Estate & Tax Planning Musings

Modified Accumulation Trusts For IRA or Other Qualified Plan Benefits at Death

2010-03-22T17:00:00.000-04:00

Recent private letter rulings issued by the Internal Revenue Service have created concern among estate-planning attorneys regarding the best way to draft trusts that are intended as potential receptacles of IRA or other qualified plan beneifts upon the death of the participant. This concern stems from the fact that, unless the trust is properly drafted, it won't be possible to stretch out the payment of the retirement benefits over the trust beneficiary's lifetime.

Richest States Could Be the Best for Estate Planning

2010-03-22T16:57:00.001-04:00

A recent study powered by TheStreet reports that the following are the states with the most and the least liquid millionaires as a percentage of the total population, listed in descending order:

Most Millionaires:
Hawaii
Maryland
New Jersey
Connecticut
Virginia
Massachusetts
Alaska
New Hampshire
Californai
D.C.

Least Millionaires:
Mississippi
Arkansas
West Virginia
Kentucky
South Dakota
North Dakota
Oklahoma
Tennessee
Louisiana
Alabama

IRS Loses Billion Dollar Transfer Pricing Case

2009-12-14T19:21:00.000-05:00

The IRS lost a billion dollar § 482 transfer pricing case yesterday. Veritas Software Corp. v. Commissioner, 133 T.C. No. 14 (Dec. 10, 2009):

P entered into a cost-sharing arrangement with S, its foreign subsidiary, to develop and manufacture storage management software products. Pursuant to the cost-sharing arrangement, P granted S the right to use certain preexisting intangibles in Europe, the Middle East, Africa, and Asia. As consideration for the transfer of preexisting intangibles, S made a $166 million buy-in payment to P. P employed the comparable uncontrolled transaction method to calculate the payment. In a notice of deficiency issued to P, R employed an income method and determined a requisite buy-in payment of $2.5 billion and made an income allocation to P of that amount. In an amendment to answer, R reduced the allocation from $2.5 to $1.675 billion. R further determined that the requisite buyin payment must take into account access to P’s research and development team; access to P’s marketing team; and P’s distribution channels, customer lists, trademarks, trade names, brand names, and sales agreements. P contends that R’s determinations are arbitrary, capricious, and unreasonable and the comparable uncontrolled transaction method is the best method to calculate the requisite buy-in payment.

Held: R’s determinations are arbitrary, capricious, and unreasonable.

5th Cir. Admits Ex-Wife's Testimony About Ex-Husband's Tax Evasion

2009-12-14T19:15:00.000-05:00

The Fifth Circuit recently allowed an ex-wife's testimony about conversations she had with her ex-husband about his tax evasion to be admitted at the husband's trial under the joint crimes exception to the martial communications privilege even thought he ex-wife was not charged with tax evasion herself. United States v. Miller, No. 08-31168 (5th Cir. Nov. 20, 2009). The ex-husband did not help himself at trial:

Miller was the sole witness for the defense. He testified that in 1995, after being audited by the IRS, he joined Save-A-Patriot. He also studied materials provided by Save-A-Patriot. Based on his study of the materials and of the Internal Revenue Code, he believed that the income tax system was voluntary and that he was not required to pay taxes, though he had filed tax returns in the past. Because of this deeply held belief, he did not file tax returns for tax years 1995 through 2001. ...

Mrs. Miller also testified that Miller decided not to file taxes after joining Save-a-Patriot because he believed that filing taxes was not necessary and unconstitutional. This statement is not privileged because, as noted, it involves discussion of joint criminal activity. ... Further, it is not prejudicial because it is consistent with Miller’s testimony that he had a good faith belief, based on his reliance on Save-A-Patriot materials, that he did not have to pay taxes.

Revocation of a Disclaimer - Vermont

2009-12-14T19:14:00.000-05:00

Disclaimer may be revoked if procured by undue influence. The testator’s mother and sole beneficiary under his will sought to revoke her disclaimer of all her interest in her son’s estate. The disclaimed property passed to the disclaimant’s nephew who was the contingent beneficiary of the will and the executor. The disclaimant then filed a document with the court purporting to revoke the disclaimer. The nephew objected and won summary judgment.

The Supreme Court of Vermont reversed, holding that a disclaimer cannot be revoked because it was based on a mistake of law or because the revocation is filed within the period for making a disclaimer, but that it may be revoked if it was procured through the exercise of undue influence. Carvalho v. Estate of Carvalho, 978 A.2d 455 (Vt. 2009).

Enforceability of in terrrorem clause in trust -- Virginia

2009-12-14T19:12:00.000-05:00

The Supreme Court of Virginia held that a no-contest provision in a revocable trust “that constitutes part of a decedent’s testamentary estate plan” is subject to the same principles applied to such clauses in wills, in particular the principle that such clauses are to be strictly construed. Keener v. Keener, 682 S.E.2d 545 (Va. 2009).

Law Changes in NY and NC

2009-10-24T07:42:00.001-04:00

New York law now allows Domestic Partner Power to Make Anatomical Gifts:

Effective October 25, 2009, New York will allow a domestic partner the ability to make an anatomical gift of the other partner’s organs. 2009 Sess. Law News of N.Y. Ch. 348.

Changes to Wills, Trusts, & Estates Laws in North Carolina:

New legislation includes the following:

- Allowing a trustee to appoint trust property to another trust for the same beneficiary. 2009 N.C. Laws S.L. 2009-318.

- Establishing a procedure for providing notice to creditors without estate administration when a decedent dies leaving no property subject to probate. 2009 N.C. Laws S.L. 2009-444.

- Increasing the amount of funeral expenses with payment priority to $3,500 from $2,500. The first $1,500 of gravestone and burial location expenses were also given priority. 2009 N.C. Laws S.L. 2009-288.

- Revamping how a surviving spouse’s forced share is computed. 2009 N.C. Laws S.L. 2009-368.

Arizona Extends Time Non-charitable Trust May Exist

2009-10-19T21:31:00.000-04:00

Arizona has extended the time a trust for a specific lawful non-charitable purpose may exist. The time period was increased from 21 to 90 years. Act of July 10, 2009, ch. 85 Ariz. Laws 2333.

Tax Court Rules on LLC Transfer Valuation

2009-10-19T21:30:00.000-04:00

Transfers are valued as transfers of interests in a limited liability company so that the LLC is not disregarded under the “check the box” regulations to treat the transfers as transfers of a proportionate share of assets owned by the LLC. As a result, the transfers are subject to valuation discounts for lack of control and lack of marketability.

Connecticut Expands Slayer Statute

2009-10-19T21:29:00.000-04:00

Connecticut expands slayer statute to permit its operation even if the slayer dies before being determined to be a “slayer.” An Act Concerning Murder and Inheritance, Conn. Session Law 09-201.

Ohio: SOL for Breach of Trust Begins When Beneficiaries Learn of Alleged Breach

2009-10-19T21:28:00.000-04:00

The successor trustee and a beneficiary brought suit for breach of duty against the prior trustee for alleged self-dealing in indirectly acquiring shares of stock in a closely held company by causing the trust to sell to a company which was effectively controlled by the trustee. The sales occurred 25 years before the suit was brought.

The Ohio Supreme Court affirmed the lower court’s dismissal, holding that the four year statute of limitations began to run at the time of the sale because the beneficiaries knew of the sale and of all of the actions of which they complain.

One justice dissented on the grounds that the decision was based on “facts and inferences” not in the complaint.

Cundall v. U.S. Bank, 909 N.E.2d 1244 (Ohio 2009).

California Court Upholds 1% Tax on Millionaires

2009-10-19T21:26:00.001-04:00

The California Court of Appeals rejected a taxpayer's constitutional challenge to Proposition 63, which imposed a 1% tax on annual incomes in excess of $1 million to fund state mental health services. Jensen v. California Franchise Tax Board, No. B211815 (Ct. App. Oct. 14, 2009):
We find no constitutional infirmity in the challenged portions of Proposition 63. An income tax may be rationally based on a taxpayer‟s income level and ability to pay, and there is no need to show that a particular taxpayer personally benefits from a tax assessed for the public good. Taxpayers earning more than $1 million annually do not comprise a “suspect class” requiring a strict scrutiny constitutional analysis. Further, Proposition 63 is valid even if it is not a constitutional amendment. ...

We are unaware of any case authority holding that wealthy individuals form a “suspect class” deserving of a heightened degree of scrutiny. Suspect classifications include race, gender, national origin or illegitimacy. Wealth generally confers benefits, and does not require the special protections afforded to suspect classes. Wealth has “none of the traditional indicia of suspectness: the class is not saddled with such disabilities, or subjected to such a history of purposeful unequal treatment, or relegated to such a position of political powerlessness as to command extraordinary protection from the majoritarian political process.” (San Antonio School District v. Rodriguez, 411 U.S. 1, 28 (1973).) ...

The Taxpayers are mistaken in thinking that taxpayers in a particular tax bracket cannot be singled out for an income tax to benefit society at large. ...

The tax imposed by Proposition 63 is not arbitrary merely because a person earning $1,000,001 is subject to the tax, while a person earning $999,999 is exempt. The government has leeway in “drawing lines” below which individuals are exempt from a tax. ...

The Taxpayers perceive themselves as victims of a populist movement to “soak the rich.” The desire of the majority of the electorate to tax a minority of citizens based on their earnings is not a basis for overturning an income tax. The courts “do not substitute their social and economic beliefs” to supplant the judgment of the enacting body.

New Trust Company Laws in Nevada

2009-10-02T14:59:00.001-04:00

As of October 1st, Nevada's public trust companies are subject to stricter licensing requirements, such as maintaining a physical office in the state, staffing a satisfactory Nevada employee, and keeping true copies of business records available for inspection. But the biggest change requires public trust companies to post $1 million in capital, with a graduated compliance plan for companies already in existence.

The new law was two years in the making. It does not apply to private family trust companies. A separate law provides for optional licensure under relaxed standards for these private companies.

Illinois Court Declines to Invalidate Religious Marriage Condition Placed on Inheritance

2009-09-30T19:23:00.001-04:00

In re Feinberg, 2009 Ill. Slip Op. 106982 (SC Sept. 24, 2009): The Illinois Supreme Court decided whether to invalidated an inheritance condition based on marrying within the Jewish faith.

Facts:
Max Feinberg, who died in 1986, left a wife, Erla, two adult children, and five grandchildren. He had executed a will that created trusts from which his widow would receive income during her lifetime. At her death, the trust assets were to be combined, and half of these assets were to be held in trust for the benefit of the grandchildren during their lifetimes, provided they had not married out of the Jewish faith, in which case they were to be “deemed deceased” on the date of such a marriage. Shares of such “deceased” grandchildren would revert to the settlor’s two children. Between 1990 and 2001, all of the five grandchildren married.

Distribution of decedent’s assets did not go according to this original plan, however, because Max also gave his widow a limited lifetime power of appointment as to his descendants which she exercised in 1997. Instead of lifetime trusts, she directed that, at the time of her death, fixed $250,000 sums be given to each of her two children and to each of her five grandchildren. She provided, however, that, as to the latter, her husband’s religious-restriction clause must be complied with. Erla died in 2003. By this time, although all the grandchildren had married, only one had complied with the religious restriction.

This situation resulted in several different proceedings which were consolidated in the circuit court of Cook County. The religious-restriction clause was invalidated there as contrary to public policy, and the appellate court affirmed.

In reaching a different result, the Illinois Supreme Court found that the issue is not Max’s original scheme of lifetime trusts for the grandchildren, but the distribution which was authorized by Erla, giving out fixed sums at the time of her death. The supreme court declined to hold the religious-restriction clause void. The grandchildren had no vested interests and Erla had merely created a condition precedent that operated on the date of her death to determine who was qualified to take. The supreme court said Erla was free to make a distribution in favor of grandchildren whose lifestyles were approved of over other grandchildren who made choices which were disapproved of.

The judgment of the appellate court was reversed, and the cause was remanded to the circuit court for further proceedings.

Vermont Adopts Uniform Trust Code

2009-09-30T19:22:00.000-04:00

New law in Vermont adopts the Uniform Trust Code. 2009 Vt. Laws No. 20. The state legislature's website provides a detailed summary of the act, including the following excerpt: This act modernizes and codifies the laws governing testamentary and inter vivos trusts. The act adopts the Uniform Trust Code in large measure, drawing from common law sources as well as existing statutory law, but has been modified in part to reflect current Vermont legal principles. The act provides a set of basic default rules that govern voluntary trusts. However, because the act is a set of default rules, the terms of a trust instrument will govern even if the terms are inconsistent with the act.

