Wills, Trusts & Estates Prof Blog

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.

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.

Factors Bearing on Trust Situs Selection Analyzed

The Program on Corporate Governance has recently released a new discussion paper entitled Perpetuities, Taxes, and Asset Protection: An Empirical Assessment of the Jurisdictional Competition for Trust Funds, authored by Robert Sitkoff (John L. Gray Professor of Law, Harvard Law School) and Max Schanzenbach (Benjamin Mazur Professor of Law, Northwestern University School of Law).

Here are excerpts from the abstract of this paper as posted by Robert Sitkoff on March 5, 2008:

This chapter provides an accessible overview of our previous work on the impact of the abolition of the Rule Against Perpetuities (RAP) on trust fund situs. The implementation of the Generation Skipping Transfer (GST) Tax by the Tax Reform Act of 1986 sparked a movement to repeal the RAP.***

Our findings imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the RAP. ***

We conclude that the jurisdictional competition for trust funds is real and intense, with the primary margin of competition being the rules that bear on trust duration, and that the enactment of the GST tax sparked the rise of the perpetual trust.***

GST and the Qualified Severance Rules for Trusts

Marc Chorney  (Attorney at Law, Chorney & Millard LLP) has recently posted on SSRN his article entitled GST Qualified Severance Regulations: Final and Proposed. 

Here is the abstract of his article:          

Prior to 2001, downstream divisions of trusts were prohibited for Generation-skipping Transfer Tax (GST) purposes. A Qualified Severance of a trust is now allowed. If a trust is properly severed, unnecessary payment of GST tax can be avoided. Final and proposed regulations were issued in August, 2007 explaining the Qualified Severance rules. This article discusses those regulations.

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."

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.

Generation-Skipping Transfer Tax and IRS Regulations

Julie Kwon, (Attorney at Law, McDermott Will & Emery LLP) has recently published her articles entitled Qualified Severances for GST Tax Purposes - Final and Proposed Regulations issued August 2, 2007, RPPT eREPORT (2007).

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

Julie Kwon thoroughly summarizes IRS Final and Proposed Regulations concerning the qualified severance of trusts for Generation-Skipping Transfer Tax planning purposes.

Inequalities in the Taxation System

Lester B. Snyder   (Professor of Law, University of San Diego School of Law) has recently posted on SSRN his article entitled Taxation of the New Era 'Family Unit'.

Here is an abstract of his article:

Virtually everyone in this country is directly affected by the material in this chapter. Whether you are single, married, cohabitating with someone of the opposite or same sex, a child, an elderly person, someone going through a divorce or separation, rich or poor, there are numerous tax issues and tax disparities that impact your daily lives. Over the past 90 or so years, the taxation of the family unit has undergone numerous changes, resulting in unequal treatment of significant numbers of citizens. The evolution of the tax law of the family unit provides us with an opportunity to view the constant interplay and conflict between federal and state laws. Keeping with the theme of this book, this chapter will focus on some of these major inequalities, many of which have received only sparse public attention and are generally unknown to the ordinary taxpayer.

Generation-Skipping Transfer Tax and Power of Appointment

The following is from Robert L. Moshman, Esq., GST Grandfathering Debated, Est. Analyst (Oct. 2007):

The Benjamin Gerson Trust became irrevocable when Mr. Gerson died in 1973. Mr. Gerson left a $22-million estate for which $7.16 million of estate tax was owed. Marital Trust A, containing $6.24 million, was subject to a power of appointment that Mrs. Gerson exercised in her will on behalf of five grandchildren. At her death in 2000, Trust A was distributed to two of the grandchildren outright and to three others in trust until they were to turn 40.

Since Mrs. Gerson held a general power of appointment over property at death, the value of such property was includible in her gross estate for Federal estate tax purposes under section 2041.

The IRS treated the transfer to the grandchildren as direct skip transfers coming from Mrs. Gerson and therefore assessed a tax deficiency of $1.14 million based on the GST tax.***

[T]he IRS*** found that the lapse of a general power of appointment resulted in a “constructive” addition to the trust and was therefore subject to GST tax.

