Thursday, April 20, 2023
Bibliography – First Quarter of 2023
The following is a listing by category of my blog articles for the first quarter of 2023.
Bankruptcy
Failure to Execute a Written Lease Leads to a Lawsuit; and Improper Use of SBA Loan Funds
Chapter 12 Bankruptcy – Proposing a Reorganization Plan in Good Faith
Business Planning
Summer Seminars
https://lawprofessors.typepad.com/agriculturallaw/2023/03/summer-seminars.html
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Civil Liabilities
Top Ag Law and Tax Developments of 2022 – Part 1
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Contracts
Top Ag Law and Developments of 2022 – Part 2
Failure to Execute a Written Lease Leads to a Lawsuit; and Improper Use of SBA Loan Funds
Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues
Environmental Law
Here Come the Feds: EPA Final Rule Defining Waters of the United States – Again
Top Ag Law and Developments of 2022 – Part 2
Top Ag Law and Developments of 2022 – Part 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Estate Planning
Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster
Happenings in Agricultural Law and Tax
Summer Seminars
https://lawprofessors.typepad.com/agriculturallaw/2023/03/summer-seminars.html
RMD Rules Have Changed – Do You Have to Start Receiving Payments from Your Retirement Plan?
Common Law Marriage – It May Be More Involved Than What You Think
The Marital Deduction, QTIP Trusts and Coordinated Estate Planning
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Income Tax
Top Ag Law and Developments of 2022 – Part 3
Top Ag Law and Developments of 2022 – Part 4
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Tax Court Opinion – Charitable Deduction Case Involving Estate Planning Fraudster
Deducting Residual (Excess) Soil Fertility
Deducting Residual (Excess) Soil Fertility – Does the Concept Apply to Pasture/Rangeland? (An Addendum)
Happenings in Agricultural Law and Tax
Summer Seminars
https://lawprofessors.typepad.com/agriculturallaw/2023/03/summer-seminars.html
RMD Rules Have Changed – Do You Have to Start Receiving Payments from Your Retirement Plan?
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Real Property
Equity “Theft” – Can I Lose the Equity in My Farm for Failure to Pay Property Taxes?
Happenings in Agricultural Law and Tax
Adverse Possession and a “Fence of Convenience”
Double Fractions in Oil and Gas Conveyances and Leases – Resulting Interpretive Issues
Abandoned Rail Lines – Issues for Abutting Landowners
Regulatory Law
Top Ag Law and Developments of 2022 – Part 2
Top Ag Law and Developments of 2022 – Part 4
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 10 and 9
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 8 and 7
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 6 and 5
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 4 and 3
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Foreign Ownership of Agricultural Land
Abandoned Rail Lines – Issues for Abutting Landowners
Secured Transactions
Priority Among Competing Security Interests
Water Law
Top Ten Agricultural Law and Tax Developments of 2022 – Numbers 2 and 1
Happenings in Agricultural Law and Tax
April 20, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Tuesday, April 11, 2023
Registration Now Open for Summer Conference No. 1 – Petoskey, Michigan (June 15-16)
Overview
Again this summer, Washburn Law School will be conducting two summer seminars focused on farm and ranch income taxation and farm and ranch estate, business and succession planning. The first of the two events will be in Petoskey, Michigan on June 15-16 at North Central Michigan College. Registration is now open and can be accessed here: https://www.washburnlaw.edu/employers/cle/farmandranchtaxjune.html
August Conferences in Idaho
The finishing touches are just about complete on the second two-day event this summer which will be at North Idaho College in Coeur d’Alene, Idaho on August 7-8. Both events will also be simulcast live over the web. The Idaho event will feature a “conference within a conference.” The standard two days will be devoted to farm/ranch income tax and farm/ranch estate and business planning topics. But starting a bit later each day and ending slightly earlier, a second conference will be occurring simultaneously in a nearby meeting hall in the same building on the North Idaho College campus devoted to topics in agricultural law. The them of this two-day conference will be on representing the ag client. Many thanks to the Idaho Bar Association, the ag law section of the Idaho Bar, Prof. Rich Seamon and the University of Idaho College of law and others in helping put this conference together. Details on this these two conferences in Coeur d’Alene will be posted here soon with registration information.
June Michigan Conference
The itinerary for the Michigan event is below. The Idaho tax/e.p./b.p. conference follows the same Day 1 itinerary as the Michigan event, but Day 2 in Idaho will have a few different topics and speakers.
Here’s the itinerary for the Michigan conference.
Day 1 Itinerary
7:30-8:00 a.m. – Registration
8:00–8:05 a.m. - Welcome and Announcements
8:05–9:05 a.m. – Tax Update (Cases and Rulings) (McEowen) [60 minutes tax update CPE]
This opening session takes a look at the most significant tax cases and rulings from the courts and the IRS during the past year that have implications for farm and ranch clients, rural landowners, and agribusiness professionals.
9:05–9:45 a.m. – The Definition of “Farm Income” for Farm Program Purposes (Neiffer) [40 minutes tax update CPE]
Many Farm Service Agency programs grant extra payments if AGI from farming is more than 75% of total AGI. This session will review how FSA determine AGI and why it can be substantially different from IRS calculations.
9:45–10:05 a.m. – Morning Break
10:05–10:30 a.m. – Machinery Trades (McEowen) [25 minutes of tax law CPE]
This session examines the trade of farm machinery with no or low basis for new machinery and the resulting gain computation, combined with substantial depreciation claimed on the new machine.
10:30–10:55 a.m. – Selected Topics - Inventory Method Options for Farmers; How Bonus Depreciation and Expense Method Depreciation Can Work Together for Farm Clients (Neiffer) [25 minutes of tax update CPE]
Tax Reform simplified many accounting methods for taxpayers including farmers. We will review those change and why Section 179 can be more beneficial than bonus depreciation.
10:55–11:45 a.m. – Solar Panel Tax Issues; Other Rental Tax Issues (McEowen) [50 minutes of tax law CPE]
This discussion explores the tax issues associated with the placement of solar panels on farmland and also looks at other tax issues associated with rentals that farming operations often encounter.
11:45–12:45 p.m. – Luncheon
12:45 p.m.– 1:45 p.m. – Protecting a Tax Practice From Scammers (IRS CID) [60 minutes of tax law]
What steps can a tax practice take to protect itself from scams, including those from the dark web? What is good office protocol? What are the essential things that can be done and what are the signs to look for to detect scammers?
1:45 p.m.–2:25 p.m. – Selected Topics - Amending Partnership Returns; Corporate Provided Meals and Lodging; Charitable Remainder Trusts for Retiring Farmers (Neiffer) [40 minutes of tax law CPE]
This session will update the required method of amending partnership returns depending on whether the centralized partnership audit regime applies; a review of the change in corporate provided meals and why charitable remainder trusts can save taxes for a retiring farmer especially with increasing interest rates.
2:25-2:45 p.m. – Afternoon Break
2:45–3:10 p.m. – Easement Tax Issues (McEowen) [25 minutes of tax update CPE]
Rural landowners are finding easement tax issues to be more commonplace. This brief session provides a review of the basic tax issues associated with easements, particularly income tax basis offset issues and the character of the easement payments.
3:10–4:00 p.m. – IC-DISC for Farmers; Disallowance of Cash Method for Farming Activities; Accounting for Hedging Transactions; When to Deduct a Purchased Growing Crop (Neiffer) [50 minutes of tax law CPE]
An IC-DISC can cut a farmer’s income taxes in half – we review when it might apply. More farming activities include non-material participating taxpayers. This can cause the entity to be on the accrual method. The reporting of hedging activities is not always intuitive. We review the requirement and the options and when can a farmer deduct purchased growing crop.
4:00–4:25 p.m. – Soil Fertility Deductions (McEowen) [25 minutes of tax law CPE]
When a farm is purchased an allocation of value can be made to depreciable items. One of those items might be excess fertilizer supply. The IRS has a specific procedure that must be followed for valuing the excess amount. This session examines the IRS approach, the amount to be amortized, the timeframe for amortization and the possibility of recapture.
4:25 p.m. - Adjournment
Day 2
Here’s the itinerary for Day 2 of the Michigan event (farm estate and business planning track):
7:30-8:00 a.m. — Registration
8:05-8:55a.m. — Current Developments in Estate and Gift Taxation (McEowen) [50 minutes tax update CPE]
This session provides an update of legislative, regulatory and court developments involving federal estate and gift tax including developments involving a decedent’s gross estate, asset valuation, gifts made during life, retirement plans and miscellaneous issues.
8:55-9:45 a.m. – “Top Ten” Strategies For a Successful Farm Business (Rhea and Dikeman) [50 minutes tax update CPE]
As we look toward the next 12 months, several items deserve increased attention for farm businesses. This presentation delivers a Top 10 list of forward-looking strategies to consider for success. Changes in cost, income, inflation, tax laws, and estate planning are some key topics discussed. These will be on the mind of farms and ranches as they navigate the uncertain economic conditions and the impact of higher asset values, growing debt, and rising interest rates. We will also demonstrate the performance distinctions of top 1/3 producers.
9:45-10:05 a.m. — Morning Break
10:05-10:55 a.m. – Taxes in Probate: Form 1041 and Distribution Deductions (McEowen) [50 minutes tax law CPE]
This session walks the practitioner through the completion of Form 1041, the assets included in the probate estate, possible income generating items for an estate, the handling of capital gain or loss, and estate accounting. A discussion of e-filing and electronic signatures will also be included. In addition, common issues associated with the death of a farmer will be addressed.
10:55 a.m.-11:45 a.m. – SLATs – Why It Might be the Best Option for Your Farmers (Neiffer) [50 minutes of tax law CPE]
This session reviews the various trust options available to farm families to transfer assets to the next generation in a tax efficient manner. The session will then review why a Spousal Lifetime Access Trust (SLAT) might be the best option.
11:45-12:45 p.m. — Lunch
12:45 p.m.-1:35 p.m. – Why Social Security is an Investment, not a Tax (Neiffer) [50 minutes of tax law CPE]
Most farmers view social security as an unnecessary tax. However, with optimal planning, social security maybe one of the best investments they ever make. We review how benefits are calculated, why spousal benefits provide even more bang for their buck and some common claiming options.
1:35 p.m.-2:50 p.m. — Tax Strategies for the Farm and Ranch Client (Rhea and Dikeman) [75 minutes of tax law CPE]
This session highlights several changes were made by the Tax Cuts & Jobs Act of 2017; many sunset after 2025 and demand attention for optimal tax planning strategies the next 3 years. We will also explain how rising inflation rates are at times helping reduce tax liability and when it does not. Rising interest rates and inflated asset values are dramatically shifting costs of farm transitions to the detriment of young and beginning farmers. Stepped-up basis is a big thing; we detail how this can be helpful to farm successors. Unintended consequences of high income and options for tax management after year end are analyzed.
2:50 p.m. – 3:10 p.m. – Afternoon Break
3:10 p.m. – 3:25 p.m. – New Estate Planning Clients – Screening Clients and Gathering Information [15 minutes of tax law CPE]
This session takes a brief look at a suggested approach to handling potential new estate/business planning clients. How to screen clients, identify potential problem clients, engagement letters and information gathering as preparatory to determining the appropriate path forward for the client.
3:25-4:25 p.m. – Ethics for Estate Planners (McEowen) [1 hour of tax ethics CPE]
What are the ethical issues facing practitioners working with clients on estate/business and tax planning matters? How might the Circular 230 rules impact tax professionals in the estate and business planning context when income tax advice is involved? This session looks at some of the common issues that can arise, applicable caselaw, and some of the more unusual situations that might arise that present difficult situations for the planner.
4:25 p.m. — Conference Adjourns
Conclusion
The registration link for the Michigan event can be found here:
As noted above, both days of the conference will be broadcast live online. Also, if you business is interested in being a sponsor, please contact me.
April 11, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)
Sunday, April 9, 2023
The Marital Deduction, QTIP Trusts and Coordinated Estate Planning
Overview
A married person can leave an unlimited amount of property outright to the surviving spouse at death with no resulting federal estate tax. I.R.C. §2056. The is also an unlimited gift tax marital deduction. I.R.C. §2523. This means that interspousal transfer, either during lifetime or at death, may be made tax-free regardless of amount. In addition, for lifetime spousal transfer, no gift tax return need be filed.
But, to qualify for the marital deduction, the transfer to the spouse must be outright. It cannot be a life estate, or a terminable interest as defined in I.R.C. §2056(b). That is, unless the terminable interest is a qualified terminable interest property (QTIP) interest. I.R.C. §2056(b)(7).
A QTIP trust was at the heart of a multi-year family dispute that the U.S. Tax Court recently decided. The case points out that QTIP trusts must be utilized carefully to avoid negative tax consequences and family disputes.
QTIP Trusts – The Basics
A QTIP trust is similar to a marital A/B trust set-up. They are both irrevocable “credit shelter” trusts that take effect when the first spouse of a married couple dies. With an A/B trust arrangement, an allocation of the first spouse’s assets at the time of death is done. In general, for an estate potentially subject to federal estate tax, an amount equal to the estate tax unified credit should be taxed in the first spouse’s estate which would then be offset by the credit. The balance should pass to the surviving spouse outright and qualify for the marital deduction. This is the A/B trust arrangement – a credit shelter trust and a marital deduction trust. The amount in the credit shelter trust is taxed in the first spouse’s estate but offset by the unified credit, and the amount in the marital deduction trust is offset by the marital deduction. The result is often little to no tax in the first estate and estate tax optimization in the second spouse’s estate. The difference between a QTIP trust and a marital trust is that with a QTIP trust has the right to income from the trust (and, perhaps, principal) but control does not pass to the surviving spouse. With a marital trust the surviving spouse controls the asset distribution.
In situations, such as a second marriage, where the first spouse to die wants to ensure the passage of property to someone other than the surviving spouse, the marital deduction would be lost to the first spouse’s estate without the QTIP provision. But, with a QTIP the first spouse can control disposition of the property upon the surviving spouse’s death while still qualifying the property for the marital deduction in the decedent’s estate.
QTIP requirements. An election must be made to achieve QTIP treatment and certain requirements must be satisfied – 1) the property must pass to a spouse from the decedent; 2) the decedent’s spouse must be entitled to all of the income from the property for life, payable at least as frequently as annually; and 3) no one, including the spouse, may have a power to appoint any part of the principal to anyone other than the spouse during the spouse’s life. If these conditions are satisfied, the estate of the first spouse to die, can claim a marital deduction for the value of the property in the QTIP trust.
Note: A QTIP trust does not necessarily restrict the surviving spouse’s ability to withdraw principal, but it is common that a QTIP trust does not grant such a withdrawal power
Estate of Kalikow v. Comr., T.C. Memo. 2023-21
Basic facts. A prominent New York City real estate developer died in 1990 with a will that created a QTIP trust for the benefit of his surviving wife. The QTIP trust contained ten income-producing apartment buildings in New York City. The trustees were instructed to pay the trust’s net income at least quarterly to the surviving spouse for life along with discretionary principal distributions, and then the assets were to be divided and paid to trusts for the benefit of the couple’s two adult children.
In 1997, the couple’s son and the family’s CPA (as trustees of the trust) created a Family Limited Partnership (FLP) and the QTIP trust was transferred to the FLP in exchange for a 98.5 percent partnership interest. At the time of the surviving spouse’s death in early 2006, the QTIP trust held the FLP interest, $835,000 of cash and marketable securities. After payment of expenses, the balance of the surviving spouse’s estate passed to charity. The couple’s daughter was also added as a trustee. Under the surviving spouse’s will, the trust was responsible for its share of estate tax arising from the inclusion of the trust property in the decedent’s estate.
A grandchild of the couple’s petitioned a local court to compel the trustees to render an account of income distributions from the QTIP trust to the surviving spouse. The trustees filed competing reports and the CPA-trustee claimed that the FLP had failed to distribute to the trust its full share of FLP distributable amounts which diminished the decedent’s receipt of trust income by almost $17 million. The CPA-trustee requested the court to order he and the other trustee to pay this amount, plus interest, to the estate from the trust’s income. However, the decedent’s children (appointed as limited administrators of their mother’s estate) filed a petition claiming that there had been an overdistribution of $3.27 million from the trust to the surviving spouse. The matter was litigated for a decade and the parties reached a settlement agreement that the trust would pay the estate $9.2 million which represented unpaid income of $6.5 million and $2.7 million in fees from January 1, 2002, through 2005.
The executor of the surviving spouse’s estate (the CPA who was also a co-trustee of the QTIP trust) filed Form 706 (federal estate tax return) in early 2007 reporting “other miscellaneous property” of $31,869,441 including $4,632,489 of undistributed income from the pre-deceased spouse’s estate and a yet to be determined claim of the estate against the trustees of the pre-deceased husband’s trust for loss of profits, excess taxes paid, interest and other damages. The children filed a Form 706 on the same day that mirrored the executors’ Form 706, but also included the assets of their father’s trust – another $43.3 million (which included the 98.5 percent FLP interest and the cash and marketable securities).
The IRS position and the Tax Court. The IRS issued a notice of deficiency asserting that the trust’s value of the 98.5 percent FLP interest was $105,664,857 instead of $42.465 million as reported on the limited administrators’ Form 706. The IRS also reduced the estate’s assets by the value of the pending claim against the trust. The executors and the limited administrators both filed a Tax Court action claiming that the IRS’ reduction of the gross estate by the $4.632,489 of the estate’s claim against the trust. The executors claimed that the pending claim should be included in the gross estate at $16,946,827, and the limited administrators asserted that the value of the trust should be reduced by the amount of any claim allowed for undistributed income due the estate from the trust and the resulting net value be included in the gross estate under I.R.C. §2044. Thus, the issues before the Tax Court were (1) whether the value of the QTIP trust assets included in the surviving spouse’s gross estate should be reduced by the agreed-upon undistributed income amount; and (2) whether the surviving spouse’s estate could deduct any part of that undistributed income as an administration expense under I.R.C. §2053. The estate asserted that the gross estate should be reduced, and an administration expense could be claimed. The IRS disagreed.