TAX COURT: ROTH IRA CAN'T OWN S CORPORATION STOCK

2009-09-30T19:19:00.000-04:00

On September 30, 2009, the Tax Court took 26 pages to decide that a Roth IRA is not a qualified S corporation shareholder -- a lot of effort to come to an obvious answer. While that seems like a long road to get to the right place, it could have been worse. Four of the Tax Court judges took 31 pages to get to the wrong answer, in dissent.

As a Group, 70 Percent of Families Will Receive More Benefits Than They Pay in Taxes Under Obama Plan:

2009-09-21T19:09:00.002-04:00

Washington, DC, September 21, 2009 -- New reports from the Tax Foundation show that President Obama's policy proposals will increase the financial dependence of middle-income Americans on the federal government.

"Attempts to put 'price tags' on health care and cap-and-trade proposals vary among government agencies and think tanks," said Tax Foundation President Scott Hodge, "but one vital question has been left unanswered: Counting all federal taxes and spending, how would these policies affect American families' financial ties to the government? The foundation's new 'fiscal incidence model' answers that question." "Currently the bottom 60 percent of the income spectrum receives more in federal spending than they pay in federal taxes," said Hodge. "By 2012, if President Obama's proposals on taxes, health care and climate change become law, 70 percent of American families will, as a group, be receiving more in federal spending than they pay in federal tax."

Even if none of Obama's policies becomes law, the extent of current income redistribution is remarkable: The top-earning 40 percent of families will transfer $826 billion to the bottom 60 percent in 2012. If Obama's policies become law, the federal government will redistribute nearly $1 trillion from the top-earning 30 percent of families to the bottom 70 percent (those earning up to $109,000). In fiscal year 2010, the lowest-income families will receive $10.44 in federal spending for every dollar in taxes they pay. Middle-income families, who are the targeted beneficiaries of many Obama policies, will receive $1.15 in government spending benefits for every dollar they pay in taxes.

When only taxes are analyzed, Obama's policies lead to tax increases for a curious mix of rich and poor families. Families earning less than $23,700 are disproportionately affected by regressive cap-and-trade policies and higher tobacco taxes, and those earning more than $280,000 will see their tax payments go up because of higher income tax rates. On net, however, when spending is included, the lowest-income households gain more than $2,200 while the highest-income families lose more than $127,000.

"The taxes paid by the wealthiest families swamp any benefits they receive from government, even when counting national defense as largely benefitting high-income people," Hodge said. "As lawmakers consider important and far-reaching tax and spending policies such as health care and cap-and-trade, they should have a basic understanding of what might be called a 'fiscal accounting' of how government benefits families receive compare to what they pay in taxes. It's only within this framework that properly informed decisions can be ma

WHAT THIS ALL MEANS: Federal tax and spending policies are already very heavily tilted to the poor and middle-class, even before we consider the Obama administration's budget proposals. The 2010 statistics:

- The lowest-income families will be targeted for $10.44 in spending for every dollar they pay in taxes.
- Middle-income families receive $1.15 for every dollar they pay in taxes.
- The top 40 percent of families pay more in taxes as a group than they receive in government spending benefits. In the case of the highest-income families, they are currently targeted for 43 cents in government spending for every dollar they pay in taxes.

Obama's tax and spending policies will further shift the tax burden toward upper-income families and spending policies to lower- and middle-income families. Surprisingly, Obama's policies will increase the number of families who are net "receivers" of government spending (those who get more back than they pay in taxes). As a group, the bottom 70 percent of families will be net receivers of government spending under Obama policies, up from the 60 percent who are collectively net receivers under today's policies. Of course this means that the number of "givers" will collectively shrink from the top 40 percent of families to the top 30 percent.

North Carolina: Trustee Can Appoint Trust Property to Another Trust

2009-09-14T20:37:00.000-04:00

New legislation in North Carolina authorizes a trustee to appoint trust property to another trust for the same beneficiary. Trustees looking to take advantage of this change in the law should consult the text of the statute because the second trust must meet certain requirements.

North Carolina Law Concerning Will-Drafting Attorney

2009-09-11T21:02:00.000-04:00

New law in North Carolina renders void any gift in a will to the attorney who drafted the will unless the attorney is a relative of the testator. In addition, the legislation requires attorneys who draft a will or codicil to state their name on the document. 2009 N.C. Laws S.L. 2009-182.

Nevada Authorizes Electronic Will Storage

2009-09-05T20:49:00.000-04:00

Nevada has adopted legislation that authorizes electronic will storage. The legislation permits the Secretary of State to create and maintain the Nevada Lockbox, a secure on-line registry which allows a person to post an electronic copy of a will or other document and retrieve that document when needed. 2009 Nevada Laws Ch. 253.

New York's New Power of Attorney Law

2009-08-31T23:22:00.001-04:00

New York State's new form for a power of attorney which takes effect on September 1, 2009 marks a major change in the law. It may be found in Section 644 of New York's General Obligations Law. As I reported earlier, the effective date of the law was postponed from this past February to give the bar a chance to become familiar with the new form and its pitfalls. The changes are so complex that a second law to amend the first and to correct some of its inconsistencies and shortcomings was needed. Unfortunately, those unruly children who comprise the august body some folks call the New York State Senate were so busy this summer having what can only be seen as a legislative food fight that virtually no meaningful work was done for weeks and this most important piece of legislation has not yet been signed into law. This can only add to the possibility that the new law will become an attorney's relief act.

While any duly drawn and executed power in existence prior to the new law will remain in full force and effect, we will all have to get used to some sweeping changes . It is necessary to take particular notice of the new form which requires not only the signature of the giver of the power but also of the agent. Specific and extensive warnings to both the giver and the agent must be acknowledged and the major gifts portion of the document must be executed simultaneously with the basic power . The major gifts portion of the power requires two witnesses and must be executed in the same manner as a will. The clear intent of the law is that both the giver of the power and the agent are far more aware of the importance of the document . The exposure of the giver is clearly spelled out as are the responsibilities of the agent who may be entitled to compensation for his or her service.

All new powers of attorney are to be durable unless it is specifically noted in the instrument that they are not. The law mandates that banks accept the power and further provides that attorneys may certify that a photocopy of a duly executed power is a true copy of the original.Banks are required to accept these certified copies. This will help to eliminate the problems which arise when a bank insists that only its own power of attorney be used --- something that may be impossible where the depositor has become incompetent and can no longer issue a new power.

There is a wide range of open issues and questions that have arisen as a result of the new power of attorney. Litigation is a likelihood in order to have resolution of these items and the potential that some folks will suffer drastic unforeseen outcomes exists.

Trust Protectors: Trust Agreement May Create the Protector's Duty

2009-08-28T14:18:00.000-04:00

Robert T. McLean Irrevocable Trust v. Patrick Davis, P.C., 283 S.W.3d 786 (Mo. Ct. App. 2009): A trustee and the mother of a beneficiary brought suit against the predecessor trustees and the trust protector alleging that the trustees improperly managed the trust and that trust protector violated his duties. Finding that the Missouri statutes (identical to Uniform Trust Code § 808) does not define the function and duties of a trust protector, the court turned to the trust document which stated that the trust protector is a fiduciary, is not to be liable to actions taken in good faith, and has the power to remove the trustee. The court held that the trust language created a duty in the trust protector to exercise the power to remove the trustee sufficient and reversed the lower court’s summary judgment for the trust protector.

The Eleventh Circuit on COBRA and ERISA

2009-08-19T07:47:00.000-04:00

In Harris v. United Automobile Insurance Group, Inc. (08-16097), the appellant/plaintiff was a former attorney for United who enrolled in COBRA following the termination of employment. Payment of his COBRA preemium was considered received on the date it was postmarked. The appellant mailed his monthly premium on the day it was due, however, it was not postmarked until the following day. United cancelled the COBRA policy based upon the failure to make the payment. The district court held that United properly cancelled the policy for failure to pay the premium.

The Eleventh Circuit stated:
On appeal, Harris asserts only that the regulations at 26 C.F.R. § 54.4980B-8 give rise to a claim for benefits under 26 U.S.C. § 1132(a)(1)(B) and that under these regulations he should have been allowed the same period of time to pay his COBRA premium as UAIG is given to fund the plan.

We conclude that this regulation does not entitle Harris to additional time beyond that provided by UAIG’s plan. The parties agree that UAIG was self-funding, meaning that medical claims were paid from the employer’s assets rather than being paid through an insurance policy. In other words, UAIG did not have a relationship such as the one described in the above regulation; it did not have an “arrangement” under the terms of which it was given a certain period of time to pay for the coverage of non-COBRA beneficiaries. The additional time frame provided in the regulation applies only to those plans that are fully-funded, i.e. that involve an agreement with an insurance company to provide benefits.

The court then noted that even though the basis for affirming the district court order's was different than the reasoning used by the district court, the court can affirm "the district court’s judgment on any ground that appears in the record, whether or not that ground was relied upon or even considered by the court below.” The court then declined to award attorneys fees.

The Federal Estate Tax in 2009 - a look back

2009-08-16T17:37:00.002-04:00

Federal estate taxes were first collected in 1916. Thanks to 2001 tax legislation, the estate tax is scheduled to be phased out in 2010 (something nobody believes will occur). The table below shows the current exemption schedule and the tax rate applied to property over that amount.

If no Congressional action is taken by Dec. 31, the federal estate tax will disappear in 2010 but return in 2011 with the more costly, pre-law-change rules in effect; that is, a 55 percent tax rate with only the first $1 million of an estate exempted from taxation.

Year Exemption Amount Highest Rate Over Exemption
2002 & 2003 $1 million 50% in 2002
49% in 2003
2004 & 2005 $1.5 million 48% in 2004
47% in 2005
2006 - 2008 $2 million 46% in 2006
45% in 2007 & 2008
2009 $3.5 million 45%
2010 No Estate Tax No Estate Tax
2011 $1 million 55%

U.S. Corporate Tax Rate Is 2nd Highest in Industrialized World

2009-08-11T21:27:00.000-04:00

New data from the Organization for Economic Cooperation and Development (OECD) shows that the U.S. corporate tax rate has fallen even further out of step with the rest of the industrialized world as countries such as Canada, the Czech Republic, Korea, and Sweden have cut their corporate rates in 2009, lowering the average statutory corporate tax rate of all OECD nations to 26.5%.

With a combined federal and state corporate tax rate of 39.1%, the U.S. continues to impose the second-highest overall corporate rate among industrialized countries. Only Japan's 39.5% combined rate is higher. As the chart below indicates, the weighted average (accounting for country size) corporate rate of non-U.S. OECD nations is now below 30% for the first time in history. 2009 marks the 12th consecutive year in which the average corporate tax rate of non-U.S. OECD nations has been below the U.S. rate.

Florida Probate: The Unambiguous Language of a Will

2009-08-10T19:45:00.002-04:00

In Chin v. Estate of Chin (3D08-1962), the Third District affirmed the trial court's interpretation of the "unambiguous language" of the decedent's will.

On April 12, 1989, Adolph Chin drafted a Will in Jamaica. When he died in 1997, he co-owned property in Miami-Dade County as tenants in common with his sister, Mary Chin. Adolph and Mary both lived on this property. David Chin, Adolph’s son, was named personal representative of Adolph’s estate.

When Adolph Chin died, "the lower court entered an Order of Summary Administration that transferred to David an immediate half interest in the Dade County property. Subsequently, David filed suit against Mary Chin to partition the subject property and force its sale." The trial court determined that David, as the administrator of the estate, erred by not giving Mary Chin the "original Order of Summary Administration or with notice that she was a beneficiary under Adolph’s Will." After the trial court reviewed all of the applicable facts, "Mary Chin was given a life estate in the subject property by her deceased brother, Adolph, and entered an Amended Order of Summary Administration."

The Third District held:

If a court finds the language of a will ambiguous, "[t]he Testator’s intent is the guiding and dominating factor in the construction of a Will." See In re Rodger’s Estate v. First Nat’l Bank, 180 So. 2d 167, 170 (1965). When interpreting ambiguous provisions of a will, courts may look upon the situation of the parties, such as ties and affection between the testator and his or her legatees. Id.

On de novo review, we agree with the trial court’s finding that paragraph seven grants a life estate to Mary Chin. Adolph shared a separate residence with each sibling. The trial court found this to be strong evidence that he did not have the intent to dispossess his siblings of their homes after his death. Additionally, to construe paragraph seven to apply only if there were co-ownership of property by all three individuals asks the Court to adopt the notion that Adolph Chin inserted a restriction into his Will with full knowledge that it had no meaning. This Court simply cannot adopt this explanation.

Connecticut Enacts Pet Trust Statute

2009-08-10T19:30:00.001-04:00

Effective October 1, 2009, Connecticut will have a pet trust statute that reads as follows:

(a) A testamentary or inter vivos trust may be created to provide for the care of an animal or animals alive during the settlor's or testator's lifetime. The trust shall terminate upon the death of the last surviving animal. A trust created pursuant to this section shall designate a trust protector in the trust instrument whose sole duty shall be to act on behalf of the animal or animals provided for in the trust instrument. A trust protector shall be replaced in the same manner as a trustee under section 45a-474 of the general statutes.