The estate argued that the transfer was grandfathered as a transfer from a trust that was irrevocable prior to October 22, 1986, under section 1433(b)(2)(A) of the Tax Reform Act of 1986[.]***

[A] divided tax court sided with the IRS and noted that Congress used the transitional rule to apply to trusts involving a specific volitional generation-skipping transfer and not a general power of appointment. Also, there was congressional intent to provide uniformity in GST tax application.

Taxation Issues from August 2006 through September 2007 - an Update

Samuel A. Donaldson (Associate Professor, University of Washington School of Law) has recently posted on SSRN his article entitled Federal Tax Update: Important Developments in Federal Income, Estate & Gift Taxation Affecting Individuals - August, 2006 to August, 2007.

Here is the abstract of his article:

This update explains several developments in the substantive federal income, estate and gift tax laws affecting individual taxpayers and small businesses. It contains summaries of significant cases, rulings, regulations, legislation and other matters from August, 2006, through September, 2007. This update generally does not discuss developments in the areas of qualified plans or the taxation of business entities (except to a very limited extent).

Qualified Severance and the Generation-Skipping Transfer Tax

Jerold I. Horn (attorney, Peoria, Illinois) has recently published his article entitled Availability of a Qualified Severance (i) If the Severance Changes Beneficial Interests or Otherwise Coincides with Changes in Beneficial Interests and (ii) If Remainder Dispositions Are Outright, 33 ACTEC J. 94 (2007).

Here is the introduction to his article:

The primary focus of this article is whether a qualified severance is available for a trust in which beneficial interests, present or future, are subject to change because of the death of a beneficiary, the termination of a term of time, the mandate of the governing instrument, the making of a severance, the availability or nonavailability of a qualified severance, the exercise of a nongeneral power of appointment, the exercise of a power of a trustee to “decant,” or the exercise of a power of an independent trustee to grant or revoke a general power of appointment. The situations that are described in the preceding sentence are common. Whether a qualified severance is available in each of these situations will have a large impact upon the extent, if any, to which reliance upon a qualified severance of a single trust that has an inclusion ratio of more than zero and less than one is a viable alternative to the mandated creation, from the outset, of two trusts, one with an inclusion ratio of zero and the other with an inclusion ratio of one.

IRS Proposes Modification of Tax Return Preparer Penalty Provisions

IRS has proposed new regulations that amend Circular 230 and address the tax return preparer penalty provisions under I.R.C. § 6694. In Notice 2007-54 IRS provides guidance on the proposed amendments.

Here is an excerpt from Prof. Roger A. McEowen's discussion on this issue:

The proposed regulations, when final, would amend section 10.34 of Circular 230.  Changes to the standards of practice were triggered by the Act, which became law in May and effectively extended the application of the return preparer penalties to all tax return preparers, altered the standards of conduct that must be met to avoid imposition of the penalties for preparing a return showing an understatement of liability, and increased applicable penalties.* * *

Under the proposed regulations, IRS says that the standards of practice under Circular 230 should conform to the civil penalty standards for return preparers. That means a practitioner may not sign a tax return as a preparer unless the practitioner has a reasonable belief that the tax treatment of each position on the return would more likely than not be sustained on its merits, or there is a reasonable basis for each position and each position is adequately disclosed.  The proposed regulations say that the definitions of "more likely than not" and "reasonable basis" are to be defined by the way those phrases are defined under I.R.C. § 6662.

IRS Proposes Regulations on Patented Tax Methods

Proposed regulations would require taxpayers to report to the IRS when they use patented tax methods.  Reg-129916-07.

Patents on Tax Planning Methods May Be Denied

James V. Roberts (Attorney at Law, Glast, Phillips & Murray P.C.) has recently published his article entitled Update on Patenting Tax Advice, RPPT eREPORT (2007).

Here is an abstract of his article:

The idea of issuing patents in the area of tax planning has stirred significant controversy and has been reported on before in eReport. As previously noted, the expansion of patents in this area has worried many practitioners for a variety of reasons, most notably the possibility that a strategy conceived for a private client later exposed (typically through a dispute process with the IRS) may be the same as or substantially similar to an existing patent, triggering an infringement claim. And from that claim, discovery could reach into the practitioner’s other files, and, if part of a firm, into the files of other practitioners in the firm.

