Wills, Trusts & Estates Prof Blog

Estate Tax Exemption Portability -- A Good Idea?

Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Portability of Exemptions.

Here is the abstract of her article:

Portability of estate tax exemptions has been called the best estate tax planning idea for a surviving spouse since the unlimited marital deduction in 1981. This article explains portability, including the recent Senate testimony urging its adoption.

The Estate Planning--Art Interface

Lance S. Hall (ASA, cofounder and President of FMV Opinions) has recently authored a article entitled The New Frontier: Non-Charitable Estate Planning Transfers with Fractional Interests in Art (and Other Personal Property).

Here is the conclusion of his article:

With the art market reaching new highs and investor interest in art exceeding previous norms, increased scrutiny to the estate planning needs of art collectors and investors is required.  With the changes in the rules for charitable gifting under the 2006 Pension Protection Act, charitable gifts of art are no longer as attractive.  Alternatively, fractional interest gifting to the junior generation may result in significant estate tax reduction.  Even if a gift is not made, art investors/collectors in community property states may be able to avail themselves of undivided interest discounts at death.

Clearly, undivided interest discounts for art and other personal property are likely to incur close scrutiny and outright rejection by the IRS. However, under the principles of "fair market value" an undivided interest discount is applicable. The challenge will be convincing the court that an analysis with no empirical data involving actual undivided interest sales in art will meet the taxpayer's burden of proof. The courts have overcome identical difficulties associated with the lack of empirical data when discounting undivided interests in real estate. The issues are no different with art, collectibles and other personal property. An objective measure of the hierarchy of discounts applicable to different asset classes is to examine the relative volatility of the individual art or personal property with other classes of investments where empirical data is available (real estate is generally less volatile than stock and art, stock is generally less volatile than art, art is generally less volatile than gold and commodities). Then, the specific attributes of the art (or other personal property) could be used to more subjectively adjust the discount up or down, accordingly.

To focus the court's attention to the lack of control and lack of marketability of the interest, and away from the right to partition, a transfer made subject to an agreement to waive the right to partition is advisable.

With the charitable gifting no longer as advantageous, the estate planning professional can expect to see a significant rise in fractional interest discount planning for art (and other personal property).

Cohabiting Siblings Denied Same Rights as Married and Same-Sex Couples

Two sisters in England (Joyce and Sybil Burden) have lived together for most of their lives.  They never married and took care of their parents and other relatives.

Since 1976, they have attempted to be recognized as cohabiting couple for tax purposes.  Their requests have always been denied.

Recently, the Burden sisters appealed to the the European Court to obtain the same tax rights as married and same-sex couples.  By a 15-2 vote, the Human Rights judges denied their claim holding that they were not unfairly discriminated against.

Because of the ruling, when the first sister dies, the surviving sister will have to sell their home to raise the money to pay the estate tax which will be due on the home.

See Sisters lose European tax battle, BBC News, April 29, 2008.

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

New Jersey Supreme court holds that decoupling of estate tax not retroactive

The court explained in Oberland v. Director, Div. of Taxation, 940 A.2d 1202 (2008), that it would be manifestly unjust to apply a statute which reduced the amount of assets that could pass free of state estate tax retroactively.

Federal Estate Tax Consequences of the Rights of Publicity Legislation

Mitchell M. Gans (Steven A. Horowitz Distinguished Professor of Tax Law, Hofstra University School of Law; Adjunct Professor, New York University School of Law), Bridget J. Crawford (Associate Professor of Law, Pace Law School) & Jonathan G. Blattmachr (Attorney at Law, Milbank, Tweed, Hadley & McCloy LLP), have recently published their article entitled Postmortem Rights of Publicity: The Federal Estate Tax Consequences of New State-Law Property Rights. This article was posted in the Pocket Part of an online companion to The Yale Journal on April 1, 2008.

Here is the introductory paragraph to their article:

California recently passed legislation that creates retroactive, descendible rights of publicity. The New York State Assembly is poised to enact similar legislation. Legal recognition of postmortem rights of publicity permits a decedent’s named beneficiaries or heirs to control (and financially benefit from) use of a deceased personality’s image and likeness. Legislators, proponents of these laws, and legal commentators have overlooked two significant federal estate tax consequences of these new state law property rights. First, a descendible right of publicity likely will be included in a decedent’s gross estate for federal estate tax purposes. Second, the estate tax value of rights of publicity easily could exceed the estate’s liquid assets available to pay taxes. These tax concerns could be eliminated, however, by rewriting the statutes to limit a decedent’s ability to control the disposition of any postmortem rights of publicity.

