============================================== This Report contains additional coverage of the Monday Recent Developments session, first by Reporter Gene Zuspann and then by Reporter Jeff Weiler ============================================== Monday, 1/10/05 - Introduction and Recent Developments Steve R.
Akers Esq. Report by Gene Zuspann Esq. The authors of the materials are Dick Covey and Dan Hastings. Per SA, the materials are excellent. The speakers covered some of the materials but had much information to add that were not included in the book. JB - where are we on the estate tax? The question now is whether the estate tax will be repealed in
2010 or 2007. JB anticipates passage in 2006. The Administration
believes that it currently has 59-60 Senators. They need 60 to override
Byrd rule. At a minimum, and even if they cannot get full repeal,
the7y can at least extend the repeal to 2015. The IRS had problem
recruiting new employees after However, the contrary position has several points: 1. The deficit is large and the estate tax in 2010 is projected to produce $50 billion of revenue (assuming a 50% maximum rate with a $2 million applicable exclusion). 2. Bush had said that his primary agenda is to fix Social Security. JB proposed leaving the estate tax at this rate to help fix Social Security. Another suggestion is that the estate tax should be earmarked to fund wars - IRAQ, Afghanistan, because estate tax has historically a tax used to pay for wars. JB has been told that carryover basis as drafted cannot work. He discussed the blue ribbon panel studying the estate tax. One alternative or new tax will be a value added tax (VAT). JB feels that it is more likely that a VAT will be adopted, at least to some extent. He believes this has more chance in passing than a national sales tax. One reason is that it is already an accepted tax in much of the rest of the world. Tom DeLay is promoting HB 25 - fire the IRS, eliminate the income tax and have a nation wide sales tax. It would be paid on every transaction in which property changes hands and would even be imputed in some transactions. It would be paid on goods and services. The stated rate is 23% but it is a tax inclusive rate - the effective rate is 28%. It would also cover medical insurance, food and rent. SA - Proposals will include changes in the private foundation rules that are dramatic. PS - Discussed the IRS Priority Guidance Plan items under the heading
Gifts, Estates and Trusts. Changes to Circular 230 PS Circular 230 Best practices: The categories pertain to client communications, factual and legal due diligence, providing accurate advice, and acting fairly before the IRS. The client should be told what the import of the opinion is. Attorneys need to take steps to put procedures.in place to insure compliance. Tax shelters involve stricter standard. There are different levels of opinions. Covered opinion. PS believes that much of what we (estate planners) do is a covered opinion. Principal purpose is the avoidance of federal tax. The attorney must use reasonable efforts to obtain reasonable facts and may not base ab opinion on unreasonable facts or representations. The opinion should not discuss audits or chance of success if settled. SA believes that this change may be the most important thing that has happened last year. JB - the cost of complying with this makes it much more expensive. PS - there is a limited opinion - may have to use this often. Note: At this point, the panel started into the materials. All of the above was discussed by the panelists but not included in the materials. The panel moved quickly and covered much more than the information included above. JB - §643 regs JB - Rev Rul 2004-64; Sec 671 & 2036. Income imputed to the grantor from a grantor trust, where the grantor pays the tax – there is no gift. However, a mandatory reimbursement provision causes inclusion under 2036. If discretionary reimbursement then you have estate tax inclusion if there was a deal or if under state law creditors can attach the trust for the a mount of the reimbursement. JB mentioned a problem an attorney had with 675()(C) - a power to reacquire the trust corpus by substituting other property of an equivalent value. A PLR requested for 2 years was finally withdrawn. The Service would not agree that this power would not cause estate tax inclusion. Jb recommended creating your grantor trust using some other means. SA - very quickly discussed valuation issues SA - FLP cases - Kimbell, Thompson and Strangi - all deal with
2036. Pg 50 - Strangi still on appeal to Fifth Circuit. Hearing March 7. ACTEC filed a brief and discusses the 2036(a)(2) issue raised by Judge Cohen. SA says that Carlyn uses a trust as the GP. The client should not be the Trustee but may have the right to remove and replace the Trustee. JB - Letter ruling 200432015. How not to form an LLC to hold a
