Report No. 1 (Mon. 1/14)
As we have done in January for the last eleven years, and again with the
permission of the University of Miami School of Law Center for Continuing
Legal Education, we will be posting daily Reports to this list containing
highlights of the proceedings of the 42nd Annual Philip E. Heckerling
Institute on Estate Planning that is being held January 14-18, 2008 at the
Orlando World Center Marriott Resort and Convention Center in Orlando,
Florida, a new venue for the Institute starting in 2007. A complete listing
of the proceedings will be published here and is also available on the
Institute's Web site at http://www.law.miami.edu/heckerling.
We also will be posting the full text of each of these Reports on the ABA
RPPT Section's Web site, as we have since the 2000 Institute. Those Reports
can be found at URL http://www.abanet.org/rppt/meetings_cle/heckerling. In
addition, each Report can also be accessed at any time from the ABA-PTL
Discussion List's Web-based Archive at URL
http://mail.abanet.org/archives/aba-ptl.html.
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This Report covers the first Fundamentals Session that was presented on
Monday morning, January 14th. The next Report should cover the Recent
Developments session that was presented on Monday afternoon. Stay tuned to
find out what Congress is up to now with regard to tax reform.
Tina Portuondo, the Institute's Director, reported in officially opening
the Institute Monday afternoon that the attendance this year is slightly
down, but still close to the usual 2,500 people, and that the Institute has
recently decided to commit to it's current Orlando venue through the year 2012.
The ABA Probate Section's booth here in Orlando has announced a 20%
discount off of the Section member price for all it's publications during
the Institute, many of which are in stock here in Orlando. They also asked
us to announce that their chocolate treats are the best in the exhibit hall
(your editor agrees). Stop by and see what they are talking about. Tell
them we sent you.
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Fundamental Program #1
Preparing and Filing the Form 709: Who, What, How, When and Where
Presenter: Glen Yale
Reporter Craig Dreyer
Mr. Yale provided a comprehensive 182-page outline with a 54-page appendix.
His discussion highlighted the main points and began by providing that the
gift tax laws cast a very wide net. He noted the Form 709 reports the
transfers subject to gift tax, GST tax, allocation of lifetime GST
exemption, to opt-out of automatic GST exemption allocation, and to make
QTIP elections on inter vivos transfers. One Form 709 is filed for each
year; the versions also differ from year to year. The IRS has forms from
previous years to 1991, however he noted ACTEC fellows have access to forms
from 1941 if one is ever necessary.
Mr. Yale discussed how Gift and Estate taxes are both transfer taxes, but
they vastly differ in reporting. The Form 709 applies to all gifts during
the year and can also apply to a sale or an exchange. He noted there is an
exception for bonified arms length sales free of donative intent.
Furthermore, he noted the definition of gift uses objective facts and
circumstances and not on the subjective motives of the donor.
The leading case in the gift tax area is Dickman v. Commissioner, 465 US
330 (1984). It provided all transfers of property and property rights have
significant value. The case analogized the gift tax to the income tax on
"all income from whatever source derived." Mr. Yale discussed how Dickman
cast a broad net of potential gifts.
Complete v. Incomplete gifts. Mr. Yale mentioned the IRS considers a gift
is complete when the donor has so parted with dominion and control as to
leave in him no power to change disposition for his own benefit or for the
benefit of another. See 25-2511-2(b). The date of a complete gift is the
date when it is taxable and it also determines the valuation date. He also
said incomplete gifts need not be reported on a gift tax return.
Mr. Yale proceeded to provide a 10-step process for completing the 709 as
discussed below. His outline also included additional steps and information.
STEP ONE - Determine If Form 709 Filed.
Donor's in general. Generally limited to citizens and residents, but may
include some nonresident aliens. Gifts included in the $12,000 annual
exclusion are limited to present interest gifts. He noted a donor may need
to report all their gifts, if they have a gift over $12,000 to any one person.
Future interest. A Form 709 is necessary to elect a QTIP interest.
Terminable interests to a spouse do not need to be filed if they contain a
GPA. When splitting gifts both spouses need to file a return since there is
no joint return. Community property gifts are automatically split. For
joint gifts under common law as joint tenants and tenants by the
entireties, each spouse files a return. He noted only individuals file gift
tax returns; trusts, partnerships or corporations cannot file them.