In January of this year, the State Bar of Texas Board of Directors approved a request by that bar’s Tax Section to submit to the Internal Revenue Service a response to its request for comment on this area, and, in that response, offering specific legislation to prohibit enforcement of tax strategy patents. The model for the proposed legislation is the language added in 1997 to prevent patents on surgical procedures from being enforced against doctors and hospitals.

The Power of Attorney-Transfer Tax Interface

Bridget J. Crawford (Associate Professor of Law, Pace University - School of Law) has recently posted her article on SSRN entitled The Tax Regulation of Contractual Intimacy: Transfer Tax Aspects of Powers of Attorney.

Here is the abstract of her article:

Powers of attorney are both the most common and the most abused of all estate planning documents. Newspapers and court cases are full of stories of alleged wrongdoing by agents who, whether due to misunderstanding or overt abuse, exceed the authorities given to them by the principal. Part I of this article provides an overview of the creation, scope and limitations powers of attorney. A power of attorney is, at its core, a contract for legal intimacy. It is an instrument that permits one person (called the attorney-in-fact or the agent) to act as the legal alter ego of another (the principal). Part II examines the estate and gift tax consequences of creating a power of attorney. Most lawyers assume (correctly) that the execution of a power of attorney does not give rise to a taxable gift by the principal and should not cause any estate tax inclusion in the estate of the agent. Part III explores how a fiduciary analysis of an agent's authorities is consistent with the Uniform Durable Power of Attorney Act. Part IV considers the implications of the Act's efforts to regularize powers of attorney. By making the principal/agent relationship more standard, some tax and estate planning professionals may shift their business practices in unexpected ways. Part V interprets the projected commodification of the principal/agent relationship in light of the way people live in the United States.

This article seeks to make two principal contributions to critical tax scholarship. The first is methodological. Instead of critiquing the existing law, this article explores a positive aspect of the existing wealth transfer tax rules. Critical tax scholarship to date tends to explore how existing law is biased, discriminatory or has a disparate impact on certain segments of the population. The article's second intended contribution is a normative one. In examining the tax treatment of intimacy that arises by contract, such as that between a principal and agent, this article opens the door for further exploration of ways in which the tax law can and should recognize choice-based human relationships. Scholars with an anti-subordination agenda should focus on ways to use existing tax laws to their advantage, given the political obstacles to left-oriented reform of the tax system.

Transfer Tax CLE

The American Bar Association Section of Real Property, Probate and Trust Law, Young Lawyers Division and the ABA Center for Continuing Legal Education is sponsoring a Teleconference and Live Audio Webcast on August 14, 2007 entitled Review of Estate Tax, Gift Tax and GST Tax -- Part 1.

Here is a description of the program:

The Essential Issues in Trust and Estate Law Series provides attorneys with the opportunity to learn more about the key basics of trust and estate law. Whether you are a new attorney wanting to know more about trust and estate law, or a seasoned attorney looking for a refresher, this series has the information you need.  Click here for more information on the series and series registration options.

This first program in our comprehensive series consists of an overview of the estate tax, gift tax, and generation-skipping transfer tax systems.  In particular, this program focuses on fundamental estate planning concepts such as: planning with your client’s applicable exclusion amount, computing gross and taxable estates, utilizing marital and charitable deductions, implementing annual exclusion gifts, and understanding generation-skipping transfer tax transfers.  In addition, the program will briefly address recent proposals for estate tax reform.  The program will provide both a solid framework for junior practitioners and an excellent review for senior practitioners.

Study Reveals that Paying Taxes May Make People Happy

John Tierney, Taxes a Pleasure? Check the Brain Scan, NY Times, June 19, 2007, reports that

The University of Oregon announced a new piece of research last week with a startling headline: “Paying taxes, according to the brain, can bring satisfaction.”

Note, however, that "this study did not exactly involve a nationally representative sample of taxpayers. The sample consisted of 19 female students at the University of Oregon. And they were not exactly paying taxes * * *."
   

“The most surprising result is that these basic pleasure centers in the brain don’t respond only to what’s good for yourself,” said Dr. Mayr, the psychologist. “They also seem to be tracking what’s good for other people, and this occurs even when the subjects don’t have a say in what happens.”