Note: The executors and limited administrators stipulated that the value of the trust’s FLP interest at the date of the decedent’s death was $54,492,712.
The Tax Court noted that under I.R.C. §2044(a), the QTIP trust property was to be included in the surviving spouse’s gross estate at fair market value as of the date of her death. Thus, the stipulated value of the trust’s FLP interest plus the cash and marketable securities of $55,327,712 was included in her gross estate. The Tax Court disagreed with the assertion that the gross estate should be decreased by the amount of the agreed-upon settlement amount. The Tax Court pointed out that by the terms of the trust, the FLP was not liable for the settlement payment and, as such, the liability had no impact on the date of death fair market value of the trust’s FLP interest. The Tax Court agreed with the assertion of the IRS that the trust would have an offsetting claim against third parties for the undistributed income payment liability. In addition, the enhanced value of the surviving spouse’s gross estate increased the estate’s charitable contribution by a like amount. The Tax Court also concluded that the estate was not entitled to deduct any part of the agreed-upon settlement payment other $838,044 attributable to paying out commissions.
Estate Planning and Family Structure
The Kalikow case presents an interesting illustration of the family dynamics that estate planners often must deal with. This apparently was not a second marriage situation for either spouse – at least there is no indication of that by the Tax Court. This raises a question as to why a QTIP trust was created under the terms of the husband’s will? Did he suspect that if his wife survived him that she would disinherit their children? Were there creditor issues? The husband died at age 70 after battling Parkinson’s disease for 36 years. Indeed, her will left the residue of her estate to charity rather than the children. Also, the co-trustees of the QTIP trust were a son, a non-family member CPA and the surviving spouse. After the death of the surviving spouse, their daughter was added as a co-trustee. But neither child was an executor of their mother’s estate. Were they estranged? The Tax Court opinion doesn’t shed any light on that question either.
Clearly, planners must think about the potential for conflict between the surviving spouse and the remainder beneficiaries that a QTIP trust can create. Those conflicts typically involve investment decisions, tax strategies and the administration of the trust. These conflicts are caused ty the surviving spouse not having any control over the trust and that the final disposition of the trust remains subject to the prior deceased spouse’s control. This means that the planner must carefully evaluate the relationship between the surviving spouse and the remainder beneficiaries and whether the surviving spouse has income and assets outside the QTIP trust.
It is a bit puzzling why a QTIP trust was utilized in Kalikow – a multimillion-dollar estate. With a QTIP trust, the trustees had no ability to allocate trust income and principal among the next generation of family members as a long-term tax minimization strategy. While a basis step-up of the QTIP assets is achieved in the surviving spouse’s estate, in such a large estate as Kalikow, the unified credit is woefully inadequate to eliminate estate tax in the survivor’s estate. That might explain the charitable gift of the remainder of the surviving spouse’s assets, but if that is a correct assumption why not simply utilize a standard credit shelter trust and give the surviving spouse the power to control the assets consistent with optimal tax planning? Also, the difference in the beneficiaries of the surviving spouse’s estate and the QTIP trust triggers a tax apportionment “tax trap” that pegs the estate tax liability on the assets of the QTIP trust.
The Kalikow estate also involve overlapping roles of fiduciaries and professionals – the family CPA was also a co-trustee and executor. Rarely is that structure recommended. With the inherent conflict given the differences between the disposition of the surviving spouse’s estate and what had been established via the QTIP, perhaps the FLP could have been structured in a manner to help minimize conflict.
Conclusion
In the end, the QTIP was valued at approximately $55 million (pre-tax) and the unpaid income amount was settled at around $6.5 million. The legal fees are not known, but they would have been substantial. The family litigation dragged on for over a decade. Was it worth it?
QTIP trusts can be beneficial, and they do have their place, but clearly they are not for everyone. Estate planning is difficult and often there is a need to coordinate the planning over subsequent deaths and even subsequent generations.
April 9, 2023 in Estate Planning | Permalink | Comments (0)
Friday, April 7, 2023
Common Law Marriage - It May Be More Involved Than What You Think
Overview
A minority of states along with the District of Columbia recognizes common-law marriages. But, even in these states, it’s not enough to just simply live together for a certain amount of time. That’s a common misconception.
Common law marriage – it’s the topic of today’s post.
Background
Whether a couple is in a common law marriage can be an important issue when it comes to inheritance rights, spousal rights in land, and liabilities for a spouse’s debts, among other issues. That makes it important to know the requirements for a common law marriage. One common requirement of a common law marriage in the states that recognize the concept is that the couple must hold themselves out to the public as married persons. There are various ways that can be done, including using the same last names and filing joint tax returns. Each state that recognizes common-law marriage sets forth certain tests that must be followed to establish the relationship.
Kansas Cases
The issue of whether a common law marriage existed has been litigated in two recent Kansas cases. These cases follow another Kansas case on the issue in 2010.
In re Marriage of Dyche, No. 97,639, 2008 Kan. Unpub. LEXIS 508 (Kan. Ct. App. Aug. 8, 2008); related proceeding at Beat v. United States, 742 F. Supp. 2d 1227 (D. Kan. Aug. 2010), recon. den., No. 08-1267-JTM, 2010 U.S. Dist. LEXIS 114139 (D. Kan. Oct. 26, 2010); further opinion at No. 08-1267-JTM, 2011 U.S. Dist. LEXIS 40501 (D. Kan. Apr. 12, 2011).
In Kansas, a couple must satisfy three requirements to be in a common law marriage – 1) they must have the capacity to marry; 2) they must agree to be married and represent to the public that they are married. The first two tests typically aren’t difficult to establish, but the third one – a public representation of the marital relationship – is more difficult.
In this case, a Kansas farmer died in 2001, leaving his entire multi-million-dollar estate to his partner (Theresa Beat) who claimed she was the decedent’s common-law wife. They had been in a “relationship” for over twenty years beginning at a time that they were both married to other persons. She was named the executor and claimed a 100 percent marital deduction on the decedent’s federal estate return and Kansas inheritance tax returns for the entire value of the estate. That wiped out tax at both the federal and state levels. But both the IRS and the Kansas Department of Revenue (KDOR) disagreed with her characterization as the decedent’s common-law wife. If she was not the decedent’s spouse at the time of his death, then the estate could not claim any marital deduction with the result that a substantial amount of tax would be due at both the federal and state levels – with interest and penalties.
In 2005, the “widow” filed a motion with the county trial court, seeking a determination that she was the common-law wife of the decedent. She claimed that they had been “married” for 20 years, had a monogamous relationship and held themselves out in the community as being married. She stated that she even wore his ring for most of the “marriage.” There was no question that they had the capacity to marry after they each were divorced from their respective spouses and the statutory waiting period for a subsequent marriage had expired. But the IRS and KDOR claimed that they had substantial evidence that there was no valid common-law marriage. Also, the KDOR pointed out that the “wife” failed to exhaust administrative remedies by prematurely filing suit with the trial court. The KDOR claimed it had primary jurisdiction to determine marital deduction issues. The IRS also intervened and got the case removed to federal court. The court granted the IRS’ motion to dismiss for a lack of subject matter jurisdiction because the court determined that it did not yet have the authority to rule on the “wife’s” pre-enforcement allegations for her failure to exhaust administrative remedies. The court remanded the case to the local trial court for a determination of all other issues.
In July 2006, the “widow” submitted 165 paragraphs of “uncontroverted facts” asserting her status as common-law wife. She also submitted a wealth of affidavits, deposition testimony and other exhibits to prove her status as a common-law wife. The court found several “facts” compelling, including the exchange of rings. Additionally, the decedent’s daughters referred to the “wife” as their stepmother, the community considered them a couple, the decedent referred to her as his “old-lady,” and he also identified her as “next of kin” on several important documents. The couple established a successful farming business in which they worked together every day. There was additional evidence presented indicating that the couple even went on a “honeymoon” in Hutchinson, Kansas, where the couple agreed to be common-law married at a restaurant and he “carried her over the threshold” of their motel room. But, she couldn’t the specific date of the “honeymoon.”
The IRS and KDOR moved for dismissal of the case alleging that the couple identified themselves as “single” on several land deeds, filed separate income tax returns, and filed for Social Security benefits as single individuals. The decedent’s ex-wife also testified that she rarely heard her ex-husband refer to his new friend as his “wife” and that the rings were never referred to as wedding bands. Additionally, the decedent intentionally prepared his will as a single person and indicated on his children’s application for college aid that he was unmarried.
In a procedural determination, the trial court struck her “affidavit of uncontroverted facts” as not having been properly submitted. On motions of the state and federal government for summary judgment, the court set forth 138 factual findings based upon their assessment of the pleadings and other evidence. The court granted the motions, stating that the parties put “different spins on the same set of facts.” The court stated that there were not enough “controverted” facts for the case to proceed to trial.
The trial court set forth the three essential elements to establish a common-law marriage in Kansas – (1) the parties must have the capacity to marry; (2) the parties must mutually agree to be presently married; and (3) the parties must mutually hold themselves out to the public as husband and wife. The trial court stated that her evidence was purely subjective and there was not enough verifiable evidence that the couple had established a common-law marriage. The court concluded that the parties did have the capacity to marry, but there was no mutual agreement to marry. The only direct evidence of an agreement to marry was her testimony regarding the Hutchinson “honeymoon.” However, there was no supporting evidence offered to establish that the couple really had a “present agreement” to marry. As to the third element, the trial court found that the parties never signed any documents representing that they were a married couple. Probably the most damaging evidence cited by the IRS and KDOR was that the decedent executed his will as a single person and refused to refer to her as his wife. Despite his attorney’s suggestions that they formalize the marriage, the decedent indicated that he left the plaintiff with enough assets to cover any estate tax or inheritance liability. The court went so far as to state the “widow” completely failed to prove a common-law marriage.
On appeal, the appellate court disagreed with the trial court’s granting of the motion for summary judgment in favor of IRS and KDOR. They found that there was a “considerable amount of evidence” that should have been weighed by the judge or a jury. In essence, the appellate court held that the determination of the existence of a common-law marriage was a fact question to be determined by a jury. One of these “problems” with the trial court’s determination was that there was (according to the appellate court) ample evidence to suggest that the couple held themselves out as a married couple. The appellate court went on to state that even though a couple never tells any member of his or her family or the public that they are actually married, that does not necessarily preclude a common-law marriage in Kansas. The appellate court believed that there were other factual indications that the couple held themselves out to the public as husband and wife.
Finally, the appellate court determined that the trial court improperly weighed the evidence in favor of the KDOR and IRS. The appellate court determined that the trial court utilized “objective” evidence and, as such, improperly “weighed” the evidence during the summary judgment motions. In the appellate court’s view, a weighing of the evidence should have taken place only during a trial. On remand, the sole issue before the trial court was whether the couple had established a common-law marriage. The matter of an estate tax refund was not ripe because the decedent’s estate had not yet filed a claim for refund.
On the later tax refund action back in federal court, the court was unimpressed by the “widow’s” arguments. Indeed, the court noted that a rational factfinder could conclude that no common-law marriage existed and that the evidence supporting a common-law marriage was so lacking that her estate tax refund claim could be considered fraudulent. The court noted that the decedent and the “widow” went to great lengths to conceal their relationship from family and neighbors. The court also determined that the doctrine of consistency should be applied – for over two decades they represented themselves to the IRS on their federal tax returns that they were not married. Accordingly, the court denied her motion for a refund of estate tax based on the marital deduction.
But, at a later trial in the federal court on the issue of whether a common-law marriage existed, the jury determined that a common law marriage had been established. The IRS had claimed that she owed $1.4 million in estate tax, another $1 million for fraud and $434,000 in interest associated with tax liabilities. On further review, the court allowed the deduction for interest expense and ordered a refund of interest on an assessed fraud penalty.
In re Common-Law Marriage of Heidkamp, No. 125,617, 2023 Kan. LEXIS 13 (Kan. Sup. Ct. Mar. 31, 2023)
In this case, the plaintiff sought a judicial confirmation that she had been in a common law marriage with her husband at the time of his death. She based this assertion on the belief that a common law marriage existed after they had lived together for seven years. The trial court confirmed that a common-law marriage existed based on the facts that the parties had the legal capacity to marry, mutually agreed that they were married, conducted themselves as if they were married, and held themselves out to the public as a married couple. They lived together; paid all of their utilities under the same name; made joint charitable contributions; had a joint savings account; owned multiple pieces of real estate together; were listed as each other’s beneficiaries on IRA accounts; called each other “husband” and “wife” at family events and in social settings; and attended medical appointments as a married couple. The plaintiff appealed due to the U.S. Supreme Court’s ruling in Commissioner v. Estate of Bosch, 387 U.S. 456 (U.S. 1967), where the Supreme Court held that the IRS and federal courts are not bound by lower state court decisions. The Kansas Supreme Court considered all the evidence presented at the trial court and affirmed the trial court’s findings.
In re Estate of Gray, No. 124,085, 2023 Kan. App. Unpub. LEXIS 153 (Kan. Ct. App. Mar. 31, 2023)
In this case, the decedent died unexpectedly and intestate. He had been living in Kansas for several months where he was taking care of his mother’s affairs following her death. Prior to that, he had lived in Texas for five years with a woman he was not married to. He had inherited a home in Kansas from his mother and his death certificate listed his Kansas home as his residence and his marital status as “never married.” The decedent did have a biological son. Eight months after his death, the woman in Texas executed a deed purporting to sell the home to another man in Texas and his company, claiming to have been the decedent’s surviving common-law wife and sole heir. Her name was not on the title to the house. The sale price was indicated as $10,000 while a private appraiser had valued the home at $30,000. Five months later, the court-appointed administrator sold the home for $30,000, subject to the probate court’s approval. The administrator also filed a motion with the probate court to set aside the prior deed as invalid because the woman had no legal interest in the home.
At an evidentiary hearing, no witnesses were aware that the decedent was married at the time of death. The decedent’s son did not believe that his father was married and testified that another woman who was purportedly his father’s girlfriend sent him money periodically. While the woman alleging to be the decedent’s common-law wife produced letters the decedent had written to her as his “wife” and received mail in her name at their Texas residence, they never had a formal wedding ceremony even though she claimed that they had planned to get married when he returned from Kansas. She also had a life insurance policy that named her daughter as the primary beneficiary and the decedent (designated as her fiancé) as the contingent beneficiary. In addition, shortly before his death, the decedent opened a bank account in his name only and designated the pay-on-death beneficiary as the administrator of his mother’s estate. He also listed his Kansas house as his home address for the account. The couple also never filed joint tax returns, and he was not on the title to her Texas house.
The trial court determined that there was no common-law marriage, and that the administrator had the authority to sell the decedent’s home. The trial court also found that the buyer was not a bona fide purchaser and that even if he were, the sale had to be first authorized by the probate court and a title company had so informed the buyer.
The appellate court affirmed on all points. The couple did not have any present agreement to marry – a required element of a common-law marriage in both Texas and Kansas. The appellate court noted that a present agreement meant an intent to be married, rather than an intent to get married. The appellate court also pointed out that Kansas law (K.S.A. §59-2305(b)) requires that a private sale of a decedent’s real estate must be 75 percent or more of the appraised value. As such, the sale for one-third of the appraised value was impermissible.
Conclusion
Common-law marriage is recognized by statute in some states (CO, IA, KS, MT, NH, SC, TX and UT), is recognized by caselaw in RI and OK, and is grandfathered in other states if it was established before a certain date (PA, OH, IN, GA, FL, AL). However, the requirements for legally establishing a common-law marriage differ among the states that recognize the concept. In any event, the cases discussed above point out that not formalizing the marital relationship can lead to substantial legal issues and disrupt what might otherwise have been a desired disposition of property at death.
April 7, 2023 in Estate Planning | Permalink | Comments (0)
Friday, March 31, 2023
RMD Rules Have Changed – Do You Have to Start Receiving Payments from Your Retirement Plan?
Overview
Taxpayers have numerous options for saving for retirement, whether working for an employer or self-employed. But, there are limitations that apply to how much can be deposited each year into a retirement account and other rules apply that specify when distributions from retirement accounts must begin. If distributions are not taken when they should, penalties can apply.
The rules can be tricky, and the Congress has modified the rules in recent years. One of those changes applies to some people and will require the beginning of distributions (a required minimum distribution (RMD)) from certain retirement accounts by April 1, 2023 – tomorrow.
Rules involving RMDs from retirement accounts – it’s the topic of today’s post.
RMDs
Funds cannot be kept in a retirement account indefinitely. In general, distributions must be made from an IRA, SIMPLE IRA, SEP IRA, or retirement plan account when the account owner reaches age 72 (73 if age 72 is attained after Dec. 31, 2022). Normally, an RMD must be made by the end of the year. But, for those turning 72 during 2022, the first RMD may be made as late as April 1, 2023. This rule applies to IRAs, 401(k)s and similar workplace retirement accounts.
Note: For persons with a Roth IRA, funds need not be withdrawn during life. But the beneficiaries of the account are subject to the RMD rules. Designated Roth accounts in a 401(k) or 403(b) plan are subject to the RMD rules for 2022 and 2023. 2023 RMDs must be taken by April 1, 2024. However, for 2024 and later years, RMDs are no longer required from designated Roth accounts.
This April 1 rule only applies for the first year that an RMD is required. For later years, the RMD must be made by the end of the year – December 31. As a result, any taxpayer that received their RMD for 2022 in 2023 (on or before April 1 of 2023) must also receive their RMD for 2023 by the end of 2023. This means that both distributions will be taxable in 2023.
Employees. Individuals that are still employed by the plan sponsor, and who are not a 5 percent owner, may delay taking RMDs from workplace retirement plan until they retire, if the plan so allows. But, even those that are still employed must begin taking an RMD starting at age 72 from traditional IRAs, SEP, SIMPLE and SARSEP IRA plans.
