============================================== This Report contains additional coverage of the Tuesday sessions. ============================================== Report by Connie T. Eyster Esq. Mr. Belcher first discussed material not in his materials concerning
a Graegin promissory note transaction used in the case of Klein
v. The decedent in Klein died in 2000 with an estate worth $300 million. Turning to the materials for this program, the speaker began by emphasizing that when speaking with a private business owner about estate planning, often the method for paying the estate tax burden is to purchase life insurance. However, in some instances the client is adverse to purchasing life insurance, life insurance might be prohibitively expensive for the client in light of all circumstances, or the life insurance currently held by the client will not cover all the estate liquidity needs. In those circumstances, the client might consider other alternatives to prepare for payment of the estate tax such as making a § 6166 election. In order to make a § 6166 election, the following requirements must be met: (a) the decedent must have been a citizen or a resident of the U.S., (b) more than 35% of the decedent's adjusted gross estate must consist of an interest in a trade or business, and (c) the personal representative of the decedent's estate must make an election on a timely filed estate tax return. If the estate qualifies for the election, it will be able to defer
payment of the estate tax on the closely held business interests
for Determining whether the decedent held interest in a trade or business can be a difficult determination, especially where the decedent held interest in rental real estate. The IRS takes the position that passive rental of real property does not qualify for the benefits of § 6166. However, the private letter rulings are all over the board on this issue. A net cash lease arrangement where the owner has no duties will not qualify for the § 6166 election. The more duties the owner has, the greater likelihood that the asset will qualify. Where the decedent is an owner of real estate that is leased to a company in which the decedent is a primary stock holder, again, the amount of duties of the landowner under the lease will determine whether the asset will qualify for the § 6166 election. The speaker suggests that duties of the landlord must be in the lease or the real estate must be conveyed to the corporation itself in order to assert the election. An estate tax audit of the §6166 election will ask very fact specific questions such as: What was the schedule of rental payments? How active was the decedent's management of the property? Who prepares and maintains the property? Who takes care of utilities, gardening and other such responsibilities? Who pays the bills? Who inspects the property? Who makes bank deposits? Clients often have holding companies and those rules should be
reviewed carefully (see p. 5-22 of the materials) if the client Note that the deferral of unpaid tax is accelerated if the business on which the election was made is sold during the deferral period. One area that the IRS has really started to change its position on is the lien and bonding requirements (see pages 5-33 and 5-34 of the materials). In March of 2000 the Treasury Inspector General for Tax Administration issued a final audit report entitled, "The IRS Can Improve the Estate Tax Collection Process." The report stated that a vast majority of the § 6166 deferrals were not subject to liens and many of those not subject to liens were in default. In addition to seeking liens on deferred assets, the IRS is now also seeking liens on the property held by the companies in which the estate owns interest. This is to protect against cases like that of IRS v. Skiba. In that case, the decedent had owned a car dealership and the estate made a § 6166 election for the business interest held by the estate. The car dealership started to do badly and the estate sold the underlying assets. When the business went bankrupt, the IRS was given the status of a general, unsecured creditor because, while it had an interest in the business itself, it did not have a lien on the underlying assets. Now, the IRS is filing liens on underlying assets rather than on the trade or business interests that are reported on the estate tax return. Mr. Belcher cautions that negotiating with individual agents regarding these liens is a tricky business and practitioners should be wary that they may see some abuses by the IRS in this regard. When doing estate planning, be aware that use of a sale to a defective grantor trust can disqualify the owner's estate for the benefits of §6166. The promissory note issued by the grantor trust will be the asset of the owner's estate, not the underlying business interest and the owner may not meet the 35% eligibility requirement. An alternative strategy to relying on § 6166 when there are
estate liquidity issues is to borrow money from a third party with
a deduction for interest payments made on the loan, often referred
to as Final words of advice: If considering one of the Graegin notes, RUN THE NUMBERS. The income tax on the interest earned by the note may make the transaction less favorable than it may appear at first blush. The IRS lien requirements make the §6166 election a more burdensome and more costly alternative. ====================================================== Report by Eugene Zuspann Esq. For Mike’s Powerpoint presentation, go to HIPAA = Health Insurance Portability and Accountability Act of 1996 Although not defined in the HIPAA regs, there are two rules: What do we have clients sign in order to obtain their PHI? - a form that meets the requirements of the Agency Rule. Note that the term ‘Authorization’ is used in two different
contexts. The Release Rule sets out a number of elements that must be included in the release provided to the medical provider. Pg 15-16. Mike believes that you are not going to get all of this in your power of attorney or your trust agreement. There are no magic rules describing the requirements of the Agency Rule. The document must include an authorization to make decisions relating to health care. His outline (pg 13) provides language for a power of attorney. There is a problem with a springing power of attorney. This probably requires a physician to certify that the HCPOA is now effective. HIPAA does have the key to the springing power in §164.510(b)(3). If the individual cannot agree, the hospital may, in its professional judgement, determine that the disclosure is in the best interests of the patient and then the hospital may release the information. This is discretionary with the doctor or hospital and there is no requirement that the recipient be the health care agent that the individual has picked. Will and trust drafting issues. The client still need to sign The problem with documents arise when disqualifying an individual as executor/trustee if such individual is lacking competency. The executor/trustee has generally not given an agency document. You could seek an authorization from the person at the time of appointment but this is a bad way to start a relationship. You are also unlikely to put all required information in the will or trust agreement. Mike’s materials contain two alternative provisions that can be added to the instrument to deal with the incompetency of the trustee. The first provides that the fiduciary’s continued service is conditioned upon the fiduciary’s voluntary release of his/her PHI. The obligation to provide the release is purely discretionary with the fiduciary, but failure to provide a release is considered an automatic resignation. His language is in the materials at page 34. The issues in these provisions are harassment and the dependability of getting a certificate from physician. An alternative provision (pg 33) requires that the fiduciary is required to maintain a currently effective release. Mike finds this very troubling. There can be an inadvertent termination of fiduciary status. There are also waiver of right issues and privacy issues for the fiduciary. Another alternative is the appointment of a trust protector to make trustee decisions independently of proof (without cause). A fourth alternative is to appoint a family member to decide competency issues. Summary Q&A Session: Q: Must a release be a single purpose release? Q: Will releases that satisfy state law satisfy HIPAA? The release must satisfy HIPAA. However, the agency authorization for someone to sign the release will satisfy the HIPAA requirement because state law will govern the power of an agent.
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