Report No. 4 (Tue. 1/15)
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 Transferring Wealth to Parents and Siblings session
that was presented on Tuesday afternoon The next Reports will cover more
of the Tuesday sessions and some more of Jason Havens' reports from the
Exhibit Hall.
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Announcement: The Lackner Group has just announced the release of its
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What is it? Life Settlement NumberCruncher (LSNC) is easy-to-learn and
easy-to-use software designed to assist professionals and their clients in
the difficult decision of whether to retain or sell an existing life
insurance policy. This indispensable software is the first commercially
available professional tool to run economic "hold" (retain) or "fold"
(sell) numbers, an essential factor in the decision-making process.
Who it's for: LSNC software was expressly designed for life settlement
professionals, life insurance agents, life settlement brokers, attorneys,
CPAs, financial planners, and trust officers.
The Creators Steve Leimberg of Leimberg & LeClair and Mike Weinberg of The
Weinberg Group created LSNC with the assistance of Ben Weinberg of The
Weinberg Group and Vince Lackner of the Lackner Group.
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Can I Turn Right on Red? Yes, With Caution: Transferring Wealth to
Parents and Siblings
Tuesday, January 15, 2008
Presenter: Read Moore
Reporter: Joanne Hindel
Read Moore started off by saying that he would cover five basic strategies
for transferring wealth to parents and siblings: annual exclusion gift
strategies; nongift strategies; transactions with parents and siblings;
taxable gift strategies and estate planning strategies. In the time
allotted, he was able to cover four of the five strategies and made the
following points:
Annual Exclusion Gift Strategies
The easiest and most tax-effective way for a client to make gifts to
parents and siblings is to make annual exclusion gifts to them. Direct
transfers of cash and property to parents and siblings qualify for the
annual exclusion.
In addition, a client's payment of a parent's or a sibling's expenses or
obligations also are taxable gifts that qualify for the annual exclusion. A
client's payments directly to persons providing "medical care" to a parent
or sibling will qualify for the annual exclusion. Medical care includes a
child's payment of a parent's or sibling's physician bills and hospital
bills. A client's payments to a person who assists an elderly parent who
requires in-home care will also qualify. The client can also pay for the
costs of long-term care services as well as the expenses for an attendant,
even if the services of the attendant do not satisfy the definition of
qualified long-term care services. But only the portion of the services
related to medical care will be excludable.
A client can also pay a portion or all of medically necessary capital
expenditures and these will be excludable. Capital expenditures that
permanently improve property for the primary purpose of medical care are
excludable only if they are an essential element of treatment.
Payments by a client of the costs of the parent's alternative living
arrangements if they can no longer reside at home are excludable.
Paying for parents' and siblings' medical insurance premiums can provide
another means to make annual exclusion gifts in excess of $12,000.
Payments for qualified long-term care insurance contracts, within the
meaning of IRC § 7702B(b)(1), are also excluded, provided the annual cost
limits provided in IRC § 213(d)(10)(B) are not exceeded.
In addition to directly paying a parent's or sibling's medical expenses, a
client can also make certain tuition payments on a parent's or sibling's
behalf without making a gift.
In order to increase the amounts of gifts that a client can make and still
qualify for the annual exclusion a good method is to create an irrevocable
trust for the benefit of parents, siblings, spouses of siblings and
descendants of siblings and give each beneficiary a Crummey power. The IRS
has challenged these trusts particularly those where persons have no
interest in the trust other than a Crummey withdrawal right. Court
decisions in this area suggest that a trust of this kind will work, as long
as all the beneficiaries who have Crummey powers are current beneficiaries.
Nongift strategies
One way a client can effectively make a tax-free gift to his or her parents
or siblings is by providing services to the parent or sibling without
charge. A child who is an investment adviser, for example, can advise his
parents or siblings on their asset allocation and investment selection,
thereby providing for free what the parent or sibling would otherwise pay for.
Making a "gift" in this way can be especially powerful in the case of a
child who is a hedge fund or venture capital manager. A client who is a
professional, such as a physician, lawyer, or architect, can also provide
some services to a parent or sibling, but there will be some practical
limits to what the client can provide, particularly in the case of health
care professionals.
The principle that the gift tax applies only to gifts of property and not
to gifts of services is so fundamental that it is difficult to find court
decisions or IRS rulings that even address the issue.
If a child has an obligation to support a parent under state law, then the
child's payments in discharge of that obligation would not be subject to
gift tax. At common law children did not have an obligation to support
their parents. Some states, however, have enacted civil statutes that
require children to support their parents.
The statutes tend to require parents to be destitute. If a parent truly is
destitute, the child really has a moral obligation to support the parent,
backed up by a statute, and the IRS is unlikely to cause trouble in this
area. Beyond the obvious cases involving destitute parents, there are no
clear legal guidelines on what a child can pay without causing a gift tax.