Plans requiring an RMD. As noted above, RMDs are not required with respect to Roth IRAs. Likewise, for 2024 and later years, RMDs aren’t required to be taken from designated Roth accounts. The RMD rules, however, apply to traditional IRAs, SEPs and Simple IRAs during the owner’s life. RMDs are also required to be taken by owners of 401(k) plans, 403(b) and 457(b) plans.
Age change. While the rule as to when an account owner must start taking an RMD has been the year in which the owner reaches age 72, starting in 2023, the required RMD must begin for the year in which the account owner turns 73. In other words, for account owners that turned 72 in 2022, the first RMD must be taken by April 1, 2023, with the RMD computed based on the account balance as of the end of 2021. For those reaching age 72 in 2023, there is no RMD requirement for this year. Instead, the first RMD will be for 2024 because that will be the year in which the individual will turn 73. The first RMD for these persons must be taken by April 1, 2025.
Meeting RMD Requirements. The RMD requirement can be satisfied by withdrawing from multiple accounts – traditional IRAs, SEPs, SIMPLEs and SARSEPs. Withdrawals need not be taken from each account the owner holds. What is required is that the total withdrawals must be at least what the total RMD requirement.
Calculating the RMD. The IRS provides Publication 590 to assist in computing the RMD. Publication 590 contains RMD tables that are used to calculate the RMD. Basically, from the table an account owner will locate their age on the IRS Uniform Lifetime Table, find the “life expectancy factor” corresponding to their age, and then divide the account balance as of December 31 of the prior year by the current life expectancy factor. The computation is different if the account owner’s spouse is the only primary beneficiary and is more than 10 years younger than the owner. In that instance, the IRS Joint Life and Last Survivor Expectancy Table (contained in Pub. 590) is used. The account owner’s life expectancy factor is based on the ages of both the account owner and spouse. The formula, however, does not change.
For persons with multiple retirement plans, the RMD is to be calculated separately for each plan. But the RMDs can be combined, and the total amount withdrawn from a single plan or any combination of plans.
Conclusion
RMDs from retirement plans can be confusing, and for those with multiple accounts it’s probably best to consult with a financial and/or tax advisor to help with determining the best withdrawal strategy.
March 31, 2023 in Estate Planning, Income Tax | Permalink | Comments (0)
Wednesday, March 29, 2023
Summer Seminars
Overview
This summer Washburn Law School will be conducting two summer seminars focused on farm and ranch income taxation and farm and ranch estate, business and succession planning. The first of the two events will be in Petoskey, Michigan on June 15-16 at North Central Michigan College. Registration will open soon. When the law school has that ready, the link will be available on my website: www.washburnlaw.edu/waltr and I will share it here. The second two-day event this summer will be at North Idaho College in Coeur d’Alene, Idaho on August 7-8. Both events will also be simulcast live over the web.
The itinerary for the Michigan event is below. The Idaho event follows the same Day 1 itinerary as the Michigan event, but Day 2 in Idaho will have a few different topics and speakers on Day 2. Also, at the Idaho conference there will also be a dual track running at the same time devoted solely to agricultural law topics. The ag law track will start a bit later in the morning and end earlier than the estate and business planning conference. It will be held at the same location in Coeur d’Alene and the luncheon each day will be for all attendees of each track. Approximately 10 hours of CLE will be available for the ag law topics. I will post more on that once the topics and speakers are completely filled-in for that day.
Day 1 Itinerary
Here's the itinerary for Day 1 at both the Michigan and Idaho locations (farm tax track):
7:30-8:00 a.m. – Registration
8:00–8:05 a.m. - Welcome and Announcements
8:05–9:05 a.m. – Tax Update (Cases and Rulings) (McEowen) [60 minutes tax update CPE]
This opening session takes a look at the most significant tax cases and rulings from the courts and the IRS during the past year that have implications for farm and ranch clients, rural landowners, and agribusiness professionals.
9:05–9:45 a.m. – The Definition of “Farm Income” for Farm Program Purposes (Neiffer) [40 minutes tax update CPE]
Many Farm Service Agency programs grant extra payments if AGI from farming is more than 75% of total AGI. This session will review how FSA determine AGI and why it can be substantially different from IRS calculations.
9:45–10:05 a.m. – Morning Break
10:05–10:30 a.m. – Machinery Trades (McEowen) [25 minutes of tax law CPE]
This session examines the trade of farm machinery with no or low basis for new machinery and the resulting gain computation, combined with substantial depreciation claimed on the new machine.
10:30–10:55 a.m. – Selected Topics - Inventory Method Options for Farmers; How Bonus Depreciation and Expense Method Depreciation Can Work Together for Farm Clients (Neiffer) [25 minutes of tax update CPE]
Tax Reform simplified many accounting methods for taxpayers including farmers. We will review those change and why Section 179 can be more beneficial than bonus depreciation.
10:55–11:45 a.m. – Solar Panel Tax Issues; Other Rental Tax Issues (McEowen) [50 minutes of tax law CPE]
This discussion explores the tax issues associated with the placement of solar panels on farmland and also looks at other tax issues associated with rentals that farming operations often encounter.
11:45–12:45 p.m. – Luncheon
12:45 p.m.– 1:45 p.m. – Protecting a Tax Practice From Scammers (IRS CID) [60 minutes of tax law]
What steps can a tax practice take to protect itself from scams, including those from the dark web? What is good office protocol? What are the essential things that can be done and what are the signs to look for to detect scammers?
1:45 p.m.–2:25 p.m. – Selected Topics - Amending Partnership Returns; Corporate Provided Meals and Lodging; Charitable Remainder Trusts for Retiring Farmers (Neiffer) [40 minutes of tax law CPE]
This session will update the required method of amending partnership returns depending on whether the centralized partnership audit regime applies; a review of the change in corporate provided meals and why charitable remainder trusts can save taxes for a retiring farmer especially with increasing interest rates.
2:25-2:45 p.m. – Afternoon Break
2:45–3:10 p.m. – Easement Tax Issues (McEowen) [25 minutes of tax update CPE]
Rural landowners are finding easement tax issues to be more commonplace. This brief session provides a review of the basic tax issues associated with easements, particularly income tax basis offset issues and the character of the easement payments.
3:10–4:00 p.m. – IC-DISC for Farmers; Disallowance of Cash Method for Farming Activities; Accounting for Hedging Transactions; When to Deduct a Purchased Growing Crop (Neiffer) [50 minutes of tax law CPE]
An IC-DISC can cut a farmer’s income taxes in half – we review when it might apply. More farming activities include non-material participating taxpayers. This can cause the entity to be on the accrual method. The reporting of hedging activities is not always intuitive. We review the requirement and the options and when can a farmer deduct purchased growing crop.
4:00–4:25 p.m. – Soil Fertility Deductions (McEowen) [25 minutes of tax law CPE]
When a farm is purchased an allocation of value can be made to depreciable items. One of those items might be excess fertilizer supply. The IRS has a specific procedure that must be followed for valuing the excess amount. This session examines the IRS approach, the amount to be amortized, the timeframe for amortization and the possibility of recapture.
4:25 p.m. - Adjournment
Day 2 (farm estate and business planning track)
Here’s the itinerary for Day 2 of the Michigan event (farm estate and business planning track):
7:30-8:00 a.m. — Registration
8:05-8:55a.m. — Current Developments in Estate and Gift Taxation (McEowen) [50 minutes tax update CPE]
This session provides an update of legislative, regulatory and court developments involving federal estate and gift tax including developments involving a decedent’s gross estate, asset valuation, gifts made during life, retirement plans and miscellaneous issues.
8:55-9:45 a.m. – “Top Ten” Strategies For a Successful Farm Business (Rhea and Dikeman) [50 minutes tax update CPE]
As we look toward the next 12 months, several items deserve increased attention for farm businesses. This presentation delivers a Top 10 list of forward-looking strategies to consider for success. Changes in cost, income, inflation, tax laws, and estate planning are some key topics discussed. These will be on the mind of farms and ranches as they navigate the uncertain economic conditions and the impact of higher asset values, growing debt, and rising interest rates. We will also demonstrate the performance distinctions of top 1/3 producers.
9:45-10:05 a.m. — Morning Break
10:05-10:55 a.m. – Taxes in Probate: Form 1041 and Distribution Deductions (McEowen) [50 minutes tax law CPE]
This session walks the practitioner through the completion of Form 1041, the assets included in the probate estate, possible income generating items for an estate, the handling of capital gain or loss, and estate accounting. A discussion of e-filing and electronic signatures will also be included. In addition, common issues associated with the death of a farmer will be addressed.
10:55 a.m.-11:45 a.m. – SLATs – Why It Might be the Best Option for Your Farmers (Neiffer) [50 minutes of tax law CPE]
This session reviews the various trust options available to farm families to transfer assets to the next generation in a tax efficient manner. The session will then review why a Spousal Lifetime Access Trust (SLAT) might be the best option.
11:45-12:45 p.m. — Lunch
12:45 p.m.-1:35 p.m. – Why Social Security is an Investment, not a Tax (Neiffer) [50 minutes of tax law CPE]
Most farmers view social security as an unnecessary tax. However, with optimal planning, social security maybe one of the best investments they ever make. We review how benefits are calculated, why spousal benefits provide even more bang for their buck and some common claiming options.
1:35 p.m.-2:50 p.m. — Tax Strategies for the Farm and Ranch Client (Rhea and Dikeman) [75 minutes of tax law CPE]
This session highlights several changes were made by the Tax Cuts & Jobs Act of 2017; many sunset after 2025 and demand attention for optimal tax planning strategies the next 3 years. We will also explain how rising inflation rates are at times helping reduce tax liability and when it does not. Rising interest rates and inflated asset values are dramatically shifting costs of farm transitions to the detriment of young and beginning farmers. Stepped-up basis is a big thing; we detail how this can be helpful to farm successors. Unintended consequences of high income and options for tax management after year end are analyzed.
2:50 p.m. – 3:10 p.m. – Afternoon Break
3:10 p.m. – 3:25 p.m. – New Estate Planning Clients – Screening Clients and Gathering Information [15 minutes of tax law CPE]
This session takes a brief look at a suggested approach to handling potential new estate/business planning clients. How to screen clients, identify potential problem clients, engagement letters and information gathering as preparatory to determining the appropriate path forward for the client.
3:25-4:25 p.m. – Ethics for Estate Planners (McEowen) [1 hour of tax ethics CPE]
What are the ethical issues facing practitioners working with clients on estate/business and tax planning matters? How might the Circular 230 rules impact tax professionals in the estate and business planning context when income tax advice is involved? This session looks at some of the common issues that can arise, applicable caselaw, and some of the more unusual situations that might arise that present difficult situations for the planner.
4:25 p.m. — Conference adjourns
Here’s the itinerary for Day 2 of the Idaho event (farm estate and business planning track):
7:30-8:00 a.m. — Registration
8:05-8:55a.m. — Current Developments in Estate and Gift Taxation (McEowen) [50 minutes tax update CPE]
This session provides an update of legislative, regulatory and court developments involving federal estate and gift tax including developments involving a decedent’s gross estate, asset valuation, gifts made during life, retirement plans and miscellaneous issues.
8:55-9:45 a.m. – Who Wants the Farm; and Should They Get It? (Bosch) [50 minutes of tax law CPE]
9:45-10:05 a.m. — Morning Break
10:05-10:55 a.m. – Taxes in Probate: Form 1041 and Distribution Deductions (McEowen) [50 minutes of tax law CPE]
This session walks the practitioner through the completion of Form 1041, the assets included in the probate estate, possible income generating items for an estate, the handling of capital gain or loss, and estate accounting. A discussion of e-filing and electronic signatures will also be included. In addition, common issues associated with the death of a farmer will be addressed.
10:55 a.m.-11:45 a.m. – SLATs – Why It Might be the Best Option for Your Farmers (Neiffer) [50 minutes of tax law CPE]
This session reviews the various trust options available to farm families to transfer assets to the next generation in a tax efficient manner. The session will then review why a Spousal Lifetime Access Trust (SLAT) might be the best option.
11:45-12:45 p.m. — Lunch
12:45 p.m.-1:35 p.m. – Why Social Security is an Investment, not a Tax (Neiffer) [50 minutes of tax law CPE]
Most farmers view social security as an unnecessary tax. However, with optimal planning, social security maybe one of the best investments they ever make. We review how benefits are calculated, why spousal benefits provide even more bang for their buck and some common claiming options.
1:35 p.m.-2:50 p.m. - Strategies and Considerations for Transferring Farm Ownership and Operations (Hemenway)
This session will explore various issues connected with the transfer of farm ownership to successive generations. Topics will include timing the transfer of labor and management; preparing the next generation for farm ownership; planning for multiple inheritors; and considerations for long-term care and asset protection planning.
2:50 p.m. – 3:10 p.m. – Afternoon Break
3:10 p.m. – 3:25 p.m. – New Estate Planning Clients – Screening Clients and Gathering Information (McEowen) [15 minutes of tax law CPE]
This session takes a brief look at a suggested approach to handling potential new estate/business planning clients. How to screen clients, identify potential problem clients, engagement letters and information gathering as preparatory to determining the appropriate path forward for the client.
3:25-4:25 p.m. – Ethics for Estate Planners (McEowen) [1 hour of tax ethics CPE]
What are the ethical issues facing practitioners working with clients on estate/business and tax planning matters? How might the Circular 230 rules impact tax professionals in the estate and business planning context when income tax advice is involved? This session looks at some of the common issues that can arise, applicable caselaw, and some of the more unusual situations that might arise that present difficult situations for the planner.
4:25 p.m. — Conference adjourns
Conclusion
I look forward to either seeing you in-person at one of these events this summer or online. At the end of Day 1 at the Idaho event, there will be a reception sponsored by the University of Idaho College of Law. Also, many thanks to Teresa Baker at the Idaho Bar Association for her assistance in locating speakers as well as to Prof. Richard Seamon (Univ. of ID College of Law) and Kelly Stevenson (leader of the ag law section off the Idaho Bar) for helping identify topics as well as speakers.
More details and registration links coming soon.
March 29, 2023 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)
Saturday, March 11, 2023
Happenings in Agricultural Law and Tax
Overview
The legal issues in agricultural law and tax are seemingly innumerable. The leading issues at any given point in time are often tied to the area of the country involved. In the West and the Great Plains, water and grazing issues often predominate. Boundary disputes and lease issues seem to occur everywhere. Bankruptcy and bankruptcy taxation issues are tied to the farm economy and may be increasing in frequency in 2023 – the USDA projects net farm income to be about 16 percent lower in 2023 compared to 2022. Of course, estate planning, succession planning and income tax issues are always present.
With today’s post, I take a look at some recent cases involving ag issues. A potpourri of recent cases – it’s the topic of today’s post.
Dominant Estate’s Water Drainage Permissible.
Thill v. Mangers, No. 22-0197, 2022 Iowa App. LEXIS 961 (Iowa Ct. App. Dec. 21, 2022)
The plaintiffs sued their neighbor, the defendant, for nuisance. Rainwater from the defendant’s property would run off onto the plaintiffs’ property. In the 1950s and 1960s the city installed a few culverts to help with the water drainage. The water drained into an undeveloped ground area where the plaintiffs later built their home. The plaintiffs tried numerous ways to block the flow, ultimately causing drainage problems for the defendant who then tried to direct the excess water back onto the plaintiffs’ property. The plaintiffs claimed that defendant’s activity caused even more damage to their property than had previously occurred, causing a neighbor to also complain. All of the parties ended up suing each other on various trespass and nuisance claims. The trial court dismissed all of the claims because the court believed that all of the parties’ actions caused the water drainage problems. The appellate court explained that the defendant, as the owner of the dominant estate, had a right to drain water from his land to the servient estate (the plaintiffs’ property) and if damage resulted from the drainage, the servient estate is normally without remedy under Iowa Code §657.2(4). The only time a servient estate could recover damages is if there is a substantial increase in the volume of the water draining or if the method of drainage is substantially changed and actual damage results. Under Iowa law, the owner of the servient estate may not interrupt or prevent the drainage of water to the detriment of the dominant owner. The plaintiffs argued that the defendant violated his obligation by installing a berm and barricade, and presented expert testimony showing that the water flow changed when the defendant added the features, but the defendant had his own expert who provided contrary testimony. The appellate court held that the defendant’s expert was more reliable because the defendant’s expert used more historical information and photographs to analyze how the water historically flowed rather than focusing on the current condition of the neighborhood as did the plaintiffs’ expert. When the plaintiffs’ expert looked at these historical photographs, he even agreed with the defendant’s expert that the natural flow of water was through the culverts onto the plaintiffs’ property. The appellate court affirmed the trial court’s finding that the plaintiffs did not prove that the defendant substantially changed the method or manner of the natural flow of water, because the water would have flowed the same way with or without the defendant’s berm and barricade.
Mortgage Interest Deduction Disallowed
Shilgevorkyan v. Comr., T.C. Memo. 2023-12
The petitioner claimed a mortgage interest deduction for 2012 associated with a home that his brother purchased for $1,525,000 in 2005. The purchase was financed with a bank loan. The brother and his wife were listed as the borrowers on the loan. The brother (and wife) and another brother also took out a $1,200,000 construction loan. Both loans were secured by the home. The construction loan was used to build a separate guesthouse on the property. In 2010, one brother executed a quit claim deed in favor of the petitioner with respect to the property. During 2012, the petitioner didn’t make any loan payments and was not issued a Form 1098 for the year. While the petitioner lived in the guesthouse for part of 2012, he did not list the property as being his place of residence or address. On his 2012 return, the petitioner claimed a $66,354 deduction for one-half of the total mortgage interest paid for the year as reported on Form 1098 that was issued to his brother and his brother’s wife. The IRS disallowed the deduction and the Tax Court agreed. The petitioner failed to prove that the debt on the property was his obligation, did not show ownership (legal or equitable) in the property, and the quitclaim deed did not convey title to him under state law. The Tax Court also determined that the petitioner failed to establish that the residence was his “qualified residence.”
