual brain activity and reconstruct it as digital video clips. Scientists recently used this system on three different subjects. The subjects were placed inside a Magnetic Resonance Imaging system and watched two different groups of Hollywood movie trailers. As the subjects watched the trailers, the fMRI system recorded the subjects’ blood flow through the visual cortex.

The data was fed into a computer program that divided the information into three-dimension pixels units called voxels. As the session continued, the computer gathered more information about how the subjects’ brain activity corresponded with the visual activity of the movie trailers.

Another group of video clips was used to reconstruct the videos shown to the subjects, and the computer built a database of potential brain activity for each clip. The computer then picked the one hundred clips that caused the subjects’ brain activity to act more similar to when the subjects’ watched the movie trailers. The computer then combined the clips into one final movie. The movie’s resolution is blurry, but it clearly matches the clips viewed by the subjects.

To watch the video clip created by the computer program, seeJesus Diaz, Scientists Reconstruct Brains’ Visions Into Digital Video In Historic Experiment, Gizmodo, Sep. 22, 2011.

Expert Valuation Testimony

Wendy C. Gerzog (Professor of Law, University of Baltimore School of Law) recently published her article entitled  Excluding Expert Valuation Testimony, 132 Tax Note 1423, Sep. 26, 2011. An excerpt from the article is below:

In its 2003 partnership return, Boltar claimed a charitable deduction for a conservation easement on property it owned in Lake County, Ind.1 The company valued the easement at $3.245 million.2 The government reduced that figure to $42,000 in its notice of final partnership administrative adjustment (FPAA). The government also filed a pretrial motion to exclude the taxpayer’s expert report and testimony under the Federal Rules of Evidence (FRE) and Daubert.3 The court ruled favorably on the government’s motion and held that the amount of the taxpayer’s deduction was limited to that allowed in the FPAA.

At the end of 1996, Laura Lake Development Co. LLC purchased two parcels (northern and southern parcels) of approximately 10 acres each for $10,000 an acre. On October 1, 1999, it transferred those parcels to Boltar.4 On November 8, 2002, Shirley Heinz Land Trust Inc. (Land Trust) quitclaimed approximately 10.3 acres (eastern parcel) just east of the southern parcel to Boltar.5 At all relevant times, the southern parcel was encumbered by a pipeline utility easement. Also, as of December 29, 2003, the date of the taxpayer’s donation, both the northern and southern parcels were subject to an access (golf cart) easement.

On December 29, 2003, the taxpayer granted a conservation easement to the Land Trust on approximately eight acres of the eastern side of the southern parcel. Of that easement, approximately 2.82 acres of the southern parcel (plus additional land in the northern parcel as well as all the acreage in the eastern parcel) is forested wetland under the U.S. Corps of Army Engineers’ jurisdiction. The discharge of fill material in those wetlands was subject to permit application and mitigation for lost resources.

Do Loved Ones Say Goodbye After Death?

Some people believe that their deceased loved ones have contacted them from beyond the grave during a paranormal event called a “crisis apparition.” A beauty shop owner in New Jersey claims she had a conversation with a customer, hours after his dead body was found. A grandson asserts that his grandfather gave him a farewell message just moments after he died from lung cancer.

Theories for these strange events range from telepathic transmissions, to a trick of the brain. Though skeptics abound, believers claim these apparitions appear as a way to give comfort to those left behind. One woman who experienced a “crisis apparition” gave the following explanation for her inexplicable experience, “these experiences have made me believe that those we love are really not that far away at all and know when we are not doing as well as we could. Just as they did in life, they offer comfort during crisis.”

See John Blake, Do Loved Ones Bid Farewell From Beyond the Grave?, CNN Living, Sep. 23, 2011.