Disclaimers and Defined Value Clauses in Christiansen

Wendy C. Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Disclaimers and Defined Value Clauses: Christiansen.

Here is an abstract of her article:

A South Dakotan attorney who had become a full-time farmer, left her entire estate to her daughter, but she anticipated that her daughter would disclaim some of that property. The article discusses the Christiansen case that examined the validity of that disclaimer as well as of a defined value clause.

Estate Tax Reform May Be Underway

According to Jeff Carlson, Finance Panel Mulls Reform of Estate Tax Rules, tax.cchgroup.com, April 4, 2008:

By all indications, the Senate Finance Committee is serious about reforming estate tax rules. On April 3, Committee Chairman Max Baucus, D-Mont., held a third hearing on the subject, ostensibly to get input from experts on where change is most needed in four areas: liquidity; portability; unification of gift and estate taxes; and charitable giving.

Prior to the 2001 tax law changes, the estate and gift tax taxes were unified; they had a single graduated rate schedule and they were also combined into a single unified credit. Under current law, the amount that transferrors can transfer tax-free while alive is substantially less than the amount that they can transfer tax-free at death. Panelists and lawmakers were in agreement that unification is necessary.

Speaking on behalf of the American Institute of Certified Public Accountants (AICPA), Roby B. Sawyers, a practicing CPA and professor in the College of Management at North Carolina State University, took it one step further, suggesting that the estate, generation-skipping transfer (GST) and gift tax exemptions be reunified.***

Special thanks to Neil E. Hendershot, Esq. (Attorney at law, Goldberg Katzman, P.C., Adjunct Professor, Widener University School of Law) for bringing this article to my attention. You can read more on Neil's blog at PA Elder, Estate & Fiduciary Law Blog.

Tax Treatment of Blended Families - Change Needed

Wendy C. Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Families for Tax Purposes: What About the Steps?

Here is an abstract of her article:

At least 4.4 million families in the U.S. are blended ones that include step-children and step-parents. For tax purposes, these steps receive preferential treatment for their status because they are on the one hand included as family members for many income tax benefit sections, but on the other hand excluded as family members for business entity attribution purposes and for gift and estate tax anti-abuse provisions. In the interests of fairness and uniformity, steps should be treated as family members for all tax purposes where steps have in fact voluntarily acted as their biological or adoptive counterparts, both when such treatment would decrease and increase their tax burdens.

The Many Aspects of Estate Planning

The following is from Ian Driscoll, Parents must put children in the know, us.ft.com, Mar 24 2008:

"Tax planning is a very important part of estate planning; sometimes the only part," says Susan Schoenfeld, principal and associate fiduciary counsel at New York-based Bessemer Trust. "But it shouldn't be, in the perfect world, the sole motivator."

Done wisely, estate planning can help parents enshrine values and educate children about fiscal responsibility. It can also forestall sibling conflicts that may follow a parent's death.***

The temptation to control one's children from the grave also afflicts incentive trusts (sometimes known as ethical trusts), an estate planning tool that has attracted much attention in recent years.

A variant of the incentive trust matches dollar-for-dollar distributions according to a child's income. Another type might disperse funds when children meet benchmarks - graduating from college, performing philanthropic work or remaining drug-free. But some advisers warn incentive trusts must be used judiciously, if at all.***

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

Joint Committee on Taxation Report on Possible Areas of Tax Reform

The staff of the Joint Committee on Taxation has prepared a document entitled Taxation of Wealth Transfers Within a Family: A Discussion of Selected Areas for Possible Reform. This report was scheduled for a public hearing before the Senate Committee on Finance on April 3, 2008.

Here is an excerpt from this document:

This document is divided into two parts. The first part describes a prominent feature of the current Federal estate and gift tax system, the partially unified credit against estate and gift tax, and evaluates two possible reforms to that credit. The credit against estate and gift tax is partially unified under present law because a single tax rate schedule applies to gifts made during life and transfers at death but the effective exemption amount under the gift tax ($1 million) is different from the effective exemption amount under the estate tax ($2 million in 2008).***

The second part of this document sets forth a discussion of liquidity to pay estate tax when estates consist largely of farms or other businesses. Congress at various times has passed reforms intended to mitigate the effect of the estate tax on family farms and other family-owned businesses. A particular concern has been that if the value of an estate is largely attributable to a farm or other business, heirs of the estate may be forced to sell the business to pay the estate tax. Forced sales of family businesses are seen as undesirable in part because of possible job losses and other disruptions to communities.