(b) Except as otherwise provided in this section, the provisions of the laws of this state that govern the creation and administration of trusts shall apply to a trust created to provide for the care of an animal or animals pursuant to this section.

(c) (1) The Superior Court, or a probate court described in subdivision (2) of this subsection, shall have jurisdiction over any trust created pursuant to this section.

(2) A probate court shall have jurisdiction over any trust created pursuant to this section if the trustee of the trust is otherwise subject to the jurisdiction of such probate court, or the trust is an inter vivos trust and the trust is or could be subject to the jurisdiction of such probate court for an accounting pursuant to section 45a-175 of the general statutes.

(d) The trustee of a trust created pursuant to this section shall annually render an account for the trust, signed under penalty of false statement, to the trust protector.

(e) Any individual identified as a trust protector pursuant to this section may file a petition in the Superior Court or a probate court having jurisdiction pursuant to subsection (c) of this section to enforce the provisions of the trust, remove or replace any trustee of the trust, or require a trustee to render an account as required under subsection (d) of this section. The court may award costs and attorney's fees to the trust protector, from the trust property, if the trust protector prevails on a petition filed under this subsection and the court finds that the filing of the petition was necessary to fulfill the trust protector's duty to act on behalf of the animal or animals provided for in the trust instrument.

(f) If the trust protector determines that the trustee has used trust property for personal use or has otherwise committed fraud with respect to the trust, the trust protector may request the Attorney General to file a petition in the Superior Court or a probate court having jurisdiction pursuant to subsection (c) of this section to enforce the provisions of the trust, remove or replace any trustee of the trust or seek restitution from the trustee with respect to such trust property. The Attorney General may file such petition if the Attorney General determines that the circumstances warrant such filing.

(g) Trust property may be applied only to its intended use, subject to proper trust expenses including trustee fees, except to the extent the Superior Court or a probate court having jurisdiction pursuant to subsection (c) of this section, upon application by the trustee or trust protector, determines that the value of the trust property exceeds the amount required for its intended use. Trust property not required for its intended use, including trust property remaining upon termination of the trust, shall be distributed in the following order of priority:
(1) As directed by the terms of the trust instrument;

(2) To the remainder beneficiaries identified in the trust instrument, under the same terms provided in the trust for the remainder interest;

(3) To the settlor, if then living;

(4) Pursuant to the residuary clause of the settlor's or testator's will; or

(5) To the settlor's or testator's heirs in accordance with the laws of this state governing descent and distribution.

The Top 1% Pays More Income Tax Than the Bottom 95%

2009-07-31T14:07:00.001-04:00

Newly released data from the IRS clearly debunks the conventional Beltway rhetoric that the "rich" are not paying their fair share of taxes. Indeed, the IRS data shows that in 2007—the most recent data available—the top 1% of taxpayers paid 40.4% of the total income taxes collected by the federal government. This is the highest percentage in modern history. ...

Remarkably, the share of the tax burden borne by the top 1% now exceeds the share paid by the bottom 95% of taxpayers combined. In 2007, the bottom 95 percent paid 39.4% of the income tax burden. This is down from the 58% of the total income tax burden they paid twenty years ago. To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

House Surtax Won't Have Noticeable Impact on Small Business

2009-07-22T21:52:00.000-04:00

Citizens for Tax Justice has released House Surcharge Proposal Unlikely to Have Noticeable Impact on Small Businesses:

1. Only about one in one-hundred are rich enough to be subject to the surcharge
2. The surcharge paid by the rich would be less than they got from the Bush tax cuts
3. Only a tiny fraction of small business owners would pay the surcharge
4. Even for those few small business owners who would pay the surcharge, the surcharge would have no effect on their hiring decisions
5. The health care reform that will be funded by the surcharge will make it cheaper to hire workers

CLAIMS COURT AGREES WITH TAX COURT: LLC LOSSES NOT AUTOMATICALLY PASSIVE

2009-07-22T21:49:00.001-04:00

Last month the Tax Court shot down an IRS argument that limited liability company losses are automatically "passive" under rules drafted for old-fashioned limited partnerships. Yesterday the Court of Claims agreed with the Tax Court. Ruling for the taxpayer on summary judgement, the Claims Court explicitly followed the Tax Court, explaining:

Finally and most importantly, an LLC is not "substantially equivalent" to a limited partnership. As discussed above, unlike a limited partnership, an LLC allows all members to participate in the business while retaining limited liability.

Claims Court: Thompson, NO. 06-211 T (Fed Cl)
Tax Court: Garnett, 132 T.C. No. 19

Irrevocable Trust Counts for Medicaid in Massachusetts

2009-07-20T21:38:00.002-04:00

The Massachusetts appeals court finds that although an irrevocable, income-only trust expressly prohibits distributions of principal, other provisions in the trust could conceivably permit the trustees to invade trust assets, and thus the trust is countable for Medicaid purposes. Doherty v. Director of the Office of Medicaid (Mass. App. Ct., Essex, No. 08-P-939, June 18, 2009).
In 2000, Muriel Doherty amended and restated an existing family trust, declaring the trust irrevocable and herself as its sole settlor. Ms. Doherty also removed herself as trustee and directed the successor trustees to distribute the trust's income to her. The trust expressly stated that the trustees could "make no distributions of principal from the Trust, to or on behalf of" Ms. Doherty. After entering a nursing home in December 2005, Ms. Doherty applied for MassHealth Medicaid benefits. MassHealth denied her application, concluding that, in at least certain circumstances, the trust instrument allowed Ms. Doherty's trustees to distribute trust assets to her or for her benefit.

The superior court affirmed the benefit denial, agreeing with MassHealth that the trust's prohibition against distributions cannot be read in isolation. For example, MassHealth pointed to a provision that the trustee may, "in its sole discretion" and notwithstanding "anything contained in this Trust Agreement" to the contrary, "pay over and distribute the entire principal of [the] Trust fund to the beneficiaries thereof, free of all trusts" so long as the trustees, "in [their] sole judgment," determine that the "fund created ... shall at any time be of a size which ... shall make it inadvisable or unnecessary to continue such Trust fund." Another provision gives to the trustee the power to "determine all questions as between income and principal and to credit or charge to income or principal or to apportion between them any receipt or gain ... notwithstanding any statute or rule of law for distinguishing income from principal or any determination of the Courts." The trust also specifically provides that Ms. Doherty has the power to appoint any part or all of the principal of the Trust fund to any one or more of her descendants or siblings.

Ms. Doherty appealed, arguing that these and similar provisions are, at most, administrative boilerplate that do not confer upon the trustees any discretionary authority to invade principal in light of the explicit provision to the contrary. While conceding that Ms. Doherty argues "with some persuasiveness," the Appeals Court of Massachusetts affirms the benefit denial, finding that "the trust vehicle, considered as a whole, evidences Muriel's expectation or intent that the trustees will invade trust assets when necessary to ensure Muriel's comfort." However, citing " Guerriero v. Commissioner of the Div. of Med. Assistance, 433 Mass. 628, 633, 745 N.E.2d 324 (2001) the court hastens to "stress that we have no doubt that self-settled, irrevocable trusts may, if so structured, so insulate trust assets that those assets will be deemed unavailable to the settlor."

THE HEALTH CARE SURTAX WILL HIT ONLY A FEW BUSINESSES: JUST THE GOOD ONES

2009-07-20T21:29:00.002-04:00

When you look at how much economic activity gets hit by the surtax, the picture looks different:
The surtax means pass-through businesses that account for 60% of small business profits will be sending more money to the government instead of developing new products, opening new locations, and hiring new employees. Or, more likely, they will be spending money on people trying to change their tax strategies to keep their money from going into the black hole of out-of-control government spending.

Are You Ready For 50% Income Tax Rates

2009-07-16T21:18:00.003-04:00

Healthcare reform begins in earnest now that House Democratic leaders have officially introduced a $583 billion bill to pay for the overhaul. Money, as usual, has been the biggest hurdle so far. Lawmakers have been struggling to come up with ways to pay for expanding medical coverage to the nearly 46 million uninsured Americans. Details of H.R. 3200, America's Affordable Health Choices Act of 2009, were revealed on Tuesday. It would raise the necessary revenue in large part via a graduated surtax on higher-income earners.

In 2010, the House bill would institute a:
• 1 percent surtax on joint filers with adjusted gross income (AGI) between $350,000 and $500,000 (between $280,000 and $400,000 for single filers);
• 1.5 percent surtax on couples filing jointly who have AGI between $500,000 and $1 million (between $400,000 and $800,000 for single filers); and
• 5.4 percent surtax on joint filers with AGI greater than $1 million (greater than $800,000 for single taxpayers).

Don't forget state rates: But those percentages are just the added federal tax bite. Calculations by the nonpartisan Tax Foundation indicate that if the maximum 5.4 percent surtax is enacted, the wealthiest taxpayers in 39 states would face a combined federal-state rate of more than 50 percent. "That means government would be taking more than half of every additional dollar from high-income taxpayers," said Tax Foundation President Scott Hodge. The problem for these higher-income earners is that states, facing budget crunches of their own, have been raising taxes on them.

Five hardest hit states: Residents in Oregon would be hit the hardest, according to Tax Foundation figures. The combined top rate in the Beaver State would be 57.54 percent.
Joining Oregon on the top five list with the highest effective marginal tax rate on wealthy residents would be Hawaii, New York, California and Rhode Island.

The Tax Foundation breaks out the rates for residents of those states in the table below if the 5.4 percent surtax becomes law. The calculations also assume that the current state and local income tax rates will remain through 2011 and that the top federal taxable income rate rises as scheduled to 39.6 percent.

State Avg. Local Rate Top
State Rate + Top Federal + Health Care + Medicare = Top Rate
Oregon 11.00% + 39.6% + 5.4% + 2.9% = 57.54%
Hawaii 11.00% + 39.6% + 5.4% + 2.9% = 57.22%
New York 8.97% + 39.6% + 5.4% + 2.9% = 56.92%
California 10.30% + 39.6% + 5.4% + 2.9% = 56.58%
Rhode Island 9.90% + 39.6% + 5.4% + 2.9% = 56.22%

Remember, this is just the beginning, but with the introduction of the H.R. 3200, the issue has once again picked up speed. House Committee markups are scheduled for this week and the Senate Health, Education, Labor and Pensions (HELP) Committee, which had been struggling to piece together its version of healthcare reform, agreed on a proposal (but still just one of many to come) on Wednesday.

Charitable Giving Declines

2009-07-16T21:13:00.002-04:00

Charitable giving fell last year by the largest percentage in five decades, according to a new study by the Giving USA Foundation. Individuals and institutions made gifts and pledges of $307.65 billion, a decrease of 5.7 percent on an inflation-adjusted basis over the $314 billion given in 2007, according to the foundation, a research organization backed by the fund-raising industry. Some experts said they were surprised the drop was not even bigger, given that endowments fell by as much as 40 percent, the stock market declined by a similar margin, corporations posted unheard-of losses and unemployment was rising at a fast clip.

The Giving USA Foundation study found that the drop in giving accelerated in the fall, as the impact of the economic crisis and the steep decline in stock markets took hold. “In the first half of the year, it was more or less business as usual for our clients, which is to say pretty good.” “Then, as we got into the last quarter, we saw corporations begin rethinking their giving in greatly different ways, and we saw individuals begin to revisit their philanthropic priorities.”
Even with the steep drop, charitable giving remained strong. Last year’s giving outstripped all previous years on record except 2007, though the outlook for next year remains uncertain.
Amherst College, for example, had a “banner year” last year, said Megan Morey, the institution’s chief advancement officer. The college received the largest bequest in its history, $23 million, and several donors responded promptly to a new $425 million capital campaign, enabling Amherst to raise a total of roughly $70 million.

But like other nonprofit organizations, Amherst has found fund-raising in the current year tough. Ms. Morey said the annual campaign, which ends in a few weeks, is down by roughly 15 percent compared with the 2007-8 effort. “Over all,” she said, “we’re tracking comparable to what we were in 2007, which I feel good about.” Giving USA estimated that donations to educational institutions fell 9 percent on an inflation-adjusted basis to $40.94 billion. Colleges, universities and private schools, including Amherst, have also been hit by sharp declines in their assets.
About two-thirds of public charities saw donations decrease in 2008, the foundation said. Most surprising, Ms. Martin said, was the decline in gifts to organizations working to meet basic needs, like food banks and homeless shelters, which are seeing a big increase in demand for their services.