Plan Ahead When Cashing Out

The following excerpts are from Lauren Foster, Preparing for life after cash out, Financial Times, April 2, 2007:

When that private equity firm or strategic buyer comes knocking, it pays to have a plan: cashing out raises complex issues ranging from family wealth preservation and philanthropy to how best to invest the windfall, be it tens of millions or hundreds of millions of dollars. * * *

There are several pre-liquidity strategies that can help lower federal transfer taxes, which include the gift tax, the estate tax and the generation-skipping transfer (or GST) tax. They range from basic steps such as taking advantage of the annual gift tax exclusion-- you can make annual gifts of up to $12,000 tax-free to any number of people, with a lifetime exclusion of $1m per donor is to setting up a Grantor Retained Annuity Trust (GRAT) and making an instalment sale to a Grantor Trust. * * *

This is how a GRAT works: the business owner makes a gift of stock to an irrevocable trust and in exchange receives an annuity for the term of the trust, usually two or three years. The value of the gift for tax purposes is the difference between the amount contributed to the trust and the present value of the annuity payments the grantor will receive.

With a bit of financial engineering, an adviser can select a combination of annuity payments and trust term that will result in the present value of all future payments being equal to the amount contributed to the trust. By IRS calculations, the GRAT will have zero assets by the time the trust expires, so no gift tax is owed. * * *

Another popular tax-efficient strategy is a sale to an Intentionally Defective Grantor Trust.

With an IDGT, a grantor sells assets – say, stock in a closely held or family business, marketable securities, limited partnership interests or property – to an irrevocable trust in exchange for an instalment note with interest. This trust works best if the assets are subject to discounts in determining their fair market value and are expected to appreciate in value at a rate greater than the interest payable on the note.

When the grantor dies, only the fair market value of the note is included in the estate. This technique "freezes" the value of the assets in the estate.

Another benefit of the IDGT is that the grantor pays the income tax on any income generated by the trust. "That effectively allows the trust assets to compound tax free and the payment of the trust’s tax by the grantor is not treated as a taxable gift," says Mr Raaf, of Harris myCFO. Also, an IDGT can be used for very effective "GST" planning as the grantor can allocate his/her "GST" exemption to the trust.

Special thanks to Prof. Joel C. Dobris of the University of California-Davis for bringing this article to my attention.

GSTT Teleconference

The American Bar Association Section of Real Property, Probate and Trust Law and the ABA Center for Continuing Legal Education are sponsoring a teleconference on March 29, 2007 entitled Generation Skipping Transfer Tax Traps for the Unwary.

Here is a description of the program:

A properly prepared, timely filed gift-tax return that reports transfers and allocation of GST exemption often effectuates, preserves, or precludes intended GST tax planning.

The realm of GST tax compliance has undergone significant transformation in recent years, including: statutory changes under the Economic Growth and Tax Relief Reconciliation Act of 2001; final regulations governing elections into and out of treatment of a trust as a GST trust; proposed regulations governing qualified severances; and changes to federal Form 709.  

This teleconference and live audio webcast will focus on the translation of theoretical GST tax rules into practice through a step-by-step examination of Form 709 and separate notice of allocation.  Our experts will explore common errors and omissions and recommend best practices to help your client take advantage of the recent changes in GST tax law in allocating GST exemption or electing into/out of automatic allocations.  This program also will review the procedure for obtaining Section 9100 relief for an extension of time to allocate GST exemption and how to report qualified severances of trusts.

I.R.S. Practice of Seeking Tax Lawyer Assistance Questioned

In David Cay Johnston, I.R.S. Letting Tax Lawyers Write Rules, NY Times, March 9, 2007, this policy is questioned.  Here are a few excerpts:

The Internal Revenue Service is asking tax lawyers and accountants who create tax shelters and exploit loopholes to take the lead in writing some of its new tax rules.

The pilot project represents a further expansion of the increasingly common federal government practice of asking outsiders to do more of its work, prompting academics and other critics to complain that the government is going too far.

They worry that having private lawyers and accountants draft tax rules could allow them to subtly skew them in favor of their clients. * * *

The I.R.S. staff has been cut by a fifth in the last decade, even as Congress has made the tax code vastly more complex. The agency, in a formal notice, said it lacked the resources to issue as much guidance as taxpayers are seeking.