Special thanks to Patrick S. Sylvester (Attorney & Counselor at Law, Sylvester Law Firm, PC) for bringing this document to my attention.

Heirs Sell Celebrated Artwork to Cover Estate Taxes

The following is from Carol Vogel, A Colossal Private Sale by the Heirs of a Dealer, NYTimes.com, April 4, 2008:

In what experts described as the largest private sale of art ever, the heirs of the legendary dealer Ileana Sonnabend have parted with some $600 million worth of paintings and sculptures in two transactions to cover their estate taxes.***

Ms. Sonnabend’s art trove, which includes seminal works by artists like Andy Warhol, Jasper Johns, Robert Rauschenberg and Cy Twombly, is valued at more than $1 billion. Taxes on the estate amount to more than half the value of the assets, experts said.***

Known for a shrewd eye and sure taste, Ms. Sonnabend was among the world’s most powerful dealers in the 1960s and ’70s, as was her first husband, Leo Castelli.***

In addition to selling art Ms. Sonnabend enjoyed holding on to her favorites, and over the years she amassed hundreds of works of art and outstanding examples of 20th-century furniture. Much of it travels on loan to museums around the world, but a good deal has also been in storage for decades.***

Proposed Treasury and IRS Rule Making May Have Significant Tax Consequences

James V. Roberts (Attorney at Law, Glast, Phillips & Murray P.C.) has recently published his article entitled New and Revamped 529 Plan Regulations Soon to Be Proposed, RPPT eREPORT (2008).

Here is the opening paragraph to his article:

On January 17, 2008, Treasury and the Internal Revenue Service issued an Announcement of Proposed Rule Making (“ANPRM”) regarding Section 529 college tuition plans. This ANPRM should be of interest to every estate planner and return preparer because it seeks to: (I) propose an anti-abuse rule (with changes to the preparer penalty provisions, all such rules now assume larger importance); (II) determine the estate, gift and GST tax results of contributions, transfers and withdrawals; and (III) create rules for making the 5 year election, addressing some income tax issues, and creating new record keeping requirements.

Rector v. Commissioner Analyzed

Steve R. Akers (Bessemer Trust, Dallas, Texas) has recently published his article entitled Rector v. Commissioner, TC Memo 2007-367, RPPT eREPORT (Feb. 2008).

Here is a summary of his article as posted on RPPT eREPORT:

The Tax Court finds an implied agreement under §2036 and applies the section to the assets contributed to the FLP rather than to the gifts of LP interests under a “single plan” analysis.

Making Gifts to Heirs Now May Reduce Taxable Value

The following is from Brett Arends, Market Turmoil Creates Opening To Enrich Heirs, online.wsj.com, March 15, 2008:

It isn't all bad news. This winter's market turmoil is creating a golden opportunity to pass on stocks, mutual funds or other appreciating assets to your heirs.

Plunging stock prices mean you can give more of those assets under the gift-tax ceiling, while the collapse in long-term interest rates has suddenly widened a little-known tax loophole on certain estate-planning trusts.

Put the two together and you could save a bundle on taxes by making bequests right now, especially if you've got an estate in the millions.***

The bottom line is that making the gift this way can slash the taxable value, allowing you to pass more to your heirs.***

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

Galloway and Disallowance of Charitable Contribution Deduction

Valerie H. Kuntz (Managing Editor of Law Review, Regent University School of Law) has recently published her Note entitled Galloway, Split-Interest Trusts, and Undivided Portions: Does Disallowing the Charitable Contribution Deduction Overstep Legislative Intent?, 20 Regent U. L. Rev. 125 (2007-2008).

