Educational Alerts

Educational Alerts are written on topics that effect various aspects of estate planning and the laws that govern it. They are usually published and posted to this site at the end of each month. Occasionally newsworthy events will initiate the release of additional alerts at the time the news breaks. The purpose of an Estate Planning Update is to bring important information to the financial advisors in the community. Our hope is that this information better equips you to assist your clients.

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No Estate Tax Reform in 2009 - Large Tax Bill Likely in 2010

Where are estate taxes headed from here? This Alert discusses the latest news regarding estate taxes. While nobody knows for sure what is going to happen, this Alert examines the diminished likelihood of permanent estate tax legislation in 2009 and the likelihood of a one-year extension of the current estate tax exemption. The Alert also discusses potential developments in 2010 and 2011.

Legacy Wealth Planning for Blended Families

Blended families, where the parties have remarried or have children from other relationships, are increasingly common. This Alert examines the unique issues arising in the blended family context and ways to avoid the many pitfalls which may exist.

IRS Scores another FLP Victory with Jorgensen Case

The Alert examines a case involving a family limited partnership in which the IRS scored another victory. The Jorgensen case underscores the necessity of the proper management of the partnership if valuation discounts are to be obtained. Your FLPs should be reviewed by an experienced estate planning attorney in light of these cases.

Turbulent Economic Times Can Lead to Estate Planning Opportunities

This article examines several ways to take advantage of the current economic conditions, from an estate planning perspective. Historically low interest rates combined with depressed asset values make many strategies more effective. The article explains how these challenging economic times can work to your client's benefit.

Recent Law Changes of Note to Financial Professionals

This Alert examines changes the recent expansion of FDIC insurance coverage and how it applies to accounts in revocable trusts. The Alert also examines how the extension of the allowance of the IRA "charitable rollover" can help your client achieve their philanthropic and tax goals.

News of Financial Crisis Brings Concerns Regarding Protection of Financial Accounts

Our alert of a few months months ago examined protection under FDIC. This alert examines protection for brokerage accounts under the SIPC and ways to expand that protection.

New Case Demonstrates the Importance of Professionally Drafted Buy-Sell Agreement

This article looks at a business arrangement between two friends and the importance of a well-drafted buy/sell agreement between them.

The Estate That Would Not Die

The recent litigation surrounding the publicity rights of the remainder beneficiary of the estate of Marilyn Monroe illustrates some of the problems with probate administrations and how a trust can help avoid some of these entanglements.

IRS Rules That Tuition Paid for Special Needs Child is a Deductible Medical Expense

The Alert examines a recent private letter ruling which allowed the taxpayer to deduct school tuition for a special needs child as a medical expense.

Court Reformation of Irrevocable Trust Does Not Cause Trust Assets to be Included in Grantor's Estate

This month's Alert discusses PLR 200730015, which dealt with the judicial reformation of an irrevocable trust and an IRS finding that the changes to the trust did not cause inclusion of the irrevocable trust in the trustor's estate. Often, trustors want to change the terms of their irrevocable life insurance trust, irrevocable trust for gifting to children and/or grandchildren or other irrevocable trusts for advanced estate planning purposes. Depending on whether the trust is a grantor trust or not, this may involve substituting the old trust for a new one, or a judicial reformation, as is the subject of this month's Alert.

Planning for Retirement Assets Requires Special Care--Bad Advice by Financial Planners Causes Tax Penalty to Client

This alert examines a new private letter ruling in which the taxpayer accidentally triggered penalties. The penalties occurred due to a violation of the rules for the "series of substantially equal periodic payments" exception for distributions prior to age 59 1/2.

IRS Uses Payment of Estate Tax to Win Family Limited Partnership Case

This article examines the Tax Court case of Estate of Erickson v. Commissioner. In this case, the IRS prevailed, including a Family Limited Partnership in the estate of the decedent under Section 2036. Various factors led to this defeat for the taxpayer, including the fact that the partnership was used to pay estate taxes, at least indirectly.

Drafting Spousal Trusts to Reduce Estate Taxes

This article examines various strategies using a marital trust and bypass trust. It also looks at using a marital trust to preserve assets of the pre-deceasing spouse in a second marriage situation.