Charitable Deduction Case Will Go to Trial on Numerous Issues
Lim v. Comr., T.C. Memo. 2023-11
During 2016 and 2017, the petitioners (a married couple) were the sole shareholders of an S corporation. In late 2016, after making a presentation to the petitioners concerning “The Ultimate Tax, Estate and Charitable Plan,” an attorney formed a “Charitable Limited Liability Company” for the petitioners to use as a vehicle for making charitable donations. The attorney agreed to transfer assets to the LLC, to transfer LLC units to a charity and to provide the supporting valuation documentation for the donation. He also agreed to represent them before the IRS and the Tax Court if the return(s) were later examined. His fee would be the greater of $25,000 or 6 percent of the “deductible amount” of assets capped at $1 million, plus 4 percent of the “deductible amount” of assets exceeding $1 million. The assets transferred to the LLC were five promissory notes with a face amount of $2,008,500. This generated a fee for the attorney of $84,000 based on a presupposed “deductible amount” of $1,600,000 even though the assets were not appraised until late January of 2017, which valued them at $1,600,000. The fee was to be paid in installments over six months beginning in January of 2017.
The attorney also created a second LLC in late December of 2016 with the petitioners as the managers, the attorney as the registered agent, and the petitioners’ S corporation as the single member. Petitioners promised to pay the second LLC $2,008,500 (the promissory notes) in seven years.
The charitable recipient was a Foundation (an I.R.C. §501(c)(3) organization) for which the attorney was the registered agent. The petitioners claimed that their S corporation donated “units” of the second LLC to the Foundation and claimed a charitable deduction. The IRS denied the deduction, partly on the basis of a lack of evidence that any property was actually transferred to the Foundation. The petitioners did not offer any explanation as to when or how the “units” were created or what physical form they took. The petitioners also claimed that they received an acknowledgement letter of the donation from the Foundation dated January 1, 2017. The letter referred to 1,000 units of an LLC that did not exist during 2016 or as of January 1, 2017. It was not addressed to the S corporation, but to the petitioner (wife) at their residence in a different city than the S corporation. The letter also was not signed by any person and appeared to be a form letter with taxpayer-specific information in bold font. It also did not refer to any property that the S corporation allegedly donated on December 31, 2016.
On January 4, 2017, the attorney submitted an appraisal, but it lacked substance. The appraisal asserted that LLC interests were donated to the Foundation in 2016, but did not denote how many interests had been contributed. The claimed charitable deduction was $1,608,808. The attorney also attached his curriculum vitae stating that he was a CPA, a certified valuation analyst and a licensed attorney in Kentucky. Also attached to the appraisal was a one-page “certification” on which the attorney stated that his fee was not contingent on the report in any manner and that he didn’t have any interest or bias with respect to the parties involved. This was despite his having arranged the entire transaction and being the registered agent for the second LLC.
The S corporation filed Form 1120S for 2016 and attached a copy of the appraisal and Form 8283 which described the donated property as “LLC units” with a basis of $2,008,500 that had been acquired by purchase, and an “appraised market value” of $1,608,808. The petitioners reported a non-cash charitable deduction of $1,608,808 on Schedule A that flowed through to them from the S corporation. Because the amount of the deduction exceeded the maximum allowable deduction for 2016, they claimed a $1,195,073 deduction for 2016 and carried the balance of $415,711 to their 2017 return.
The IRS audited the petitioners’ 2016 and 2017 returns and disallowed the charitable deductions for lack of substantiation. The petitioners challenged the disallowance in the Tax Court and the IRS moved for partial Summary Judgment. The Tax Court determined that the appraisal was not a “qualified appraisal” within the meaning of I.R.C. §170(f)(11)(C). Treas. Reg. §1.170A-13(c)(6)(i) requires, among other things, that “no part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property.” Accordingly, the attorney’s fee was a prohibited appraisal fee within the meaning of the regulation. However, the Tax Court held that the petitioners had shown reasonable cause for failure to comply with the substantiation requirements of I.R.C. §170. They had presented sufficient proof that they relied upon professionals in claiming the charitable contribution deduction. Accordingly, the Tax Court denied the IRS summary judgment on this issue. The Tax Court also denied summary judgment to the IRS on the issue of whether the written acknowledgement was a “contemporaneous written acknowledgement” of the contribution in accordance with I.R.C. §170(f)(8)(A). Accordingly, the Tax Court granted the Summary Judgment motion of the IRS in part, while the remaining issues will be set for trial.
Note: In 2018 the Department of Justice filed a complaint against the attorney, alleging that he promoted the “Ultimate Tax Plan” as a tax evasion scheme. He was accused of running a $35 million federal tax advice scam offering fake deductions using three bogus charities for 19 years. The complaint alleged that he was at the helm of "a national charitable-giving tax scheme" that targeted "wealthy individuals in high tax brackets facing large tax liabilities.” He settled with the Government and agreed to a permanent injunction. On April 26, 2019, the U.S. District Court for the Southern District of Florida entered a final judgment of permanent injunction against him, holding that he had engaged in conduct penalizable under I.R.C. §6700 by promoting the “Ultimate Tax Plan.” The court permanently enjoined him from, among other things, promoting “the Ultimate Tax Plan or any plan or arrangement that is substantially similar.” The court ordered the attorney to perform other actions as well in relation to the plan.
Document Filed with FSA Not a Valid Lease
Coniglio v. Woods, No. 06-22-00021-CV, 2022 Tex. App. LEXIS 8926 (Tex. Ct. App. Dec. 7, 2022)
Involved in this case was land in Texas that the landowner’s son managed for his father who lived in Florida. The landowner needed the hay cut and agreed orally that the plaintiff could cut the hay when necessary. The hay was cut on an annual basis. So that he could receive government farm program payments on the land, the plaintiff filed a “memorialization of a lease agreement” with the local USDA Farm Service Agency (FSA). The landowner’s son also signed the agreement at the plaintiff’s request, but later testified that he didn’t believe the document to constitute a written lease. After three years of cutting the hay, the landowner wanted to lease the ground for solar development, and the plaintiff was told that the hay no longer needed to be cut and there would be no hay profits to share. The plaintiff sued for breach of a farm lease agreement. The trial court ruled in favor of the plaintiff on the basis that the form submitted to the USDA was sufficient to show the existence of a lease agreement. On appeal, the defendant claimed that the document filed with the FSA did not satisfy the writing requirement of the statute of frauds. The appellate court agreed, noting that the document didn’t contain the essential terms of the lease. It didn’t denote the names of the parties, didn’t describe the property, didn’t note the rental rate, and didn’t list any conditions or any consideration. Accordingly, the appellate court determined that no valid lease existed and reversed the trial court’s judgment.
Conclusion
I’ll provide another summary of recent cases in a subsequent post.
March 11, 2023 in Estate Planning, Income Tax, Real Property, Water Law | Permalink | Comments (0)
Sunday, February 5, 2023
Tax Court Opinion - Charitable Deduction Case Involving Estate Planning Fraudster
Overview
The rules surrounding charitable giving can be rather complicated when the gift is not of cash and is of a significant amount. Those detailed rules were at issue in a recent U.S. Tax Court case. What made the case even more interesting was that it also involved taxpayers that got themselves connected with an estate planning and charitable giving fraudster that the U.S. Department of Justice eventually shut down. This is the second significant Tax Court decision in the past six months involving charitable giving. The Furrer farm family of Indiana was involved with a charitable remainder trust scenario that was structured completely wrong (see my blog article here: https://lawprofessors.typepad.com/agriculturallaw/2022/12/how-not-to-use-a-charitable-remainder-trust.html) and now another case.
The rules on charitable giving and a recent case involving a chartable giving scam. It’s the topic of today’s blog article.
Background
The Tax Code allows a deduction for any charitable contribution made during the tax year. I.R.C. §170(a)(1). The amount must be “actually paid during the tax year” and the taxpayer bears the burden to prove the surrender of dominion and control over the property that was contributed to a qualified charity. See, e.g., Pollard v. Comr., 786 F.2d 1063 (11th Cir. 1986); Goldstein v. Comr., 89 T.C. 535 (1987); Fakiris v. Comr., T.C. Memo. 2020-157.
For charitable contributions consisting of anything other than money, the amount of the contribution is generally the fair market value of the property at the time of the contribution. Treas. Reg. §1.170A-1(c)(1). For non-cash contributions exceeding $5,000 (at one time), the taxpayer must obtain a “qualified appraisal” of the property. I.R.C. §170(f)(11)(C). This includes attaching to the return a fully completed appraisal summary on Form 8283. Id.; Treas. Reg. §1.170A-13(c)(2). When a non-cash contribution exceeds $500,000, a copy of the appraisal must be attached to the return. I.R.C. §170(f)(11)(D). If the donor is an S corporation or a partnership, the qualified appraisal requirement is the obligation of the entity and not the members or shareholders. Id.
A “qualified appraisal” is one that is conducted by a “qualified appraiser” using generally accepted appraisal standards and otherwise satisfies the applicable regulations. A qualified appraisal is “qualified” only if it is “prepared, signed, and dated by a qualified appraiser.” Treas. Reg. §1.170A-13(c)(3)(i)(B). There are 11 categories of information that the appraisal must include. Id. subdiv. (ii). One of those is that “[N]o part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property.” Treas. Reg. §1.170A-13(c)(6)(i). See also Alli v. Comr., T.C. Memo. 2014-15.
There is a reasonable cause exception for failing to satisfy the substantiation requirements. I.R.C. §170(f)(11)(A)(ii)(II). To use the reasonable cause exception, the taxpayer must show that willful neglect is not present based on the facts and circumstances. If the exception applies, the charitable deduction may be allowed. See, e.g., Belair Woods, LLC v. Comr., T.C. Memo. 2018-159.
Recent Case
In Lim v. Comr., T.C. Memo. 2023-11, during 2016 and 2017, the petitioners (a married couple) were the sole shareholders of an S corporation. In late 2016, after making a presentation to the petitioners concerning “The Ultimate Tax, Estate and Charitable Plan,” an attorney formed a “Charitable Limited Liability Company” for the petitioners to use as a vehicle for making charitable donations. The attorney agreed to transfer assets to the LLC, to transfer LLC unites to a charity and to provide the supporting valuation documentation for the donation. He also agreed to represent them before the IRS and the Tax Court if the return(s) were later examined. His fee would be the greater of $25,000 or 6 percent of the “deductible amount” of assets capped at $1 million, plus 4 percent of the “deductible amount” of assets exceeding $1 million. The assets transferred to the LLC were five promissory notes with a face amount of $2,008,500. This generated a fee for the attorney of $84,000 based on a presupposed “deductible amount” of $1,600,000 even though the assets were not appraised until late January of 2017 which valued them at $1,600,000. The fee was to be paid in installments over six months beginning in January of 2017.
The attorney also created a second LLC in late December of 2016 with the petitioners as the managers, the attorney as the registered agent, and the petitioners’ S corporation as the single member. Petitioners promised to pay the second LLC $2,008,500 (the promissory notes) in seven years.
The charitable recipient was a Foundation (an I.R.C. §501(c)(3) organization) for which the attorney was the registered agent. The petitioners claimed that their S corporation donated “units” of the second LLC to the Foundation and claimed a charitable deduction. The IRS denied the deduction, partly on the basis of a lack of evidence that any property was actually transferred to the Foundation. The petitioners did not offer any explanation as to when or how the “units” were created or what physical form they took. The petitioners also claimed that they received an acknowledgement letter of the donation from the Foundation dated January 1, 2017. The letter referred to 1,000 units of an LLC which did not exist during 2016 or as of January 1, 2017. It was not addressed to the S corporation, but to the petitioner (wife) at their residence in a different city than the S corporation. The letter also was not signed by any person and appeared to be a form letter with taxpayer-specific information in bold font. It also did not refer to any property that the S corporation allegedly donated on December 31, 2016.
On January 4, 2017, the attorney submitted an appraisal, but it lacked substance. The appraisal asserted that LLC interests were donated to the Foundation in 2016, but did not denote how many interests had been contributed. The claimed charitable deduction was $1,608,808. The attorney also attached his curriculum vitae stating that he was a CPA, a certified valuation analyst and a licensed attorney in Kentucky. Also attached to the appraisal was a one-page “certification” on which the attorney stated that his fee was not contingent on the report in any manner and that he didn’t have any interest or bias with respect to the parties involved. This was despite him having arranged the entire transaction and being the registered agent for the second LLC.
The S corporation filed Form 1120S for 2016 and attached a copy of the appraisal and Form 8283 which described the donated property as “LLC units” with a basis of $2,008,500 that had been acquired by purchase, and an “appraised market value” of $1,608,808. The petitioners reported a non-cash charitable deduction of $1,608,808 on Schedule A that flowed through to them from the S corporation. Because the amount of the deduction exceeded the maximum allowable deduction for 2016, they claimed a $1,195,073 deduction for 2016 and carried the balance of $415,711 to their 2017 return.
The IRS audited the petitioners’ 2016 and 2017 returns and disallowed the charitable deductions for lack of substantiation. The petitioners challenged the disallowance in the Tax Court and the IRS moved for partial Summary Judgment. The Tax Court determined that the appraisal was not a “qualified appraisal” within the meaning of I.R.C. §170(f)(11)(C). Treas. Reg. §1.170A-13(c)(6)(i) requires, among other things, that “no part of the fee arrangement for a qualified appraisal can be based, in effect, on a percentage (or set of percentages) of the appraised value of the property.” Accordingly, the attorney’s fee was a prohibited appraisal fee within the meaning of the regulation. However, the Tax Court held that the petitioners had shown reasonable cause for failure to comply with the substantiation requirements of I.R.C. §170. They had presented sufficient proof that they relied upon professionals in claiming the charitable contribution deduction. Accordingly, the Tax Court denied the IRS summary judgment on this issue. The Tax Court also denied summary judgment to the IRS on the issue of whether the written acknowledgement was a “contemporaneous written acknowledgement” of the contribution in accordance with I.R.C. §170(f)(8)(A). Accordingly, the Tax Court granted the Summary Judgment motion of the IRS in part, while the remaining issues will be set for trial.
Note: In 2018 the Department of Justice filed a complaint against the attorney, alleging that he promoted the “Ultimate Tax Plan” as a tax evasion scheme. He was accused of running a $35 million federal tax advice scam offering fake deductions using three bogus charities for 19 years. The complaint alleged that he was at the helm of "a national charitable-giving tax scheme" that targeted "wealthy individuals in high tax brackets facing large tax liabilities.” He settled with the Government and agreed to a permanent injunction. On April 26, 2019, the U.S. District Court for the Southern District of Florida entered a final judgment of permanent injunction against him, holding that he had engaged in conduct penalizable under I.R.C. §6700 by promoting the “Ultimate Tax Plan.” The court permanently enjoined him from, among other things, promoting “the Ultimate Tax Plan or any plan or arrangement that is substantially similar.” The court ordered the attorney to perform other actions as well in relation to the plan.
Conclusion
When non-cash gifts are made to charity particular rules must be followed for a charitable deduction to be claimed. Unfortunately, there are those engaged in unscrupulous techniques that prospective donors must be on the alert for.
February 5, 2023 in Estate Planning, Income Tax | Permalink | Comments (0)
Monday, January 30, 2023
Bibliography - July Through December 2022
Overview
After the first half of 2022, I posted a blog article of a bibliography of my blog articles for the first half of 2022. You can find that bibliography here: Bibliography – January through June of 2022
Bibliography of articles for that second half of 2022 – you can find it in today’s post.
Alphabetical Topical Listing of Articles (July 2022 – December 2022)
Bankruptcy
More Ag Law Developments – Potpourri of Topics
Business Planning
Durango Conference and Recent Developments in the Courts
Is a C Corporation a Good Entity Choice For the Farm or Ranch Business?
What is a “Reasonable Compensation”?
https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html
Federal Farm Programs: Organizational Structure Matters – Part Three
LLCs and Self-Employment Tax – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html
LLCs and Self-Employment Tax – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html
Civil Liabilities
Durango Conference and Recent Developments in the Courts
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
More Ag Law Developments – Potpourri of Topics
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Contracts
Minnesota Farmer Protection Law Upheld
Criminal Liabilities
Durango Conference and Recent Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/20Ag Law Summit
https://lawpr22/07/durango-conference-and-recent-developments-in-the-courts.html
Environmental Law
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
More Ag Law Developments – Potpourri of Topics
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Estate Planning
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
IRS Modifies Portability Election Rule
Modifying an Irrevocable Trust – Decanting
Farm and Ranch Estate Planning in 2022 (and 2023)
Social Security Planning for Farmers and Ranchers
How NOT to Use a Charitable Remainder Trust
Recent Cases Involving Decedents’ Estates
Medicaid Estate Recovery and Trusts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/medicaid-estate-recovery-and-trusts.html
Income Tax
What is the Character of Land Sale Gain?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal With Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
What is “Reasonable Compensation”?
https://lawprofessors.typepad.com/agriculturallaw/2022/08/what-is-reasonable-compensation.html
LLCs and Self-Employment Tax – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-one.html
LLCs and Self-Employment Tax – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/08/llcs-and-self-employment-tax-part-two.html
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Declaring Inflation Reduced and Being Forgiving – Recent Developments in Tax and Law
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
Extended Livestock Replacement Period Applies in Areas of Extended Drought – IRS Updated Drought Areas
More Ag Law Developments – Potpourri of Topics
IRS Audits and Statutory Protection
https://lawprofessors.typepad.com/agriculturallaw/2022/10/irs-audits-and-statutory-protection.html
Handling Expenses of Crops with Pre-Productive Periods – The Uniform Capitalization Rules
When Can Depreciation First Be Claimed?
Tax Treatment of Crops and/or Livestock Sold Post-Death
Social Security Planning for Farmers and Ranchers
Are Crop Insurance Proceeds Deferrable for Tax Purposes?
