Wills, Trusts & Estates Prof Blog

Trust Beneficiary as Owner for Income Tax Purposes

Jonathan G. Blattmachr (retired partner, Milbank, Tweed, Hadley & McCloy LLP), Mitchell M. Gans (professor of law, Hofstra University), & Alvina H. Lo have published their article entitled A Beneficiary as Trust Owner: Decoding Section 678, 35 Am. C of Trust and Estate Counsel J. 106 (2009).

A synopsis of the article is below:

This article explores under what circumstances a person who did not actually contribute property to a trust can be considered its "owner" for income tax purposes.  In particular, the article undertakes a detailed examination of whether a non-grantor holding a power to distribute trust property to himself or herself, subject to an "ascertainable standard," is properly treated as the trust's owner for income tax purposes and the extent to which a non-grantor who held an unrestricted power of withdrawal that has lapsed may continue to be treated, for income tax purposes, as the owner of the portion of the trust with respect to which the power lapsed.

States Increase Income Tax in Face of Financial Woes

According to the Wall Street Journal, states facing income deficits are increasing taxes on their wealthiest residents to fill the gap:

A flurry of rate increases occurred this year, and tax analysts say the trend will accelerate in 2010.  . . .

Californians, who have a top individual rate of 10.55% on income over $1 million, actually gained in sideways fashion from recent rate raises around the country. The state dropped below Hawaii, Oregon and New Jersey on the list of places with the highest individual tax rates.

Hawaii enacted a top individual rate of 11% on income over $200,000, Oregon has a new 11% rate on income over $250,000, and New Jersey enacted a 10.75% rate on income above $1 million.

Arden Dale, States Turn to 'Millionaire's Tax,' WSJ, Nov. 13, 2009.

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

Rules for Tax Return Preparers

Brian C. Bernhardt (attorney, North Carolina) has recently published his article entitled Tax Return Preparer Penalties: The New Rules of Code Sec. 6694, Part 2, Prob. & Prop., Sept./Oct. 2009, at 23.  For a summary of this article, please see my prior post regarding the first half of the article. 

Retitling Inherited IRA's

If you inherit an IRA, retitling the IRA so that it clearly reflects the owner's death and the new beneficiary can provide valuable benefits.  According to Kelly Greene, Getting the Title Right to an Inherited IRA, WSJ, Oct. 10, 2009:

After you have retitled the inherited IRA, you can stretch out withdrawals from the account across your lifetime, rather than being forced to withdraw the funds sooner. That gives you a chance to extend the time that tax-deferred earnings can accrue, possibly increasing your inheritance.

See Kelly Greene, Getting the Title Right to an Inherited IRA, WSJ, Oct. 10, 2009, for a suggested title format that will accomplish these goals.

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

IRS Extends Amensty Program for Taxes Not Paid on Foriegn Accounts

As previously noted, the IRS recently offered a six-month amnesty program during which tax evaders who have hidden funds in off-shore accounts discolse and pay the evaded taxes.

The IRS has extended this amnesty program.  Below is the applicable extension provision taken from IRS Notice 2009-62, published in IRS Bulletin 2009-35, Aug. 31, 2009:

In light of the additional time needed for the Department of the Treasury to address issues pertaining to FBAR [the Report of Foreign Bank and Financial Accounts] filing requirements and the need to provide administrative relief for (i) persons with signature authority over, but no financial interest in, a foreign financial account, and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund, this notice provides that those persons have until June 30, 2010, to file an FBAR for the 2008 and earlier calendar years with respect to these foreign financial accounts. Thus, eligible persons that avail themselves of the administrative relief provided in this notice may need to file FBARs for the 2008, 2009 and earlier calendar years on or before June 30, 2010, to the extent provided in future guidance.

The FBAR filing extension provided by this notice applies to FBARs with respect to 2008 and earlier calendar years. For (i) persons with signature authority over, but no financial interest in, a foreign financial account, and (ii) persons with a financial interest in, or signature authority over, a foreign commingled fund, the FBAR filing extension provided in this notice supplements the filing extension to September 23, 2009, previously provided by the IRS on its public website.

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

Anna Nicole Smith Owes $43,000 in Back Taxes

According to the state of California, Anna Nicole Smith owes the state over $43,000 in back taxes for the year of 2007.  Because not even death evades the tax-man, a creditor's claim has been filed in Smith's probate case.

See TMZ, Anna Nicole Smith - Taxed After Death, Sept. 17, 2009.

CLE on Captive Insurance Companies

The ABA section of Real Property, Trust & Estate Law is sponsoring a 90 minute teleconference and live audio webcast CLE entitled "Captive" Insurance Companies and Closely Held Enterprises: Income Tax and Transfer Tax Opportunities and Implicationson Sep. 1, 2009.