IRS Offers Favorable Rulings Regarding Transfers of Life Insurance Policies to an Irrevocable Life Insurance Trust

The article looks at two recent revenue rulings which confirm that transfers of life insurance policies to ILITS that are grantor trusts do not run afoul of the "transfer for value rule."

IRS Finds Pecuniary Gift of IRA to Charity is Taxable

The Alert examines ILM 200644020 which involved an IRA payable to a trust. The trust used the assets to pay pecuniary bequests to charities. The Service held that, under the Kenan rule, there was a sale or exchange, and thus the trust recognized the income on the asset. Further, the trust did not get a charitable deduction. The Alert states that careful planning could have avoided this outcome.

Recent IRS Ruling Spawns Retirement Planning Strategy

The article examines a PLR in which the taxpayer got approval to treat a (d)(4)(A) Special Needs Trust as a "conduit" trust rather than an "accumulation" trust for purposes of minimum required distributions. In other words, they were allowed to ignore remainder beneficiaries and use the primary beneficiary's life expectancy to calculate required distributions.

Creating a Trust to Protect from Future Unknown Creditors is a Fraudulent Transfer in Washington

This month's alert reviews United States v. Townley, a case in which a District Court in Washington held that the creation and transfer of assets to an irrevocable trust was a fraudulent transfer with respect to future creditors. The IRS was not a foreseen future creditor at the time the trust was created, but the trustors testified that one of the primary reasons the trust was established was concerns about liability associated with a different identified potential future creditor.

Proper Drafting of Trust Protects Trust Assets from Creditors, Including the Internal Revenue Service

This article examines recent IRS guidance concerning the ability of the IRS to attach a beneficiary's interest in a trust. The article provides options for greater creditor protection by not using typical HEMS language.

IRS Issues Favorable Life Insurance Private Letter Ruling

This month's Alert covers a PLR in which the IRS approves a transfer of life insurance policies from one Irrevocable Life Insurance Trust structured as a grantor trust for income tax purposes to another Irrevocable Life Insurance Trust structured as a grantor trust. The Alert explains how this planning strategy avoids recognition of gain, the transfer for value rule and the three year rule. Call our office if you have clients with insurance trusts that might need to be re-thought.

Fifth Circuit Releases Long Awaited Strangi Opinion

This month's alert highlights the findings of the Strangi 4 FLP case. This is the second appeal to the 5th Circuit. The opinion is a partial victory for the IRS, but the key points of the case are the issues regarding implied agreements (and use of FLP assets to pay estate administration expenses, debts of the decedent and estate taxes) and what is business and non-business purposes are sufficient to meet the "bona fide transfer for fair value" exceptio under IRC 2036.

2036 Is Not Just for Family Limited Partnerships

In past alerts we have informed you how the IRS has had successes in using IRC - 2036 to pull back transferred partnership assets into the estate of a decedent, thwarting the taxpayer's plans to obtain a discount. These victories have emboldened the IRS to apply the requirements of IRC - 2036 against other types of intra-family transfers.

Taxpayers Using FLPs Continue to Trip Over Section 2036

The article examines three new FLP cases in which the Service was victorious. It stresses the need for clients to have their FLP agreements and practices reviewed.

Disclaimer Proves Fatal to Estate Plan

Mr. Katz executed a will in 1991 that called for the creation of a "pecuniary credit shelter trust" equal to the amount of the "aggregate federal estate tax exemption equivalent." The will language further provided that the credit shelter trust "shall not be reduced on account of any disclaimer by my wife." Finally, another provision in the will stated conflicting provision in this will, "if my wife disclaims any interest in any portion of the property otherwise passing outright to her under this Article of my will, such portion shall be added to the [credit shelter] trust." The purpose of the credit shelter trust created under Mr. Katz's will was to place an amount equal to the amount that can pass free of estate tax into trust so that it would eventually pass to his children without being subject to estate taxes in his wife's estate.

