Tax, Trusts & Estates Law Monitor

Supreme Court Finds No Extended Limitations Period for Basis Overstatement

Jeffrey H. Schechter — Tue, 01 May 2012 08:30:21 -0500

The U.S. Supreme Court recently held that an overstatement of basis did not trigger the extended six-year statute of limitations assessment period under Internal Revenue Code Section 6501(e)(1)(A) (United States v. Home Concrete & Supply LLC, U.S., No. 11-139, 4/25/12).

The Court in a 5-4 split decision affirmed a U.S. Court of Appeals for the Fourth Circuit decision holding that an understatement of income resulting from overstatement of basis in goods sold is not an omission from gross income triggering the extended assessment period.

Under Section 6501(e), the normal three (3) year statute is extended to six (6) years if the taxpayer omits gross income in excess of 25% of the amount stated on the return. This decision essentially clarified the Court’s 1958 ruling in Colony, Inc. v. Commissioner in determining that misstatements of basis in property do not fall within the scope of Section 6501(e)(1)(A) which calls for the extended limitations period. In addition, the decision rejected the Government’s argument that a recently promulgated Treasury Regulation interpreting the statute in its favor should be given deference since Colony had already interpreted the statute and any construction inconsistent with Colony was not available.

For Corporations, a "Virtual Office" in New Jersey Can Lead to an Actual Tax

Kenneth L. Baum — Fri, 20 Apr 2012 08:08:27 -0500

For out-of-state corporations that do business in New Jersey through the use of “virtual offices,” the recent decision by the Appellate Division of the Superior Court of New Jersey in Telebright Corporation, Inc. v. Director, New Jersey Division of Taxation is a reminder that employees who “telecommute” from New Jersey will not relieve their employers of certain corporate tax obligations.

Telebright Corporation, Inc. (“Telebright”), which was incorporated in Delaware and maintained its offices in Maryland, employed a woman who lived in and telecommuted from New Jersey. Her job was developing and writing software code from a computer in her home, which she uploaded to a repository on Telebright’s remote computer server. Other than attending company-wide meetings in Maryland once or twice a year, she worked entirely from her home.

From the beginning of the employee’s tenure, Telebright withheld New Jersey income tax from her salary and remitted it to the New Jersey Division of Taxation (“Taxation”). Taxation determined that Telebright was subject to the New Jersey Corporation Business Tax Act (“CBT Act”) and, thus, was required to file New Jersey Corporation Business tax returns. The New Jersey Tax Court upheld that determination, and Telebright appealed to the Appellate Division. On appeal, Telebright did not dispute that the employee’s activities satisfied the statutory test for “doing business” under the CBT Act. Instead, Telebright argued that applying the CBT Act to those limited activities violated the Due Process and Commerce Clauses of the United States Constitution.

In support of its due process argument, Telebright claimed that upholding the CBT tax against it would allow a state to tax any corporation whose employees resided in that state. The court in Telebright rejected that argument, reasoning that Taxation imposed the CBT tax because the employee worked for Telebright on a full-time basis in New Jersey, and not because she lived there. Taxing a business based on the presence of a full-time employee, the court held, does not violate the Due Process Clause. The court further reasoned that if the employee violated the restrictive covenant in her employment contract, Telebright could file suit against her in the New Jersey courts. Thus, Telebright had sufficient minimum contacts with New Jersey to justify taxation under the CBT Act, consistent with the Due Process Clause.

The court in Telebright then addressed Telebright’s argument that imposition of the CBT Tax violated the Commerce Clause. As the court noted in citing Supreme Court precedent, imposition of a tax does not violate the Commerce Clause if the tax (i) is applied to an activity with a substantial nexus with the taxing state, (ii) is fairly apportioned, (iii) does not discriminate against interstate commerce, and (iv) is fairly related to the service provided by the state. Telebright did not dispute that the latter three prongs of this test were satisfied, arguing only that employing one person in New Jersey does not create a “definite link” or “minimum connection” between Telebright and the state. Notably, Telebright also argued that, given the prevalence of telecommuting, taxing companies on the basis that their employees work from remote locations would impose “unjustifiable local entanglements” and an undue accounting burden on those companies.