Many fund-raising experts had predicted that donors would increase giving to those types of charities at the expense of others, like arts groups. But the foundation estimated that gifts to those organizations fell by an inflation-adjusted 15.9 percent, to $25.88 billion. Boys & Girls Clubs of America, for instance, saw donations drop 4.7 percent last year to a preliminary $524 million. This year is not shaping up to be any better, said Cyndi Court, executive vice president for marketing and development at the organization, although the group recently received unexpected gifts of $5 million and $1.2 million to support its summer meals program from Morgan Stanley and Wal-Mart, respectively. “We’re definitely anticipating another down year,” Ms. Court said.

Article courtesy of NY Times

IRS: Defective Chinese Drywall May Qualify for Casualty Loss Deduction

2009-07-14T20:05:00.000-04:00

The IRS has sent this letter to Sen. Jim Webb (D-VA), explaining that homeowners may be able to deduct losses caused by defective Chinese drywall as casualty losses under § 165(c)(3):
[Y]our constituents['] ... homes were constructed with Chinese drywall. The constituents said that Chinese drywall emits putrid smell and gas causing various health problems, as well as extreme and unusual corrosion of pipes, air conditioning coils, and electrical appliances. They indicated that these problems arose soon after construction of the homes, with the result that the homes are uninhabitable. ...

A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, and unusual. Damage or loss resulting from progressive deterioration of property through a steady operating cause is not a casualty loss. ...
The EPA and the Consumer Product Safety Commission are investigating the reported problems with Chinese drywall. If it is determined that Chinese drywall emits an unusual or severe concentration of chemical fumes that causes the extreme and unusual damage you describe, affected taxpayers can qualify for a casualty loss deduction.

Loans by trust to insurance trust violated prohibition on retention of unproductive property

2009-07-13T21:00:00.001-04:00

An income beneficiary objected to the trustees’ accounting which showed that the trust had made loans to a second trust to pay premiums on a life insurance policy on the income beneficiary. The court granted summary judgment for the income beneficiary. Because the loans had never produced income in the fifteen years they had been outstanding, they were unproductive property retention of which violated the trustees’ duty to the income beneficiary and the express language of the trust prohibiting the trustees from retaining unproductive property beyond a reasonable period of time.

In re Terranova, 873 N.Y.S.2d 651 (N.Y. App. Div. 2009).

Income Redistribution Set to Increase Under Obama’s Budget

2009-07-11T19:53:00.002-04:00

Counting Both Spending and Taxes, New Study Finds Redistribution from Top-Earning 5 Percent Will Rise from $619 Billion to $698 Billion in 2012

New analysis of President Obama's Budget finds that he is targeting the nation's highest earners for greater income redistributions. By 2012, the federal government is scheduled to be redistributing an extra $79 billion from the top-earning 5 percent of American families, and $71 billion of that will be paid by the top-earning 1 percent of families. "That's an additional $64,000 per family redistributed from the top-earning 1 percent," said the Tax Foundation's president Scott Hodge, "on top of the already substantial $368,000 that would have been redistributed from each family even without President Obama's new policies."

"Part of that change is higher taxes, and part is lower spending on items that benefit high-income people." It is the first in a projected series of reports based on the Tax Foundation's "fiscal incidence" model, a computer simulation of the U.S. fiscal system with an innovation: it measures the redistributive effects of both spending and tax policies. Thanks to numerous studies of tax laws by the Congressional Budget Office, the Joint Tax Committee and others, policymakers are well aware of how much money the tax system by itself redistributes from high- to middle- and low-income Americans. Now the Tax Foundation is measuring the redistributive effects of spending as well.

Income redistribution has been on the front burner at least since President Obama told 'Joe the Plumber' on the stump, "When you spread the wealth around, it's good for everybody." "Many tax cuts are no different from government spending programs, but they're treated very differently by our political process." For example, if a congressman proposes to increase welfare benefits, he may be criticized as a profligate spender, but if he proposes an increase in a refundable tax credit, he may be praised as a tax-cutter. Really, both proposals redistribute income in similar ways, one through the tax code and one through federal appropriations. This project is an effort to equalize the treatment of spending and taxes."

The History of U.S. Inheritance Laws

2009-07-11T19:45:00.004-04:00

The Colonial Period:

• Authority over inheritance of personal and real property was handled by one court as opposed to two as it was in Great Britain.
• Intestacy laws turned to a more equal, if not totally equal, intestacy rule for children.
• Virginia introduced the holographic will as an exception to witness requirements.
The American Revolution:
• Equal treatment of children in intestacy spread to all states.
• Entails, or restrictions on land ownership limited to the testator's descendants, were abolished in most states.
The Nineteenth Century:
• Inheritance rights of a surviving spouse grew: Texas introduced the first surviving spouse homestead right guaranteeing the surviving spouse a life estate in the family home; more states gave personal property inheritance rights to the surviving spouse; all but one state provided a forced share for a surviving spouse; the surviving spouse begins taking through intestacy to the exclusion of children.
• The use of trusts greatly expanded: The spendthrift trust developed to keep creditors away from trust funds, business and pension trusts emerged, and the prudent investor rule emerged.
The Twentieth Century:
• The Rise of Federal Taxes: The estate tax, which had been used only during military crisis, became a permanent institution; the gift tax was enacted simultaneously; the generation skipping tax was later introduced.
• Trusts Expand: the dynasty trust resulted when states began abolishing the rule against perpetuities and the living trust became an inexpensive and popular alternative to a will.

NY: Widow Lacks Standing to Sue Husband's Lawyers Over Mishandled Will, Judge Finds

2009-07-10T21:54:00.002-04:00

A widow who claims that the mishandling of her husband's will by his attorneys will cost her $9 million may not pursue a malpractice claim against them, a Manhattan judge has ruled.
Supreme Court Justice Marilyn Shafer ruled that there was neither privity nor even "near privity" between the widow, Jeanne Sorenson Leff, and the attorneys.

Shafer discounted Leff's argument that her occasional interactions with the attorneys, including their preparation of her own will, created an attorney-client relationship regarding her husband's estate planning. "[T]he mere fact that plaintiff might have had a 'subjective belief as to the existence of an attorney-client relationship' is not enough to create [one],"

The decision raises the question of who, if anyone, may sue in New York for malpractice when attorneys make mistakes in planning estates. "In New York, we're one of the few states left with the privity doctrine. When the decedent died, he was the only one who had privity and he was the only one who could sue." Not even the administrator or executor of a decedent's estate may stand in his stead for a malpractice action, according to Schlesinger, whose firm is not involved in the Leff case. Nationally, the law is evolving away from that position, he added, as states move to abandon the doctrine.

Shortly after Mr. Leff's death, his son, Adam, made a claim pursuant to Mr. Leff's 1974 separation agreement with his first wife, in which Mr. Leff agreed that "no less than one-half of his probate estate" would pass to their son, Adam. Mr. Leff's attorneys had not considered that agreement when drafting his estate plan -- they later testified that they only discovered the agreement in Cunningham's file cabinet when responding to Adam's claim, shortly after Mr. Leff's death. Adam and Mr. Leff's estate entered into a settlement agreement under which Adam received approximately $20 million.

Ms. Leff subsequently filed the present suit contending the lawyers committed malpractice by failing to inform Mr. Leff about the existence of the separation agreement, and thereby neglected to consider it when developing his estate plan. That failure, Ms. Leff argued, interfered with Mr. Leff's intent, as expressed in his will, to leave her one half of his estate. She claims the mistake cost her approximately $9 million.

In a decision handed down last week, Justice Shafer ruled that Ms. Leff does not have standing to pursue the claim. "This court finds that the evidence does not indicate that plaintiff was ever involved in a joint estate plan with her husband, or that a relationship approaching 'near privity' with defendants vis-a-vis Leff's estate plan existed such as might make defendants plaintiff's attorneys with regard to Leff's personal estate plan," Shafer concluded in granting the defendants' motion for summary judgment.

California 9th Circuit Decision: Posthumous Children and Social Security Benefits

2009-07-10T21:50:00.002-04:00

On May 6, 2009, the Ninth Circuit Court of Appeals held that a child conceived with a man's sperm three years after his death is not eligible for Social Security survivorship benefitsunder California Law. The sperm was retrieved from the man's body after his death and without any indication that he wanted to father children posthumously.

The court held that under Ninth Circuit precedent and a ruling from the SSA, a child must prove that the insured was the child's parent, or that the child is both legitimate and was dependent on the biological parent. The court first held the child at issue to be a legitimate child of the man because of their biological relationship. Turning to the dependency determination, the court held that it was impossible for the child to have been actually dependent on the sperm donor at the time of his death because she was conceived three years after his death.

The court next held that the California family code focuses on the parent child relationship, never a biological relationship without anything more, to establish "natural parentage" and dependency. Finally, the court held that the California Probate Code does not provide a method of intestate succession for children conceived and born posthumously without the deceased biological parent's consent, and therefore, the child could not prove dependency under the laws of intestate succession.

The court also held that it's holding did not present an equal protection violation because it did not exclude all posthumous children from eligibility for benefits, only those who do not qualify.

Tax Court: LLC and LLLP owner losses don't have to be passive

2009-07-01T21:38:00.001-04:00

The Tax court shot down an IRS bid to treat as "per se" passive losses from limited liability companies or limited liability limited partnerships. Nebraskans Paul and Alicia Garnett invested in LLCs and LLLPs that operated farming businesses in Iowa. The Garnetts claimed that they "materially participated" in the entities and deducted losses shown on the K-1s from the LLCs and LLLPs. The IRS assessed about $360,000 in deficiencies from these losses from 2000 to 2002, saying that the losses were passive no matter what. "Passive" losses are allowed only to the extent of "passive" income, or when the activity is sold.

The IRS applied Sec. 469(h)(2), which says: Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates.

The taxpayers argued that LLCs and LLLPs are not "limited partners" under these rules, and they are therefore subject to the regular "material participation" rules for determining whether a loss is passive. The Tax Court looked at the state law rules governing these entities to sort it out. The court found that Iowa law gives allows powers to LLC members and LLLP owners beyond those allowed traditional limited partners. They also said limited liability wasn't enough to make an owner a "limited partner" under Sec. 469(h)(2):

Thus, while limited liability was one characteristic of limited partners that Congress considered in the enactment of section 469(h)(2), it clearly was not, as respondent suggests, the sole or even determinative consideration. To the contrary, the more direct and germane consideration was the legislative belief that statutory constraints on a limited partner's ability to participate in the partnership's business justified a presumption that a limited partner generally does not materially participate and made further factual inquiry into the matter unnecessary.

We do not believe that this rationale properly extends to interests in L.L.P.s and L.L.C.s. As previously discussed, members of L.L.P.s and L.L.C.s, unlike limited partners in State law limited partnerships, are not barred by State law from materially participating in the entities' business. Accordingly, it cannot be presumed that they do not materially participate. Rather, it is necessary to examine the facts and circumstances to ascertain the nature and extent of their participation. That factual inquiry is appropriately made, we believe, pursuant to the general tests for material participation under section 469 and the regulations thereunder.

When Sec. 469(h) was written, LLCs and LLLPs barely existed. The differences between these new entities and the old limited partnerships are profound, and it is common for LLC and LLLP members to work full time in roles analogous to general partners in limited partnerships. The new entities just aren't comparable to limited partnerships.

Yesterday's ruling doesn't close the case; it was a "summary judgment" motion on the 469(h)(2) issue. The IRS might still challenge the losses under the normal "material participation" standards.

Cite: Garnett, 132 T.C. No. 19.

Kansas - Implied requirement of good faith allows beneficiaries to recover

2009-06-30T19:07:00.001-04:00

A prenuptial agreement provided that if the husband died first, wife would maintain a valid will giving not less than one-quarter of her entire estate to each of her husband’s three sons. The husband’s will left a substantial portion of his estate to his wife.

After the husband’s death, his wife made transfers to irrevocable trusts which greatly reduced her probate estate. Her will left her probate estate to husband’s sons.

After the wife died, his sons sued and the Supreme Court of Kansas upheld the imposition of a constructive trust in their favor. The confidential relationship between the husband and his wife gave rise to an implied duty in the wife not to make gifts inconsistent with her obligations under the agreement. The nonclaim statute does not bar what is in essence an action by the wife’s estate to marshal assets nor is the action barred by the statute of limitations because the right of action did not accrue until the wife’s death.

Alaska: Oral contract barred by statute

2009-06-27T07:52:00.000-04:00

Alaska Statute 13.12.514 (identical to UPC § 2-514) requires that all contracts to make a will or devise be in writing. In its opinion in Cragle v. Gray, 206 P.3d 446 (Alaska 2009), the Alaska Supreme Court held that an oral agreement between a grandmother and her granddaughter providing that the grandmother would give her house to her granddaughter if the granddaughter cared for her for until her death was a succession contract and there void because not in writing.