Rule making is the heart of what Washington does, though it gets little news coverage. Once a bill becomes law it must be carried out through rules that range from advice memoranda to formal regulations, which are printed in the Federal Register. At that point, they are subject to public comment and at times public hearings before being revised and then formally adopted as the way the executive branch will carry out the new law.

GSTT & QTIP Articles

Wendy Gerzog (Professor of Law, University of Baltimore School of Law) has recently posted two tax articles on SSRN, one hot off the press and one historical.

• Gerson: Plain Meaning and the GSTT, 114 Tax Notes 701 (Feb. 12, 2007). 
  "In Gerson, the Tax Court upheld the government's regulation regarding the grandfather exception to the generation-skipping transfer tax and held that the decedent's exercise of a general testamentary power of appointment in 2000, granted under a trust created by her husband at his death in 1973, was subject to the GSTT. The article reviews the decision and the plain meaning of the grandfather exception to the GSTT."
     
• Davis and Whiting: QTIP Income Interests and Intent, 106 Tax Notes 1597 (Mar. 28, 2005).
  "It is somewhat difficult to anticipate when a court will reform a trust to conform to a testator's intent to qualify for the marital deduction. With this in mind, the author compares the recent Ninth Circuit case Davis to the recent Tax court opinion in Whiting."

The GRAT--GST Tax Interface

Edward M. Manigault and Milford B. Hatcher Jr. (both partners in the Atlanta office of Jones Day) have recently published their article entitled GRATs and GST Planning -- Potential Pitfall and Possible Planning Opportunity, Prob. & Prop., Nov./Dec. 2006, at 28.  Here is the introduction to their article:

Many clients have GST exemptions that exceed their lifetime gift tax applicable exclusions, especially because the maximum GST exemption (currently $2 million) presently exceeds the maximum gift tax exclusion of $1 million.  The excess can increase as clients make taxable gifts that are not GST transfers, and it will continue to grow when the GST exemption increased to $3.5 million in 2009. * * * Advisors are therefore looking to devise ways for clients to take advantage of the use of excess GST exemption over the gift tax applicable exclusion amount without making any, or at least not material, taxable gifts.  One excellent transfer technique is, of course, a GRAT.  Using GRATs for GST planning, however, presents one pitfall, but also a possible planning opportunity.

Patent Your Favorite Tax-Saving Technique?

There is a growing trend for lawyers to patent tax-saving techniques which they have developed.

Here are some excerpts from Jeremy Kahn, Taxes: Patent that loophole, Fortune, Aug. 30, 2006:

In recent years, the Patent Office has begun granting patents to people who claim to have invented novel ways of avoiding taxes. The trend is part of a larger explosion in the number of patents granted to financial firms for so-called "business method" innovations.

So far, 48 patents for tax reduction strategies have been granted and at least another 61 applications are pending.

To tax shelter touts, the patents are a potentially deceptive new marketing tool. After all, if something is patented, it sounds as if it is government-approved. But just because something is patented doesn't mean it's legal.  * * *

Earlier this year, a Florida company called Wealth Transfer Group filed suit against John Rowe, the executive chairman of Aetna, alleging he infringed on the patent it holds for a tax savings technique involving the transfer of stock options to a certain type of trust because he used a similar technique without paying Wealth Transfer a licensing fee.

The case, which has yet to go to trial, is being closely watched by both tax and intellectual property lawyers.

Some are warning of dire consequences if the court sides with Wealth Transfer. "If you can patent an interpretation of the tax law, why not patent anyone's legal advice?" asks Carol Harrington, a lawyer with the firm McDermott Will & Emery in Chicago. "Then you could say people being prosecuted for murder can't use a certain defense without paying a licensing fee. Something is seriously wrong with that in my view."

An editorial in today's (Oct. 31, 2006) New York Times speaks out against the practice.

New York University's 65th Institute on Federal Taxation

From NYU's website:

New York University's School of Continuing and Professional Studies is pleased to present the 65th Institute on Federal Taxation. For hundreds of tax practitioners, the NYU Institute on Federal Taxation is the event of the year. The institute addresses all major areas of taxation and attracts attorneys, both general tax practitioners and specialists, accountants, corporate treasury and compliance executives, tax managers and financial planners seeking expert discussion of the latest technical, legislative, and planning developments. Just as important, the Institute provides the perfect setting to meet practitioners from all around the country. Its an opportunity for you to share ideas, exchange views, learn what others are doing, and obtain credit for continuing education.