Here is the conclusion to her Note:

When individuals make charitable contributions through split-interest trusts, they risk the disallowance of any potential charitable contribution deduction for estate tax purposes. Even where the interest given to the charitable beneficiary represents an undivided portion of the decedent's interest in trust property--as was the case in Galloway--under the prevailing statutory interpretation of I.R.C. § 2055(e)(2) and Treasury Regulation § 20.2055-2(e), the deduction will be disallowed. This draconian application of Section 2055(e)(2) oversteps the legislative intent behind the enactment of that section. Until a better solution to this conflict between statutory language and intent is reached, whether through case precedent or legislative amendment, the “moral” of Galloway remains that “the drafter who is unsure of the technical [deduction disallowance] rules would be well-advised to seek” legal counsel before trying to make any contribution to charitable beneficiaries out of his or her estate.

Growing Dislike of the Super Rich and Possible Solutions

The following is from John Thornhill, How super-rich can avoid lynching, FT.com, Feb. 22, 2008:

We have, it seems, reached that point in the economic cycle when resentment is rising against the rich.***

That sentiment has marked the US presidential election campaign as fears of recession grip the country.***

While wealth creation and distribution should remain free, Carnegie supported high inheritance taxes. “Of all forms of taxes this seems the wisest,” he wrote. “By taxing estates heavily at death the state marks its condemnation of the selfish millionaire’s unworthy life.”

Much has changed since Carnegie’s day. Great fortunes are made in ways that Carnegie would have probably considered unworthy.*** Pro-business politicians now denounce “death taxes”. But Carnegie’s conclusion still provokes thought and should inspire action: “The man who dies rich dies disgraced.”

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

Sisters Hide Inheritance in the Shed to Avoid Japanese Estate Tax

According to Matthew Firestone, Big in Japan: Sisters hide billions of yen in their tool shed, gadling.com, March 12, 2008:

Today in Japan, the tabloids are buzzing with the latest news of two sisters from the city of Osaka, who were arrested yesterday after hiding US$58 million from the tax man.***

[T]hey actually kept all of the money in cardboard boxes and paper bags that were stowed away in a shed attached to their house!***

According to prosecutors, the two sisters in question, Hatsue Shimizu and Yoshiko Ishii, inherited about 7.5 billion yen (or US$73 million) when their father, who owned a property and finance company, died in 2004.

In Japan, inheritance tax can take a serious chunk out of your assets, and this dastardly duo wasn't about to lose their hard-earned money to the government.

So, rather than losing an estimated 2.86 billion yen (or US$28 million) of their newfound fortune, the free-thinking pair simply declared a small amount and stashed the rest.***

Special thanks to David S. Luber (Attorney at law, Florida Probate Attorney Wills and Estates Law Firm) for bringing this article to my attention.

Estate of Christiansen v. Commissioner Analyzed

Steve R. Akers (Bessemer Trust, Dallas, Texas) has recently published his article entitled Estate of Christiansen v. Commissioner, RPPT eREPORT (Feb. 2008).

Here are excerpts from the introduction to his article:

The Tax Court reviewed the validity of a formula disclaimer, that operated much in the same manner as defined values clauses, in Estate of Christiansen v. Commissioner, 130 T.C. No. 1 (2008). The court unanimously approved the formula disclaimer to a foundation and rejected the IRS’s arguments that the clause violated public policy[.]***

The case is especially important because of its implications for defined value transfers, in which a transfer is made and allocated between a “taxable” and “non-taxable” portion based on gift or estate tax values. A redetermination of value by the IRS operates much like with a standard marital deduction formula clause, where an increased value allocates a larger value to the surviving spouse but does not generate additional estate tax.***

The Future of the Estate Tax

The following is from AP, Senate Panel Weighs Estate Tax Overhaul, Forbes.com, March 12, 2008:

A Senate tax panel on [March 12, 2008] explored ways to overhaul the U.S. estate tax system as Congress struggles with the expiration of estate tax relief in three years.

Senate Finance Committee Chairman Max Baucus, D-Mont., said he wants to reach a bipartisan compromise on estate tax law changes before the current law expires in 2011 and rates shoot up. * * *

The committee heard from three academics whom the panel encouraged to propose far-ranging plans to revamp the estate tax.

For example, Lily L. Batchelder, associate law professor at New York University School of Law, discussed replacing the estate tax system with a comprehensive inheritance tax. Under this regime, an individual "inheriting an extraordinary amount over his lifetime would pay income tax and a flat 15 percent tax on a portion of his inheritance," she said. She said such a change could be implemented without gain or loss to the U.S. Treasury if the first $2 million in lifetime inheritances were exempt from taxes. * * *

Analysts don't believe Congress will act on the estate tax issue during a presidential election year.