Bank and Trust Officer Held Liable for Estate Tax

Learn the facts as well as lessons that should be learned from the case of Hatleberg v. Norwest Bank Wisconsin, 678 N.W.2d 302 (Wis. App. 2/24/2004)

IRS Scores Family Limited Partnership Victory

In a new case, the IRS has had new success in attacking FLPs using Section 2703.

IRS Blesses Planning With Grantor Trusts In Revenue Ruling 2004-64

The IRS, with its release of Revenue Ruling 2004-64, has given its approval to the use of grantor trusts as an income and estate planning strategy and it has removed any confusion as to whether the trust must contain a provision for the reimbursement of income taxes paid by the grantor.

Mistake in Preparing Estate Tax Return Costs Taxpayer: IRS Provides No Relief

The facts in PLR 200422050 are as follows: a decedents will left her estate in trust for the benefit of her husband. The trust provided that the husband was to receive all income from the trust and he could compel the trustee to make trust assets productive. As a result of these provisions, the trust would qualify for the federal estate tax marital deduction under IRC § 2056 as a qualified terminable interest property ("QTIP") trust if the executor made an election under IRC § 2056(b)(7).

IRS Suffers Big Blow in Fifth Circuit Reversal of the District Court Holding on Kimbell FLP Case

On May 20, 2004, the Fifth Circuit Court of Appeals reversed the grant of summary judgment for the government in the U.S. District Court case of Kimbell v. United States, 244 F. Supp.2d 700, 91 AFTR.2d 2003-585 (N.D. TX 5/14/2003).

Failure to Qualify for Marital Deduction Can Cost Hundreds of Thousands

The amount that can be given at death free of estate taxes in 2004 is $1.5 million. With proper planning, a married couple can double that amount to $3 million. Where an estate is greater than $3 million, the estate tax on the excess can be deferred until the death of the surviving spouse, but only if proper planning is put in place. This is because of the unlimited federal estate tax marital deduction. Where the first spouse to die wants to control where the excess assets go after the death of the surviving spouse (by giving the surviving spouse only a life estate in the excess assets), a special kind of trust, known as a Qualified Terminable Interest Property Trust (or QTIP Trust) must be used.

Ninth Circuit Court Affirms Asset Protection for Trust Beneficiary

One of the advantages of establishing trusts for beneficiaries as opposed to outright distributions is asset protection. In the case In re John and Holly Coumbe, Debtors, a Bankruptcy Trustee sought to include the assets of a testamentary trust created by the debtors mother in his Chapter 7 bankruptcy estate. The Court held the trust assets were unavailable to the debtors creditors.

Limited Liability Company Provides Answer to Trust Termination

It is becoming more common to leave assets at death in trust for children and other beneficiaries. In many instances, this strategy affords the beneficiaries protection from creditors and protection of their inheritances from divorcing spouses. When trust assets consist of business holdings, real estate or a diverse portfolio of securities, it also provides for centralized management and potential economies of scale.

Distributions from Retirement Plans or Individual Retirement Accounts Can Reduce or Eliminate Estimated Tax Underpayment Penalties

Seniors and self-employed individuals often complain about having to make quarterly estimated income tax payments. Failure to make the payments can lead to underpayment penalties and interest (calculated using the federal short term rate plus an additional three percent) having to be paid on income taxes due.

Circumstances Surrounding Drafting, Execution, and Administration of a Prenuptial Agreement Determine Its Effectiveness

The planning done before marriage is often as important as planning after marriage in assuring that a clients estate planning wishes are carried out. Laws governing prenuptial agreements vary somewhat from state to state, but often the circumstances surrounding the drafting, execution, and administration of a prenuptial agreement are crucial to the effectiveness of the agreement.

HIPAA Protected Health Information Provisions Become Effective - Clients Need to Take Action Now

On April 14, 2003, the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 45 CFR §§ 160-164, affectionately dubbed HIPAA, went into effect. The new regulations have caused much turmoil among "covered entities" (e.g., doctors, hospitals, nursing home facilities, and insurance companies), as they will now, for the first time, be subject to federally imposed sanctions and monetary fines for unauthorized disclosure of "private health information." The new law has caused many health care providers to clamp down on the release of medical records and other health care information to anyone other than the patient.