The program will be held on October 22-27, 2006 in New York and on November 12-17, 2006 in San Diego.

The key dates for our purposes are October 26 (New York) and November 16 (San Diego) when the Institute focuses on Trusts and Estates.  Follow the links for detailed descriptions of the presentations.

The RAP-Tax Interface

Robert H. Sitkoff (Professor of Law, New York University) and Max M. Schanzenbach (Assistant Professor of Law, Northwestern University) have recently published their article entitled Perpetuities or Taxes?  Explaining the Rise of the Perpetual Trust, 27 Cardozo L. Rev. 2465 (2006). 

Here is the abstract of their article:

By abolishing the Rule Against Perpetuities, twenty-one states have validated perpetual trusts. The prevailing view among scholars is that enactment of the generation skipping transfer (GST) tax in 1986 prompted the movement to abolish the Rule by conferring a salient tax advantage on long-term trusts. However, an alternate view holds that demand for perpetual trusts stems from donors' preference for control independent of tax considerations. Proponents of both views have adduced supporting anecdotal evidence. Using state-level panel data on trust assets prior to the adoption of the GST tax, we examine whether a state's abolition of the Rule gave the state an advantage in the jurisdictional competition for trust funds. We find that, prior to the GST tax, a state's abolition of the Rule did not increase the state's trust business. By contrast, in a prior study we found that, between the enactment of the GST tax and 2003, states that abolished the Rule experienced a substantial increase in trust business. Accordingly, we conclude that the enactment of the GST tax prompted the rise of the perpetual trust. These findings bear on the debate over proposals to liberalize the law of trust termination and modification and to amend the GST tax. Our findings also contribute to the literature on the bequest motive.

Estate Tax Bill Dies

Here is an excerpt from Carl Hulse, Wage Bill Dies; Senate Backs Pension Shift, NY Times, August 3, 2006:

Senate Democrats on Thursday [August 3, 2006] blocked legislation tying the first minimum wage increase in almost a decade to a decrease in the federal estate tax, denying Republicans a legislative victory as lawmakers head into a crucial month of campaigning before the November elections.

Republican backers of the measure * * * fell 4 votes short of the 60 needed to cut off debate. Democrats had argued that it was a bad bargain to exchange a $2.10 wage increase for struggling workers for a costly tax cut for the country’s wealthiest families.

Follow this link for a report of how each Senator voted.

Estate Tax and Extension of Tax Relief Act of 2006

Earlier on this blog, I reported on the proposed Estate Tax and Extension of Tax Relief Act of 2006.

For a complete description of this legislation which "provides permanent estate and gift tax relief, extension of certain tax relief provisions through 2007, other tax relief provisions and an increase in the Federal minimum wage," see the Detailed Summary prepared by the Committee on Ways and Means (June 28, 2006).

Special thanks to Prof. Joel C. Dobris of the University of California-- Davis for bringing this report to my attention.

New York Times Editorial accuses I.R.S. of politically motivated lay-offs

An editorial in the New York Times, More Hope for the Truly Rich (July 27, 2006), says the plan to eliminate 157 estate tax attorney positions, previously blogged here, appears politically motivated.

   

The I.R.S. says the layoffs are warranted because the Bush tax cuts mean fewer people are obliged to pay estate taxes.
   

That’s not very reassuring. Fewer smaller estates — currently, those worth up to $2 million are exempt — are subject to the tax today than when Mr. Bush first took office. But large estates are still taxed, and with inequalities in income and wealth producing ever more billionaires and millionaires, there’s ever more gold in those hills for auditors to mine.
   

Still, the I.R.S. says it is confident it is catching most tax cheaters since auditing of 10% of estate tax returns accounts for 80% of additional taxes. However, until 2004, the I.R.S. released information to Syracuse University research organization Trac containing
   

comprehensive I.R.S. audit figures — by size of the estate, the number of hours spent and the amount of extra recommended tax. Researchers analyzed the data and posted it on the organization’s Web site, so the public had a continuing sense of the I.R.S’s fairness, efficiency and effectiveness.
   