Tax Issues Associated With Easement Payments – Part 1
Tax Issues Associated With Easement Payments – Part 2
How NOT to Use a Charitable Remainder Trust
Does Using Old Tractors Mean You Aren’t a Farmer? And the Wind Energy Production Tax Credit – Is Subject to State Property Tax?
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
Tax Deal Struck? – and Recent Ag-Related Cases
Ag Law Summit
https://lawprofessors.typepad.com/agriculturallaw/2022/08/ag-law-summit.html
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
More Ag Law Developments – Potpourri of Topics
Ag Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Regulatory Law
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
The Complexities of Crop Insurance
https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html
Federal Farm Programs – Organizational Structure Matters – Part One
Federal Farm Programs – Organizational Structure Matters – Part Two
Federal Farm Programs: Organizational Structure Matters – Part Three
USDA’s Emergency Relief Program (Update on Gain from Equipment Sales)
Minnesota Farmer Protection Law Upheld
Ag Law and Tax Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/09/ag-law-and-tax-developments.html
Animal Ag Facilities and Free Speech – Does the Constitution Protect Saboteurs?
Court Says COE Acted Arbitrarily When Declining Jurisdiction Over Farmland
Ag Law Developments in the Courts
https://lawprofessors.typepad.com/agriculturallaw/2022/12/ag-law-developments-in-the-courts.html
Water Law
More Ag Law Developments – Potpourri of Topics
January 30, 2023 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Thursday, December 29, 2022
Medicaid Estate Recovery and Trusts
Overview
When a Medicaid beneficiary dies, a state might seek recovery of the Medicaid benefits paid during the beneficiary’s life from the deceased beneficiary’s estate. Part of estate planning to protect assets from being depleted during life and limit or eliminate a state’s right to recover benefits post-death involves transferring property to a trust with the appropriate terms. Known as a Medicaid Asset Protection Trust (MAPT), it’s a part of estate planning that is very important to many farm and ranch families that desire to keep the farm in the family for multiple generations. It’s also a topic that I started lecturing on nationally over 30 years ago after I wrote one of the very first law review articles ever published on the topic. Roger A. McEowen, et al., “Estate Planning for the Elderly and Disabled: Organizing the Estate to Qualify for Federal Medical Extended Care Assistance,” 24 Ind. L. Rev. 1379 (1991). I then followed that up with another article three years later. Roger A. McEowen, “Estate Planning for Farm and Ranch Families Facing Long-Term Health Care,” 73 Neb. L. Rev. 104 (1994).
An MAPT was involved in a recent Iowa case. Unfortunately for the estate, the court’s suspect reasoning resulted in the trust not operating to protect the decedent’s assets from the state seeking reimbursement. A dissenting opinion, however, pointed out the majority’s flawed rationale.
Medicaid asset protection trusts – it’s the topic of today’s post.
Medicaid Basics
For many persons, estate planning also includes planning for the possibility of long-term health care. Nursing home care is expensive and can require the liquidation of assets to generate the funds necessary to pay the nursing home bill unless appropriate planning has been taken. Medicaid is a joint federal/state program that pays for long-term health care in a nursing home. To be able to receive Medicaid benefits, an individual must meet numerous eligibility requirements but, in short, must have a very minimal level of income and assets. States set their own asset limits and determine what assets count toward the limit. Assets exceeding the limit must be spent on the applicant’s nursing home care before Medicaid eligibility can be established.
There are also rules that can apply to help protect certain assets from being depleted to pay for a long-term care bill, and different rules apply when the Medicaid applicant/beneficiary is married, and the spouse is not applying for or receiving Medicaid. However, the overriding public policy concern is that private assets are primarily used to pay for care before taxpayer dollars are utilized.
While some states set different timeframe for the “look-back” period, the general rule is that the value of any non-exempt asset owned by a Medicaid applicant or applicant’s spouse that is disposed of for less than fair market value within five years of an application for Medicaid is treated as an available asset for purposes of Medicaid eligibility. That is the rule for outright transfers as well as transfers to or from a trust. If such a transfer occurs, a penalty period is triggered that could further delay Medicaid eligibility. The penalty period is determined by dividing the uncompensated value of the transfer by the average monthly cost of nursing home care in the individual’s state. The resulting figure is the number of months the individual’s penalty period will last. The penalty period begins on the date on which the individual has applied and is otherwise eligible for Medicaid.
Asset Sheltering Trusts
An asset sheltering trust (also known as an MAPT) is a trust designed to enable the grantor to be eligible for public assistance benefits (Medicaid) for long-term health care costs that would be incurred if the grantor entered a nursing facility. The rules surrounding these types of trusts are quite complex and are constantly changing given the public policy concerns that surround the creation of these types of trusts.
In general, these trusts contain language explicitly evidencing the grantor’s intent to give the trustee complete discretion (a “fully discretionary” trust) to distribute trust income and principal. Similar language might also be used to assure that the grantor’s intent was to supplement rather than supplant public benefits that might be otherwise available. The purpose of these types of provisions is that if the beneficiary ever is in need of long-term medical assistance in a nursing facility, then the trustee has the discretion to withhold the payment of funds from the grantor’s property contained in the trust to permit the beneficiary to receive public assistance (Medicaid) benefits at taxpayer expense and preserve the grantor’s assets for the heirs. They also operate to not create any interest in the trust corpus that the state can attach to seek reimbursement from after the beneficiary dies.
Recent Iowa case. In In re Trust Under the Will of Riessen, No. 22-0048, 2022 Iowa App. LEXIS 925 (Iowa Ct. App. Dec. 7, 2022), the court faced the issue of whether a trust effectively barred the state from seeking post-death reimbursement for Medicaid benefits paid to a trust beneficiary during life. The trust grantor died in 1972 with a will that established a trust to hold an equal share of his farm for a daughter, with his son serving as trustee. The trust authorized the son to pay the net income and principal of the trust to the daughter at his complete discretion – he was not obligated in any way to provide trust funds to his sister as the beneficiary. The trust also stated that the grantor’s reason for giving the complete discretionary power to the trustee was because it was the grantor’s “hope and desire to keep the entire property in the family.” The trust specified that the son had the right to rent the land in the trust and farm it as the tenant. The trust also stated that it was the grantor’s intent that the son, as trustee, buy certain adjacent tracts of land to help maintain the family farming operation.
The daughter died in 2020 and during her lifetime the trust didn’t provide any funds for her medical care, but the state did provide Medicaid benefits for her. After she died, the state sought reimbursement from the trust for the Medicaid benefits provided to the daughter during her life. The probate court ordered the trust to reimburse the state and the trustee appealed. The state based its reimbursement claim on Iowa Code §249A.53(2), which provides that when Medicaid funds care for an individual 55 or older that is a resident of a care facility, the debt can be collected from any trust in which the individual had an interest. However, the trustee asserted that the trust was a fully discretionary trust and that he had the complete discretion to ignore the beneficiary’s medical needs if he so desired – there was no standard set in the trust that he had to follow in providing trust funds for his sister’s care. As such, the trustee asserted that the beneficiary had no interest in the trust to which the state’s claim could attach.
The state claimed that the trust language meant that the trust gave the trustee the discretion to use trust funds for his sister’s care for that he deemed “advisable and beneficial” and that discretion meant that the trustee couldn’t completely ignore the beneficiary’s medical needs. But the trustee pointed out that Iowa Code § 633A.4702 stated that, “in the absence of clear and convincing evidence to the contrary, language in a governing instrument granting a trustee discretion to make or withhold a distribution shall prevail over any language governing instrument indicating that the beneficiary may have a legally enforceable right to distributions or indicating a standard of payments or distributions.” The appellate court, however, noted that the statute was inapplicable to trusts effective before 2004. The appellate court also determined (with not much analysis (the entire majority opinion, including a recitation of the facts) is only eight pages (double-spaced)) that the grantor’s intent to maintain the farm in the family did not negate or outweigh the grantor’s desire that his daughter medical needs be met from the trust.
The appellate court also reasoned that the trust language meant that the trustee could invade the corpus of the trust for the benefit of the sister when necessary and that the grantor preferred for the trust to be used to provide for the sister instead of protect family land. Consequently, the appellate court determined that the beneficiary had an interest - portions of the trust were to be used for her care and the trustee was instructed to invade the corpus of the trust to make distributions in the sister’s support. This meant that the state had a right to the sister’s interest in the trust for reimbursement of past Medicaid benefits that were paid on her behalf and affirmed the probate court’s determination.
The dissenting judge, a senior judge sitting by designation and who had written a prominent court opinion on the issue in the past, disagreed that the trust language could be interpreted to identify any type of ascertainable or measurable standard that could give the daughter any interest in the trust that would allow the state to have a legitimate reimbursement claim. Indeed, the trust granted the trustee the “sole and absolute discretion” to invade the trust corpus when the trustee deemed it “necessary for the benefit” of the grantor’s daughter. That language did not reference any particular standard that could measure the daughter’s interest in the trust. He noted that the term “benefit,” as used in the trust, is simply not a distributional, ascertainable standard. To read it as one as the majority did, meant that the majority was judicially rewriting the terms of the trust.
Conclusion
Medicaid asset and trust planning can be a complex part of estate planning. But it can be a very important aspect of protecting farm assets from being depleted paying a long-term health-care bill. The facts of the Riessen case as stated in the opinion were insufficient to be able to determine whether the trust was drafted with the intent of protecting assets from being depleted to pay for the beneficiary’s long-term health care. However, as the dissent points out, and as I have written and lectured on this topic for years concerning MAPT language, the trust language at issue comported with that of a properly drafted as a fully discretionary MAPT to accomplish that goal. The dissent properly pointed out that the majority’s opinion essentially rewrote the trust to give the state a reimbursement claim.
If the case is appealed, it is likely that the Iowa Supreme Court, based on past precedent, will overturn the appellate court’s judgment. It’s simply inappropriate for a court to essentially rewrite the terms of a trust to accomplish an outcome it desires. If the decision is not appealed or is not overturned on appeal, the Iowa legislature will need to determine what it desires from a public policy standpoint concerning the breadth of the state’s ability to be reimbursed from a decedent’s estate for past Medicaid benefits paid.
December 29, 2022 in Estate Planning | Permalink | Comments (0)
Saturday, December 24, 2022
Recent Cases Involving Decedents' Estates
Overview
Unfortunately, litigation sometimes occurs after death and can involve family members. The issues can be unique and may also be the result of misunderstandings, the lack memorializing understandings, or simply family members not getting along.
In today’s post, I highlight three recent cases involving the estate of a decedent. Hopefully, a review of these cases will provide some insight as to the issues that can arise at deaths in hopes of avoiding them in the future.
A look at recent cases involving estates – it’s the topic of today’s post.
Government Agency’s Interest in Estate Attaches Before Nursing Home’s Judgment Lien. A nursing home sought to recover fees from a decedent’s estate that the decedent incurred while a resident. The Iowa Department of Health and Human Services (Department) had paid the deceased’s medical fees to the nursing home and filed a claim in probate seeking to recover $395,612.12. The estate executor filed a report and inventory showing the gross value of probate assets as $51,016.20, with $45,000.00 of the value attributed to the decedent’s home. The nursing home claimed it had a right to the value of the home to pay for the debt owed to it via a judicial secured lien, but the Department claimed it had a priority position. The trial court agreed with the Department. The nursing home argued on appeal that its secured lien was not subject to the probate code’s classification of debts and charges statutory provision, claiming instead that its judicial lien was on the real estate the decedent owned. However, the appellate court pointed out that the real estate was a homestead to which the judgment lien did not attach and would not attach upon the decedent’s death merely because the decedent had no heirs. The appellate court determined that the Department could recover from the decedent’s estate as it existed immediately before death, including her home with the homestead exception still in effect because the nursing’s home judgment would not attach until after the death. The appellate court affirmed the trial court’s grant of summary judgment for the Department. In re Estate of Rice, No. 21-1868, 2022 Iowa App. LEXIS 936 (Iowa Ct. App. Dec. 7, 2022).
Economic Benefit Not Required for Trust Funds to Pay Attorney’s Fees. The grantor created a trust naming his three daughters as beneficiary. However, before death, the grantor agreed to give one of his daughters the homestead in return for helping him on the homeplace during his life. However, this agreement was not memorialized in the trust due to a drafting error. One of the daughters objected to the alleged pre-death agreement and also objected to part of the trust being used to pay off debts immediately. The trial court determined that the evidence was sufficient as to the grantor’s intent to respect the pre-death agreement, but did not allow that daughter use funds from the trust to pay attorney fees on the basis that the litigation did not benefit the trust. On appeal, the appellate court reversed in part. The appellate court noted that state law allows a court to award “attorney’s fees from trusts administered through the court as well as in probate and guardianship proceedings” when the litigation benefits the decedent’s estate and when the litigation resulted from the executor’s negligence, fraud, or inactivity. The appellate court determined that an economic benefit was not necessary to award fees, but that other non-economic benefits were sufficient. Consequently, the appellate court determined that the litigation involving the trust resulted in the trust being administered in the way intended the grantor intended and that this was sufficient to be considered beneficial. In addition, the court found that the fact that the daughter to receive the homestead was a beneficiary of the trust had no bearing on the attorney fee issue. The appellate court reasoned that to not allow beneficiaries to use trust funds to litigate issues would discourage strong claims from being brought. Ultimately, the appellate court held that the trial court abused its discretion by denying the motion for attorney fees based on its erroneous view that an attorney fees award "required" an economic benefit to the trust and that fulfilling the intent of the settlor was not a basis for awarding attorney fees. The appellate court held that the trial court should not have discounted the efforts to reform the trust to align with the settlor's undisputed intent simply because the daughter benefitted from the successful outcome of the litigation. The appellate court, however, determined that the trial court did not err when it determined that the litigation on the issue of mortgage payments did not provide the trust with an economic benefit because the successful litigation did not provide the estate with income it could not have otherwise obtained from a different renter. In re Petersen Land Trust, No. 29745, 2022 S.D. LEXIS 139 (S.D. Sup. Ct. Nov. 23, 2022).
Surviving Spouse Removed as Co-Trustee. The decedent established a revocable living trust in 2000 to continue his farming operation and benefit his wife as the primary beneficiary and his two sons as the other beneficiaries. Effective upon the grantor’s death, the trust named the surviving wife as a co-trustee and the decedent’s cousin as an independent co-trustee. The trust specified that the independent trustee could distribute income and principal to any of the beneficiaries at the independent trustee’s discretion. Upon the wife’s subsequent death, the trust was to be divided into two separate shares, one for each son, and funded with the remaining trust undistributed income and principal. Upon the decedent’s death in 2014 the trust contained about $2,385,000 in assets, most of which were nonliquid. Most of the assets had to be liquidated to pay debts that the decedent incurred during life, including part of the decedent’s farm that was sold in 2018. After payment of debts $112,048.34 remained in the trust. The trust was divided into a marital and a nonmarital share and at the time of the decedent’s death only the nonmarital half was funded. Without the cousin’s knowledge, the wife withdrew $104,161.34 of the $112,048.34 for her own personal expenses. This amount was more than the wife had a right to receive that year from the trust. In addition, the Farm Service Agency (FSA) deposited farm-related funds directly into the wife’s account instead of the trust account. The cousin requested that the FSA deposit the funds into the trust instead of the wife’s account, but the FSA refused citing the wife’s name as the first named trustee and the only one with the right to change where the funds should be sent. Soon after this, the cousin filed an action to remove the wife as a trustee for mishandling the funds. The trial court removed the wife as a co-trustee. The wife appealed. The Kansas Uniform Trust Code (KUTC) specifies that a court may remove a trustee if “the trustee has committed breach of trust.” A breach of trust is a violation of the trustee’s duty to the beneficiaries. To determine if the wife committed a breach, the appellate court looked to the decedent's intent for management of the trust. The language of the trust gave the exclusive discretion over distribution of the trust’s income and principal to the cousin as the independent trustee. The trust stated that, “whenever a power of discretion is granted exclusively to my Independent Trustee, then any Interested Trustee who is then serving as my Trustee is prohibited from participating in the exercise of the power of discretion.” The appellate court found the wife was an interested trustee because she was both a trustee and beneficiary, so she should not have exercised any discretion over the distribution of the funds of the trust. The appellate court agreed with the trial court that the wife repeatedly disregarded the terms of the trust and tried to take advantage of being a co-trustee. The language of the trust agreement was clear that the wife’s discretion should have been restricted and her acts prohibited. The wife failed to show the trial court abused its discretion by removing her as a co-trustee and affirmed the trial court’s decision. In re Link Zweygardt Trust No. 1., No. 124,760, 2022 Kan. App. Unpub. LEXIS 616 (Kan. Ct. App. Dec. 2, 2022).
Conclusion
The issues that can arise post-death are numerous. These cases are merely a sample of what can happen.
December 24, 2022 in Estate Planning | Permalink | Comments (0)
Wednesday, December 7, 2022
How NOT to Use a Charitable Remainder Trust
Overview
A charitable remainder trust can be a useful estate planning tool for a farmer or rancher, particularly one that is ready to retire from farming or ranching. Instead of selling the last crop and reporting the income along with the income from the previous year’s crop that has been deferred to the current year, the crop can be transferred to a charitable remainder trust. Doing so avoids having to report the sale of the crop and the associated self-employment tax that would be triggered. But, a charitable remainder trust is a complex estate planning device that should only be utilized by professionals the understand the rules. A recent Tax Court case involving an Indiana farm couple illustrates how badly things can turn out with a charitable remainder trust if the rules aren’t closely followed.
Charitable remainder trusts – it’s the topic of today’s post.
Background
A charitable remainder trust is an irrevocable trust to which you can donate property, cash or other property. The trust takes a carryover income tax basis in the transferred asset(s). The trust then sells the transferred assets (the sale is not taxable because the seller is a charity) and uses the income from the sale to pay the donor (or other designated person(s)). The payments continue for a specific term of up to 20 years of the life of one or more beneficiaries (typically the transferor). At the end of the term, the remainder of the trust passes to at least one designated charity. The remainder donated to the charity must be at least 10 percent of the initial net fair market value of all of the property placed in the trust.