life PS - GST - Prop regs have been issued under §2642(a)(3) governing
qualified severance of trusts. Proposed regs have been issued on the predeceased parent exception to the GST tax. JB - Grat regs. - Grat payments must continue for the term - reversion is not
sufficient. Do not stop the payments after the death of the grantor. SA §2703 - Blount case and the requirements for a valid buy-sell
agreement True Case - pg 134 SA - Uniform Trust Code - He discussed the activity in the UTC during the last year and referred to changes in the law. SA mentioned several areas of concern - duty to inform (Sec 813), power to modify or terminate (410, 411), inability of a settlor to change the duties or the obligations of the trustees in several areas (105(b) and 105(b)(9)), creditors rights (Article 5), and the remedies for breach of trust. He also mentioned the ability to forum shop (107). This was a quick summary without time for detailed discussion. Diversification of investments. - pg 261 SA - The Dumont case and duty to diversify. The instrument contained language that the Eastman Kodak stock was not to be sold and was to be distributed to the ultimate beneficiaries unless there was “some compelling reason other than diversification of investment for doing so.” The Court held this language was only a direction and would not protect the trustee from failure to diversify. Court held that duty to diversify was compelling given the fact of the case. All three panelists commented on this decision and the overriding duty to diversify, even if the language in the trust directs that the investment be held. SA had discussed this issue with an attorney drafting a trust and suggested the only way to avoid this was to add language that the investment could never be sold, and the attorney commented that he would never put such a provision in the document. JB suggested this may be a non-tax reason to create a LP to hold the stock and give the trustee LP units. The session was very good with much added to the published materials by the panel. The pace was very rapid and getting down much of the presentation was virtually impossible. ================================================ Jonathan: Estate tax repeal. Rumors are circulating that it is a sure thing. Poll of Senators
shows 59 probable votes for repeal with 60 votes needed to overcome
the Bryd rule. Steve: Likely to be dramatic changes proposed by Senate Finance Committee concerning oversight of charities. Pam: Reviewed some of items on Treas Dept/IRS 2004-2005 Guidance Plan. Some interesting areas to watch: guidance under 2036 - transfers with retained life estates (probably FLP's), 2704 - liquidation of an interest, 2702 - qualified interests. Jonanthan: 2004 Jobs Act. Reason for enactment was WTO ruling related to US companies with overseas sales. It allows personal itemized deduction for sales tax in lieu of state and local income taxes. Pres. Bush may propose eliminating deduction for both state and local income tax as well as the new sales tax deductions as revenue raisers. Also, new law requires 754 election if value of entity assets are below basis by $250,000. S corporation rules for number of shareholders liberalized by treating family tree as one shareholder. Jonathan: Notice 2005-1 will require revisions to deferred compensation arrangement to get deferral (almost all plans need work). Pam: Circular 230 revisions. (Jonathan: one of most important 2004 developments). New Regs issued Dec 17, 2004 to be effective June 20, 2005. They
have much broader coverage than merely tax shelters and will impact
the way we practice law in the estate planning area. Best practices
requirements do not create exposure to penalties but could be used
in malpractice claims. Pam: Qualified Severance Proposed Regs (GST). She finds some problems in proposed regs that she hopes will be fixed before they become final. One problem is with effective date (12-31-00). ACTEC comments on treatment of discretionary pecuniary discretionary divisions. The speakers next commented on portions of the outline. Jonathan: FSA and RR 2004-5 allow a trust to receive a charitable deduction for a flow through from a partnership. Trust has no provisions authorizing charitable deduction. Jonathan: 653 (b) final regs definition of trust income. Effective for tax years ending after Jan 2, 2994 (sic.) - which
means 2004. Jonathan: 671 and 2036 - tax reimbursement provisions in grantor trusts - RR 2004-64. If mandatory reimbursement required and not made, there is an additional gift. Will be inclusion in gross estate of grantor if grantor's creditors can get at trust assets. Suggests prohibiting reimbursement in trust terms. Problem (and indigestion) concerning creating income tax defective