A wealthy client may wish to take a parent or a sibling on a vacation,
perhaps using the client's private plane, or throw a big party for the
parent or sibling. More simply, a child could ask a parent to come to the
child's vacation home with the client for a few days. Is the child's
provision of benefits for a parent or a sibling in this situation a gift
that is subject to the gift tax? The gift tax applies only to gifts of
property. In the vacation or party situation, the parent is not making a
direct transfer of property to a parent or a sibling. The gift tax,
however, applies to indirect transfers of property as well as to direct
transfers of property:
Any transaction in which an interest in property is gratuitously passed or
conferred upon another, regardless of the means or device employed,
constitutes a gift subject to tax.
Can a client allow a parent or sibling to occupy real estate owned by the
client on a rent-free basis without gift tax consequences? In general, the
answer appears to be no under the United States Supreme Court's decision in
Dickman v. Commissioner, 465 U.S. 330 (1984).
Although Dickman involved interest-free loans, the Court's view of the gift
tax and the use of property quoted above is broad enough to support the
notion that if a client allows a family member to live in a residence on a
rent-free basis, the taxpayer will likely have made a gift of the foregone
rent. One way that clients can approach the rent-free use problem is to
jointly own property with a parent or sibling and allow the parent or
sibling to live rent-free on the property.
As long as the parties split the ownership expenses of the property, the
fact that the child does not receive rent from the parent should not result
in the child being deemed to have made a gift.
If, however, one co-tenant excludes or "ousts" the other co-tenants from
using the property, then the occupying co-tenant will be liable to the
other tenants for rent.
While joint ownership is more promising than merely allowing a parent or
sibling to use property on a rent-free basis, perhaps the best way to allow
a parent or sibling to use property on a rent-free basis is for a trust for
the benefit of the parent or sibling to allow the parent or sibling to use
the property without rent.
Transactions with Parents and Siblings
Intrafamily transactions may qualify for the "ordinary course of business"
exception if there is sufficient evidence of a genuine business arrangement
(arm's length negotiation and lack of donative intent). Transfers to family
members, however, are subject to special scrutiny and are presumed to be
gifts despite any business relationship between the parties.
If a client does not own a family company in which he or she can employ a
parent or sibling, can the client contract with the parent to provide
personal services to the client in exchange for compensation? For example,
could a child pay a parent or sibling for babysitting or gardening? How
about for fixing things around the house or setting up the client's home
theatre or wireless computer network? Cooking? Security? As a legal matter
the answer is yes, but as with all intrafamily transactions the transaction
will be scrutinized to determine whether it is a gift.
If a client and his or her parents or siblings cannot come up with a way in
which the parent or sibling can provide services to the client in exchange
for compensation, could the client agree to pay a parent or sibling for not
doing something? Under contract law, an individual's agreement to not do an
act, such as smoking, is consideration that supports an enforceable
contract. The limited gift tax-related authority in this area suggests that
the answer is no even though contract law would recognize the contract.
One simple way a wealth client can assist a parent or sibling is by lending
the parent or sibling money, which the parent or sibling could either spend
or invest to produce income.
If the purpose of the loan is to provide spending money to a parent or
sibling, one obvious issue that will come up is how the parent or sibling
will repay the loan. The parties could structure the loan as a line of
credit, which will allow the borrower to borrow only what he or she needs
from time to time.
If, however, the client could make the loan to a grantor trust for the
benefit of the parent or the sibling, many of the income tax inefficiencies
may disappear.
Taxable Gift Strategies
Clients often want to make bequests to their parents and siblings in their
estate plans. From a tax perspective, however, the client would be better
off making a taxable gift to the parent or sibling than making a taxable
bequest. One obvious reason is that the annual exclusion is available for
the first $12,000 of a gift of a present interest. In addition to the
annual exclusion, however, is the fact that the government taxes gifts at a
lower rate than transfers at death and most states do not impose a gift tax.
Gift tax law allows a donor to make a gift to a donee on the condition that
the donee pays the gift tax - a "net gift." A net gift is best made in
January of a given year, which permits a tax-free gift of 15 months of
interest or dividends.
If the client is interested in making a gift of income-producing property,
several factors suggest that an irrevocable trust is a much better way to
make the gift. Trusts provide creditor protection, which may be important
in the case of a spendthrift parent or sibling, who could squander the
income (and principal, through a sale) if the client made an outright gift
of an income-producing property. Another benefit of using an irrevocable
trust as a vehicle for a gift of income-producing property is the fact that
the client can make the trust a grantor trust and pay the income on the
trust's income that is distributed to the parent or sibling.
Read Moore's presentation was thorough and thought-provoking and his
outline provides additional details on this strategies for transferring
wealth to parents and siblings.
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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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Headquarters Hotel - Orlando World Center Marriott
8701 World Center Drive
Orlando, FL 32821
Telephone (407) 239-4200, FAX (407) 238-8777
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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
http://www.lexisnexis.com/productsandservices. The text of these
proceedings is also available on CD ROM from Authority On-Demand by
LexisNexis Matthew Bender. For further information, contact your sales
representative, or call (800) 833-9844, or fax (518) 487-3584, or go to
http://www.bender.com, or write to Matthew Bender & Co., Inc., Attn: Order
Fulfillment Dept.,1275 Broadway, Albany, NY 12204.
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