The court in Telebright rejected that argument, holding that the fact that Telebright’s full-time employee worked from a home office, rather than one owned by Telebright, is immaterial for purposes of determining whether the employee’s activity had a “substantial nexus” with New Jersey. As the court noted, the employee produced a portion of Telebright’s web-based product in New Jersey, and the company clearly benefited from all of the protections afforded to the employee under New Jersey law. Thus, because the tax related to an activity with a substantial nexus with New Jersey, the application of the CBT Act did not violate the Commerce Clause. Accordingly, the Appellate Division affirmed the Tax Court’s decision.

The Appellate Division’s decision in Telebright is instructive for corporations seeking to economize by establishing virtual offices in New Jersey. While maintaining such offices may allow corporations to reduce the traditional cost of maintaining a physical presence in New Jersey, the presence of even one employee in the state is sufficient to trigger the most familiar of business expenses: the corporate business tax.

Power of Attorney Permits Revocation of Living Trust in New Jersey

Steven M. Saraisky — Tue, 10 Apr 2012 08:35:03 -0500

An agent acting under a power of attorney can revoke an existing trust created by the principal and transfer assets to a new trust, a New Jersey Chancery Court has held.

Mildred Quick Muller created a revocable trust that was amended and restated in 1998. JP Morgan Chase was the trustee. In 2010, at age 97, Muller executed a new Will and new revocable trust. In the new trust, she named her great-nephew, James Neiman, as trustee. She also named Neiman as her agent under her power of attorney.

Neiman, acting under the power of attorney, sought to transfer $3.6 million in assets in the 1998 trust to the new 2010 trust. JP Morgan, the trustee of the 1998 trust, refused to make the transfer and sought direction from the Chancery Court. The court found that the 1998 trust permits the grantor to instruct the trustee to completely deplete the assets of the trust. The court found that the power of attorney granted Neiman full and complete power and discretion to take any actions that Muller could take, including transferring accounts to a trust of which Muller was the beneficiary. Accordingly, the court found that Neiman could effectively terminate the 1998 trust under the power of attorney, and direct the transfer of the assets into the 2010 trust.

This is a helpful decision, especially in assisting clients who are incapacitated. Flexibility is critical in estate planning, and this decision allows for greater flexibility by upholding a power of attorney holder’s broad right to act on the principal’s behalf. Having a power of attorney that grants broad powers to an agent is a practical and essential component of most estate plans.

Estate of Mildred Quick Muller, Essex County Chancery Court, unpublished opinion.

Gifting to a Spousal Lifetime Access Trust

Marc R. Berman — Fri, 30 Mar 2012 13:10:37 -0500

As we have previously advised our clients, there is a $5 million gifting exemption per person that is available under the current law through December 31, 2012. It is unclear at this point as to whether this benefit will ultimately be extended or eliminated. Because of that, we are recommending that our clients look seriously at taking advantage of this benefit as the year progresses. We recognize that some clients may be reluctant to actually make asset transfers to children that they are no longer able to access for themselves, so we want to bring to your attention a type of trust that should eliminate any such fears: a Spousal Lifetime Access Trust (SLAT).

Under such a trust, a husband and a wife can each gift assets into a trust for the other and your children, that can be accessed by the other (since they will be the sole trustee) for the health, education, maintenance or support of any of these beneficiaries. There are technical provisions these trusts should include to avoid any potential estate tax problems associated with the “reciprocal trust doctrine”. If done properly, each spouse could gift $5 million into a trust for the other, together utilizing the $10 million of exemptions. The value in these trusts, once the two spouses pass away, including the appreciation on the assets that were gifted, will avoid estate taxation. This is a very appealing option, because as the Trustee of the other's Trust, each spouse could continue to utilize the assets for the enumerated reasons.