grantor trusts. Many (if not most) estate planner use non fid substitution
of assets based on Jordahl case. IRS refused to rule that this does
not cause inclusion in gross estate. Using this approach may create
a fight with IRS. Steve: Post death events and impact on valuation. Helen Noble TCM 2005-2 - Tax Court used post death sale (13 months after death) as valuation factor. Suggests - wait for conclusion of IRS audit before selling assets. Steve: 2032 Prop Regs.for alternate valuation date. 9100 relief is available if 709 is filed within 1 year of its due date. PLR 2004-52-030 allowed 9100 relief. Steve: Kimbell taxpayer showed 13 objective factors to support its position and CA 5 enumerated 3 tests: interest credited to partner's account was proportional to fmv of assets contributed, assets properly credited to proper capital account, at termination or liquidation distributions to partners from respective capital accounts. Having bona fide sale on formation will not prevent inclusion concerning later gifts of partnership interests. Partnership assets may not be in gross estate, but gif of partnership interest is at risk. Steve: Thompson CA 3 requires a business purpose. Appears to require
a business activity and majority of CA 3 disagrees with Stone and
Kimbell. Inclusion of partnership assets in gross estate will a be problem with estate tax marital deduction for discounted value of partnership interests but partnership assets in gross estate at full value. Suggests avoid grantor as sole general partner, allow transfer
of general partnership interest (rather than conversion to limited
partnership Also, suggests trust with third party trustee as general partner.
Note RR Jonathan: 2035 (b) gift tax in gross estate. PLR 200432016 confirms that the 3 year period for inclusion begins with the date of the gift and not a the beginning of the calendar year in which the gift occurred. Jonathan: PLR 200432015. Transfer of life insurance to FLP and gift of FLP to family member resulted in life insurance in gross estate where death occurred within 3 years of the transfer - it was an "integrated transaction". Also, no marital deduction because life insurance was received by FLP and surviving spouse to not get at the funds. Steve: Graegan case (56 TCM 387) developments - borrowing to pay
estate tax and up front deduction on estate tax return for all future
interest expense. Cal case permitted trustees to enter into 25 year
loan - Klein v Hughes 2004 WL 838189 (Cal. App. 1 Dist 2004). Estate
lost in Rupert (Dist Ct Pa. 2004 no cite provided). Estate could
sell assets (right to lottery Pam: GST exemption. PLR 200422051 split gift resulted in each spouse being transferor of ½ of gift. Prop Regs on electing out to deemed (automatic) allocation of exemptions.
Simplified 9100 relief is available for late election of application of exemption. Can be after death but must be before estate tax return is due. Jonathan: 2702, GRATs, proposed regs, Walton cases. Have annuity continue to be paid to estate after death for remaining term under GRAT. For marital deduction have payment from marital deduction trust equal to greater of fiduciary accounting income or annuity payment. Steve: 2703 Agreements restricting transfers, valuation (buy sell
agreement). Blount 87 TCM 1303 (2004) was a pre 2703 case modified
after Life insurance payable to company is required to be considered an asset of the company for valuing the company and company's obligation to purchase stock was not a permitted offset to life insurance. Steve: Uniform Trust Code. (92 outline pages devoted to this topic.) Major areas of controversy: court's authority to override exercise of trustee's discretion over discretionary distributions, too much info to be given to trust beneficiaries, will irrevocable trusts be included in gross estate due to modification authority, courts ability to override settlor's ability to use trust terms. Steve: Diversification required of trustee. Dumont, NYLJ, July 13, 2004, page 19. Trustee held liable for loss for failure to diversify trust assets (stock) even though trust agreement authorized retention. Case is on appeal. Very difficult, if not impossible to fully protect trustee from not diversifying through trust provisions. Jonathan: Suggests that settlor put asset into a FLP and then put FLP interest into trust. Trustee will not be able to sell FPL with restriction in partnership agreement. _________________________________________ GENERAL INFORMATION ABOUT INSTITUTE ______________________________________________________ To search the ABA-PTL archives online or manage your subscription,
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