Types. There are two types of charitable remainder trusts. The type of trust is tied to how payment from the trust is made. A charitable remainder unitrust (CRUT) pays a percentage of the trust value annually to noncharitable beneficiaries. The payments must be at least five percent and not exceed 50 percent of the fair market value of the trust’s assets, valued annually. A charitable remainder annuity trust (CRAT) pays a specific dollar amount each year. The amount is at least 5 percent and no more than 50 percent of the value of the trust’s property, valued as of the date the trust was established.
Tax on payments. Payments from a charitable remainder trust are taxed to the non-charitable beneficiaries. The non-charitable beneficiaries report the income on Schedule K-1 (Form 1041) as distributions of the trust’s income and gains.
The distributions are reported in a particular order.
- Payments are considered to be ordinary income first to the extent the trust had ordinary income for the year and undistributed ordinary income from prior years. This means that if the trust had enough ordinary income to cover all of the payments, all of the payments are taxed as ordinary income. As a result, it is not advisable to transfer ordinary income property to the trust – particularly not ordinary income property with low or no income tax basis.
- Once the trust’s ordinary income is exhausted, payments are taxed as capital gains based on the sale or disposition of the trust’s capital assets. The payments are taxed as capital gain to the extent of the trust’s capital gain for the current year and any undistributed capital gain income from prior years.
- After all of the trust’s ordinary income and capital gain have been distributed, any additional payments are then characterized as other income to the extent of the trust’s current year and accumulated other income.
- Finally, after the first three-tiers of distributions have been made, any further payments are considered to be from the “principal” of the trust and are not taxable.
Charitable deduction. The contribution to a charitable remainder trust will qualify for a partial charitable deduction. The deduction is partial because it is limited to the present value of the charitable organization’s remainder interest calculated as the value of the donated property minus the present value of the annuity that the trust pays to the non-charitable beneficiary (or beneficiaries). Treas. Reg. §1.664-2(c). The deduction is also subject to adjusted gross income and other limits set forth in I.R.C. §170(e).
Tax filing requirements. A charitable remainder trust must file Form 5227 every year. A beneficiary must report any payments received from the trust on Schedule K-1 of Form 1041.
IRS concerns. The IRS closely monitors the use of charitable trusts. It is critical to not inflate the basis of assets transferred to the trust as well as failing to account for the transfer of any assets to the trust. It’s also important to not mischaracterize the distributions of ordinary or capital gain income as distributions of corpus. The ordering rules must be closely followed. There can also be no self-dealing, making an upfront cash payment to a charitable beneficiary in lieu of the remainder interest, or a transfer of the trust’s remainder interest to a non-qualified organization. Also, personal expenses can’t be paid with trust funds, and funds can’t be borrowed from the trust. It’s also prohibited to use loans or forward sales of assets or other financial schemes to hid capital gains or income in the trust.
The Furrer Case
If there ever was a case that provides a roadmap for farmers as to how not to use a charitable remainder, Furrer v. Comr., T.C. Memo. 2022-100 is that case. Indeed, it is almost inconceivable that the farmer couple involved in the case were represented by legal counsel. The arguments made on behalf of the Furrers were that bad.
The Tax Court began its opinion by noted that the Furrers, “after seeing an advertisement in a farm magazine” formed a CRAT. The opinion goes downhill quickly from there for the Furrers. The Furrers raised corn and soybeans on their Indiana farm. In July of 2015, they formed the first of two CRATs, naming their son as trustee. The Furrers were the life beneficiaries, and three qualified charities were designated as remaindermen. They transferred 100,000 bushels of corn and 10,000 bushels of soybeans from their farm to the first CRAT, which then sold the grain for $469,003. The CRAT distributed $47,000 to the charities and used the balance to purchase a Single Premium Immediate Annuity (SPIA), which made annual payments to the Furrers of $84,369 in 2015, 2016 and 2017. The SPIA issued a Form 1099-R to the trustee listing the annuity payments as “gross distributions” and showed a small amount of interest as the “taxable amount.” The Furrers claimed a $47,000 charitable deduction.
The Furrers created a second CRAT in 2016 naming themselves as the lie beneficiaries and seven qualified charities as the remainder beneficiaries. and also funded that trust with grain that they raised. The CRAT sold the grain for $691,827 and distributed $69,294 to the charities. The annuity from this trust was payable over 2016 and 2017 in the amount of $124,921 each year. The SPIA also issued Form 1099-R to the trustee listing the annuity payments as “gross distributions” and showing a small amount of interest as the “taxable amount.” They claimed a charitable deduction of $69,294.
On their 2015 and 2016 returns, they did not claim charitable deductions for their transfers to the CRATs, but reported only the interest income from the SPIA, which was reported to them by the life insurance company providing the annuity. They treated the balance of the annuity distributions that they received as a nontaxable return of corpus under I.R.C. §664(b)(4). They also reported their transfers of crops to the CRATS on Forms 709 for 2015 and 2016, which reflected the fair market value of the crops with a cost basis of zero. The CRATs reported the sales of crops as sales of business property on Form 4797, inexplicably treating the crops as having substantial basis (derived from the purported purchase of the grain at fair market value) that generated a small loss for 2015 and a small gain for 2016. Their son (as trustee) prepared the CRATs’ returns.
On audit, the Furrers claimed they should be entitled to charitable deductions for the in-kind transfers of the crops that were ultimately destined for the charitable remaindermen, which were not claimed on their return. They made this claim even though they had no income tax basis in the grain that was transferred to the CRATs. Incredibly, and despite not including the proper documentation, the IRS Revenue Agent allowed the charitable deductions. But the IRS still issued a notice of deficiency for each year because of the omitted income from the annuity and increased their Schedule F income by $83,440 in 2015, and by $206,967 in 2016 and also in 2017. This resulted in tax deficiencies of $55,040 for 2015, $56,904 for 2016 and $95,907 for 2017. The IRS also tacked on an accuracy-related penalty for each year.
Note: For gifts of property (other than publicly traded securities) valued in excess of $5,000, the taxpayer generally must (1) obtain a qualified appraisal of the property and (2) attach to the return on which the deduction is claimed a fully completed appraisal summary on Form 8283. I.R.C. §170(f)(11)(C). A “qualified appraisal” must be prepared by a “qualified appraiser” no later than the due date of the return, including extensions. I.R.C. §170(f)(11)(E); Treas. Reg. §1.170A-13(c)(3). The taxpayer must also maintain records substantiating the deduction. Treas. Reg. § 1.170A-13(b)(2)(ii)(D). At no time did the Furrers secure an appraisal (“qualified” or otherwise) of the crops they transferred to the CRATs. They also did not attach to their 2015 or 2016 return a completed Form 8283 substantiating the gifts, and they did not maintain the written records that the regulations required. But, even had they done so, they would not have been entitled to any charitable deduction because of the lack of an income tax basis in the grain transferred to the trusts.
After the Furrers filed the Tax Court petition, the IRS conceded the accuracy-related penalties for lack of the immediate supervisor’s approval. But, the IRS attorneys also requested leave to amend its answer to disallow the charitable deductions that the Revenue Agent allowed. The Tax Court held that the IRS carried its burden of proof on the charitable deduction disallowance issue – the Furrers did not substantiate the in-kind donations and they had no income tax basis in the crops. Thus, any charitable deduction was limited to zero regardless of whether they would have satisfied the substantiation requirements. The IRS also maintained that the annuity distributions were fully taxable as ordinary income on the basis that the grain was inventory that the Furrers held for sale to customers in the ordinary course of their farming business. The Tax Court agreed and noted that the Furrers violated the ordering rules for income tax treatment of distributions from the CRATs. The Trusts’ sale of the grain involved a sale of ordinary income property (raised grain). As a result, the annuity was purchased with the proceeds of ordinary income property and any distributions from the trust to the Furrers retained that same ordinary income character. While the Furrers tried to apply the rules of I.R.C. §72 to the annuity distributions, the Tax Court noted that I.R.C. §664 provides a special rule for annuity distributions from CRATS that was not in their favor. In addition, even if I.R.C. §72 applied, the Tax Court noted that the Furrers would not have been able to use the exclusion rule because they had no “investment in the contract” – the funds used to purchase the contract had never been taxable.
Comment: I have no answer as to why this case ended up in the Tax Court. The Furrers were represented by counsel, but there appears to have been some very poor choices made on their behalf. The counsel of record is from California and the Furreres, as mentioned, farm in Indiana. I have no explanation as to how that happened. Many aspects of the set-up of the CRATs was wrong, and by not accepting the adjustment made by the IRS Revenue Agent and filing a Tax Court petition, the Furrers ended up losing the charitable deductions that the Revenue Agent had (mistakenly) allowed! Granted, the Furrers got the accuracy-related penalty to go away, but that was achieved at the price of losing substantial charitable deductions. I also wonder whether the IRS should have conceded on the penalty issue. The Tax Court’s approach to IRS supervisory approval as a prerequisite to applying penalties has been disregarded by two Circuit Courts of Appeal. According to the 11th and 9th Circuits, supervisor approval at any time before assessment is enough to satisfy the statute. See, e.g., Kroner v. Comr., 48 F.4th 1272 (11th Cir. 2022) and Laidlaw’s Harley Davidson Sales, Inc. v. Comr., 29 F.4th 1066 (9th Cir. 2022). Hopefully the Tax Court’s decision will not be appealed to the Seventh Circuit. If it is, the prospect for a favorable outcome for the Furrers is slim to none.
Conclusion
The Furrer case illustrates that the rules surrounding the use of charitable remainder trusts are very complex. Only competent professionals that are experienced in the rules and use of such trusts should be engaged in utilizing them on behalf of clients. While the Tax Court said that the Furrers created the trusts after reading an ad in a farm magazine, I do not know the nature and extent of legal and tax advice they received (if any) in advance. If they were guided by tax counsel in setting up the trusts, the counsel was woefully inadequate. To add insult to injury, as noted, the decision to petition the Tax Court rather than accepting the Revenue Agent’s adjustments put the Furrers in a worse position.
The Tax Court has not yet officially entered its decision in the Furrer case. The 90-day timeframe for appeal does not start until the decision document (which is separate from the court’s opinion) has been entered. Presently, the parties must submit their Tax Court Rule 155 calculations by December 21, 2022. Those calculations will form the basis of the decision document.
December 7, 2022 in Estate Planning, Income Tax | Permalink | Comments (0)
Sunday, November 6, 2022
Social Security Planning for Farmers and Ranchers
Overview
Many farmers and ranchers are reaching retirement age for Social Security benefit purposes. That raises numerous questions involving such things as benefits, earnings, what counts as “wages” and the cash renting of farmland. These are all important questions for farmers and ranchers to have answers to so that appropriate planning can be engaged in and expectations realized.
Details on Social Security benefits - it's the topic of today’s post.
Full Retirement Age
Once a person reaches “full retirement age” (according to the Social Security Administration) earnings don’t impact Social Security benefits. The full retirement age used to be 65 for those born in 1937 or earlier. Those born between 1943 and 1954 have a full retirement age of 66. The full retirement age further increases in two-month increments each year to 66 and 10 months for those born in 1959. For those who turned 62 in 2022, the full retirement age is 67.
During the calendar year in which an individual reaches age 66, an earnings limit applies for the months before the individual reaches full retirement age. For example, for an individual who turns age 66 during 2022, there is a monthly earnings limit of $4,330 ($51,960 ¸ 12 months) for the months before full retirement age is reached. Excess earnings for this period result in a $1 reduction in benefits for each $3 of excess earnings received before attaining the age of 66 years and four months. But, for a person who hasn’t reached full retirement age, benefits are reduced by $1 for every $2 of earnings over the annual limit of $19,560 (for 2022). As noted above, for those drawing benefits after reaching full retirement age, there is no limit on earnings – benefits are not reduced.
Drawing Benefits
An individual can receive full Social Security benefits if they aren’t drawn until full retirement age is achieved. Another way to state it is that if an individual delays taking Social Security benefits until reaching full retirement age, the individual receives additional benefits for each year of postponement until reaching age 70. The rate of increase is a fraction of one percent per month. In essence, the impact of drawing Social Security benefits before reaching full retirement age is that such a person must live longer to equalize the amount of benefits received over their lifetime compared to waiting until full retirement age to begin drawing benefits.
Taxability of Benefits
Federal. About 20 million people each year, some who are undoubtedly farmers and ranchers, pay tax on their Social Security benefits. These people are commonly in the 62-70 year age range. Taxing Social Security benefits seems harsh, inasmuch as the person has already paid income tax and Social Security payroll taxes on the earnings that generated the benefits. But not every dollar of benefits is taxed. What matters is a person’s total income from non-Social Security sources such as wages and salaries, investment income (and capital gains on those investments), and pension income. To that amount is added one-half of the person’s Social Security income. The total amount then is measured against a limit. For example, a person who files as married-filing-jointly (MFJ) will subject 50 percent of their Social Security benefits subject to tax if the total amount exceeds a base amount - $32,000 for 2022 (it’s $25,000 for a single filer). The 50 percent changes to 85 percent once the total amount exceeds $44,000 (MFJ) or $34,000 (single) for 2022. Those are the maximum percentages in theory. In reality, however, there is a complex formula that often results in less Social Security benefits being taxed than that maximum percentage. For instance, for taxpayers that fall in the 50 percent taxability range, the amount of Social Security benefits that are included in income is the lesser of one-half of the Social Security benefits for the year or one-half of the difference between combined income and the base amount. The formula is more complex for those who trigger the 85 percent test.
Note: The IRS provides a worksheet to calculate Social Security tax liability in IRS Publication 915. The formula often results in about 20 percent of Social Security benefits being taxed once the total amount threshold is exceeded.
State. The following states tax Social Security benefits to some extent: Colorado; Connecticut; Kansas; Minnesota; Missouri; Montana; Nebraska; New Mexico; Rhode Island; Utah; Vermont and West Virginia. The taxability of benefits varies from state to state. In Kansas, for example, Social Security benefits are exempt if federal AGI is $75,000 or less. Above that threshold, Social Security benefits are taxed to the same extent they are taxed at the federal level. By comparison, Nebraska, for 2021, did not tax Social Security for joint filers with a federal AGI of $59,960 or less and other taxpayers with a federal AGI of $44,460 or less (the 2022 threshold is not available yet). For taxpayers exceeding these thresholds, Social Security benefits are taxed to the same extent they are taxed at the federal level. For 2022, taxpayers can choose to deduct 40% of Social Security benefits on the state return that are included in federal AGI instead of having them taxed in accordance with the above rule. The optional deduction percentage increases to 60% for 2023, 80% for 2024, and 100% for 2025 and thereafter.
Special Considerations
The “donut” hole. The computation of Social Security retirement benefits is based on an individual’s earnings record. That record can include 40-plus years of earnings up to age 62 when eligibility for benefits begins. Earnings are adjusted based on wage inflation to equivalent dollars when an individual turns 60. That is the last year earnings are indexed for wage inflation. Earnings after age 60 are added to the earnings record but are not adjusted for inflation.
A cost-of-living adjustment (COLA) kicks in each year starting at age 62. The two-year gap where there is neither a wage inflation adjustment nor a COLA is particularly evident this year because of an inflation rate not seen in over 40 years. Presently this affects people born in 1960 and 1961. There is nothing that can be done about this; it’s simply tied to when an individual turns age 62.
Wages in-kind. Some farmers receive wages in-kind rather than in cash. In-kind wages such as crops or livestock, count toward the earnings limitations test. The earnings limit test includes all earnings, not just those that are subject to Social Security (FICA/Medicare) tax. But, employer-provided health insurance benefits are not considered to be “earnings” for purposes of the earnings limitation test. They are not taxed as wages. I.R.C. §3121; SSA Program Operations Manual System, §§RS 01402.040; 01402,048.
Farm programs. Federal farm program payments that a farmer receives are not deemed to be “earnings” when calculating each calendar year's earnings limitation. SSA Program Operations Manual System §RS 02505.115. That is the case except for the initial year of Social Security benefit application. In that initial year, all FSA program payments are counted along with other earned income and earnings for purposes of the annual earnings limitation test.
Cash rent. For farmers who cash rent farm ground to their employer, the cash rental income that the farmer receives will likely be treated as “earnings” even though the farmer is getting a wage from the employer. This is particularly the case if the farmer is farming the ground on the employer’s behalf. The result would be a “doubling-up” of the wage income and the cash rent income for purposes of the age 62-66 earnings test.
CRP payments. For a farmer who is drawing Social Security benefits, whether retired or not, Conservation Reserve Program Payments received are not subject to Social Security tax. I.R.C. §1402(a)(1).
Conclusion
Social Security benefit planning is an item that is often overlooked by farmers and ranchers. However, it is useful to know how such planning may fit into the overall retirement plan. It is just one piece of the retirement, succession, estate plan that should be considered in terms of how it fits in with other strategies. While a farmer or rancher may never actually “retire,” there is a benefit to properly timing the drawing of Social Security benefits. In addition, as noted above, there are some special situations that a farmer or rancher should be aware of.
Also, the Social Security Administration website (ssa.gov) has some useful online calculators that can aid in estimating retirement benefits. It may be worth checking out.
November 6, 2022 in Estate Planning, Income Tax | Permalink | Comments (0)
Saturday, September 24, 2022
Farm and Ranch Estate Planning In 2022 (and 2023)
Overview
The Tax Cuts and Jobs Act (TCJA) has made estate planning much easier for most farm and ranch families. Much easier, that is, with respect to avoiding the federal estate tax. Indeed, under the TCJA, the exemption equivalent of the unified credit (i.e., the “basic exclusion amount”) was doubled from its prior level of $5 million and then indexed for inflation. For deaths in 2022, it is is $12.06 million per decedent. When that is combined with the unlimited marital deduction and the ability to “port” over the unused exclusion (if any) at the death of the first spouse to the surviving spouse, very few estates will incur federal estate tax. Indeed, according to the IRS, there were 3,441 federal estate tax returns filed in 2020, and only 1,275 of those represented returns where federal estate tax was due.