There are ways to further enhance this benefit by gifting assets that can be discounted, and we can discuss with you how to maximize any tax savings. Please feel free to call any of our attorneys to discuss whether this idea is appropriate for you, and pay attention to the looming deadline of December 31, 2012.

March Interest Rates Remain Historically Low

Gary A. Phillips — Fri, 02 Mar 2012 08:25:14 -0500

In a blog post on February 29, we highlighted the opportunities to implement significant estate planning in 2012, and the possibility that these opportunities may expire if not acted upon. We want to add that the IRS interest rates in March remain historically low, making certain estate planning techniques even more attractive.

The March 7520 rate remains unchanged from February at 1.4%. What this means for GRATs, for example, is that the annuity payments that get paid back to the grantor are calculated based on a 1.4% interest rate, as opposed to a historically much higher interest rate. If the underlying assets of the GRAT grow at a greater rate than 1.4%, the GRAT becomes an even more powerful wealth transfer vehicle.

In connection with sales to grantor trusts, if a three year promissory note is utilized, the interest rate on the note could be as low as 0.19%. If a nine year note is used, the minimum interest rate could be as low as 1.08%. These low interest rates mean less money needs to be paid to the grantor, resulting in more assets passing to the trust beneficiaries.

In short, the low interest rate environment makes certain estate planning techniques even more compelling in 2012.

Tax Planning Opportunities in 2012

Steven D. Leipzig — Wed, 29 Feb 2012 10:00:44 -0500

Significant estate tax planning opportunities which are available under current legislation may be eliminated or severely restricted after December 31, 2012. It is therefore critical to evaluate whether steps should be taken this year to maximize estate tax savings.

For the following reasons, 2012 is the year to implement tax reduction strategies:

The federal law provides for a $5.12 million gift tax exemption through year-end which creates significant gifting opportunities. On January 1, 2013, the exemption is scheduled to be reduced to $1 million.
Powerful concepts available under current law such as valuation discounts for interests in family entities and transfers to Intentionally Defective Grantor Trusts (“IDGTs”) and short term Grantor Retained Annuity Trusts (GRATs) may be restricted under new tax legislation.
Lifetime gifts can achieve significant New Jersey or New York estate tax savings. Neither state has a gift tax and, unlike the federal estate tax, lifetime gifts are generally not taken into account in the calculation of New Jersey or New York estate taxes.
Market conditions may produce lower asset valuations, particularly with respect to real estate, which is beneficial from a tax perspective.
The low interest-rate environment enhances the tax benefits of several planning strategies that are interest-rate sensitive.

This article published recently in the New York Law Journal highlights these important issues.

New Jersey Bill Introduced To Increase The New Jersey Estate Tax Exemption To $1 Million

Gary A. Phillips — Thu, 09 Feb 2012 11:50:01 -0500

In January, a bill was introduced in the New Jersey Legislature to increase the New Jersey estate tax exemption from $675,000 to $1 million. The reasoning advanced by the sponsoring senators to increase the exemption is that the $675,000 threshold is “archaically” low, and is forcing small businesses and their owners to shut down and leave the state.

The exemption amount sets the threshold amount of assets that can pass New Jersey estate tax free to someone other than a surviving spouse. Under current law, assets in excess of $675,000 passing to someone other than a surviving spouse will trigger a New Jersey estate tax. A New Jersey taxpayer who owns $1 million of assets at death and bequeaths them to a child would incur a $33,200 New Jersey estate tax under current law. Under the proposed bill, this situation would produce no New Jersey estate tax.

The threshold for filing a New Jersey estate tax return also would be increased to $1 million under the proposed bill.

Note that in 2012, the federal exemption amount is $5,120,000, but if Congress fails to act in 2012 and change the law, the exemption amount would be reduced to $1 million (adjusted for inflation).