Federal Tax Lien Trumps State Asset Protection Law

Approximately half the states provide that a married couple may take title to real property as tenants by the entireties. This type of ownership, while similar to joint tenancy, offers superior asset protection from many creditor's claims. The question of whether an IRS tax lien can attach to tenancy by entirety property was the subject of U.S. v. Craft, 122 S. Ct. 1414, 89 AFTR.2d 2002-2005 (2002).

Reformation of Trust Saves Estate Taxes

Joint trusts for married couples have been used in community property states for over a decade. There had been speculation by some attorneys regarding the effectiveness of joint trusts in common law states. However, concerns over recognition of joint trusts by the IRS have largely been put to rest by PLRs 200101021 and 200210051 (see our previous FaxAlert dated April 30, 2001 titled "Joint Trusts in Common Law States" for more on this subject).

IRS Issues Final Regs On Section 645

A living trust becomes irrevocable upon death and, as a separate legal entity, it requires a tax identification number to report income during its period of administration. If the decedent had assets subject to probate outside his or her trust, then the decedents estate may also need a tax identification number and an additional fiduciary income tax return (Form 1041) may be required.

Care Must Be Taken When Disinheriting an Heir

It is not uncommon for a person to place provisions in his or her will or trust to exclude an heir from receiving an inheritance. Such was the desire of Mary Bartels, who wished to disinherit her daughter, Deborah Smith, and whose will was the subject of dispute in the case In the Matter of the Estate of Mary Alberta Bartels, Deceased, 184 Or. App. 448, 56 P.3d 501 (October 23, 2002).

IRS Releases Final Regs for IRAs and Retirement Plans

The Internal Revenue Service recently released, in T.D. 8987 (April 16, 2002), the long awaited Final Treasury Regulations for Internal Revenue Code ("IRC") § 401. These regulations replace Proposed Regulations dating back to 1987, with modifications. The Final Regulations are effective starting January 1, 2003, but can be used in calculating Minimum Required Distributions ("MRDs") for calendar year 2002, as described below. Some of the key provisions of the Final Regulations are as follows:

Tax-Driven Estate Plans May Need to Be Revised

Many clients with children from a previous relationship have a strong desire to benefit those children, while at the same time providing for the care of their new spouse. Unfortunately, this type of planning often becomes complicated because of tax ramifications.

Clients Should Use Attorney-Drafted Powers of Attorney for Property

After the incapacity of an individual, powers of attorney often are used to initiate or continue annual gifting programs to reduce the size of the incapacitated individual's estate for estate tax purposes - or as part of a Medicaid qualification strategy. Using a generic power of attorney obtained off the internet or from the legal forms department of a book, stationery or office supply store can often lead to problems. This is even true of the use of statutory power of attorney language provided by a state's legislature.

Liability for Failure to Conduct Post Mortem Estate Planning and Administration

More and more, the failure to properly discharge fiduciary duties and to find and exploit various post-death options and elections to reduce estate taxes have resulted in large damage awards against executors, trustees and their professional advisors.

Getting a "Step-Up" Under the Internal Revenue Code

Many people have heard of the "step-up" in basis for property received by inheritance, but don't know exactly what that means. One's "basis" in property is what determines if there is a gain or loss upon sale and Internal Revenue Code (hereinafter "Code") § 1012 generally defines basis as the cost of such property. But what about property that doesn't have a cost to the holder, such as property acquired by inheritance or gift?

IRS Issues Surprise Revisions to Proposed IRA Regulations

In an unanticipated move, the Department of Treasury has issued a substantial revision to the Proposed Treasury Regulations ("Proposed Regs.") that govern Minimum Required Distribution ("MRD") from IRAs and qualified retirement plans. The changes affect distributions both after age 70.5 and after the owner's death. These alterations substantially change the MRD rules that have been in place since 1987! The new Proposed Regs. considerably simplify the distribution rules and are retroactive to January 1, 2001.

Who Pays the Estate Tax When Someone Passes Away?