However, upon receiving the request in the following years, the I.R.S did not release the information. Though ordered by a Federal court in 2006 to release the information, the data released was not nearly as comprehensive. “If the I.R.S. wants to avoid suspicion that its actions are politically motivated, it should release all the data that researchers need to evaluate its actions.”  (NYTimes.com)

I.R.S. to Cut Estate Tax Auditors

In I.R.S. to Cut Tax Auditors (July 23, 2006), New York Times journalist David Cay Johnston reported that the federal government is planning to eliminate nearly half of its estate tax attorneys. 

   

The administration plans to cut the jobs of 157 of the agency's 345 estate tax lawyers, plus 17 support personnel, in less than 70 days. Kevin Brown, an I.R.S. deputy commissioner, confirmed the cuts after The New York Times was given internal documents by people inside the I.R.S. who oppose them.

   

The Bush administration has passed measures that reduce the number of Americans who are subject to the estate tax which opponents refer to as the "death tax” but has failed in its efforts to eliminate the tax entirely. Mr. Brown said in a telephone interview Friday that he had ordered the staff cuts because far fewer people were obliged to pay estate taxes under President Bush's legislation.

   

Estate tax lawyers are the most productive tax law enforcement personnel at the I.R.S., according to Mr. Brown. For each hour they work, they find an average of $2,200 of taxes that people owe the government.

   

Mr. Brown said that careful analysis showed that the I.R.S. was auditing enough returns to catch cheats and that 10 percent of the estate audits brought in 80 percent of the additional taxes. He said that auditing a greater percentage of gift and estate tax returns would not be worthwhile because the next case is not a lucrative case and likely to be of relatively little value.

   

Special thanks to Prof. Joel C. Dobris of the University of California-- Davis for bringing this article to my attention.

E-STATE Issue 2006.1

ABA Real Property, Probate and Trust Law Section has recently released issue 2006.1 of its E-STATE publication.  Below is a list of the articles included in this issue:

By Steve R. Akers:

Heckerling 2006 Institute Musings

Heckerling Institute Notes 2006

ACTEC 2006 Annual Meeting Musings

By John C. McCaffrey:

December 19, 2005 N ew York State Office Of General Counsel – No “Insurable Interest” In Non-Recourse Life Insurance Transactions

January 6, 2006: Sendas Lose FLP Valuation Appeal To 8th Circuit

January 6, 2006 Transfer Of Funds To A CRT Are Not Part of Trust Corpus

January 17, 2006 Pre-Paying Tuition Benefits Confirmed

January 25, 2006 Retained Power To Substitute Property Does Not Cause Estate Inclusion

February 13, 2006: Trust To Trust Transfer Of Life Insurance Not A Transfer For Value

February 24, 2006 IRS Chief Counsel Denies Joint Filing For California Domestic Partners, In Spite of Community Property Law: Potential Transfer Tax Consequences Massive

New Estate Taxation Student Text

The following is from a message I received from the Kendall/Hunt Publishing Company:

Estate Planning and Taxation, Fourteenth Edition, by Professor John Bost awaits your review.  For more information or to qualify for your complimentary copy, visit www.kendallhunt.com/bost and click "request review copy," or call (800) 228-0810.  Hurry, the supply of complimentary copies is limited.

This popular book is back with:

• A concise, integrated overview written as a student-oriented text with numerous questions and problems.
• Quantitative emphasis and over 500 easy to follow examples.
• Completely updated material emphasizes current law, trends and techniques.
• Information needed by CFP7 candidates, students in undergraduate or graduate business schools, law students, and estate planning professionals.

2006 / 0-7575-2606-3

Circular 230

Edward M. Manigault (Partner, Jones Day, Atlanta, Georgia) and Steve R. Akers (Bessemer Trust, Dallas, Texas) have recently published their article entitled Circular 230 -- How It Changed Our Lives (Or at Least Our Practices), Prob. & Prop., May/June 2006, at 32.

Here is the conclusion of their article:

The authors believe that the majority of advisors were surprised by the effect of the covered opinion rules of Circular 230.  it is not yet clear that the tax community has a widespread understanding of the covered opinion rules.  Certainly, there is no uniformity in responses to Circular 230.  Only time will tell if a consensus grows or it "best practices" develop among practitioners.