We will keep you posted on the status of this bill.

IRS Announces Third Offshore Voluntary Disclosure Program

Steven M. Saraisky — Thu, 02 Feb 2012 16:07:10 -0500

The IRS announced a third voluntary disclosure program for offshore accounts recently. The IRS has conducted two prior voluntary disclosure programs – one in 2009 and one in 2011. According to the IRS, it had 33,000 disclosures from the 2009 and 2011 programs. The Service has closed approximately 95% of the 2009 cases and collected approximately $3.4 billion in payments. The IRS also stated that it has collected approximately $1 billion in up-front payments as a result of the 2011 program.

The third voluntary disclosure program does not have a set termination date and includes a top penalty rate of 27.5%, slightly higher than the top penalty rate in the 2011 program. IRS Commissioner Douglas Shulman said that the Service’s focus on offshore tax evasion continues to produce strong, substantial results.

The IRS has also pursued a number of international banks to disclose the names and records of customers with undisclosed offshore accounts, and now also requires the filing of a Form 8938 for taxpayers to disclose specified foreign financial assets.

The third voluntary disclosure program may be a benefit to taxpayers who have not disclosed offshore accounts previously and were otherwise facing uncertainty as to how the IRS would treat their disclosures. If you have questions about the program please contact us.

NJ Tax Court Finds Gift in Contemplation of Death Subject to Inheritance Tax

Steven M. Saraisky — Wed, 01 Feb 2012 16:21:07 -0500

After meeting with a lawyer who advised him about divesting himself of assets so that he one day would be able to qualify for Medicaid, Peter Muscle, age 88, made a gift to his girlfriend of PSE&G stock having a value just over $1 million. He died six months later.

As most readers know, New Jersey has both an estate tax and an inheritance tax. The estate tax is triggered on a decedent’s assets that exceed $675,000. The inheritance tax is imposed on assets that do not pass to a spouse or lineal descendants. Since New Jersey does not have a gift tax, gifting assets away during lifetime under some circumstances can have the effect of saving New Jersey transfer taxes.

However, the inheritance tax law (but not the estate tax law) also contains a rule that gifts made in contemplation of death are pulled back into the decedent’s estate and subject to inheritance tax. See NJSA 54:34-1(c). Furthermore, if the decedent makes a transfer without adequate consideration of a material portion of the decedent’s estate within three years of death, then the burden of proof switches to the estate to prove that the gift was not in contemplation of death.

In this relatively straightforward case, the court did not believe the estate’s explanation that the gift was made in celebration of marriage, and held that the estate failed to carry its burden of proof. The gift was therefore made in contemplation of death and was subject to New Jersey inheritance tax.

Gifts are an effective planning technique to reduce state level estate tax exposure, but advisors need to be aware of this risk in New Jersey inheritance tax cases.

Year-End Planning - Individuals 70 ½ or Older Should Consider Charitable Gifts from IRAs

Steven M. Saraisky — Tue, 20 Dec 2011 12:56:08 -0500

The Internal Revenue Code currently provides a tax break for individuals age 70 ½ or over to make distributions of up to $100,000 from an IRA to a charity and exclude the distributions from taxable income. This generally results in tax savings compared to either (1) the taxpayer making charitable gifts using other, after-tax assets, or (2) the taxpayer taking a distribution from his or her IRA and then contributing the distributed funds to a charity. Because the amount distributed from the IRA to charity is not included in taxable income, it is not subject to the 50%/30%/20% of AGI limitations on charitable deductions.

This provision is set to expire on December 31, 2011. Taxpayers who are planning year-end charitable contributions should consider whether the contribution may be completed using IRA assets.