Bill Introduced to Allow Home Office Standard Deduction

2009-06-27T07:50:00.000-04:00

Senators Olympia J. Snowe (R-ME) and Kent Conrad (D-ND) and Rep. Charles A. Gonzalez (D-TX) have introduced the Home Office Tax Deduction Simplification and Improvement Act of 2009. The bipartisan bill, introduced in both the House and Senate, would direct the Treasury Secretary to create an optional, easy-to-use standard deduction to encourage greater use of the home office tax incentive. In addition to instituting an optional home office tax deduction, the [bill] would require the IRS to streamline its reporting requirements to clearly identify the portion of the deduction devoted to real estate taxes, mortgage interest and depreciation in order to further reduce the burden on the taxpayer....

Recent research from the U.S. Small Business Administration indicates that roughly 53% of America’s small businesses are home-based, but few home businesses actually take advantage of the tax incentive because of the complex, rigid reporting requirements.

Supreme Court watches as state tax collectors dip into Capital One's wallet

2009-06-24T19:56:00.001-04:00

Out-of-state state tax collectors just got a boost from the country's high court. The U.S. Supreme Court today decided against hearing an appeal from out-of-state companies that Massachusetts officials say owe it taxes. Bay State tax collectors set their sites on credit-card giant Capital One Financial. Massachusetts officials said that since the Virginia-base company made beaucoups money from cardholders who live in their state, Cap One should fork over more than $2 million in taxes to the Massachusetts treasury.

The Department of Revenue was emboldened by a Massachusetts Supreme Court ruling that the state could tax out-of-state corporations if the businesses have a "substantial nexus" in the state.

Also involved in the case is Geoffrey, Inc., a subsidiary of Toys R Us. The Associated Press notes that Capital One offers credit cards that are used by Massachusetts residents and hires state-based collection agencies to go after delinquent accounts there. Geoffrey, Inc., licenses the use of Toys R Us trademarks for its stores in Massachusetts.

The two companies asked the U.S. Supreme Court to hear their argument that the Commerce Clause of the Constitution prohibits state officials from taxing out-of-state companies that do not have a physical presence in that state. The Justices said no, not specifically to their complaint, but to hearing it in the first place. So Massachusetts tax collectors should be knocking on Cap One and Geoffrey, Inc doors right about now.

IRS Settlements Might Become Less Costly

2009-06-24T19:48:00.001-04:00

Congress is considering legislation that would eliminate the 20% downpayment requirement for IRS settlement offers:

To submit an Offer In Compromise (OIC) with the Internal Revenue Service in order to pay pennies on the dollar, a nonrefundable 20% downpayment is required. Combined with a very low acceptance rate by the Internal Revenue Service of OICs, the downpayment has the effect of discouraging people from applying for an Offer.
A Congressional bill was recently introduced the title to which tells it all: “Repeal of the Partial Payment Requirement on Submissions of Offers in Compromise”.

If enacted into law, the struggle with your tax debts may be a bit easier. If this bill passes, it’s good news for both taxpayers and the IRS. The more legitimate offers that are filed by taxpayers and accepted by the IRS, the narrower the tax gap becomes.

NY Case: Court Orders Destruction Of Frozen Semen Specimens

2009-06-20T21:38:00.001-04:00

With the advent of modern science comes legal issues we never dreamed of in law school (at least if we went to law school in the seventies or earlier!). Witness the decision of the First Department of New York's Appellate Division in Speranza v. Repro Lab Inc reported at 875 N.Y.S.2d 449. In affirming a decision of New York County Supreme Court Justice Jane Solomon, it was declared that the administrators of the estate of the plaintiffs' late son had no right to the semen specimens deposited in the defendant tissue bank and the administrators would also not be entitled to an injunction against the destruction of the specimens.

The problem here is that the Speranza's son Mark had deposited the semen specimens in 1997 prior to undergoing a surgery which he feared might have rendered him incapable of fathering a child in the future. After he died in 1998, his parents continued to pay an annual storage fee to the defendants who kept the specimens frozen in their tissue bank. In 2005, the parents began to seek a surrogate mother to bear a child using their late son's specimens. The defendant lab refused to turn the samples over for this purpose and the estate sued to establish that it was the rightful owner of the specimens and was entitled to have them returned.

The court noted that the contract between the decedent and the defendant lab provided that the specimens be destroyed in the event of Mark's death. This contract was found to be clear and unambiguous in setting forth the true intent of the decedent which was to have the specimens preserved so that he might father a child during his lifetime . This agreement also clearly precluded classifying Mark as a "donor" (whose specimens might be used for reproductive purposes on a recipient other than his regular sexual partner) rather than as a "client-depositor" who deposits a specimen for " potential use in artificial insemination or assisted reproductive procedures performed on his regular sexual partner"

Even though the court recognized and sympathized with the desire of the decedent's parents to have a surrogate bear his child after being artificially inseminated with the specimens, it found it was unable to reform the contract between Mark and the defendant lab to achieve this end, stating that "Reformation of a written instrument is available where, because of a mutual mistake of fact, the instrument fails to express the real agreement between the parties. The equitable remedy of reformation will not make a new agreement for the parties but, instead, will establish and perpetuate the true, existing contract by making the instrument express the real intent of the parties. Reformation is only available to correct a mutual mistake in order to conform an agreement to the original intent of the parties." Therefore, because the court felt that the intent of the parties was clearly spelled out in the contract, reformation was not an available option.

Minnesota Case: When Guardianships Harm More Than Help

2009-06-20T21:35:00.001-04:00

A Minnesota woman succeeded in getting her capacity restored after two years under the guardianship of conservator Wells Fargo, during which time she claims the company excessively used-up over $600,000 of her assets and succeeded in getting a reverse mortgage on her home. The guardianship was originally ordered due to the woman's poor mental state; however, the woman claims that after she recovered and was able to care for herself, the court refused to restore her capacity, all the while charging her estate with attorney fees and high costs for home health that she did not need. The professional conservator was more inclined to resign after the woman ran out of money.

This may be another example of a recent trend showing that a system designed the helpless can harm them if not properly monitored.

For a detailed article on this woman's shocking ordeal, see James Eli Shiffer, 2 years: $672,808 gone, Star Tribune, Feb. 15, 2009.

Kansas Case: Initials of witness on each page of the will deemed insufficient as an attestation

2009-06-20T21:32:00.001-04:00

In its opinion in In re Estate of Leavey, 202 P.3d 99 (Kan. Ct. App. 2009), the Kansas intermediate appellate court affirmed denial of probate for lack of due execution. While the testator and one witness signed the will at the end and also signed the self-proving affidavit, the intended second witness, the scrivener, did not sign the line provided for his signature. The initials of the scrivener, the testator, and the witness did appear on the bottom right-hand corner of each page.

The court held that the initials did not substantially comply with the statutory requirement that the witnesses attest and subscribe the will in the presence of the testator.

U.S. & Switzerland Agree to Information Exchange to Combat Tax Evasion

2009-06-20T21:30:00.002-04:00

From Treasury Department Press Release TG-177:

As part of the Obama Administration's aggressive efforts to enforce U.S. tax laws and reduce offshore tax evasion, the U.S. Department of the Treasury today announced the conclusion of negotiations with Switzerland to amend the U.S.-Switzerland income tax treaty to provide for increased tax information exchange. Official signing of the protocol is expected in the next few months. ... The protocol would revise the existing U.S.-Switzerland income tax treaty to allow for the exchange of information for income tax purposes to the full extent permitted by Article 26 of the OECD Model Income Tax Convention.

7th Circuit Affirms District Court in Valero Tax Workpapers Case

2009-06-17T18:44:00.000-04:00

The 7th Circuit today resoundingly affirmed the district court in Valero Energy Corp. v. United States, No. 08-3473 (7th Cir. June 17, 2009):

In this appeal, Valero Energy Corporation asks us to take a close look at the tax practitioner-client privilege. Valero sought to protect several documents under this privilege, and the result was a mixed bag—some documents were shielded from the IRS, while others were not. Valero now contends that by reaching this decision, the district court misconstrued not only the privilege, but also an exception to the privilege, which grants the government access to certain documents when tax shelters are promoted. ...

We close by noting what this opinion does not do. At this early stage, we are not evaluating the propriety of Valero’s tax-reduction plan. The IRS only wants access to documents, it is not (in this appeal) asking Valero to pay anything. It is not pointing any fingers. The government’s burden to overcome the privilege is relatively light—it need only show that there is some foundation in fact that a particular document falls within the taxshelter exception. We affirm the district court’s holding that the IRS has met this burden and leave for another day any other issues which may percolate out of this squabble between Valero and the government.

NY Court Orders Destruction Of Frozen Semen Specimens

2009-06-17T18:42:00.000-04:00

Oregon Court Rules Revocable Living Trust an Expectancy

2009-06-17T18:40:00.000-04:00

The Oregon Court of Appeals, in a case of first impression, recently held that a husband's interest in a revocable living trust is an expectancy and therefore not subject to division during divorce. The court reasoned that the husband's interest is more akin to an expectancy under a will than a contingent interest in a trust, which is a divisible property interest because the settlor has given up all interest in the trust property. The court also noted the difficulties associated with dividing an interest in a revocable living trust or taking it into account in dividing the rest of the marital assets.

The dissent thought the husband's interest more akin to a contingent interest in a trust than an expectancy under a will. The dissent concluded that a contingent interest in a trust and an interest in a revocable living trust are the same in practice, the only difference being that the former interest is lost because a contingency fails to occur and the latter is lost because a settlor revokes. The dissent noted the disparity that resulted in this case:

As a result, wife emerges from this dissolution of the marriage (during which she enjoyed, according to the trial court, a "reasonably good standard of living") with a maximum income from employment of less than $13,000 per year, no housing, and nothing to show for her contributions of money and labor to the home in which she and husband lived for 23 years, while husband will have rent- or mortgage-free housing, a larger income, and, in all probability, a soon-to-be-realized half interest in two parcels of Willamette Valley farm property.

Trading a Credit Card Debt for a Tax Bill

2009-06-17T18:33:00.002-04:00

Tough times are hitting the credit card industry, too, Rather than spending a lot of time trying to collect all the unpaid balances on their books, card issuers are opting to make deals with their customers. Or, as the New York Times notes, "As they confront unprecedented numbers of troubled customers, credit card companies are increasingly doing something they have historically scorned: settling delinquent accounts for substantially less than the amount owed.

One such beneficiary of this new attitude is Edward McClelland: "McClelland's credit card company was calling yet again, wondering when it could expect the next installment on his delinquent account. He proposed paying half of his $5,486 balance and calling the matter even.
It's a deal, the account representative immediately said, not even bothering to check with a supervisor." Unfortunately for McClelland, he's not likely to get such a deal from the IRS

In many (actually, most) such instances, the IRS views canceled debt as taxable income.
Homes yes, plastic no: A lot of people think that the recent changes to offer canceled debt relief to mortgage holders also absolves all forgiven debt. Not so.

McClelland will owe tax on the $2,743 he recently sent to his credit card company to wipe out that account's balance. As the story notes, he now has spared himself the prospect of years of collection calls. But he's gained a new creditor.

McClelland's clearing of his credit card debt means that he will owe tax on the other, forgiven half that the card company ate. If he's in the 25 percent bracket, that comes roughly to $686.
Granted, a $686 tax bill is a lot more manageable than an almost $5,500 credit card bill. Still, McClelland and many others in his situation might not be aware that their deals with creditors will have tax implications.

The IRS' position. The IRS notes in one of it's many Web pages devoted to the taxability of forgiven debt, often referred to as Cancellation of Debt Income or CoDI, that: The tax impact of debt forgiveness or cancellation depends on your individual facts and circumstances. Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.

Elsewhere, the IRS offers some ways to get around having to count the canceled debt as income. Most of them, however, are not that palatable: If you had a nonbusiness credit card debt canceled, you may be able to exclude the canceled debt from income if the cancellation occurred in a title 11 bankruptcy case, if you were insolvent immediately before the cancellation, or if you were affected by the Midwestern disasters. You should read Bankruptcy, Insolvency, or Qualified Midwestern Disaster Area Indebtedness under Exclusions in Chapter 1 to see if you can exclude the canceled debt from income under one of those provisions. If you can exclude part or all of the canceled debt from income, you should also read Bankruptcy, Insolvency, and Qualified Midwestern Disaster Area Indebtedness under Reduction of Tax Attributes in Chapter 1. Yep, if you file for bankruptcy, the IRS also will usually forgive your canceled debt. How thoughtful.

Other CoDI relief: The financial difficulties related to last year's major Midwestern storms are a one-time deal, but other, more long-term instances in which canceled debt is erased from IRS taxable income ledgers include: • Bankruptcy, mentioned previously; • Insolvency, which means basically that your total debts are more than the fair market value of your total assets; • Certain farm debts; • Non-recourse loans, which are loans for which the lender cannot pursue you personally in case of default; and • Forgiveness of Qualified Principal Residence Indebtedness.

