============================================== This Report contains additional coverage of the Tuesday sessions. Since some of this relates to charitable planning, a copy of this Report is being sent to the GIFT-PL and Planned Giving lists. ============================================== Funding Bypass and QTIP Trusts with Retirement Plan Assets Prof. Christopher R. Hoyt Report by Herbert L. Braverman Esq. Christopher Hoyt is a professor at the University of Missouri (Kansas He began by reviewing the minimum distribution rules for retirement
accounts and he reminded us of the 10% penalty for most distributions
taken before 59 1/2 and the odious 50% penalty imposed when an account
owner does not take appropriately large distributions after attaining
the age of 70 1/2 or retiring , whichever occurs later. Professor
Hoyt noted that minimum distributions during lifetime are essentially
the same, regardless of who or what is named as beneficiary. On
the other hand, after the account owner's death and in particular
as of September 30 of the year following death, the identification
of the designated Professor Hoyt took the time to point out that the Japanese who eat no fat outlive Americans and the French who eat a lot of fat and drink a good bit also outlive us; so do the wine-drinking, fat -eating Italians--his conclusion is that it must be "speaking English that kills you!" He then turned to the integration of income tax and estate tax
planning. He presented some interesting statistics to illustrate
how few 706's will be filed in the future under the current tax
regime--perhaps as few as 200 per state in 2006--and , therefore,
how much more important income tax planning for retirement funds
will be. Professor Hoyt reviewed the advantage a surviving spouse has as
the DB, namely, the ability to do a rollover IRA and treat the new
IRA as Professor Hoyt also discussed basic tax planning strategies for married individuals. Where there are no estate tax concerns, a spousal rollover of retirement benefits, followed by a stretch IRA for the children should suffice.But what if there are estate tax concerns that would normally call for the use of a conventional bypass trust? First , try to fund the bypass trust with non-IRD assets. If these are insufficient, some retirement assets will have to fund the full credit shelter amount. Where there is sufficient wealth, Professor Hoyt suggests several strategies: 1. give some retirement assets to the 2. consider establishing a conduit bypass trust to reduce both
the size of the required distributions and the income tax rate imposed
on them. 3. consider a 2-generation CRUT. This can result in estate tax and income tax advantages similar to a 2-generation IRA rollover. 4. for "young" surviving spouses, use an IRA rollover to achieve substantial income tax objectives, even though the assets will be in her/his estate in the distant future (who knows what the estate tax system will be then?) Similar integrated estate and income tax planning strategies can be used when considering the use of retirement assets to fund QTIP trusts. As for the unmarried individual with out estate tax issues, the use of the stretch IRA is probably the best alternative, but the use of a CRUT as a beneficiary would still be available. Where estate taxes are likely to be suffered, Professor Hoyt recommends a charitable bequest of retirement accounts and other IRD assets to avoid the "double whammy of estate and income taxes." I think this is a full report of the session, but I recall the Professor quoting President Bush as saying that it is important to right 90% of the time and not worry "about the other 6%." ==================================================== Report by Connie T. Eyster Esq. This presentation addressed the issue of how much deference courts are apt to give to IRS regulations, rulings and other agency pronouncements when making decisions on tax court cases, and how the court decides the level of deference. The speaker believes that a sea change on this question is happening in administrative law, which change could have a significant impact on how we advise clients, write opinions on tax issues, and litigate tax cases as this change begins to impact our area of the law. Prof. Gans indicated that he believes the IRS has been publishing more guidance in recent years and will continue to do so in order to garner further support for the deference argument in the courts. It is not clear to what extent the IRS realizes their expanding power under this deference principle, but practitioners need to be aware of the arguments and take them into account. There was a confluence of events that led Prof. Gans to believe that there was a dramatic change happening with regard to deference issues. 1. In 1996, the U.S. Supreme Court decided a case called Smiley
v. Immediately before the Chevron case was decided, courts applied deference in two different ways. "Legislative regulations," which are regulations issued by the service out of an express direction in the legislation granting such authority, were given deference that was very hard to overcome. A legislative regulation would not be given deference only if the regulation was arbitrary and capricious. All other types of regulations, including those issued generally under IRC § 7805 (which generally allows the IRS to promulgate regulations interpreting the code called "interpretive regulations") were given "Skidmore deference." Whether the court decided to give deference to these non-legislative regulations would be determined based on a variety of factors such as whether the court thought the interpretation by the agency was correct, whether the statute was amended or reenacted after interpretation was issued, whether the agency was involved in litigation when the regulation was written, and whether the regulation was written contemporaneously with the passing of the statute. Chevron purported to establish a new theory of deference, which was discussed in the case of U.S. v. Mead, 533 U.S. 218 (2001). Under this new deference standard, the court will first look to see if a statute is ambiguous or silent on the issue presented. If it is not silent or ambiguous, then the court will use the express language of the statute to determine the issue. If the statute is silent or ambiguous, then the courts will defer to the agency regulation issued on that question, if the regulation reasonably resolves the ambiguity. Smiley tells us that this new standard will be used, even when the traditional Skidmore factors would have indicated that no deference should be given to the agency regulation. Smiley was a non tax case that was unanimously decided by the Supreme Court. In that case, the statute at issue was enacted 100 years before the regulation, but the fact that the regulation was not contemporaneous with the statute did not seem to impact the court's decision. Likewise, the regulation was issued after the transaction in the case had been consummated and after lower courts had issued rulings in the case. Nonetheless, although the agency issued the regulation while taking an adversarial position, the court still gave deference to the regulation. Further troubling was that the court upheld the regulation, despite the fact that the agency had previously taken contrary stances in other published notices. Prof. Gans highlighted footnote 3 in Smiley case, in which the court said that even though the regulation applied retroactively to the transaction in that case, it was not, in fact, a retroactive application because the agency had not previously issued formal regulations on that issue (even though it had taken a position on the issue in other notices). This was the court's decision, even though, like the IRS, the agency in the Smiley case was prohibited from issuing retroactive regulations. Under this analysis, Prof. Gans questioned why would the Supreme Court ever grant certiorari on a tax case? If the statute is ambiguous, all the IRS would need to do is issue a new regulation addressing the issue, which would be deferred to by the court. 2. Also making Prof. Gans aware of the deference issue was a 1997 3. Finally affecting Prof. Gans's concern about the deference issue, Prof. Gans believes we will see more of this deference issue, which seems to be expanding the power of the IRS, rather than the courts, to decide tax issues. _________________________________________ GENERAL INFORMATION ABOUT INSTITUTE ______________________________________________________ To search the ABA-PTL archives online or manage your subscription,
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