Termination of Life Insurance Policy with Loans in Excess of Basis Triggers Gain

Steven M. Saraisky — Sun, 18 Dec 2011 12:46:07 -0500

Sometimes a client owns life insurance and borrows against the policy in order to pay premiums. After many years of this, it is not unusual for the loans against the policy to exceed the owner’s basis in the policy. If the policy is then terminated (ie, the client surrenders the policy or just stops paying the premiums), the client often is surprised to learn that the termination triggers income tax on the difference between the amount of the outstanding loan and the basis in the policy.

The seminal case on this issue is Atwood v Comm’r (TC Memo 1999-61). In Atwood, the Tax Court found that when the policy is disposed of (surrender, lapse or life settlement), the relief of the outstanding liability is tantamount to a cash distribution and is therefore taxable to the extent it exceeds basis.

In a recent appellate level decision, the 10th Circuit affirmed a Tax Court decision on the same issue. McGowen v Comm’r, 108 AFTR 2d 2011-6063 (10th Cir 2011), aff’g TC Memo 2009-285. In this case, the taxpayer purchased a single premium life insurance policy in 1986. By 2004, the loan on the policy exceeded its cash value. The insurance company notified the taxpayer that she needed to make a minimum payment on the loan in order to keep the policy in force. The taxpayer failed to make any payment, and the insurance company cancelled the policy and sent a 1099 reflecting over $500,000 of taxable income. The taxpayer claimed that the income was cancellation of indebtedness (“COD”) income and excludible because she was insolvent at the time. But the Tax Court disagreed, finding that the debt was not discharged but rather was repaid in effect by transferring an appreciated asset (the built-up cash value of the policy). The 10th Circuit affirmed, finding that the taxpayer was not insolvent at the time the policy was terminated.

These cases usually involve inadvertent terminations of the life insurance policy, and this was the case in McGowen where the taxpayer likely ignored the insurance company’s notices about the consequences of a policy termination. If a client is aware of this issue, there may be viable alternatives to prevent such an adverse result, such as keeping the policy in force until death but significantly reducing the death benefit so that the premiums are significantly reduced.

Gudie Illustrates the Risks Faced by Fiduciaries

Steven M. Saraisky — Fri, 16 Dec 2011 11:12:33 -0500

One of the most basic reasons to have a Will is to name an executor. The executor gathers and manages assets, administers the estate, pays bills, pays taxes, and ultimately distributes the estate assets to the decedent’s beneficiaries. The “paying taxes” part of the job can be difficult. People don’t like to pay taxes. Also, if there are substantial non-probate assets, or different beneficiaries sharing disproportionately in the estate, the allocation of taxes among the beneficiaries can be a very significant issue. The executor also is responsible for dealing with tax authorities, not always a desirable job.

These types of issues came to a head in the recent Tax Court case of Gudie v Comm’r. Decedent, a California resident, held her assets in a living trust (ie, non-probate asset) with her two nieces as successor co-trustees. During her lifetime, decedent entered into an unusual private annuity transaction, selling her assets to her nieces in exchange for their promise to pay her an annuity. Although no payments related to the transaction ever were made, decedent’s estate tax return reported that the decedent’s $8 million liability from the private annuity transaction exceeded the decedent’s $7 million in assets, so no estate tax was due. Perhaps not surprisingly, the IRS challenged this position, and sent a deficiency notice to one of the nieces.

The niece raised the “wrong taxpayer” defense, arguing that, even though she had signed the estate tax return, she was only a co-trustee and had never been formally appointed as the executor of the decedent’s probate estate, so she was not the proper party to be notified of the deficiency. Again unsurprisingly, the Tax Court rejected this argument, and denied the niece’s motion to dismiss the case. The court found that the niece was a “statutory executor” under the tax rules and was the proper person to receive the deficiency notice.

This case highlights some of the risks faced by fiduciaries of trusts or estates. The successor trustee in this case attempted a weak argument to try to avoid the alleged tax deficiency, and lost. The estate administration process is often complicated and needs to be attended to carefully.