The description of the CLE is below:

Once the domain of the Fortune 500, captive insurance companies are now accessible by families and family-owned enterprises. The family business can use a captive to not only reduce casualty insurance costs, but to also defer/reduce income taxes, improve risk management practices, and provide wealth transfer opportunities.

During this presentation, we will examine the following:

• What is a captive?

• Brief tax law history of captives

• Types of casualty risks insurable in a captive

• Income tax treatment of captives

• Jurisdiction (onshore versus offshore)

• Business planning opportunities

• Estate planning opportunities

• Implementation process

• Identifying prospects

• Potential problem areas

IRS to Receive UBS Account Info

As part of a tougher stance on tax havens and tax evaders, a US-Swiss deal will provide information regarding approximately 4,400 suspect UBS accounts to the IRS. 

The IRS is offering a six-month amnesty program during which tax evaders may escape jail time by disclosing taxes evaded and paying back taxes and a penalty. According to the IRS, publicity over the UBS case has lead to hundreds of citizens seeking amnesty under the program, which ends on September 23.

Britain, Germany, and France have been reported to be taking a tougher stance on tax havens as well.

See David R. Francis, Economic Scene: A tougher stance on tax havens, Christian Science Monitor, Aug. 19, 2009.

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

Taxation Conference and Estate Planning Workshop in Austin

The University of Texas at Austin School of Law is sponsoring its 57th annual Taxation Conference in Austin, December 9-10, 2009.  Additionally, Stanley M. Johanson's Estate Planning Workshop will be held on December 11, 2009.

The following is the summary of the conference and workshop:

This year’s Taxation Conference covers the latest in tax regulations and policy, including a federal update from Martin J. McMahon and Ira B. Shepard, and offers a look at current and prospective tax legislation and possible reform. Topics also include: updates on the margin tax, tips and strategies for working with the IRS, and tax issues in bankruptcy.

On Friday, Stanley Johanson presents his popular one-day Estate Planning Workshop. Don’t miss up-to-date materials, lively discussion and practical advice.

Simplifying Retirement Benefits in the Estate Plan

Edward V. Atnally, (attorney, White Plains, New York) has recently published his article entitled Estate Planning and Retirement Benefits: An Approach Toward Simplification, Part I, Prob. & Prop., July.Aug. 2009, at 23.

The following is the introduction to the article:

Much has been said and written about the use of retirement plan benefits in the estate planning process, but little has been done to simplify the concepts and procedures involved. This article is designed to help practitioners provide guidance to their clients when dealing with retirement plans in estates of all sizes and complexities.

Part I of this article reviews the steps to be taken in smaller estates when there is not need for a trust arrangement and in more complex estates in which trusts are useful to provide for beneficiaries with special needs. Part II, which will appear in the September/October issue, will review the steps to be taken when credit shelter and marital deduction trusts are desirable to reduce estate taxes.  The planner's goal is to avoid the payment of unnecessary taxes and especially income taxes by "spreading out" retirement plan distributions and related tax liabilities thereby enhancing the value of assets eventually passing to the plan beneficiaries.

Taxation of Pet Trusts

Gerry W. Beyer (Governor Preston E. Smith Regents Professor of Law, Texas Tech University School of Law) and Jonathan P. Wilkerson (attorney and former Editor-in-Chief of the Texas Tech Law Review) have recently published their article entitled Max's Taxes: A Tax-Based Analysis of Pet Trusts, 43 Univ. Richmond L. Rev. 1219 (2009).

Here is a summary of their article:

Humans and charities are no longer the primary entities many individuals wish to benefit upon death. Instead, there is a growing interest in providing for Rover, Fluffy, and Polly, that is, our beloved pets. There has been a recent surge of public interest in pet planning as high-profile individuals have died with significant provisions in their wills or trusts for the benefit of their animals.

This increase in the special estate planning needs of pet owners is reflected by legal scholarship, continuing legal education programs, and legislative action in the pet trust arena. But little time has been devoted to the tax ramifications of pet trusts although a brief discussions are included in several articles. The purpose of this article is to fill this gap and give practitioners guidance as to how pet trusts are treated for tax purposes and to suggest to Congress how the Internal Revenue Code should be amended to clarify taxation issues.

The article may be downloaded here and a limited number of complementary reprints of this article are available upon request.

Charitable Strategies for Trust Beneficiaries

Sharon L. Klein (Senior Vice President, Trust Counsel and Director of Estate Advisement, Fiduciary Trust Company International, New York, New York) and Henry S. Ziegler (Former Senior Vice President and Special Advisor for Global Estate Planning, Fiduciary Trust Company International, New York, New York) have recently published their article entitled Charitable Strategies for Trust Beneficiaries.