The TCJA also retains the basis “step-up” rule. That means that property that is included in the decedent’s estate at death for tax purposes gets an income tax basis in the hands of the recipient equal to the property’s fair market value as of the date of death. I.R.C. §1014.
But, with the slim chance that federal estate tax will apply, should estate planning be ignored? What are the basic estate planning strategies for 2022 (and into 2023), and for the life of the TCJA through 2025?
Married Couples (and Singles) With Wealth Less Than $12.06 Million.
Most people will be in this “zone.” For these individuals, the possibility and fear of estate tax is largely irrelevant. But, there is a continual need for the guidance of estate planners. The estate planning focus for these individuals should be on basic estate planning matters. Those basic matters include income tax basis planning – utilizing strategies to cause inclusion of property in the taxable estate so as to get a basis “step-up” at death.
Existing plans should also focus on avoiding common errors and look to modify outdated language in existing wills and trusts. For example, many estate plans utilize "formula clause" language. That language divides assets upon the death of the first spouse (regardless of whether it is the husband or the wife) between a "credit shelter trust," which utilizes the remaining federal estate tax exemption amount, and a "marital trust," which qualifies for the (unlimited) federal estate tax marital deduction. The intended result of the language is to cause that trust’s value to be taxed in the first spouse’s estate where it will be covered by the exemption and create a life estate in the credit shelter trust property for the surviving spouse that will “bypass” the surviving spouse’s estate upon death. As for the martial trust assets, tax on those assets is postponed (if it is taxed at all) until the surviving spouse dies.
But, here’s the rub. As noted above, the TCJA’s increase in the exemption could cause an existing formula clause to “overfund” the credit shelter trust with up to the full federal exemption amount of $12.06 million. This formula could potentially result in a smaller bequest for the benefit of the surviving spouse to the marital trust than was intended, or even no bequest for the surviving spouse at all. It all depends on the value of assets that the couple holds. The point is that couples should review any existing formula clauses in their current estate plans to ensure they are still appropriate given the increase in the federal exemption amount. It may be necessary to have an existing will or trust redrafted to account for the change in the law and utilize language that allows for flexibility in planning.
In addition, for some people, divorce planning/protection is necessary. Also, a determination will need to be made as to whether asset control is necessary as well as creditor protection. Likewise, a consideration may need to be made of the income tax benefits of family entities to shift income (subject to family partnership rules of I.R.C. §704(e)) and qualifying deductions to the entity. The entity may have been created for estate and gift tax discount purposes, but now could provide income tax benefits. In any event, family entities (such as family limited partnerships (FLPs) and limited liability companies (LLCs)) will continue to be valuable estate planning tools for many married couples in this wealth range.
Most persons in this zone will likely fare better by not making gifts and retaining the ability to achieve a basis step-up at death for the heirs. That means income tax basis planning is far more important for most people. Also, consideration should be made to determine whether insurance is still necessary to fund any potential estate tax liability It also may be possible to recast insurance to fund state death taxes (presently, 11 states retain an estate tax and five states have an inheritance tax (one state (Maryland) has both)) and serve investment and retirement needs, minimize current income taxes, and otherwise provide liquidity at death.
Note: In those states that have either an inheritance tax or an estate tax (or both in the case of Maryland), the exemption from tax is typically much lower than the federal exemption. This fact requires additional planning for decedents in these states.
Other estate planning points for moderate wealth individuals include:
- For life insurance, it’s probably not a good idea to cancel the policy before having that move professionally evaluated. That’s particularly the case for trust-owned life insurance. For pension-owned life insurance, for those persons that are safely below the exemption, adverse tax consequences can likely be avoided.
- Evaluate irrevocable trusts and consider the possibility of “decanting.” On the decanting issue, see my recent blog article here: https://lawprofessors.typepad.com/agriculturallaw/2022/09/modifying-an-irrevocable-trust-decanting.html
- For durable powers of attorney, examine the document to see whether there are caps on gifted amounts (the annual exclusion is now $16,000) and make sure to not have inflation adjusting references to the annual exclusion.
Note: The present interest annual exclusion for federal gift tax purposes is projected to be $17,000 per donee for gifts made in 2023.
- For qualified personal residence trusts (QPRTs) that were created when the estate tax exemption was $2 million, the conventional advice was to deed the house from the QPRT to the children or a remainder trust (which might have been a grantor trust), with a written lease agreement in favor of the parent/donor who would continue to live in the house. Now, it may be desired to have the home included in the estate for basis step-up purposes and the elimination of gain on sale.
- While FLPs and LLCs may have been created to deal with an estate tax value-inclusion issue, it may not be wise to simply dismantle them because estate tax is no longer a problem for the client. Indeed, it may be a good idea to actually cause inclusion of the FLP interest in the estate. This can be accomplished by revising the partnership or operating agreement and having a parent document control over the FLP. Then, an I.R.C. §754 election can be made which can allow the heirs to get a basis step-up.
Other Planning Issues
While income tax basis planning (using techniques to cause inclusion of asset value in the estate at death) is now of primary importance for most people, asset protection may also be a major concern. Pre-nuptial agreements have become more common in recent decades, and marital trusts are also used to ultimately pass assets to the heirs of the first spouse to die (who may not be the surviving spouse’s heirs) at the death of the surviving spouse. A “beneficiary-controlled” trust has also become a popular estate planning tool. This allows assets to pass to the beneficiary in trust rather than outright. The beneficiary can have a limited withdrawal right over principal and direct the disposition of the assets at death while simultaneously achieving creditor protection. In some states, such as Nebraska, the beneficiary can be the sole trustee without impairing creditor protection.
Powers of attorney for both financial and health care remain a crucial part of any estate plan. For a farm family, the financial power should be in addition to the FSA Form 211 and give the designated agent the authority to deal with any financial-related matter that the principal otherwise could.
Impact of Inflation
The rampant inflation in the economy caused by numerous bad political choices over the past 20 months means that the inflation adjustment for the basic exclusion amount is projected to be $12.920,000 per decedent for deaths in 2023. That is a significant increase, and it is likely that the basic exclusion amount will be in the $14 million range for 2025 (the last year of the TCJA). On the flip side, the same disastrous political choices have caused the stock market to drop significantly. So, not only are retirement savings being lost, but the remaining dollars are also being devalued by inflation. However, for the few with significant wealth that would potentially be subjected to federal estate tax at death, it is imperative to not waste the higher exemption. This is particularly true given that the IRS has taken the position that gifts made during a year when the unified credit is high will not be clawed back into the donor’s estate at death if the credit is lower at that time.
Conclusion
While estate planning has been made easier by the TCJA, that doesn’t mean that it is no longer necessary. Reviewing existing plans with an estate planning professional is important. Also, the TCJA is only temporary. The estate and gift tax provisions expire at the end of 2025. When that happens, the exemption reverts to what it was under prior law and then is adjusted for inflation. For deaths in 2026, the federal estate and gift tax exemption is estimated to be somewhere between $7 and $8 million dollars. While those numbers are still high enough to cover the vast majority of people, they are a far cry from the present $12.06 million amount. One thing is for sure – a great deal of wealth is going to transfer in the coming decades. One estimate is that approximately $30 trillion in asset value will transfer over the next 30-40 years. That’s about a trillion per year over that timeframe. A chunk of that will involve farm and ranch real estate, livestock, equipment and other personal property.
September 24, 2022 in Estate Planning | Permalink | Comments (0)
Sunday, September 18, 2022
Modifying an Irrevocable Trust – Decanting
Overview
Trusts are a popular part of an estate plan for many people. Trusts also come in different forms. Some take effect during life and can be changed whenever the trust grantor (creator or settlor) desires. These are revocable trusts. Other trusts, known as irrevocable trusts, also take effect during life but can’t be changed when desired. Or, at least not as easily. That’s an issue that comes up often. People often change their minds and circumstances also can change. In addition, the tax laws surrounding estates and trust are frequently modified by the Congress as well as the courts. Also, sometimes drafting errors occur and aren’t caught until after the irrevocable trust has been executed.
So how can a grantor of an irrevocable accomplish a “do over” when circumstances change? It involves the concept of “decanting” and it’s the topic of today’s post.
Decanting 101
Why decant? Attempting to change the terms of an irrevocable trust is not a new concept. “Decanting” involves pouring one trust into another trust with more favorable terms. To state it a different way, decanting involves distributing the assets of one trust to another trust that has the terms that the grantor desires, with the terms that the grantor no longer wants remaining in the old trust. The reasons to decant a trust can be numerous. For instance, decanting can be done to change a trust’s situs or trustee powers. It can also be used to change the number of trustees or to consolidate different trusts. Decanting can also be used to change the distributional scheme to provide greater asset protection and to better address the needs of a special needs beneficiary.
Authority to decant. The ability to “decant” comes from either an express provision in the trust, or a state statute or judicial opinions (common law). Presently, 12 states have adopted the Uniform Trust Decanting Act (UTDA). Those states are AL, CO, IL, ME, MA, MT, NE, NM, NC, VA, WA and WV. 24 other states have not adopted the UTDA but have their own specific decanting statutes. These states are AL, AZ, CA, DE, FL, GA, IN, IA, KY, MI, MN, MO, NV, NH, NY, ND, OH, RI, SC, SD, TN, TX, WI and WY. In these states, a key question is whether the statute allow the trustee to make the changes that the grantor desires. If not, a determination must be made as to what the state courts have said on the matter, if anything. But that could mean that litigation involving the changes is a more likely possibility with a less than certain outcome.
Other states, such as Kansas, allow trust modification under common law. In some of these states, courts have determined that decanting is allowed based upon the notion that the trustee’s authority to distribute trust corpus means that the trustee has a special power of appointment which allows the trustee to transfer all (or part) of the trust assets to another irrevocable trust for the same beneficiaries. Thus, a trustee attempting to decant a trust must do so consistent with the fiduciary obligations that govern a trustee – reasonableness and good faith.
Note: With respect to fiduciary duties, because some beneficiaries might be disaffected by decanting, it may be wise for the trustee to obtain consents or releases from trust beneficiaries. But, if such consent is deemed to be a right to control property in the hands of the beneficiary, gift tax could be triggered. This is a particular likelihood if the beneficiary causes or permits the beneficiary’s interest in the trust to pass to a different beneficiary, or if the beneficiary releases a general power of appointment.
Ascertainable standard. Many trusts have “ascertainable standard” provisions that direct the trustee to make distributions to a beneficiary in an accordance with certain standards typically tied to the beneficiary’s living conditions and needs. If the trustee is also a beneficiary, any ascertainable standards established in the trust should not be changed by decanting. Indeed, state law might require the ascertainable standards in the new trust to be either more restrictive or at least as restrictive as the prior trust if the trustee having the power to appoint trust property is also a beneficiary.
Grantor’s rights. Care should be taken to not change the grantor’s rights and interests in trust principal. Likewise, the ability of the trustee to decant should not involve the grantor or be contingent upon the grantor’s consent so as to avoid the decanting process being deemed as a right to control property under I.R.C. §§2036 or 2038 that would cause inclusion of the trust corpus in the grantor’s gross estate upon death. Similar issues can arise with respect to beneficiaries. Decanting can create an estate tax issue for a beneficiary if the decanted trust (new trust) provides a beneficiary with a general power of appointment that wasn’t present in the original trust, or the property included in the beneficiary’s gross estate is treated as a gift by the beneficiary due to decanting, or the power to decant is deemed a general power of appointment, or decanting makes an incomplete gift a complete gift when the beneficiary dies.
Note: The decanting process cannot add beneficiaries without express authority in the original trust instrument. Even then, only a non-beneficiary trustee may engage in the decanting process.
GSTT. Also, if assets are added (even indirectly) to a grandfathered generation-skipping transfer trust (GSTT), the grandfathered status is lost, and the trust is exposed to the GSTT. In 2011, the IRS announced that it was studying the implications of decanting that result in a change in the beneficial interest in the trust. IRS requested comments regarding when (and under what circumstances) such transfers are not subject to the GSTT. Notice 2011-101, 2011-52 IRB 932.
Trust protector. If conditions are not favorable for decanting in a particular jurisdiction, it may be possible under the trust’s terms, or a “trust protector” provision, to shift the trust to a different jurisdiction where the desired changes will be allowed. Absent favorable trust terms, it might be possible to petition a local court for authority to modify the trust to allow the governing jurisdiction of the trust to be changed.
Document preparation. If decanting can be done, the process of changing the trust terms requires document preparation that will result in the pouring of the assets of the trust into another trust with different terms. Throughout the process, it is important to follow all applicable statutory rules. Care must be taken when preparing deeds, beneficiary forms, establishing new accounts and conducting any other related business to complete the change.
IRS Private Ruling – Judicial Reformation
In the fall of 2015, the IRS released a Private Letter Ruling that dealt with the need to change an error in the drafting of an irrevocable trust in order to repair tax issues with the trust. Priv. Ltr. Rul. 201544005 (Jun. 19, 2015). The private ruling involved an irrevocable trust that had a couple of flaws. The settlors (a married couple) created the trust for their children, naming themselves as trustees. One problem was that the trust terms gave the settlors a retained power to change the beneficial interests of the trust. That resulted in an incomplete gift of the transfer of the property to the trust. In addition, the retained power meant that I.R.C. §2036 came into play and would cause inclusion of the property subject to the power in the settlors’ estates. The couple intended that their transfers to the trust be completed gifts that would not be included in their gross estates, so they filed a state court petition for reformation of the trust to correct the drafting errors. The drafting attorney submitted an affidavit that the couple’s intent was that their transfers of property to the trust be treated as completed gifts and that the trust was intended to optimize their applicable exclusion amount. The couple also sought to resign as trustees. The court allowed reformation of the trust. That fixed the tax problems. The IRS determined that the court reformation would be respected because the reformation carried out the settlors’ intent.
When to Decant
So, it is possible that an irrevocable trust can be changed to fix a drafting error and for other reasons if the law and facts allow.
What are common reasons decant an irrevocable trust? Some of the most common ones include the following:
- To achieve greater creditor protection by changing, for example, a support trust to a discretionary trust (this can be a big issue, for example, with respect to long-term health care planning);
- To change the situs (jurisdiction where the trust is administered) to a location with greater pro-trust laws;
- To adjust the terms of the trust to take into account the relatively larger federal estate exemption applicable exclusion and include power of appointment language that causes inclusion of the trust property in the settlor’s estate to achieve an income tax basis “step-up” at death (this has become a bigger issue as the federal estate tax exemption has risen substantially in recent years);
- To provide for a successor trustee and modify the trustee powers;
- To either combine multiple trusts or separate one trust into a trust for each beneficiary;
- To create a special needs trust for a beneficiary with a disability;
- To permit the trust to be qualified to hold stock in an S corporation and, of course;
- To correct drafting errors that create tax problems and, perhaps, in the process of doing so create a fundamentally different trust.
Conclusion
The ability to modify an irrevocable trust is critical. This is particularly true with the dramatic change in the federal estate and gift tax systems in recent years. Modification may also be necessary when desires and goals change or to correct an error in drafting. Fortunately, in many instances, it is possible to make changes even though the trust is “irrevocable.”
September 18, 2022 in Estate Planning | Permalink | Comments (0)
Sunday, September 11, 2022
September 30 Ag Law Summit in Omaha (and Online)
Overview
On September 30, Washburn Law School with cooperating partner Creighton Law School will conduct the second annual Ag Law Summit. The Summit will be held on the Creighton University campus in Omaha, Nebraska. Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law. The Summit will be held at Creighton University on September 30 and will also be broadcast live online.
The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them.
The 2022 Ag Law Summit – it’s the topic of today’s post.
Agenda
Developments in agricultural law and taxation. I will start off the day with a session surveying the major recent ag law and tax developments. This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world. There have been several major developments involving agricultural that have come through the U.S Supreme Court in recent months. I will discuss those decisions and the implications for the future. Several of them involve administrative law and could have a substantial impact on the ability of the federal government to micro-manage agricultural activities. I will also get into the big tax developments of the past year, including the tax provisions included in the recent legislation that declares inflation to be reduced!
Death of a farm business owner. After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies. Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections. The handling of tax attributes after death will be covered as will some non-tax planning matters when an LLC owner dies. There are also entity-specific issues that arise when a business owner dies, and Prof. Morse will address those on an entity-by-entity basis. The transition issue for farmers and ranchers is an important one for many. This session will be a good one in laying out the major tax and non-tax considerations that need to be laid out up front to help the family achieve its goals post-death.
Governing documents for farm and ranch business entities. After a morning break Dan Waters with Lamson Dugan & Murray in Omaha will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities. What should be included in the operative agreements? What is the proper wording? What provisions should be included and what should be avoided? This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.
Fence law issues. After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands. This is an issue that seems to come up over and over again in agriculture. The problems are numerous and varied. This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones.
Farm economics. Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday. Darrell is an ag economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers. What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers? How will the war in Ukraine continue to impact agriculture in the U.S.? This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending.
Ethics. I return to close out the day with a session of ethics focused on asset protection planning. There’s a right way and a wrong way to do asset protection planning. This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.
Online. The Summit will be broadcast live online and will be interactive to allow you the ability to participate remotely.
Reception
For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus.
Conclusion
If your tax or legal practice involves ag clients, the Ag Law Summit is for you. As noted, you can also attend online if you can’t be there in person. If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial.
I hope to see you in Omaha on September 30 or see that you are with us online.
You can learn more about the Summit and get registered at the following link: https://www.washburnlaw.edu/employers/cle/aglawsummit.html
September 11, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Monday, September 5, 2022
Bibliography – January through June of 2022
Overview
Periodically I post an article containing the links to all of my blog articles that have been recently published. Today’s article is a bibliography of my articles from the beginning of 2022 through June. Hopefully this will aid your research of agricultural law and tax topics.