In 2001, Donald Decedent dies with an estate plan in place which leaves the residue of his estate as follows: a) $500,000 to his children from a previous marriage, b) $500,000 to his children from his current marriage, c) $500,000 to charity, and d) $500,000 to his wife at the time of his death. Who pays the federal and state transfer taxes of at least $125,250 under these circumstances? The answer is, "it depends." Liability for the payment of the estate tax would be governed by the "tax allocation clause" contained in Donald Decedent's trust agreement (or his Will, if that is the governing instrument). If Donald had no trust or Will, or if his Trust or Will was silent about the payment of transfer taxes, then liability for the payment of the transfer taxes would be governed by state law.

An Advanced Technique to Remove Life Insurance from the Estate

Unless steps are taken to remove it, the death benefit of a life insurance policy owned by the insured is included in his or her estate under Internal Revenue Code Section ("IRC §") 2042. One way to remove the death benefit from the estate of the insured is to gift the insurance policy to the insured's children or to an Irrevocable Life Insurance Trust ("ILIT"). The value of the gift will be the interpolated terminal reserve ("ITR") of the policy (Treasury Regulation § 25.2512-6(a)), which can usually be roughly approximated from the cash value of the policy.

Reducing Estate Taxes on Insured Cross Purchase Agreements

This Alert discusses a technique to dramatically reduce the estate taxes imposed on the estates of surviving owners of an insured cross purchase agreement.

Avoid Failure to File Penalties on the Death of the Grantor of a Revocable Trust

PLR 9740009 points out the need for practitioners to carefully consider the potential for penalties for failure to file income tax returns after a client's death. 9740009 dealt with a decedent who died intestate and no formal administration of the estate was done for 8 years, and no returns were filed for the 8 years.

Preserving an S Corporation Election at the Death of the Shareholder

S corporation status is an extremely valuable income tax benefit to S corporation shareholders and is to be carefully monitored. The primary benefit is that the income earned by the corporation is taxed to the shareholder in a "pass-thru" fashion rather than being taxed first to the corporation and then taxed again when transferred to the shareholder as occurs with other corporations. This avoidance of "double taxation" is particularly important when a sale of the business operations is planned. If the corporation is a "C," or regular corporation, the sale of the corporation's assets will be taxed once when the corporation sells and again when the after-tax sale proceeds are distributed to the shareholder in liquidation.

Joint Tenancy, a Will or a Trust? What's the Best Way to Plan Your Estate

Taxpayers and Estate Planners generally agree that Intestate Probate, also known as "the governments estate plan for you if you fail to plan your own," is never preferable to creating your own estate plan.

Joint Tenancy Dangers

Topics include: Tax Problems, Loss of Control & Much More, No Avoiding Probate, Losing Control, A Taxing Issue, A Matter of Risk, The Better Way to Handle Title to Property, The Financial Advisor's Role in the Living Trust and Taxation Alert: The Case of the Double Domicile.

Make Sure Your Clients Don't Make These Estate Planning Mistakes

Financial Advisors are often their clients' first line of defense on a whole host of issues. Estate Planning is just one of them. As you work with your clients year after year, help them protect their interests by letting them know whenever they're making one of these estate planning mistakes.

The Special Child: Helping Parents Plan

As tough as it is to consider, all parents have an obligation to plan for the unthinkable: that death or disability may render them unable to care for their children. Parents of children with disabilities have a special challenge. Here's important information that your clients need to know.

Making the Most of Life Insurance: Irrevocable Life Insurance Trusts

We all know life insurance is important. But buying life insurance alone may be only part of the solution. Depending on how your clients own that policy, it can actually contribute to one of the problems they thought they were solving: estate taxes. An irrevocable life insurance trust can help your clients make the most of their life insurance investment.

Estate Planning Alerts for Advisors

Monthly Educational Alerts
Educational Alerts are written for advisors on topics that affect various aspects of estate planning and the laws that govern it. Read our latest Alert and request to be added to our email distribution list.
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These recent developments and case studies address any aspect of the law that touches on estate planning. They offer an interesting perspective and/or warning. View our latest FYI or request to be added to our email distribution list.

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