Disinheriting a Loved One

Gary A. Phillips — Wed, 14 Dec 2011 15:25:44 -0500

As estate planning attorneys, it is not uncommon for us to be confronted with clients who, for whatever reason, make the decision to disinherit a family member. While a spouse is not legally permitted to completely disinherit a surviving spouse due to elective share statutes, there is no legal restriction from disinheriting children.

Here is a link to an article in last week’s New York Times, which discusses disinheritance from a child’s point of view. We thought it was interesting and worthwhile to share.

Important Inflation Adjustments in 2012 to Applicable Exclusion And GST Amounts

Gary A. Phillips — Mon, 07 Nov 2011 10:10:06 -0500

On October 20, 2011, the IRS released Revenue Procedure 2011-52, which announced inflation adjustments to the applicable exclusion amount beginning in 2012. For an estate of any decedent dying during calendar year 2012, the applicable exclusion is increased from $5 million to $5.12 million. This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.

The $13,000 gift annual exclusion has not been increased.

Note that the present tax law provides that if there is no change in the law prior to December 31, 2012, the applicable exclusion will be reduced to $1 million, subject to inflationary adjustment. Due to this potential decrease in the lifetime gift exclusion, now is the time to seriously consider gifting options before they are limited.

Other items of note that also are subject to inflationary adjustment in 2012 include the social security wage base, which increases from $106,800 in 2011 to $110,100 in 2012, and the maximum amount that can be deferred into a 401(k) from $16,500 to $17,00

IRS Retreats on Employer-Provided Cell Phones

Steven M. Saraisky — Fri, 14 Oct 2011 09:18:41 -0500

This post should provide fodder for all the tax reformers out there who want to simplify the tax code. Employers, employees take note: the IRS has simplified the recordkeeping requirements for employer-provided cell phones! Uh, sort of.

Let us explain: the Internal Revenue Code defines gross income as all income from whatever source derived. Gross income of course includes things like compensation for services, but it also includes fringe benefits received by employees from their employers, such as car services, nonqualified moving expenses, etc.

There are exceptions to the fringe benefit rule. For example, Code §132(a)(3) provides that gross income does not include any fringe benefit which qualifies as a “working condition fringe,” that is, a work-related benefit that would be deductible if the employee had to pay for it. Code §132(a)(4) provides that gross income does not include any fringe benefit which qualifies as a “de minimis fringe,” that is, property or a service so small as to make accounting for it unreasonable or administratively impracticable. There are substantiation requirements for these fringe benefits. In addition, there are “heightened substantiation rules” for property specifically listed by Congress because it is subject to “abuse.”

Prior to the Small Business Jobs Act of 2010 (the “Act”), employer-provided cell phones were listed property and subject to the aforementioned heightened substantiation rules. But the Act, among other things, removed employer-provided cell phones from the heightened substantiation list.

The IRS has now come out with its own guidance, clarifying its position on whether employer-provided cell phones are taxable fringe benefits. The IRS takes the following position: although an employee’s use of an employer-provided cell phone is a fringe benefit and generally includible in income, if the employee’s use of the phone is for business purposes such that it would be deductible by the employer, then the business use of the cell phone qualifies as a working condition fringe and is excludible from the employee’s income. Furthermore, if an employer provides a cell phone to an employee for business reasons (the “business reason cell phone”), then the employee’s use of the cell phone for personal calls is a de minimis fringe and also is excludible from income. Notice 2011-72. Employers no longer have to record which of the employees’ calls are business and which are personal. Employees no longer have to report the cost of those personal calls (paid by the employer) as income.

On the other hand, if the employer provides the cell phone to the employee only to promote morale or goodwill (the “non-business reason cell phone”), then the value of the phone and service is a taxable fringe benefit.

So, are the rules simplified, still overly complex, or both? Is the IRS’ position on employer-provided cell phones sound tax policy that gets to the core principle of taxing income in any form, or does it represent everything that is wrong with America today (is this really what Congress does)? We leave these questions for our readers to answer.