STEP TWO- Determine What Gifts to Report
Annual exclusion gifts. Annual exclusion gifts are present interest gift of
$12,000 where the donee has immediate enjoyment. If there is any delay they
are a future interest. Mr. Yale noted a vested right to property is
insufficient to create a present interest. He also stated similar rules
apply to LLC and partnership interests. However, transfers to political
organizations, educational exclusions, and medical exclusions are not
taxable. For a gift to trust to qualify as a present interest three things
must be proven. First, the trust must receive income. Second, the portion
of income will flow steadily to beneficiaries. Third, the income flow can
be ascertained, which means can be valued.
Trust present interests. Persons with crummey withdrawal right must have
reasonable ability to make a withdrawal and there must no be a prior
understanding that there would not be a withdrawal. Mr. Yale also noted
2503(c) trusts are especially useful with divorce situations, since a
former spouse may exercise crummey rights for the child. A gift of closely
held corporation share is generally not a present interest gift. Payment of
debt of another is a present interest gift. He also mentioned forgiveness
of indebtedness to closely held corporation is generally not a present
interest.
Closely Held Interests. Gifts of closely held stock may not be a present
interest even if vested. See Rev. Rul. 76-360. See also Hackl v. Comm., 335
F3d 664. (Regarding LLC interests).
Gifts to Entities. A gift to a corporation is a gift to its shareholders.
Gifts to corporations are typically not a present interests. Chanin v. US,
393 F.2d 972. However, there is an exception for gifts to non-profit
corporations.
Reciprocal Transfers. Mr. Yale also briefly described the reciprocal gift
cases generally involving siblings. He also noted transfers to
intermediaries are generally disregarded for annual exclusion purposes.
Heyen v. U.S., 945 F.2d 359. He also noted there is a limit on the gift
exclusion to a non-U.S. citizen spouse.
Timing of Gifts. Real Estate is usually transferred upon filing of deed if
it is always in the hands of the donor or the donor's agent. The delivery
of the deed to the grantee is also a completed gift. Stock is transferred
upon a change of title on the books of the corporation or upon delivery of
the endorsed certificate. Charitable checks relate back to the time of
check. Non-charitable checks if not deposited and cleared by death they are
considered an incomplete gift, since the decedent can always cancel the
check anytime before death. Mr. Yale provided that one should make the gift
and deposit it in same year to get it included in that year.
Non-taxable gifts. Transfers to political organizations if formed to elect
a candidate are excluded, but not excluded if formed to advocate for an
issue. Educational exclusions apply regardless of the relationship between
donee and donor. Certain marital gifts, charitable gifts, and certain
qualified disclaimers are not reported, along with gifts to a US citizen
spouse. Gifts to a spouse must be terminable to get marital deduction,
except for a L.E. with GPA. There is no reporting required if all gifts to
charities are of an entire interest. Qualified disclaimers are not reported
(in writing, made 9 months after gift or death- no holiday rule),
non-qualified disclaimers may be gifts and they must be reported.
Powers of Appointment. Exercise, release or lapse of GPA may be a gift.
5 and 5 power. Sec 2514 (e) provides a lapse is a release. It is a taxable
gift if it exceeds the greater of $5,000 or 5% of aggregate value at time
of lapse. Each person gets one 5 or 5 power per year; if there is more than
one there is a GPA that will lapse. Mr. Yale also discussed how to value
such a lapse.
Step Three - Splitting Gifts
Decide whether spouse will split. One must file a form 709 to split gifts.
Community property is automatically split.
Requirements to split. Must be married at the time of the gift. If divorced
or widowed, and did not remarry during calendar year you can also split.
However the gift must have been during the lifetime of the deceased spouse.
One also cannot give spouse a GPA over the property transferred. He also
discussed how to consent to gift splitting. He noted the election must be
made on all gifts during a year, as one cannot pick and choose. However,
one can change the election from year to year. One also cannot elect after
the return is past due. One can remove the election if the return is still
within the time period. The consent to split does not give the spouse an
ownership interest. See Rev. Rul 54-246.
Community Property. Community property gifts are automatically split. No
gift tax returns are required to split. Additionally, it permits gift
splitting where one or both are NRA. Unlike split gifts, community property
gifts may receive a split interest discount.
Step Four - Complete part 1, page 1
Need to include Donor's name, they must be a US citizen or resident.
Nonresident aliens must include tangible property situated in the US and
intangible property if left in the US.
Filing other than by Donor. A Guardian may file on behalf of an incompetent
or an agent may file upon illness, absence, or non-residence of the
grantor. If an agent files an accompanying statement explaining the reason
for such agent filing must be included with the Form 709. Additionally, the
donor must ratify the return prepared when the donor is able to do so. An
agent for mere convenience of the donor cannot file a Form 709. An executor
on behalf of a deceased donor may file a Form 709.