Here is an excerpt from the article's introduction:

Certain trusts permit distributions to be made to trust beneficiaries at the discretion of the trustee. There are benefits to making these distributions in the form of appreciated property—also called a distribution in kind. A distribution in kind is a distribution of property (for example, shares of stock), rather than cash, from a trust. The technique of distributing appreciated property bears investigating for the potential advantages to trust beneficiaries and charitable organizations that receive gifts from trust distributions. When a trustee distributes appreciated property to a beneficiary, the trustee can determine the capital gains treatment of the distribution. The trustee does this in accordance with an election granted under Section 643(e)(3) of the Internal Revenue Code, commonly referred to as the 643(e) election.

Reverse Exchanges

Bradley T. Borden (Associate Professor of Law, Washburn Univ. School of Law) has written an article entitled Financing Reverse Exchanges and Safeguarding Exchange Proceeds, 22 J. Tax'n & Regulation of Fin. Inst. 33 (2008).

Here is the abstract of the SSRN version of this article:

Over the last several years, reverse exchanges have become a fixture of section 1031. A fluid economy and a strained financial industry send a reminder that safe guarding exchange proceeds in reverse exchanges is paramount. This Article reviews reverse exchange structures, both safe harbor and non-safe harbor, and describes how such transactions must be financed to satisfy tax law requirements and safe guard exchange proceeds. The Article is adapted, with permission, from Chapter 5 of Tax-Free Like-Kind Exchanges.

The distributive justice--charitable deduction interface

Miranda Perry Fleischer (Associate Professor of Law, Univ. of Illinois College of Law) has recently posted on SSRN her article entitled Theorizing the Charitable Tax Subsidies: The Role of Distributive Justice. 

 

Here is the abstract of her article:

Distributive justice plays a starring role in many fundamental tax policy debates, from the marginal rate structure to the choice of base to the propriety of wealth transfer taxes. In contrast, current tax scholarship on the charitable tax subsidies generally either ignores or explicitly disavows distributive justice concerns. Instead, it focuses on the efficiency and pluralism-enhancing advantages of having charities provide public goods instead of or in addition to the government. While identifying these advantages is a necessary and important contribution to our understanding of charitable giving policy, avoidance of distributive justice concerns ignores the very purpose of charity: voluntary redistribution. After all, it's called the charitable deduction, not the public goods deduction. 

As a result, the current body of work on the charitable tax subsidies is incomplete: It purposely under-theorizes "the good" in order to avoid making value judgments about which projects should be subsidized. Although this sounds appealing, completely avoiding such judgments is both impossible and counter-productive. Current scholarship thus over under-theorizes the good, creating confusion about the charitable tax subsidies in both theory and practice. 

Explicitly addressing distributive justice - in addition to pluralism and efficiency - will enhance our understanding of the subsidies for three reasons. First, existing scholarship - which generally ignores distributive justice issues - is incomplete and inconsistent for so doing. It is incomplete because it does not adequately identify which projects deserve a subsidy; it is inconsistent because it implicitly contains value judgments that have distributive justice implications but that are unacknowledged (and often disavowed) by their proponents. Second, popular criticisms of the charitable tax subsidies raise distributive justice issues that have not been adequately addressed. And lastly, the law governing the charitable tax subsidies is itself confused on the role of distributive justice. 

Extending our understanding of the subsidies in this manner has three benefits. First, it will help the efficiency- and pluralism-minded scholars better address how to structure the tax subsidies to best promote those benefits. Second, a better understanding of distributive justice will help us assess existing justice-related criticisms of the subsidies. And lastly, because our society currently spends a great deal of resources subsidizing charity, such a discussion will help us allocate our resources in a more systematic fashion.

Could giving up United States citizenship be a part of a good estate plan?

Kathleen Macaulay (LLM Taxation Candidate, Univ. of Houston Law Center) has recently posted on SSRN her article entitled Take the Money and Run - The Impact of the HEART Act on the Ultimate Estate Plan: Expatriation to Avoid U.S. Income, Estate and Gift Tax.

Here is the abstract of her article:

Internal Revenue Code Sections 877A and 2801 were created by the HEART Act to impose a mark-to-market exit tax on citizens wishing to expatriate, and to impose a wealth transfer tax upon U.S. gift recipients of an expatriate's wealth. The idea is for expatriating citizens to pay their taxes, take their money, and run. However, the new provisions imposed by the HEART Act do not make things that simple. The prior expatriate tax regime applies to U.S. citizens or residents expatriating prior to June 16, 2008, while the new exit tax regime applies to U.S. citizens or residents effecting their expatriation after June 16, 2008. Any person expatriating from the United States must carefully consider the applicable tax provisions. 