New York Follows IRS in Eliminating Two Year Time Limit on Innocent Spouse Equitable Relief Claims

Steven M. Saraisky — Fri, 14 Oct 2011 09:15:07 -0500

The New York Department of Taxation and Finance recently announced that it will follow the IRS and eliminate the two year time limit for innocent spouse equitable relief claims.

For federal tax law purposes, a taxpayer can request innocent spouse relief by any of three methods: (1) making a timely election within two years from the date the IRS has begun collection activities (and meeting other requirements), (2) electing to allocate a tax deficiency in proportion to each spouse’s contribution to the deficiency, or (3) by petitioning the IRS for “equitable relief” when relief is not available under the first two alternatives if it would be inequitable under the circumstances to hold the spouse liable.

Pursuant to 2002 regulations, an innocent spouse equitable relief claim (the third method above) had to be made within two years of the date that the IRS began collection activities. But in July, 2011, the IRS repealed this requirement. Notice 2011-70.

New York has similar innocent spouse rules. New York Tax Law §654. On September 27, 2011, New York announced that it will follow the IRS’ lead and also will eliminate the two year time limit on innocent spouse equitable relief claims. TSB-M-11(11)I. This change may apply to pending and past innocent spouse claims as well.

Tax Court Finds FLP Assets Includible in Decedent's Estate but Permits Faulty Crummey Gifts to Qualify for Annual Exclusion

Steven M. Saraisky — Fri, 14 Oct 2011 08:08:09 -0500

Estate planners frequently prepare both life insurance trusts and family limited partnerships. These planning tools are similar in that the client has ongoing administrative and management jobs after the legal work has been completed. With life insurance trusts, clients typically have to manage a new bank account for the trust, prepare and send proper Crummey notices, keep trust records, etc. With family limited partnerships, clients have to make investment and distribution decisions, and manage the partnership as a legitimate business. Lawyers always are concerned about whether a client will properly administer the planning after the legal work has been completed.

In Estate of Turner, a recent Tax Court case (TC Memo 2011-209), the IRS asserted two arguments – (1) that the decedent had not managed his family limited partnership as a legitimate business, and therefore all of the partnership assets were includible in his estate under Code §2036, and (2) that the decedent’s faulty annual exclusion gifts to his insurance trust failed to qualify for the $13,000 per person per year annual exclusion.

The court found for the IRS on the Code §2036 claim, finding that there was no bargaining among the family members in creating the family partnership, that the decedent commingled personal and partnership funds when he used partnership funds to make gifts, pay premiums on life insurance policies and pay legal fees, that the partnership was not funded for at least eight months following the formation of the entity, and that the decedent treated the partnership as his own at-will investment account.

However, the court found for the estate on the issue of annual exclusion gifts. Even though the decedent had paid the insurance premiums from his own funds rather than gifting funds to the trust (which the trustee could then use to pay premiums), and even though no Crummey notices had been sent to the trust beneficiaries, the court found that the premium payments were indirect gifts that qualified as “present interest” gifts for purposes of the annual gift tax exclusion.

Clients who have struggled to follow the administrative requirements of an insurance trust to the letter (and their advisors who have explained it to them) can take heart from the second part of the Tax Court’s opinion in this case. Like the Crummey and Cristofani cases before it, Turner represents another taxpayer victory on the issue of present interest gifts to insurance trusts.

Tax Alert: The IRS Announces New Voluntary Worker Classification Settlement Program

Jeffrey H. Schechter — Fri, 07 Oct 2011 12:53:37 -0500

On September 21, 2011 the IRS announced a new program to permit taxpayers to voluntarily reclassify workers as employees rather than independent contractors for employment tax purposes with minimal tax consequences for prior years. The new program is called the Voluntary Classification Settlement Program (“VCSP”) and permits employers to make the change with minimal federal tax consequences. To be eligible, an applicant must meet the following criteria:

• Consistently have treated the workers in the past as non-employees.
• Have filed all required Forms 1099 for the workers for the previous 3 years.
• Not currently be under audit or investigation by the IRS, the Department of Labor or any State agency concerning the classification of these workers.