A bibliography of articles for the first half of 2022 – it’s the content of today’s post.
Bankruptcy
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Other Important Developments in Agricultural Law and Taxation
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
Business Planning
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance – Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Intergenerational Transfer of the Farm/Ranch Business – The Buy-Sell Agreement
IRS Audit Issue – S Corporation Reasonable Compensation
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
S Corporation Dissolution – Part 1
https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html
S Corporation Dissolution – Part Two; Divisive Reorganization Alternative
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
Durango Conference and Recent Developments in the Courts
Civil Liabilities
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
Agritourism
https://lawprofessors.typepad.com/agriculturallaw/2022/03/agritourism.html
Animal Ag Facilities and the Constitution
When Is an Agricultural Activity a Nuisance?
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Durango Conference and Recent Developments in the Courts
Dicamba Spray-Drift Issues and the Bader Farms Litigation
Tax Deal Struck? – and Recent Ag-Related Cases
Contracts
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
What to Consider Before Buying Farmland
Elements of a Hunting Use Agreement
https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html
Ag Law (and Medicaid Planning) Court Developments of Interest
Cooperatives
The Agricultural Law and Tax Report
https://lawprofessors.typepad.com/agriculturallaw/2021/05/the-agricultural-law-and-tax-report.html
Criminal Liabilities
Animal Ag Facilities and the Constitution
Is Your Farm or Ranch Protected From a Warrantless Search?
Durango Conference and Recent Developments in the Courts
Environmental Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
“Top Tan” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 3) – New Regulatory Definition of “Habitat” under the ESA
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
Estate Planning
Other Important Developments in Agricultural Law and Taxation
Other Important Developments in Agricultural Law and Taxation (Part 2)
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
Nebraska Revises Inheritance Tax; and Substantiating Expenses
https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html
Tax Consequences When Farmland is Partitioned and Sold
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Should An IDGT Be Part of Your Estate Plan?
Farm Wealth Transfer and Business Succession – The GRAT
Family Settlement Agreement – Is it a Good Idea?
Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Proposed Estate Tax Rules Would Protect Against Decrease in Estate Tax Exemption
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Ag Law (and Medicaid Planning) Court Developments of Interest
Joint Tenancy and Income Tax Basis At Death
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
IRS Modifies Portability Election Rule
Income Tax
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 10 and 9
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 8 and 7
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 2 and 1
The “Almost Top Ten” (Part 4) – Tax Developments
The “Almost Top 10” of 2021 (Part 7) [Medicaid Recovery and Tax Deadlines]
Purchase and Sale Allocations Involving CRP Contracts
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
What’s the Character of the Gain From the Sale of Farm or Ranch Land?
Proper Tax Reporting of Breeding Fees for Farmers
Nebraska Revises Inheritance Tax; and Substantiating Expenses
https://lawprofessors.typepad.com/agriculturallaw/2022/02/recent-developments-in-ag-law-and-tax.html
Tax Consequences When Farmland is Partitioned and Sold
Expense Method Depreciation and Leasing- A Potential Trap
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
income Tax Deferral of Crop Insurance Proceeds
What if Tax Rates Rise?
https://lawprofessors.typepad.com/agriculturallaw/2022/03/what-if-tax-rates-rise.html
Registration Open for Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Captive Insurance – Part One
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-one.html
Captive Insurance – Part Two
https://lawprofessors.typepad.com/agriculturallaw/2022/03/captive-insurance-part-two.html
Captive Insurance – Part Three
https://lawprofessors.typepad.com/agriculturallaw/2022/04/captive-insurance-part-three.html
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
IRS Audit Issue – S Corporation Reasonable Compensation
Missed Tax Deadline & Equitable Tolling
https://lawprofessors.typepad.com/agriculturallaw/2022/04/missed-tax-deadline-equitable-tolling.html
Summer 2022 Farm Income Tax/Estate and Business Planning Conferences
Joint Tenancy and Income Tax Basis At Death
Tax Court Caselaw Update
https://lawprofessors.typepad.com/agriculturallaw/2022/05/tax-court-caselaw-update.html
Deducting Soil and Water Conservation Expenses
Correcting Depreciation Errors (Including Bonus Elections and Computations)
When Can Business Deductions First Be Claimed?
Recent Court Decisions Involving Taxes and Real Estate
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
Tax Issues with Customer Loyalty Reward Programs
S Corporation Dissolution – Part 1
https://lawprofessors.typepad.com/agriculturallaw/2022/06/s-corporation-dissolution-part-1.html
S Corporation Dissolution – Part Two; Divisive Reorganization Alternative
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
What is the Character of Land Sale Gain?
Deductible Start-Up Costs and Web-Based Businesses
Using Farm Income Averaging to Deal with Economic Uncertainty and Resulting Income Fluctuations
Tax Deal Struck? – and Recent Ag-Related Cases
Insurance
Tax Deal Struck? – and Recent Ag-Related Cases
Real Property
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
What to Consider Before Buying Farmland
Elements of a Hunting Use Agreement
https://lawprofessors.typepad.com/agriculturallaw/2022/02/elements-of-a-hunting-use-agreement.html
Animal Ag Facilities and the Constitution
Recent Court Decisions Involving Taxes and Real Estate
Recent Court Cases of Importance to Agricultural Producers and Rural Landowners
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Tax Deal Struck? – and Recent Ag-Related Cases
Regulatory Law
The “Almost Top 10” of 2021 (Part 5)
https://lawprofessors.typepad.com/agriculturallaw/2022/01/the-almost-top-10-of-2021-part-5.html
The “Almost Top 10” of 2021 (Part 6)
https://lawprofessors.typepad.com/agriculturallaw/2022/02/the-almost-top-10-of-2021-part-6.html
Ag Law and Tax Potpourri
https://lawprofessors.typepad.com/agriculturallaw/2022/02/ag-law-and-tax-potpourri.html
Animal Ag Facilities and the Constitution
Pork Production Regulations; Fake Meat; and Tax Proposals on the Road to Nowhere
Farm Economic Issues and Implications
https://lawprofessors.typepad.com/agriculturallaw/2022/04/farm-economic-issues-and-implications.html
Ag Law (and Medicaid Planning) Court Developments of Interest
Wisconsin Seminar and…ERP (not Wyatt) and ELRP
More Ag Law Court Developments
https://lawprofessors.typepad.com/agriculturallaw/2022/06/more-ag-law-court-developments.html
Ag Law-Related Updates: Dog Food Scam; Oil and Gas Issues
Constitutional Limit on Government Agency Power – The “Major Questions” Doctrine
The Complexities of Crop Insurance
https://lawprofessors.typepad.com/agriculturallaw/2022/07/the-complexities-of-crop-insurance.html
Secured Transactions
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 6 and 5
Water Law
“Top Ten” Agricultural Law and Tax Developments of 2021 – Numbers 4 and 3
Durango Conference and Recent Developments in the Courts
September 5, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Saturday, August 20, 2022
Ag Law Summit
Overview
Last September Washburn Law School conducted it’s first “Ag Law Summit” and held it at Mahoney State Park in Nebraska. This year the Summit returns in collaboration with Creighton University School of Law. The Summit will be held at Creighton University on September 30, and will also be broadcast live online.
The Summit will cover various topics of relevance to agricultural producers and the tax and legal counsel that represent them.
The 2022 Ag Law Summit – it’s the topic of today’s post.
Agenda
Survey of ag law and tax. I will start off the day with a session surveying the major recent ag law and tax developments. This one-hour session will update attendees on the big issues facing ag clients and provide insight concerning the issues that look to be on the horizon in the legal and tax world.
Tax issues upon death of a farmer. After my session, Prof. Ed Morse of Creighton Law School will examine the tax issues that arise when a farm business owner dies. Income tax basis and the impact of various entity structures will be the focus of this session along with the issues that arise upon transitioning ownership to the next generation and various tax elections.
Farm succession planning drafting language. After a morning break Dan Waters, and estate planning attorney in Omaha, NE, will take us up to lunch with a technical session on the drafting of critical documents for farm and ranch entities. What should be included in the operative agreements? What is the proper wording? What provisions should be included and what should be avoided? This session picks up on Prof. Morse’s presentation and adds in the drafting elements that are key to a successful business succession plan for the farm/ranch operation.
Fences and boundaries. After a provided lunch, Colten Venteicher who practices in Gothenburg, NE, will address the issues of fence line issues when ag land changes hands. This is an issue that seems to come up over and over again in agriculture. The problems are numerous and varied. This session provides a survey of applicable law and rules and practical advice for helping clients resolve existing disputes and avoid future ones.
The current farm economy and future projections. Following the afternoon break, a presentation on the current economy and economic situation facing ag producers, ag businesses and consumers will be presented by Darrell Holaday. Darrell is an economist and his firm, Advanced Market Concepts, provides marketing plans for ag producers. What are the economic projections for the balance of 2022 and into 2023 that bear on tax and estate planning for farmers and ranchers? This will be a key session, especially with the enactment of legislation that will add fuel to the current inflationary fire – unless of course, the tax increases in the legislation slow the economy enough to offset the additional spending.
Ethics. I return to close out the day with a session of ethics focused on asset protection planning. There’s a right way and a wrong way to do asset protection planning. This session guides the practitioner through the proper approach to asset protection planning, client identification, and the pitfalls if the “stop signs” are missed.
Reception
For those attending in person, a reception will follow in the Harper Center Ballroom on the Creighton Campus.
Conclusion
If your tax or legal practice involves ag clients, the Ag Law Summit is for you. As noted, you can also attend online if you can’t be there in person. If you are a student currently in law school or thinking about it, or are a student in accounting, you will find this seminar beneficial.
I hope to see you in Omaha on September 30 or see that you are with us online.
You can learn more about the Summit and get registered at the following link: https://www.washburnlaw.edu/employers/cle/aglawsummit.html
August 20, 2022 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)
Saturday, July 16, 2022
IRS Modifies Portability Election Rule
Overview
With the increase in the exemption equivalent of the unified credit to $12.06 million per person for deaths in 2022, very few estates have any federal estate tax liability. That means it is often the case that there is a “leftover” (unused) exemption amount at death. Normally, that unused amount would simply be lost. However, starting in 2011, upon the death of the first to die of a married couple the estate of the first spouse to die can elect to “port” (transfer) the unused exclusion amount to the surviving spouse. The amount ported over is added to the existing exclusion amount of the surviving spouse for the surviving spouse to use to either offset lifetime gifts (the federal estate tax and gift tax are “coupled”) or offset estate tax at death.
Often, the amount ported over is the full $12.06 million that can be ported to the surviving spouse, either because the estate was unplanned and everything automatically passes to the surviving spouse (and is covered by the marital deduction), or because the first spouse’s estate has been intentionally planned with that result in mind. But, sometimes there are larger estates where some of the first-spouse’s exemption is used to offset federal estates tax. The unused balance can be ported to the surviving spouse and added to the surviving spouse’s exemption.
But the “porting” of the deceased spouse’s unused exclusion amount (DSUEA) is not automatic. As indicated above, an election must be made in the deceased spouse’s estate to transfer the DSUEA to the surviving spouse. The timeframe for making the portability election had been two years from the date of the first spouse’s death. Now, the IRS has changed that two-year timeframe to five.
The IRS modification of the timeframe for filing a portability election – it’s the topic of today’s post.
The DSUEA Election
Two-year rule. The Treasury Regulations set the rules for making the DSUEA portability election. The executor of the estate of the first spouse to die must make the election on a timely-filed federal estate tax return (Form 706). Treas. Reg. §20.2010-2(a). To make the election, the deceased spouse must be a U.S. citizen or resident as of the date of death; a federal estate tax return is not required to be filed (because the estate is not large enough to have federal estate tax liability); and no federal estate tax return was filed. If no Form 706 is filed, the portability election cannot be made. Treas. Reg. §20.2010(a)(3). For larger estates that trigger an estate tax liability and the filing of Form 706, any unused DSUEA is automatically ported to the surviving spouse.
As for the portability election, “timely-filed” means nine months after death or, by extension, 15 months after death. The IRS can grant extensions of time from those deadlines and has done so on numerous occasions by issuing private letter rulings. Indeed, the IRS grew weary of granting so many extensions that it issued Rev. Proc. 2017-34 in 2017 providing a simplified method for estates to get an automatic extension of time to make the portability election. 2017-26, I.R.B. 1282. With Rev. Proc. 2017-34, the IRS also granted an automatic two-year “grace” period to make the portability election – two years from the date of the decedent’s death.
Note: If a portability election is not desired upon the death of the first spouse, the executor must state affirmatively on a timely filed Form 706 (or attachment) that the estate is not electing portability under I.R.C. §20.10(c)(5). For larger estates where there is a Form 706 filing requirement, a box on part 6, section A of Form 706 can be checked if the executor does not want to port over the DSUEA.
Five-year rule. Even with the two-year “grace” period provided in Rev. Proc. 2017-34, the IRS still received many requests for an extension of time to make the election. Those requests, coupled with the shortage of IRS personnel in the Estate and Gift Tax branch has led IRS to supersede Rev. Proc. 2017-34 with Rev. Proc. 2022-32, 2022-30 I.R.B. ___. Under Rev. Proc. 2022-32, the timeframe for making the portability election is extended to five years from the date of the decedent’s death. Rev. Proc. 2022-32 is effective for estates of decedents dying on or after July 8, 2022.
Note: It continues to be the case that the Form 706 that is filed to make the DSUEA election for a non-taxable estate is a simplified Form 706. There is no need for any appraisals, and amounts can be rounded down to the nearest $250,000. Also, the requirement for making the electing referenced above that were contained in Rev. Proc. 2017-34 remain unchanged.
Conclusion
The DSUEA election is an important part of estate planning for a surviving spouse. While the federal estate tax exclusion amount is schedule to drop to $5 million (adjusted for inflation in 2011 dollars) for deaths after 2025, any amount ported over presently would remain. That could be a big deal for a surviving spouse with a sizable estate that dies in a year when the applicable exclusion amount is lower than it is now. It can also be important when a surviving spouse comes into unexpected wealth that substantially increases the size of the taxable estate. In any event, the DSUEA portability election is an election that should be made in practically every estate of the first spouse to die of a married couple. While it may ultimately prove to have been unnecessary, it is always better to be safe than sorry. Now, IRS has provided a five-year period from the death of the first spouse to make the election. That’s good news for many estates, farm and non-farm.
July 16, 2022 in Estate Planning | Permalink | Comments (0)
Sunday, July 3, 2022
Farm/Ranch Tax, Estate and Business Planning Conference August 1-2 – Durango, Colorado (and Online)
Details
This summer’s second premier national ag income tax and estate/business planning conference will be in Durango, Colorado on August 1 and 2 at Fort Lewis College. The first conference was held at the Wisconsin Dells in mid-June. If you aren’t able to attend in-person, the conference will be live-cast on the web.
Day 1 Itinerary
- I will start off Monday August 1 with a tax update covering key rulings and cases of recent vintage. This session will keep you updated on what the tax issues are in the courts and with the IRS.
- Paul Neiffer with CliftonLarsonAllen will take us through the tax reporting issues with various federal farm programs and the options for deferring crop insurance.
- I will then have a session on correcting depreciation errors. When can an amended return be filed and when is Form 3115 required?
- Paul will then cover research and development credits and how to claim them on an amended return. He will follow this session with another session on farm net operating losses – a tax technique that has been modified several times in recent years. Making and revoking elections will be addressed.
- During the last morning session, I will cover taxation of retailer reward programs from the perspective of both the retailer and the customer. These programs are popular among many ag retailers. I will also address the proper tax treatment of demolishing structures on the farm.
- After the luncheon, Tiffany Robinson of the Criminal Investigation Division of IRS will provide insight from the Division’s perspective on how a business can identify data breaches, how the “Dark Web” is utilized for cyber-crimes, and crypto crimes.
- The afternoon session involves myself and Paul covering numerous farm tax topics from machinery trades to inventory accounting, to early termination of CRP contracts, weather-related livestock sales and contribution margin analysis.
Day 2 Itinerary
- Tuesday August 2 opens with my update of cases and rulings pertaining to farm business structures and estate planning.
- I will follow my opening session with a discussion of succession planning strategies with intentionally defective grantor trusts and grantor-retained annuity trusts.
- After the morning break, Tim O’Sullivan of the Foulston firm in Wichita, Kansas, will address income and estate planning techniques for estates of all sizes and how to fit those techniques with your client’s particular goals and objectives.
- The final morning session will involve Mary Ellen Denomy, a nationally known speaker on oil and gas issues and CPA addressing how to report oil and gas royalties and working interest payments on the tax return; estate plans for clients with oil and gas interests; whether clients are being paid according to their agreements; and the role of the CPA in these situations.
- After the luncheon, Mark Dikeman of the Kansas State University Farm Management Association will provide a session on farm economics and how to analyze the economic health of a client’s farming/ranching business. What is the true financial health of the business as opposed to what the tax return might say?
- The next session is an absolute must if you represent clients with water rights. This panel session will involve three practitioners (one from Kansas (Mike Ramsey) and two from Colorado (Andy Morehead and John Howe) that will cover water rights in the context of income tax and estate/business planning. How do water rights impact sale and transition transactions?
- Shawn Leisinger and I will close out the day with an hour of ethics focusing on asset protection planning - the right way to do it and the potential ethical violations if it is not done properly. This will be an eye-opening session.
Attend Online
If you can’t attend in person, attendance may be virtually.
Accreditation
Washburn Law School is an NASBA certified CPE provider. For accountants, the conference qualifies as GIB, but is also offered in GL format. The conference also qualifies for CLE credit for attorneys.
Additional Information
More information about the conference and how to register can be found at this link: https://www.washburnlaw.edu/employers/cle/farmandranchtaxaugust.html
Conclusion
If you have a rural practice or represent farm and ranch clients on their tax or estate/business planning issues, this conference is a “must attend” conference. I hope to see you there or online.
July 3, 2022 in Business Planning, Estate Planning, Income Tax | Permalink | Comments (0)