See also Editorial, New Hope for the Rich, NY Times, March 13, 2008, reflecting the view that estate tax reform is merely a shield for wealthy individuals.  Special thanks to Jennifer Fisk (Texas Tech University School of Law) for bringing this editorial to my attention.

Rector and Gore Opinions from the Tax Court

Wendy C. Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled Rector and Gore: Two Recent Flp Cases.

Here is an abstract of her article:

Rector and Gore are two recent family limited partnership (FLP) memorandum opinions from the Tax Court. In both cases, the coveted FLP marketability and minority discounts eluded the estates.

New Jersey Supreme Court Holds Estate Tax Constitutional but Unjust

The following is from Tom Hester, Supreme Court rules estate tax was unjust, NJ.com, Feb. 28, 2008, discussing a New Jersey case Oberhand v. Director, Div. of Taxation, A-106-06 (N.J. Feb. 27, 2008).

The state Supreme Court ruled yesterday an attempt by the state to collect taxes on portions of the estates of two people who died was legal, but unjust.

At a time when the Corzine administration is scraping for every dollar for the state budget, the decision is expected to force the Division of Taxation to refund more than $2 million in taxes and interest in 40 estate tax cases in which the executors have gone to state Tax Court to regain the money.***

In a 5-2 decision, the Supreme Court upheld a state Tax Court decision that the amendment applied to the estates is constitutional. But the justices found the amendment should not be applied to the Ober hand and Seider estates because it would be "manifest injustice" -- a legal doctrine designed to prevent unfair results that do not necessarily violate the Constitution.***

"When the decedents executed their wills and at the time that each died, the trust formulae were framed in such a fashion that no federal or state taxes would be due[.]"***

This case is also discussed by Michael Rispoli, Court partially overturns estate tax law, courierpostonline.com, Feb. 28, 2008.

Special thanks to Neil E. Hendershot, Esq. (Attorney at law, Goldberg Katzman, P.C., Adjunct Professor, Widener University School of Law) for bringing these articles to my attention.

The court may reject both the taxpayer’s and the government’s values

In Estate of Thompson, 499 F.3d 129 (2nd Cir. 2007), the court upheld the Tax Court’s rejection of both the taxpayer’s and the government’s valuation of stock in a closely held corporation. 

The court rejected the taxpayer’s argument that the Tax Court was bound to accept the taxpayer’s value once the court rejected the government’s value.  The Tax Court was thus permitted to conduct its own valuation of the stock.  Nonetheless, the appellate court remanded the case to correct a calculation error.

Charitable gifts reduced by proportional share of state and federal estate taxes

In Hale v. Moore, No. 2005-CA-001895-MR & 2006-CA-000662-DG, 2008 WL 53871 (Ky. Ct. App. Jan. 4, 2008), involving the estate of Claudia Sanders, the widow of Kentucky Fried Chicken founder Colonel Harland Sanders, the court required charitable beneficiaries (two colleges) to have their shares burdened by a proportional amount of state and federal taxes.

The court explained that Kentucky law does not exempt charitable gifts from being subject to reduction for transfer taxes unless the will expressly provides otherwise.  The will did not contain any specific language that the gifts to the colleges were to receive special treatment or be exempt from taxes.

Charitable deduction for faulty unitrust denied because the estate failed to file court proceeding to reform the trust

The court in Estate of Tamulis v. Commissioner, 509 F.3d 343 (7th Cir. 2007), refused to apply the substantial compliance doctrine.  The court explained that the taxpayer knew that reformation was needed and “had no excuse” for the failure to do so.  The court also stated that the reformation “requirement is not unimportant; it protects against efforts to bend trust law to get a tax benefit.”

Tax Reforms and Their Applicability

The following excerpts are from Robert L. Moshman, The Zero Percent Capital Gains Tax Rate, Est. Analyst (Feb. 2008):

These days, tax reforms are like time-release pills; the relief comes years after the legislation. The zero percent tax bracket of 2008 originated with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) and was scheduled only for one year, 2008. Then the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) extended the zero bracket to include 2009 and 2010 as well.***

The zero bracket applies only to taxpayers who are in the two lowest federal income tax brackets of 10% and 15%. The favorable zero bracket covers long-term capital gains (after being offset by net short-term losses). Qualified  dividend income is also covered.***

Second guessing these decisions is inevitable because the fate of the stepped-up basis for assets transferred at death remains uncertain. An estate tax repeal with a carryover basis is still possible, so taking advantage of current temporary techniques to avoid capital gains is somewhat tempting.***

A Discussion of the Estate Tax Controversy

Ann Mumford (Senior Lecturer in Tax, University of London , Queen Mary School of Law) has recently posted on SSRN her article entitled Inheritance in Socio-Political Context: The Case for Reviving the Sociological Discourse of Inheritance Tax Law. 