Executor. Executor of deceased donor has an obligation to report taxable
gifts. They are obligated to determine if there are any unreported gifts
and must make reasonable inquiry into any unreported gifts. If a gift is
not reported the gift tax obligation rests on the donee.
Due Date. Gift tax returns are due April 15 of the year following, but can
be extended by a Form 4868, which automatically extends the time to file a
gift tax return for six months. Furthermore, the Form 8892 can extend the
Form 709 if one is not requesting additional time to file their income tax
return. However, a Form 709 cannot be due later that the Form 706.
Step 5- List gifts on Schedule A
529 plans. Line B provides a space to report for 529 (c)(2)(B) educational
plans. Mr. Yale notes it is clear how to report a gift of $60,000 to be
reported over 5 years. However, it is unclear how to average a less than
$60,000 gift over five years. Also can one allocate on a late gift tax
return? Must you file a late return or simply file in the year of election?
The qualified tuition programs qualify for annual exclusion, but not the
educational exclusion. They also qualify for GST annual exclusion.
A From 709 requires a donee's name and address, and relationship to donor,
and description of the gift.
Basis. The donor's basis on the gift tax return is the basis for income tax
purposes or exchange value. There is no need to prove the basis of assets.
There is also no need to show proof of basis to the donee. In 2011, when
there is no estate tax, but we do have a gift tax, the donor will be
required to provide a statement of basis. Currently, there is no rule
requiring anything to substantiate basis to the donee or the IRS.
Date of gift. The date of the gift is important for the three-year
inclusion rule, and important to note the year of the annual exclusion.
Column F shows the value of the gift. Mr. Yale also noted the donor can
choose to gift a minority interest of an asset, which is the unlike the 706
value where all assets are valued. Multiple minority interests may be
granted to multiple donees in multiple years. Column G shows split gifts,
with one-half an amount in Column F, so there is no possibility for a
valuation discount.
Part 2 Direct Skips. Includes gifts currently subject to gift tax and GST
tax. This does not include political gifts, medical, and annual exclusion
gifts. A skip person is a person two or more generation below the donor. A
trust is a skip trust if all persons with an interest in the trust are skip
persons. If any non-skip person has an interest in the trust will not be a
skip person. Non-family members are skip persons if they are under 37(1/2)
years younger. Mr. Yale also discussed the predeceased parent rule.
GST Tax exclusions. Certain direct skips are non-GST taxable gifts. Gift
tax annual exclusion, medical payments, and educational payments are
excluded from GST.
Deemed Allocation. Mr. Yale noted any unused portion of individual's GST
exemption will be allocated to extent necessary to make deemed allocation
ratio of a trust zero. One uses Column C to elect out. Under IRC Section
2632(B)(3), one can elect out, and attach a statement. One reports a direct
skip on timely filed 709 and paying GST tax is considered a statement. Mr.
Yale noted one good reason to elect out is if you own a trust with term
policy and insured is in good health.
ETIP. Mr. Yale also discussed the termination of an ETIP. He also noted
that before close of ETIP, the allocation of GST would not produce a zero
inclusion ratio. Also, if an ETIP terminates on date of death it can be
allocated GST on estate tax return.
Indirect Skips- (49) gifts to GST trust. A GST trust is instrument, which
could be a GST transfer with respect to the transferor. Mr. Yale noted this
provision was created to help people who inadvertently created GST trusts.
However, he recommends the advisor allocate GST or exempt out on a gift tax
return. One can elect one of three options under 2635(c)(5) for GST trusts.
Election 1) you may elect not to have automatic allocation rules apply to
current transfer made to a particular trust. Election 2) you may elect not
to have the automatic allocation rules apply to the current transfer or to
any future transfers to the trust. Election 3) you may elect for all
transfers to apply automatic allocation.
Step Six- Complete Schedule B
Schedule B is completed if gift tax returns were previously filed. Mr. Yale
noted one can list former gifts not reported, but it is probably better to
file old gift tax returns to start statute of limitations. Transfers prior
to 8/6/96 with tax paid cannot be adjusted; if no tax was paid then the
values can still can be adjusted any time. After 8/5/97 they cannot be
revalued if "finally determined." To be finally determined the gift must be
adequately disclosed. Adequately disclosed is when reported adequate to
apprise the IRS of the nature of the gift and the basis for the value so
reported. The return or statement attached to the return should provide i)
a description of the property transferred and any consideration received by
the transferor; ii) identity of and relationship of transferor to the
transferee; iii) If transferred in trust the trust's tax Id number and
brief description of trust terms or a copy of the trust instrument; (iv) a
detailed description of the method used to determine the fair market value
of the property transferred or submitting a detailed description of the
method used to determine the fair market value; (On detailed description
need financial data utilized in determining the value. Any restriction on
the transferred value of the property- description of discounts for
blockage, minority or fractional discounts, and lack of marketability.