In exchange for prospectively treating the workers as employees for future tax periods, the taxpayer will only have to pay an amount equal to 10% of the employment taxes that may have been due related to compensation paid to the workers for the most recent tax year. This typically equals just over 1% of compensation. No interest or penalties will be due on the liability and the taxpayer will not be subject to an employment tax audit with respect to the worker classification issue for prior years. Taxpayers participating in the VCSP must agree to extend the period of limitations on assessment of employment taxes for 3 years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed to begin treating the workers as employees.

Before participating in the program other issues need to be considered including, without limitation employee benefits, retirement plans, wage and hour and state tax considerations.

You should consult a qualified professional with respect to these issues.

Historically Low AFR For October

Gary A. Phillips — Mon, 26 Sep 2011 09:16:06 -0500

The IRS recently released the Applicable Federal Rate, or “AFR,” for October, 2011. The AFR is a key interest rate used in connection with a number of the more sophisticated estate planning techniques, such as grantor retained annuity trusts (“GRATs”), sales to intentionally defective grantor trusts, and qualified personal residence interest trusts (“QPRITs”).

The mid-term AFR for October is 1.4%, which is historically low. This means that GRATs, sales to grantor trusts, and intra-family loans are even more attractive in October because the amount that is required to be paid back to the donor under these techniques is relatively lower due to the extremely low interest rate.

On the other hand, techniques in which the value of the gift is dependent upon the value of the income interest retained by the grantor, such as QPRITs or charitable remainder annuity trusts (“CRATs”), are not as attractive. For these techniques, the low interest rate leads to a lower value for the retained interest and a higher value for the remainder interest, thereby resulting in a larger taxable gift when the technique is implemented.

With the increased lifetime gift exclusion ($5 million in 2011 and 2012) and the possibility that the use of GRATs may be restricted in the future, now may be the time to explore some of the estate planning approaches that have been enhanced by historically low interest rates.

New York Trust Decanting Law Substantially Revised

Steven M. Saraisky — Thu, 22 Sep 2011 08:17:36 -0500

On August 17, 2011, New York Governor Andrew Cuomo signed legislation that substantially revises New York’s trust decanting statute, NY EPTL 10-6.6. New York was the first state to enact a decanting law in 1992. The statute offers one effective method to revise or update otherwise irrevocable trusts. The revisions to the statute significantly expand its scope, including the following changes:

“Absolute discretion” standard expanded. Under the old New York law, the trustee had to have “absolute discretion” to invade the trust principal in order to be able to decant the trust. The new law relaxes this requirement.

Under the new law, if the trustee has “unlimited discretion” to distribute the trust principal, the trustee may decant the trust in favor of one or more of the trust beneficiaries, to the exclusion of others. Similarly, the remainder beneficiaries of the new trust can be one or more of the remainder beneficiaries of the old trust, to the exclusion of others.

For example, if a trust permits distributions to any of four children for the “best interests” of any of them, the trustee could decant the entire trust in favor of only one of the children. The rationale is that such a distribution falls within the trustee’s broad discretion under the terms of the trust.

If the trustee does not have “unlimited discretion” – for example, the trust only permits principal distributions according to a “health, education, maintenance and support” standard – then the trustee still may decant the trust, but the beneficiaries of the new trust must be the same as the old trust, and the new trust must contain the same standard regarding principal distributions.

Notification. The revised New York decanting statute still requires that all interested parties be notified of the changes to the trust. In addition, the revised statute provides that, unless the beneficiaries consent, the decanting will become effective 30 days after service of notice.
Feel free to contact us if you have any questions about the pros and cons of decanting a trust, or the application of New York’s decanting statute.