Each of these debt forgiveness circumstances is detailed in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Home debt special rules: As mentioned several times earlier, forgiveness of a debt connected to your primary residence is excluded from taxable income. This is thanks to the Mortgage Debt Forgiveness Act of 2007. Since its passage, the tax relief for folks facing foreclosure or loan restructuring has been expanded.

The latest change in this area came in the Emergency Economic Stabilization Act, the bailout bill enacted in October 2008. Now, mortgage loan debt canceled in 2007 through 2012 is not taxed.
In all cases of canceled debt, your lender or creditor should send you a Form 1099-C, Cancellation of Debt, showing any forgiven debt.

Homeowners eligible to count that amount as nontaxable will need to report the canceled mortgage debt on Form 982 and send it in with your personal tax return. But those of you with debt canceled in connection with a credit card or other loans, will need to note that amount on the "other income" line of your tax return.

When a creditor writes off a debt, the tax code generally treats the amount of the canceled debt as taxable income to the debtor, but Congress has carved out a number of exceptions. The rules that determine whether cancellation of debt income is includible in gross income are complex, and taxpayers often do not receive reliable information about their tax reporting and payment obligations.

529 Plan Assets for Technology

2009-06-17T18:29:00.001-04:00

The American Recovery and Reinvestment Act of 2009 amended § 529(e)(3)(A) to add new clause (iii):

(iii) expenses paid or incurred in 2009 or 2010 for the purchase of any computer technology or equipment (as defined in section 170(e)(6)(F)(i)) or Internet access and related services, if such technology, equipment, or services are to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is enrolled at an eligible educational institution.

This language is quite broad, covering the "beneficiary and the beneficiary's family." As a result, it appears to cover not only a college student's laptop but also the family's home computer and related equipment, software, and Internet access. The language also is broad enough to cover Apple's iPhone, Sprint's Pre, Blackberry's Storm, and other smart phones.

IRS Extends Tax Break for New Car Purchases to Residents of States Without Sales Taxes

2009-06-10T18:20:00.001-04:00

The IRS announced today (IR-2009-60) that the special deduction for sales taxes on a new car purchased in 2009 (after February 16) also extends to taxpayers in those states without a sales tax -- Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon. Taxpayers in these states who purchase a new car in 2009 can deduct other fees and taxes imposed by the state or local government. According to the IRS, Congress intended for these fees or taxes to qualify for this special tax deduction.

The deduction is available even if the taxpayer does not itemize deductions. The deduction is limited to the fees or taxes paid on up to $49,500 of the purchase price of a qualified new car, light truck, motor home, or motorcycle. The amount of the deduction is phased out for taxpayers whose AGI is $125,000- $135,000 (single) and $250,000-$260,000 (married filing jointly).

Unprecedented Times in the Wealth-Management Industry

2009-06-09T19:21:00.002-04:00

Courtesy of the WSJ:

These are unprecedented times in the wealth-management industry. Some industry stalwarts– Bear Stearns, Lehman Brothers–are gone. Others, such as UBS, are embroiled in lawsuits or investigations. And a few, like U.S. Trust and Merrill Lynch, have been changed beyond recognition by mergers. Those changes, combined with investor anger over their shrunken fortunes, have set the stage for the biggest shake-up in wealth-management in decades. Billions of dollars of client money will move to new homes, along with bankers and brokers. New business models will emerge. Old names will tumble, new ones will emerge. The latest to enter the fray are mid-tier investment-banking firms.

Evercore Partners, Roger Altman’s deal-shop, recently created a wealth-management business led by Jeff Maurer, the former CEO of U.S. Trust. Evercore Wealth Management has been expanding quickly, adding staff and recently buying a U.S. Trust unit that handles fiduciary services. According to people familiar with the matter, Evercore is about to go national with the opening of a San Francisco office. It also is hiring a team of prominent wealth advisers from U.S. Trust, these people say. Details have yet to be announced, but the expansions will give the company key footholds in the two most prized wealth centers, New York and California. Thursday also brought news news that Lazard, the venerable mergers-and-acquisitions shop, is building its own wealth-management business. To run it, Lazard has hired Thaddeus Shelly, a former senior managing director at Bessember Trust.

Granted, Lazard already manages some client money through its Lazard Asset Management and Lazard Freres Gestion businesses. Still, the new Private Wealth Management subsidiary marks a more-focused effort to target the money of the wealthy. Along with investment management, it will roll in some tax planning, trust and estate advice, philanthropy advice and multigenerational planning.

Will they succeed? They have a solid chance. Many of the giant banks are now viewed with suspicion by wealthy clients, who feel lost in giant institutions and complain of constant product pushing. At the same time, many of the boutiques are bedeviled by questions about their longevity, sophistication and governance (not to mention concerns about having a “Madoff” problem).

Just as Evercore and Lazard have carved out an ideal niche in deal making (between the boutiques and giant banks) they may also be successful at wealth management. Where would you put your money these days?

IRS Launches Tax Return Preparer Review

2009-06-04T17:03:00.001-04:00

IR-2009-57, June 4, 2009

WASHINGTON — IRS Commissioner Doug Shulman announced today that by the end of 2009, he will propose a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers.
Some of the potential recommendations could focus on a new model for the regulation of tax return preparers; service and outreach for return preparers; education and training of return preparers; and enforcement related to return preparer misconduct. The Commissioner will submit recommendations to the Treasury Secretary and the President by the end of the year.
“Tax return preparers help Americans with one of their biggest financial transactions each year. We must ensure that all preparers are ethical, provide good service and are qualified,” Shulman said. “At the end the day, tax preparers and the associated industry must be part of our overall game plan to strengthen the integrity of the tax system.”

The first part of this groundbreaking effort will involve fact finding and receiving input from a large and diverse constituent community that includes those that are licensed by state and federal authorities — such as enrolled agents, lawyers and accountants — as well as unlicensed tax preparers and software vendors. The effort will also seek input and dialog with consumer groups and taxpayers.

“We plan to have a transparent and open dialogue about the issues,” Shulman said. “At this early and critical stage of the process, we need to hear from the broadest possible range of stakeholders.”

Later this year, the IRS plans to hold a number of open meetings in Washington and around the country with constituent groups. More information, including schedules and agendas for public meetings, will be posted on the “Tax Professionals” page on this Web site and will be communicated to stakeholder groups.

Delaware Domestic Tax Haven Troubles

2009-06-01T21:46:00.003-04:00

In the spring some European nations that had been branded offshore tax havens turned around and pointed their fingers at some American states they considered just as guilty of helping folks shelter money from the IRS? Well now some domestic fingers also are being directed at one of those states: Delaware.

In the New York Times' article "Critics Call Delaware a Tax Haven," Lynnley Browning reports that states squeezed by hard times "are pushing to collect taxes that corporations are avoiding through Delaware shell companies. ... About 20 states have adopted laws that would effectively keep companies from using the decades-old tax loopholes in Delaware."

So far, according to the newspaper, Maryland has reclaimed $267 million in such taxes, including interest and penalties, and has assessed an additional $143 million. Overall, other states are looking to the First State for "tens of billions of dollars in annual tax receipts, funds that states say they need during this recession."

A growing number of states are moving aggressively to claim taxes that they say are rightfully theirs. The headquarters of Capital One Financial is in McLean, Va. (near Washington, D.C.), but the states' approach described in the Times' article seems to follow that of Massachusetts tax collectors going after Cap One earnings. The article elaborates on the Delaware corporate tax structure and why companies find it so appealing. They utilize a mechanism known as "embedded royalty" companies.

All the legal and tax contortions aside, Delaware officials just flat out insist that their state is not a shady tax haven. Delaware’s assistant secretary of state Richard J. Geisenberger told the newspaper that the loophole "is simply a state tax law."

Housing Credit Becomes Down Payment

2009-06-01T21:41:00.001-04:00

The first-time homebuyer tax credit is changing yet again, this time to allow some buyers to get their hands on the tax money as a down payment. When it was created last year, it was a $7,500 (or 10 percent of the home's purchase price, whichever was less) tax break that basically operated as an interest-free loan that eligible buyers got when they filed their tax returns. It has to be repaid in subsequent tax filings.

Then came the American Recovery and Reinvestment Act. When that stimulus package was signed into law on Feb. 17, it included provisions that increased the credit for eligible 2009 purchases to $8,000 (or 10 percent of the home's purchase price, whichever is less) and made it a true credit that didn't have to be paid back. The IRS followed up the new law by allowing flexibility on when the credit could be claimed. Still, the tax break was available only after the qualifying taxpayers closed on their first home. That's now changing for some buyers.

HUD tweaks: A ruling by the Department of Housing and Urban Development (HUD) will allow some homebuyers to "monetize" their credit as a down payment. Eligible buyers can use their credit amount to secure a piggyback or bridge loan from private lenders, state housing agencies and some nonprofit groups and use that money as a down payment.

HUD Secretary Shaun Donovan, in announcing the plan, said the down payment option "will not only help these families to purchase their first home but will present an enormous benefit for communities struggling to deal with an oversupply of housing." Donovan pointed to a home builders' study that claimed that the tax credit will stimulate 101,000 sales to first-time buyers. Another 59,000 home sales will follow, according to the study, by folks who then will be able to buy homes because first-time buyers purchased their properties.

The tax credit down payment program is available only for FHA loans and buyers still must follow some of the federally-insured loan rules. FHA loans will continue to require a minimum 3.5 percent down payment, which the buyers much come up with on their own. However, they can use loans from certain nonprofits and state and local housing agencies to reach the 3.5 percent amount. Any additional funds from a tax credit secured loan can be used as an additional down payment amount. The bridge or piggyback loan would be paid back when the homebuyer receives his or her tax credit.

New Restricted LLC or LP in Nevada

2009-05-30T18:25:00.000-04:00

Estate planners often use family limited liability companies and family limited partnerships to facilitate gifting and installment sales of minority interests or non-voting interests to family members or irrevocable trusts for the benefit of family members.

Under Code Section 2704(b) and Treasury Regulations §25.2704-2(a), if an interest in an entity is transferred to or for the benefit of a member of the transferor's family, any applicable restriction is disregarded in valuing the transferred interest.

Treasury Regulations §25.2704-2(b) defines an applicable restriction as a limitation on the ability to liquidate the entity (in whole or in part) that is more restrictive than the limitations that would apply under the state law generally applicable to the entity in the absence of the restriction.

Until now, all states have been limited to some form of the Uniform Laws. A number of states, including Nevada, have had favorable default restrictions that allow for slightly higher valuation discounts than the discounts that can be obtained using other states' laws.

But Nevada has now separated its valuation discount opportunities significantly in comparison to all other states. Specifically, Nevada Senate Bill 350 was signed into law by the Governor on May 29, 2009. One of the provisions of the new law, effective October 1, 2009, allows the creation of a Restricted LLC or a Restricted LP.

The difference between a Restricted LLC and Restricted LP versus a standard LLC and LP is that the Restricted LLC and LP have a default statute locking in the entity's underlying assets for a ten-year period. This creates a new significantly higher ceiling on valuation discounts that is not available in any other state.

Tax Amnesty in Connecticut and Maryland

2009-05-29T19:36:00.001-04:00

Connecticut and Maryland are offering state tax amnesty programs in the wake of a six-month Internal Revenue Service amnesty program for taxpayers with unpaid offshore account income. On March 23, the IRS issued directives about the federal program, which generally trims civil penalties from the greater of 50 percent of the account value or $100,000, to a one-time payment of 20 percent of the account value, or 5 percent for an inherited account. The program involves filing up to six years of amended returns.

Connecticut's tax amnesty program, which covers numerous kinds of taxable income owed for tax periods ending on or before Nov. 30, 2008, runs from May 1 through June 25. Maryland's program covers taxes due on or before Dec. 31, 2008 and runs from Sept. 1 through Oct. 31. Under both programs, participants can avoid penalties and criminal prosecution and pay lower interest on back taxes.

The most recent prior amnesty state programs were in 2007 in Iowa and Texas, according to a Maryland Department of Legislative Services report filed with the bill, which detailed the fiscal impact of such programs. The amnesty programs offer greater incentives than many states' general voluntary disclosure policies, which allow delinquent taxpayers to file missing returns or correct old returns in exchange for leniency.