Here is the abstract of her article:         

The anti-'death tax' movement is the starting point for contemporary discussions of inheritance taxation. The political rhetoric surrounding calls for its repeal typically is met with analyses of the extent to which inheritance tax avoidance benefits the wealthy, and arguments that inheritance taxation is fair and 'targeted'. This article suggests that engagement by tax lawyers with sociological theories of economic inheritance has the potential to revive this discourse. A renewed approach to inheritance taxation is of immediate concern to supporters of inheritance taxation in the United Kingdom , who face considerable obstacles posed by the increasing use of United States anti-inheritance tax movement political rhetoric by politicians. Durkheim's consideration of the conjugal family and, more recently, Beckert's sociology of inheritance are submitted as analyses that, amongst others, have particular potential. Such engagement also has the potential to revive the interest of sociologists in inheritance taxation, memorably described by MacNamee and Miller as a sociological lacuna.

Qualifying for a Charitable Deduction

Prof. Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted on SSRN her article entitled The Strict Rules of Charitable Split Interest Gifts.  Her article also appears in Tax Notes, Vol. 118, No. 5, 2008.

Here is the abstract of her article:         

When giving both to your family and to your charity, you must follow the rules carefully to qualify for a charitable deduction. The article discusses the recent Tamulis case, other split interest charitable deduction cases, and the doctrine of substantial compliance.

Bypass Trust Basics Explained

According to Ronald Lipman, Bypass trusts can reduce couples' estate taxes, chron.com, Jan. 25, 2008:

Bypass trusts are usually created by married people as a way to save estate taxes.

Under current law, everyone can leave as much as $2 million free of estate taxes at death. Married persons can also leave each other an unlimited amount of money and property with no estate taxes.

Many married couples have simple wills and leave all their property directly to the other. Although no estate taxes are owed at the first spouse's death, this leaves assets stacked up in the estate of the surviving spouse.***

A bypass trust can sharply reduce this tax.***

Not all kinds of property are appropriate for a bypass trust, and not all bypass trusts are written the same.

Also, different rules may apply to non-United States citizens.

Estate Planning with the IRS in Mind

John W. Porter (Attorney at Law, Baker Botts LLP), Stephanie Loomis-Price (Attorney at Law, Baker Botts LLP), and Charles E. Hodges II (Attorney at Law, Chamberlain, Hrdlicka, White, Williams & Martin), have recently published their article entitled Anticipating the Audit Call, Prob. & Prop., Jan./Feb. 2008, at 20.

Here is the conclusion to their article:

In sum, there are numerous protections of communications among advisors and between advisors and their clients. To best protect those communications from discovery or, if produced, from misinterpretation, it is important to understand the differences among those protections and to ensure that the communications are documented in the context of the broader goals of the client, such that both tax and nontax reasons for the transaction are clearly indicated. Keeping these protections in mind at all times can assist the estate planner in advising his or her client and in accomplishing the client’s goals. And, although privileges generally are thought to protect communications, anticipating that at some point the client might find it advantageous to waive these privileges and deliberately documenting communications that could be helpful in the event of a tax audit or dispute could be the linchpins for the client’s case.

Patents for Tax Planning Inventions – An Update

In Proposal to Prohibit Tax Planning Patents - S. 2369, RPPT eREPORT (2007), Rana Salti (Attorney at Law, McDermott Will & Emery LLP) "keeps us up to date on the continuing saga of the patenting of tax planning devises. On November 15, 2007, legislation was introduced in the United States Senate that would prohibit the issuance of any patents for tax planning inventions."

Lack of Portability of the Estate Tax Exemption and Possible Solution

Mitchell M. Gans (Steven A. Horowitz Distinguished Professor of Tax Law, Hofstra University School of Law), Jonathan G. Blattmachr (Attorney at Law, Milbank, Tweed, Hadley & McCloy LLP)  and Austin Bramwell (Attorney at Law, Milbank, Tweed, Hadley & McCloy LLP), have recently published their article entitled Estate Tax Exemption Portability: What Should the IRS Do? And What Should Planners Do in the Interim?, 42 Real Prop. Prob. & Tr. J. 413 (2007).