Remember to check the box since you will not get SOL if one does not check
if there is a valuation discount); (v) a statement describing any position
taken contrary to any proposed, temporary, final regulation or revenue
ruling at the time of the transfer.
Disclosure. To provide adequate disclosure Publicly traded securities
should include the exchange where listed, the CUSIP number, and the mean
between highest and lowest selling prices on applicable valuation date. In
closely held entities, disclosure must be made of 100% of underlying assets
without regard to any discounts. The taxpayer bears the burden of proving
any discount taken.
Disclosure by appraisal. He also discussed the requirements for an
appraiser and the actual appraisal as provided in treasury regulation
section 301.6501(c)-1(f)(3).
Contrast of Estate and Gift Tax. Mr. Yale noted the difference from estate
value is in the gift transaction we are trying to freeze the value of the
asset. What is at stake in gift tax return is to make the value frozen and
stick in the estate process since it subject to review in the estate
process. He also noted the IRS will not treat salary as a gift if it is
consistently treated as salary (p.61). Income is treated as adequate
disclosure for gift tax purposes even though not reported for gift tax
purposes. An incomplete gift that is reported as a complete gift for gift
tax purposes will be adequately disclosed and start running of SOL even if
it is an incomplete gift. However, if incomplete gift is actually complete
gift and not adequately disclosed you do not get benefit of SOL (58).
Additionally with split gifts if one spouse meets the requirements of
adequate disclosure, the other spouse also receives the benefit.
Step Seven- Complete schedule C.
Schedule C is the computation of Generation-Skipping Tax.
Step Eight- Complete schedule A, part 4.
This reports the total amount of gifts from the donor. Mr. Yale noted that
GST tax paid on any direct skips reported on the return is also considered
a gift, and must be added to the other gifts reported on the return. Thus,
he noted we are paying tax on tax.
Step Nine- Imposition of Tax.
Mr. Yale noted as a resident you take the maximum credit listed. If one is
a non-resident alien, they strike out credit. He also noted one cannot
prepay tax and save unified credit for the estate tax return.
Step Ten - Sign and date the return.
Mr. Yale noted that if you have a living donor the return cannot be filed
prior to January 1st of the year the following the year the gift is made.
The deceased donor has a due date of the earlier of the due date of the
donor's estate tax return or the extended due date for filing the donor's
gift tax return.
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THE REPORTERS
Our on-site local reporters who are present in Orlando this year are Gene
Zuspann Esq. of Zuspann & Zuspann in Denver, Colorado; Joanne Hindel Esq.
of Fifth Third Bank in Cleveland, Ohio; Jason Havens Esq. of Howard, Mobley
& Havens PLLC in Florida and Tennessee; Kimon Karas Esq. of McCarthy,
Lebit, Crystal and Liffman Co., LPA in Cleveland, Ohio; Bruce Stone Esq. of
Goldman, Felcoski & Stone, PA in Coral Gables, Florida; Craig Dreyer Esq.
of McDonald Hopkins LLC in Cleveland, Ohio; Carol Sobczak Esq. of The Law
Offices of Carol A. Sobczak in St. Helena, California; Ronda Martinez Esq.
of Fifth Third Bank in Southfield, Michigan; and Mike Stiff Esq. of
Hutchins & Stiff LLC in Denver, Colorado. The editor again this year will
be Joseph G. Hodges Jr. Esq, a solo practitioner in Denver, Colorado, who
also is the Chief Moderator of the ABA-PTL List.
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GENERAL INFORMATION ABOUT INSTITUTE:
Inquiries/Registration:
Philip E. Heckerling Institute on Estate Planning
University of Miami School of Law
Center for Continuing Legal Education
P.O. Box 248087
Coral Gables, FL 33124-8087
Telephone: 305-284-4762 / FAX: 305-284-6752
Web site: www.law.miami.edu/heckerling
E-mail: heckerling@law.miami.edu
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NOTICE: Although audio tapes of all of the substantive session at the Miami
Institute currently are only made available to Institute registrants for
purchase, the entire proceeding of the Institute are published annually by
Lexis/Nexis. For further information, go to their Web site at
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proceedings is also available on CD ROM from Authority On-Demand by
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