This paper discusses the impact of the HEART Act provisions on what has been called the "ultimate estate plan," expatriation to minimize or avoid U.S. income, estate, and gift tax. Initially, I will discuss why citizens or permanent residents choose to expatriate, the federal tax burdens considered, and examples of high profile American expatriates. Second, this paper will explain the former tax regime under I.R.C. Section 877 for expatriates and its tax effects. Third, I will explain the HEART Act and the application of current internal revenue code sections 877A and 2801 to expatriates, followed by an analysis of the administration and workability of an exit tax. Finally, this paper will look at planning considerations and options for those currently seeking to expatriate from the United States.

Taxes due today!

Happy (?) Tax Day!! 

Be sure to file your income and gift tax returns promptly or obtain the appropriate extension.

2008 Federal Tax Update

Samuel Donaldson (Professor of Law and, Director, Graduate Program in Taxation, University of  Washington School of Law) has recently posted his article on SSRN entiteld 2008 Federal Tax Update.

Here is the abstract of the 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, 2007, through August, 2008. 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).

Benefits of intentionally defective grantor trust

The following excerpts are from Mike Spector and Anne Tergesen, Unusual Trusts Gain Appeal in Unusual Time, Yahoo! Finance, April 10, 2009:

It may seem hard to come up with a financial product with a name as unattractive as an "intentionally defective grantor trust." Yet these days, in the world of estate planning, those words denote one sexy vehicle.

That's because this aggressive strategy -- which can be used to move money out of taxable estates and transfer gains to heirs tax-free -- is especially appealing at a time like now, when asset values have fallen sharply and interest rates are near historic lows. * * *

The trusts are considered "defective" because they are subject to somewhat contradictory tax treatment. They remove assets from your estate -- saving your heirs estate taxes in the process -- while allowing you to continue paying income taxes on those assets, effectively making another "gift" to your heirs. Another benefit: Unlike some other popular trust strategies, these can also be used as part of a broader plan to pass assets to your grandchildren.

Defective grantor trusts can be structured in many ways. Typically, the strategy involves creating a trust and then lending it money to buy one of your assets -- such as securities, real estate or a business interest -- that you expect to appreciate significantly. In return for lending the trust money, you receive interest payments for a set number of years. The lower the interest rate, the less the trust must repay you -- and the more your heirs will benefit. * * *

Defective grantor trusts can backfire. Unlike some other trusts, if your assets plunge in value, the trust is still on the hook to repay your loan. And that could mean more money from your pockets. * * *

Another big caveat: The IRS has never specifically blessed these trusts, which draw on two separate areas of the tax code * * *.

Proposed Conduit Financing Regulations

Jeffrey "Jeff" Rubinger (Partner, Holland + Knight) has written an article entitled Proposed Conduit Financing Regulations Treat Disregarded Entities as Regarded Entities, Mar. 2, 2009.

Here is a summary of the article:

The IRS has issued a proposed regulation that clarifies that the term person includes disregarded entities when they are involved in a conduit financing arrangement. The article goes through a fairly detailed analysis of the change and the type of transactions involved. He provides the following example, contained in the proposed regulation from the IRS, to show a simple scenario that would be affected by the change. The sole example contained in the Proposed Regulations involves, in effect, a back-to-back loan arrangement. FP, a foreign corporation organized in a jurisdiction that does not have an income tax treaty with the United States (e.g., the Cayman Islands), lends $1 million to DS, a corporation organized in the United States, in exchange for a note issued by DS. A year after making the original loan, FP assigns the DS note to FS, a wholly-owned foreign subsidiary of FP organized in a jurisdiction that has an income tax treaty with the United States (e.g., the Netherlands) in exchange for a note issued by FS. The DS-FS income tax treaty eliminates withholding tax on dividends, interest and royalties. FS is a disregarded entity under the check-the-box regulations. After receiving notice of the assignment, DS remits payments due under its note to FS. According to the example, because the term "person" includes a disregarded entity under the Proposed Regulations, FS is treated as a person and therefore may itself be an intermediate entity that is linked by financing transactions to other persons in a financing arrangement. The DS note held by FS and the FS note held by FP are financing transactions, and together constitute a financing arrangement. Therefore, under the example, the interest paid from DS to FS would not be eligible for the reduced withholding tax rates under the DS-FS income tax treaty, but rather would be subject to a 30 percent U.S. withholding tax.

Stanford has big tax bill

According to IRS seeks $227 million in back taxes from Stanford, Yahoo!News, March 16, 2009:

The U.S. Internal Revenue Service has asked a judge to let it to continue to seek unpaid back taxes from Allen Stanford, the billionaire Texan accused of an $8 billion fraud by U.S. regulators, court documents show.

Stanford and his wife Susan owe the U.S. government $226.6 million in unpaid federal income taxes between 1999 and 2003, the IRS said in a filing with a federal court in Dallas on March 13.

Stanford's tax debt could inflate even more as he hasn't filed his income tax return for 2007, the IRS said.

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