Here is the editors' synopsis of their article:

This Article addresses the problem of the lack of portability of the estate tax exemption: if one spouse dies without using the exemption, it is lost, and the surviving spouse cannot retain it for later use. The authors trace the Internal Revenue Service’s response to this problem through four private letter rulings and conclude that the analysis used in the rulings is problematic because it could undermine enforcement of the Internal Revenue Code in other contexts. Instead, the authors propose a new approach to resolving the portability problem and recommend that it be implemented administratively so that taxpayers may employ it safely.

Taxes in 2008

In Tax Thresholds for 2008, Est. Analyst (Jan. 2008), Robert L. Moshman covers some estate-planning related tax facts for 2008:

TOP ESTATE TAX RATE: * * * the estate tax was repealed in 2001 but we are in the seventh year of an eight-year phase-out. The top estate tax rate remains at 45% this year and through 2009 and applies to estate assets in excess of $1.5 million.

ESTATE TAX EXEMPTION: We remain at $2-million estate tax exemption for 2008, the third and final year at that level before increasing to $3.5 million in 2009. This could be modified by new tax legislation during 2008, of course. * * *

GENERATION-SKIPPING TRANSFER TAX: Also unchanged. Both the tax rate and exemption for estates continue to apply to the GST tax, i.e., 45% and $2 million.***

STATE DEATH TAX: The state death tax credit had been phased out. State death taxes are treated as a deduction. The number of states with some form of death taxes (24) seems to have stabilized. Some of these states have “decoupled” from the Federal approach.

Only a few days left to make annual exclusion gifts for 2007

The following reminder is from Bracewell & Giuliani LLP, Year-End Wealth Transfer Opportunity – Annual Exclusion Gifts (Dec. 27, 2007):

Estate planners often recommend complex and highly technical estate planning techniques to their clients for a variety of reasons not the least of which are tax minimization and creditor protection. However, clients should not overlook a very simple yet significant way in which to transfer substantial wealth to family members through direct gifts that take full advantage of the annual exclusion from gift taxes. The annual exclusion amount is currently set at $12,000.

Bigelow Analyzed

Prof. Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted her article on SSRN entitled Bigelow: The Ninth Circuit on FLPs.  The article also appears in Tax Notes, Vol. 117, No. 12, 2007.

Here is the abstract of her article:

The article discusses the Ninth Circuit's recent Bigelow case. The issues on appeal were: 1) whether the Tax Court erred in its finding that there was an implied agreement of income retention from the property the decedent transferred to her FLP, and 2) whether the Tax Court erred in its holding that the transfer did not constitute a bona fide sale for adequate and full consideration, exempting it from section 2036.

Federal Estate Tax Changes and their Effect on the States

Sarah E. Nutter, (Associate Professor of Accounting, George Mason University School of Management) has recently posted on SSRN her article entitled State Estate, Inheritance, and Gift Taxes: Uncertainty at the Federal Level Passes Down to the States.

In this article the author looks at the effect federal "death" tax changes have had on the states.

Estate of Roski – Tax Court Leaves Bond Issue Unresolved

Here is what Robert L. Moshman, Esq., A Glimmer of Hope?, Est. Analyst (Oct. 2007), reports on the Estate of Roski v. Commissioner, a case that has been a subject of an ongoing discussion among representatives of legal and tax professions:

In 2002, the estate of Edward Roski filed an estate tax return showing a balance of $32,778,000 along with a Notice of Election to defer payments under Section 6166. The IRS insisted that the estate either post a bond for twice that amount or be subject to a special lien under §6324A. The estate filed for relief under §7479 and argued that the IRS had exceeding its discretion. The IRS sought summary judgment saying its discretion was not subject to review.

The Tax Court determined that it had jurisdiction and that the IRS has no authority to impose a bond or lien requirement in every case.*** The statutory lien under §6324 was adequate as well.***

Yes, the Commissioner had discretion…but “by adopting a bright-line rule in every case, the Commissioner has shirked his administrative duty to state findings of fact and reasons to support his decisions * * *.”  The case was remanded; the Court did not rule whether the bond was necessary or not.