Estate of Feinberg - The Jewish Trust Clause

2009-05-27T16:24:00.002-04:00

In Estate of Feinberg, 383 Ill. App. 3d 992 (1st Dist. June 30, 2008), an Illinois appellate court ruled a testator could NOT disinherit his grandchildren for marrying non-Jews. Here's how the case was summarized in this piece in the Chicago Jewish News:

When Max Feinberg was in dental school in the 1920s and '30s, he was one of only a handful of Jews in his class and was subjected to anti-Semitic slurs. He graduated at the height of the Depression and worked a seven-day week to build his dental practice. Although he did not adhere to the Orthodox Jewish practices in which he was raised, his Judaism was a crucial part of his life. He and his wife, Erla, belonged to a Conservative synagogue, observed Jewish tradition and always celebrated Jewish holidays.

Before he died in 1986 at age 77, Feinberg had his attorney insert a clause in his will concerning the distribution of his considerable financial assets. It stated that none of his grandchildren, or their children or grandchildren, would inherit the $250,000 he had allotted to each of them if they married a non-Jewish spouse unless the spouse converted to Judaism.

Max Feinberg couldn't have known that that clause would become the subject of intense scrutiny and the basis of a lawsuit. In it, one of his grandchildren sought to prove that the clause was invalid. An Illinois court agreed. Now the Illinois Appellate Court has confirmed the decision, with one Jewish justice offering an impassioned dissent. There's a possibility the case may go to the Illinois Supreme Court next.

The key excerpt from the Feinberg opinion:

The Restatement Third of Trusts provides that trust provisions which are contrary to public policy are void. It gives as a specific example a provision that all of a beneficiary's rights to a trust would terminate if he married a person who was not of a specified religion:

[Comment j.] Family relationships. A trust or a condition or other provision in the terms of a trust is ordinarily * * * invalid if it tends to encourage disruption of a family relationship or to discourage formation or resumption of such a relationship. * * *

In addition, a trust provision is ordinarily invalid if it tends seriously to interfere with or inhibit the exercise of a beneficiary's freedom to obtain a divorce * * * or the exercise of freedom to marry * * * by limiting the beneficiary's selection of a spouse * * *. * * *

[Illustration 3.] The marriage condition terminates all of [settler's nephew] N's rights if, before termination of the trust, he ‘should marry a person who is not of R Religion,’ with the same gift over to C College. The condition is an invalid restraint on marriage; the trust and N's rights will be given effect as if the marriage condition and the gift over to C College had been omitted from the terms of the trust.

Restatement of Trusts § 29, Explanatory Notes, Comment j, Illustration 3, at 62-64 (3d ed.2003).

We hold that under Illinois law and under the Restatement (Third) of Trusts, the provision in the case before us is invalid because it seriously interferes with and limits the right of individuals to marry a person of their own choosing.

NY Probate - Interested Witness Without Knowing It

2009-05-22T10:50:00.001-04:00

On April 27, 2009, a New York court held that a necessary witness to a will was an interested witness and was denied benefit under the will, even though his benefit under the will was unknown.

The respondent in the case, Henry Wu, was the beneficiary of two life insurance policies. Decedent's will provided that all taxes resulting from decedent's death, including those arising outside the will, were to be paid by the estate and were not to be apportioned among the beneficiaries. Wu argued that this provision freed him from responsibility for the taxes on the approximately $3.3 million he received from the life insurance policies. The court would have agreed had Wu not been a necessary witness to the will. New York law provides that a witness to a will cannot benefit from a disposition in the will. The court reasoned that the non-apportionment clause operated as a benefit in favor of Wu because he would be relieved from his portion of applicable taxes. Therefore, the court ordered Wu to pay his portion of the taxes on the life insurance proceeds.

The court recognized that the decision may seem harsh. While the interested-witness statute was designed to prevent a witness from using fraud or coercion to benefit under the will, Wu was not named in the will, and he claimed that he was unaware of his benefit at the time of witnessing. Nevertheless, the court deemed Wu an interested witness, even though it seems it was unlikely he used fraud or coercion to benefit under the will. The court concluded that "[i]t behooves any drafter using [a non-apportionment clause] to be fully informed of the testator's non-probate assets to avoid unintended consequences, some of which may have even greater potential for frustrating the testator's intent." In re Estate of Wu, 2009 NY Slip Op 29188 (Sur Ct, New York County 2009).

Kentucky Supreme Court on Trustee Disclosure

2009-05-21T18:21:00.001-04:00

Kentucky Supreme Court Rules Trustee Disclosure Proper:

"The Kentucky Supreme Court . . . is raising eyebrows with a recent ruling that says the bank trustee of a living trust was right to tell a group of charities they had been cut from an elderly woman's will." See Dale Arden, GETTING PERSONAL: Living Trusts Can Offer Up Secrets, The Wall Street Journal, May 13, 2009, discussing JP Morgan Chase Bank, N.A. v. Longmeyer, 2005-SC-000313-DG, Feb. 17, 2009.

The disclosure prompted lawsuits from the disinherited, and presumably somewhat disgruntled, beneficiaries. While the ruling raises some interesting questions, it reinforces the need to address privacy issues when creating a living trust or a will.

Walmart's Tax Savings Strategy

2009-05-21T18:19:00.000-04:00

WalMart's aggressive tax strategy that has saved it hundreds of millions in state taxes in recent years by transferring its stores to REITs owned by Wal-Mart subsidiaries in Delaware and then deducting rental payments to the REITS, which were not taxed on the rental receipts in Delaware. The North Carolina Court of Appeals on Tuesday rejected the Wal-Mart tax strategy in Wal-Mart Stores East, Inc. v. Hinton, No. 08-450 (N.C. Ct. App. May 19, 2009), affirming the trial court's conclusion:

[Wal-Mart does] not deny the facts demonstrating the circular journey taken by the "rents" paid by these plaintiffs, but contend[s] that on each leg of the journey [Wal-Mart was] only taking advantage of a lawful deduction afforded them by then-existing tax law. Such a piecemeal approach exalts form over substance, however.

IRS Allows Suspension of Plan Contributions

2009-05-18T17:05:00.001-04:00

The IRS has come up with some new rules to "ease the pain" of these dire economic conditions and has issued some proposed regulations allowing employers to reduce or suspend their 401(k) or 403(b) safe harbor nonelective contributions mid-year in the case of a "substantial business hardship described in section 412(c) [of the Internal Revenue Code]." The IRS notes in the preamble to the proposed regulations (in today's Federal Register) that the new rules will "provide an employer an alternative to the option of terminating the employer's safe harbor plan in such a situation." The IRS does require 30-day advance notice.

Creditor Claims Period Not Applicable to the IRS

2009-05-17T19:48:00.003-04:00

In U.S. v. Guyton, (M.D.Fla. May 08, 2009), the personal representative of an estate was found personally liable for any of the decedent's unpaid taxes to the extent they paid any debts due by the decedent before paying the decedent's tax liability (31 U.S.C. § 3713(b)). The court ruled that the IRS is NOT subject to the limitations periods applicable to all other estate creditors absent its own consent.

References: Florida Statute § 733.705(8); United States v. Summerlin, 310 U.S. 414 (1940); and United States v. Kellum, 523 F.2d 1284, 1286 (5th Cir.1975).

2010 Health Savings Account Limits

2009-05-15T12:03:00.002-04:00

The IRS has released the 2010 dollar limits and requirements for Health Savings Accounts. The 2010 contribution limits are:

$3,050 for single plans; and
$6,150 for family plans.

You have to have a "high deductible" plan to qualify to make an HSA contribution. That is a plan with an annual deductible of at least $1,200 for single plans and $2,400 for family coverage. The plans can't have annual out-of-pocket expenses (besides premiums) in excess of $5,950 for single coverage and $11,900 for family coverage.

Special State Income Tax Rate on the "Rich"

2009-05-14T17:13:00.004-04:00

The following states impose a special income tax rate on "The Rich."

State - Tax Rate - Applicable
Hawaii - 11.00% - Income > $ 200,000
California - 10.55% - Income > $1,000,000
New Jersey - 8.97% - Income > $500,000
New York - 8.97% - Income > $500,000
(plus NY City income tax rate of 3.648%, for a 12.618% rate)
Maryland - 6.25% - Income > $1,000,000
(plus country income tax that averages 2.98%, for a 9.23% rate)

Obama Administration Proposes $60 billion in New Tax Increases

2009-05-10T19:47:00.004-04:00

WASHINGTON -- The Obama administration will propose $60 billion in new tax increases over 10 years on wealthy estates, businesses and others to make up for shortfalls in its fund to pay for an expensive overhaul of the health-care system. The measures go beyond plans the White House has announced in the past few weeks. Officials said that upon further analysis they realized that they had overestimated savings and tax increases proposed in February to help pay the bill. Some of the changes will be announced Saturday, with the full proposals coming Monday when the White House releases a detailed analysis of its budget blueprint. Administration officials described the new proposals not as tax increases, but as eliminating "tax loopholes."

One element would raise an estimated $24 billion over 10 years by tightening estate-tax rules, giving taxpayers less flexibility to minimize their liability on inherited goods by claiming a different value on the same item for different transactions.

A second element, which would raise $10 billion over 10 years, would require businesses and others who make payments to corporations to report such payments to the Internal Revenue Service. Under current law, payments to individuals are required to be reported on a 1099 form, but no such requirements exist for similar payments to corporations. The goal is to make sure that the recipient corporations report all their taxable income.

How to pay for a health-care overhaul estimated to cost more than a trillion dollars over a decade is one of the trickiest questions facing the administration and Congress. The White House has proposed a combination of health-care spending cuts and tax increases.

In February, the administration identified $634 billion over 10 years to set aside in a health-care "reserve fund," enough to cover about half the total cost. The money would be needed to pay for new subsidies to help people buy insurance, among other things.

The cuts to government health-care spending are controversial because they mean lower payments for various providers, and they are not expected to raise anywhere near enough money to pay the full tab.

President Barack Obama's main tax proposal -- to cap deductions for the wealthy -- has been all but dismissed by key members of Congress, but officials Friday said they are sticking with it.
The matter was made more challenging after further analysis, when officials realized that their proposals did not actually raise $634 billion.

The spending cuts, originally estimated at saving $316 billion, would actually save only $309 billion, a White House official said. The tax increases, originally estimated at $318 billion, would actually raise $267 billion. That leaves a gap of $58 billion over 10 years. To make up the gap, officials found about $60 billion in new taxes. On Friday, they detailed about $35 billion of that to The Wall Street Journal and said they would reveal the rest of the proposals on Monday.
The provision regarding estates would prevent taxpayers from using two different valuations for the same items. Under current law, the White House official said, some people estimate a particular inherited item at one value for the purposes of the estate tax, but estimate the value of the same item at a higher amount when reporting it as a gift.

That is because the incentive is to undervalue items when paying the estate tax. But the incentive is to overvalue them when reporting gifts, so that the basis will be higher when calculating capital gains if the item is sold. Under the proposal, taxpayers would have to use the same value for both purposes.

The administration is also proposing to more quickly kill what it calls the "paper company loophole." The tax code gives a tax credit to companies that develop alternative fuels if they mix biological products with other fuel. The official said that paper manufacturers have figured out that if they add some gasoline to the sludge they have long produced and used as a fuel that they can qualify. The change will raise less than $1 billion over 10 years.

2009 Alternative Minimum Tax Changes

2009-05-07T19:23:00.002-04:00

The following changes to the AMT went into effect for 2009.

AMT exemption amount increased. The AMT exemption amount has increased to $46,700 ($70,950 if married filing jointly or qualifying widow(er); $35,475 if married filing separately).

AMT exemption amount for a child increased. The AMT exemption amount for a child whose unearned income is taxed at the parent’s tax rate has increased to $6,700.

Certain credits still allowed against AMT. The special rule that allows the credit for child and dependent care expenses, credit for the elderly or the disabled, education credits, mortgage interest credit, and the District of Columbia first-time homebuyer credit to be applied against the AMT was scheduled to expire at the end of 2008. However, Congress has extended the special rule through 2009, so those credits can be applied against the AMT for 2009. This special rule is also expanded to include the personal use part of the alternative motor vehicle credit. It also applies to the nonbusiness energy property credit.

Qualified motor vehicle tax allowed against AMT. If you claim the standard deduction for the regular tax and it includes any state or local sales or excise tax on the purchase of a qualified motor vehicle, that tax is also allowed as a deduction for the AMT.

Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 exempt from AMT. Tax-exempt interest on specified private activity bonds issued in 2009 or 2010 is not an item of tax preference and therefore is not subject to the AMT. A refunding bond is treated as issued on the date of the issuance of the refunded bond (or, in the case of a series of refundings, the original bond). However, tax-exempt interest on a specified private activity bond issued in 2009 or 2010 to currently refund a private activity bond issued after 2003 and before 2009 is not an item of tax preference.

Boomers Going Bust - Boston Globe

2009-05-07T13:14:00.003-04:00

People have accused the baby boomers of being whiners almost since we were born. But just wait until we get to retirement age and discover that we don't have nearly enough money to take care of our "golden years." That's going to be the ultimate generational bummer.

I've been gathering some data about what I'll call, with the usual boomer understatement, the "retirement crisis." My mentors have been Eugene Ludwig, the head of the consulting firm Promontory Financial Group, and his colleague Michael Foot. The numbers show a genuinely frightening gap between what people have saved for retirement and what they will need. And many of these studies don't take into account last year's stock market crash, which will make the problem worse.

Let's start with the basic fact that only about half of Americans have any employer-sponsored retirement plan at all. The other folks will have to depend on Social Security. For a typical boomer worker, that would mean a monthly benefit of about $2,400 at a retirement age of 66 in 2020. On that, you won't be able to afford many Starbucks lattes.

But let's assume that our average worker is one of the lucky ones with an employer-sponsored pension. Not so long ago, that usually would have meant a "defined benefit" pension at retirement. About 80 percent of employees in medium-size and large companies had such plans in 1985, according to the Labor Department. By 2000, defined-benefit recipients totaled just 36 percent.

What's happened is that employees have taken on the investment and actuarial risks as their employers shifted to "defined contribution" formulas. Employers now contribute to 401(k) plans that are managed by the employees. Unfortunately, workers often don't do a good job as investors. They underestimate what they will need in retirement, and they underfund their 401(k) plans. And as for shifting out of stocks before the market tanks, well, let's just forget about that. . . .

How bad are baby boomers at financial planning? Extremely bad, according to Annamaria Lusardi and Olivia Mitchell of the National Bureau of Economic Research. They found that more than one-quarter of boomer households thought "hardly at all" about retirement and that financial literacy among boomers was "alarmingly low." Half could not do a simple math calculation (divide $2 million by five) and fewer than 20 percent could calculate compound interest. The NBER researchers also found that, as of 2004, the typical boomer household was holding nearly half its wealth in the form of housing equity. Uh-oh.

For a closer look at the retirement squeeze, consider a study released last month by the Congressional Research Service. Patrick Purcell analyzed the most recent data on consumer finances gathered by the Federal Reserve. He found that for the 53 percent of households that hold at least one retirement account, the median combined balance was a mere $45,000.

Hold on, you say, that figure includes some younger workers who haven't started saving in earnest yet. Okay, for households headed by persons between the ages of 55 and 64, the median value of all retirement accounts was just $100,000. Purcell noted that for a 65-year-old man retiring last month, that $100,000 would buy an annuity that would pay a paltry $700 a month for life, based on current interest rates.

And here's an extra bit of bad news: The Fed data used in Purcell's study were gathered in 2007. With stock market declines since then, the median account balances are probably even lower now.

What's going to happen? Certainly, people will try to save more. But my guess, knowing my generational cohort, is that we'll want a government bailout to supplement our too-meager retirement savings. Unfortunately, the Treasury won't have enough money to fund our Medicare benefits, let alone a top-up in Social Security.

A poll released in January by the National Institute on Retirement Security shows the anxiety about this issue. Because of the recession, 83 percent of those polled said they were worried about having a secure retirement; of those with a 401(k) account, only about half thought they would have enough money to retire. And 71 percent said it was harder to retire now than for previous generations.

Are you whining yet? I am. As my pension mentor Foot says: "This is a time bomb that has been building for years. The recession has made it more acute. It has pricked the bubble of hope that high investment returns could get us out of the crisis."

New York - New Power of Attorney Law Takes Effect on Sept. 1, 2009

2009-05-07T09:09:00.001-04:00

NY: Sweeping changes in New York's law concerning powers of attorney will take effect on September 1, 2009. The legislature has revised Chapter 644 of the laws of 2008 to amend the state's General Obligations law. The changes are complex and affect, among other things, not only the instrument's form but also the level of fiduciary responsibility imposed, the need for the agent to keep detailed records and to make them available and provisions for using the power to make major gifts.

Life Insurance - Revenue Rulings on May 1, 2009

2009-05-04T22:00:00.012-04:00

IRS: The IRS released on May 1, 2009, two Revenue Rulings dealing with how life insurance policies are taxed when they are surrendered or sold to an investor. The rulings mention both cash-value contracts and term contracts. The first ruling deals with how the original owner of the policy is taxed. The second deals with how the investor is taxed.

Rev. Rul. 2009-13 – Taxation of the Policy Owner

This Revenue Ruling deals with how owners of life insurance are taxed when they sell or surrender the policy.

Situation 1: Owner buys life insurance on his own life. He is the owner and his family is the beneficiary. Owner pays $64,000 in premiums over 8 years and then surrenders the policy for $78,000. During the 8 years he pays $10,000 in “cost-of-insurance” charges.

Result 1: Owner has $14,000 of ordinary income ($78,000 received minus $64,000 premiums paid).

Situation 2: The same facts except that Owner sells the policy to Investor for $80,000. Investor is not related to owner and has no insurable interest in Owner.

Result 2: Owner has $26,000 taxable income. That consists of $14,000 ordinary income ($78,000 cash surrender value minus $64,000 premiums paid) and $12,000 long-term capital gain income ($80,000 sales price minus $78,000 cash surrender value.)

Situation 3: Same facts except the policy is level premium 15-year term life insurance with a $500 a month premium. Owner pays $45,000 in premiums during the 8 years and then sells the policy to Investor for $20,000.

Result 3: Owner has $19,750 long-term capital gain income ($20,000 sales price minus $250 adjusted basis. The adjusted basis is the $45,000 total premiums paid minus the cost-of-insurance protection. The cost-of-insurance is the $500 monthly term premium times the 89.5 months premiums paid – that is, $44,740.)

Rev. Rul. 2009-14 – Taxation of an Investor

This ruling deals with how an investor who buys life insurance is taxed. It assumes the investor does not have an insurable interest in the life of the person insured under the contract.

Situation 1: Owner buys a level premium 15-year term life insurance on his own life with a monthly $500 premium. He is the owner and his family is the beneficiary. After paying $45,000 in premiums, Owner sells the policy to Investor for $20,000. Investor, a “United States person,” does not have an insurable interest in Owner’s life. Investor pays another $9,000 premiums and the insured then dies. Investor receives a $100,000 death benefit.

Result 1: Investor has ordinary income of $71,000 (the $100,000 death benefit minus both the $20,000 paid for the policy and the $9,000 premiums paid after buying the policy).

Situation 2: Same facts except that Investor pays the added $9,000 premiums and then sells the policy to Investor2 for $30,000.

Result 2: Investor has $1,000 long-term capital gain (the $30,000 sales prices minus a $29,000 adjusted basis. The adjusted basis is the $20,000 he paid Owner plus the extra $9,000 premiums).

Situation 3: Same facts as Situation 1 except that Investor is a foreign corporation.

Result 3: Investor has $71,000 ordinary income. It is treated as income from sources within the United States.

Start-Up Business Expenses

2009-05-04T17:12:00.009-04:00

IRS: Thomas J. Woody v. Commissioner of Internal Revenue - The petitioner, Mr. Woody, deducted on his 2004 income tax return various expenses he incurred in connection with certain real property he owned. The IRS audited Mr. Woody’s tax return and disallowed the deductions on the grounds that he had not yet begun his real estate rental business. The IRS claimed that the expenses should have been capitalized and amortized as start-up expenses under §195. Judge David Gustafson cited controlling law, a taxpayer is not carrying on a trade or business under section 162(a) until the business is functioning as a going concern and performing the activities for which it was organized. Glotov v. Commissioner, TC Memo 2007-147.

Thus, the issue for the Court was whether or not Mr. Woody was engaged in the business of real estate rentals at the time he incurred the expenses. In Mr. Woody’s business outline, dated May 10, 2004, he indicated that he was starting Value Property Investments “for the purpose of buying, remodeling and renting property. Therefore, until Mr. Woody began to buy, remodel, or rent–i.e., to perform the activities for which Value Property Investments was organized–he was not carrying on a trade or business as contemplated by section 162.

The Court agreed with the IRS and the deductions were disallowed, Mr. Woody’s activities in 2004 were, at most, start-up activities, because he had not yet commenced the activities for which Value Property Investments was organized, i.e., buying, selling, renting, or offering to rent property, or even “flipping” or “wholesaling”.

Planning Tip: If you are starting a new business, defer the payment of as much of your expenses as possible until after you have actually begun the regular operations of the business. By doing this you will make the expenditures deductible in full in the year in which they were paid.

IRS Releases New Mortality Tables Effective May 1, 2009

2009-05-01T14:18:00.003-04:00

IRS: Internal Revenue Code Section 7520 requires that the Secretary of the Treasury revise the mortality assumptions underlying the IRS tables at least once every ten years to incorporate the most recently available mortality data. These tables were last updated on May 1, 1999, and new tables have now been issued effective for transactions occurring on or after May 1, 2009.

CRT Impact: A donor's deduction for a contribution to a charitable remainder trust will be less under the new tables.

Q-PERT Impact: A qualified personal residence trust will be adversely affected, primarily because the value of the reversion will fall.

Private Annuity Impact: Private annuities will be favorably affected.

Facts about the New Sales Tax Deduction for Vehicle Purchases

2009-05-01T13:17:00.003-04:00

IRS: According to Tax Tip 2009-3, individuals who buy a new car or several other types of motor vehicles this year may be entitled to a special tax deduction when they file their 2009 federal tax returns next year. The tax break is part of the American Recovery and Reinvestment Act of 2009.

Here are seven things you should know about this new deduction: (i) State and local sales taxes paid on up to $49,500 of the purchase price of qualifying vehicles are deductible; (ii) Qualified motor vehicles generally include new (not used) cars, light trucks, motor homes and motorcycles; (iii) Purchases must occur after Feb. 16, 2009, and before Jan. 1, 2010; (iv) This deduction can be taken regardless of whether or not you itemize other deductions on your tax return; (v) Taxpayers will claim this deduction when filing their 2009 federal income tax return next year; (vi) The amount of the deduction is phased out for taxpayers whose modified adjusted gross income is between $125,000 and $135,000 for individual filers and between $250,000 and $260,000 for joint filers; and (vii) The deduction may not be taken on 2008 tax returns.

Consumers who are considering buying a new car may find that this tax incentive means there may have never been a better time to buy.

IRS Eases Up On Electing 5-year NOL Carryback

2009-04-30T19:00:00.003-04:00

IRS: The IRS has backed off a tricky rule that would have cost many taxpayers the ability to use the temporary 5-year net operating loss carryback. The regular federal net operating loss carryback period is two years. That allows taxpayers to get refunds on taxes paid in the prior two years if they have a business loss in the third year. A special provision allows taxpayers to carryback 2008 NOLs up to five years.

The initial IRS guidance (Rev. Proc. 2009-19) required taxpayers to elect the five year carryback on the the tax return for the loss year -- even though the loss carryback refund is claimed on a separate filing. This could have caused taxpayers to inadvertently lose the ability to use the five year carryabck. Newly issued Rev. Proc. 2009-26 fixes this problem by allowing taxpayers to elect the five year carryback on their loss carryback claim - not just the original return. Individuals can claim the five year carryback on Form 1045 or 1040-X; corporations can claim it on Form 1139 or an amended return for the carryback year.

This new procedure fixes the IRS problems with the five-year carryback, but only Congress can fix the bigger problems: (i) It only apples to businesses with gross receipts up to $15 million; and (ii) It only applies to 2008 losses. All indications are that 2009 will be much worse than 2008 for most businesses.

Settlor’s Attempt to Relieve Trustee’s Duty to Account Deemed Ineffective

2009-04-30T18:27:00.005-04:00

Maryland Case: A husband and his wife jointly created a revocable trust. The husband died first and under the trust terms, one-half of the property was divided into two trusts. The surviving spouse had a general power of appointment over one and a special power of appointment over the other, was sole income beneficiary during her life, and had the discretion as the trustee to distribute up to the entire principal for her health, maintenance, or support. A son of her husband is a taker in default of the exercise of either power if he survives the surviving spouse. The trust also contains language purporting to prevent the trustee being required judicially to account. The court affirmed the lower court’s order requiring the trustee to account. The court held that the son had a future interest in the trust which entitled him to demand an accounting and that the language eliminating the duty to account was of no effect.
Johnson v. Johnson, No. 126, 2009 WL 608342 (Md. Ct. Spec. App. 2009).

Action for Accounting & Removal is not a Challenge to Will

2009-04-30T18:05:00.002-04:00

Georgia Case: The testator’s will contained an in terrorem clause applicable to any beneficiary who contests the validity of the will whether or not in good faith and with or without probable cause. In Sinclair v. Sinclair, 670 S.E.2d 59 (Ga. 2008), the court held that a beneficiary is entitled to ask for a declaratory judgment to determine whether a proposed course of action would violate an in terrorem clause and that because an action for an accounting and removal of the executor is not a challenge to the validity of the will, the action did not violate the in terrorem clause.