|
|
|
|
The Year In Review, 2001
by Bob Moshman
n time, the year 2001 may come to be remembered as the year when everything changed. For estate planners, the passage of a major tax reform package is always a time to inventory all rules and strategies and recalculate which arrangements are the most advantageous. But the repeal of the estate tax and the renewed attempt to apply a carryover basis to assets passed at death are by far the most significant estate-planning changes in a generation.
But after September 11, 2001, even these significant tax changes were dwarfed by the immense sea change affecting the entire context of estate planning. Stock prices, skyscrapers, and our highest aspirations have come falling down. Budget surpluses? Not in this new world. And while the world watched these significant events unfolding, an extremely substantive year of highly important cases and rulings was taking place. As always, there was no shortage of intriguing, outrageous, or celebrated estates in the news.
Judicial Impact: Courts
Review FLPs & Crummey
Looking back over 2001, there were many court cases that fall into the category of "relevant but not necessarily remarkable." There were, however, two areas of notable significance. Most obvious has been the attention given to family limited partnerships (FLPs), which have extended an FLP winning streak that has involved cases such as Estate of Church, DC Tex., 2000-1 USTC (Jan., 2000); Knight v. Comm'r., 115 T.C. 506 (Nov., 2000); and Strangi Estate, 115 T.C. 478 (Nov., 2000).
In July, 2001, the Court of Appeals affirmed Church in an unpublished three-paragraph opinion. Church involved an FLP that was formed only two days before the plaintiff's death. Courts are simply respecting the business motives that people have in establishing FLPs. Strangi now faces an appeal and both taxpayers and the IRS have a lot riding on the outcome. There are thousands of FLPs in the pipeline and billions of dollars will escape transfer taxation unless the IRS finds a winning argument.
But a second area, Crummey trusts, may have given rise to the most significant case of 2001, Estate of Trotter v. Comm'r., T.C. Memo. 2001-250 (Sept., 2001). In light of an illness, Eleanor Trotter transferred a condominium valued at $125,000 to an irrevocable Crummey trust for her heirs. The transfer was made without consideration. Because she retained rent-free possession of the property and managed it for the duration of her life, the Tax Court concluded that there was an implied understanding between Ms. Trotter and family members. As a result, the condominium was includible in Ms. Trotter's gross estate, causing an estate tax deficiency of $48,750.
All that may appear mundane until you consider the Crummey context. Even when it was on the receiving end of significant defeats in Cristofani and Kohlsaat, in recent years, the IRS continued to make brave noise about returning to the battle someday by assessing the motives of those who aggressively exploit Crummey trusts. That day apparently arrived in 2001. The estate argued that the existence of Crummey powers precluded any implied agreement allowing the decedent to remain in the home for life. The Tax Court's response: "We cannot blind ourselves to the reality of the family relationships involved, and the estate has failed to show that the withdrawal rights were anything more than a paper formality without intended economic substance." These are words the IRS will undoubtedly be invoking in future Crummey cases.
The IRS Impact: Rulings and Regulations
The year began with a series of three of the most significant regulatory initiatives in many years. The areas affected were minimum retirement plan distributions, the definition of trust income, and the valuation of split-dollar life insurance arrangements.
MRDs: Time ran out on the Taxpayer Relief Act of 2000, which never got to the floor of the Senate for a vote. One of the unrequited provisions would have set a one-year time limit for the IRS to finally simplify the Byzantine set of rules for calculating the minimum required distributions (MRDs) from IRAs, 401(k) plans, and other qualified retirement plans under IRC §401(a)(9). Yet in January, before the 107th Congress could get off the mark, the IRS put forth a bold new approach for the calculation of MRDs. The most significant innovation of Proposed Regulations 130477-00 and 130481-00 is a uniform table that can be used to calculate the annual MRD by simply plugging in the participant's age and the balance of the retirement account at the end of the previous year. This avoids:
Annual recalculation of the participant's life expectancy;
Calculation of joint life expectancies with a beneficiary; and
Application of the "incidental benefit" rule which limits the age disparity between the owner or plan participant and a nonspousal beneficiary to 10 years for purposes of calculating a joint life expectancy.
Since the age of the beneficiary is no longer relevant, the selection of beneficiaries can be more flexible. Moreover, without being locked into a beneficiary designation prior to the required beginning date (RBD) when distributions must commence, employees will be able to change beneficiaries without affecting the size of required distributions. In fact, it would be possible for the beneficiary to be determined as late as the end of the year following the year of the employee's death. Beneficiaries could also disclaim interests after the employee's death without a negative impact on the size of distributions. Plenty of wrinkles remain and final regulations may bring adjustments in the coming year.
Trust Income Definition:
A major estate-planning change is looming over the horizon…and it's not the repeal of the estate tax. In 2001, the IRS took a major step toward modernizing a revised definition of trust income under §643(b). The new proposed regulations address how trustees apportion income and principal when working with modern "total performance" portfolios that place greater weight on long-term returns than current income. The fate of many arrangements, particularly charitable trusts, hangs in the balance. However, a modern definition would enable trustees to utilize total return unitrusts in investing for the overall return from a portfolio and then allowing both current-income beneficiaries and remainder beneficiaries to share the benefits.
"The IRS means well," said Conrad Teitell, an estate-planning attorney with Cummings and Lockwood in Stamford, Connecticut, "but could cause problems for existing trusts as now written." If the changes are not made prospectively only, existing trusts would need to be reformed, which would mean court proceedings. Reforming a charitable trust usually involves the state attorney general's office and frequently means appointing guardians for elderly beneficiaries. All of this adds up to a huge burden to impose, said Teitell, and is hardly deserved considering that the purpose of the proposed changes was not to penalize any abusive practices or close any loopholes. Hopefully, the final regulations will address such concerns.
Split-Dollar Arrangements:
In recent years, split-dollar life insurance arrangements have grown both in popularity and variety, but not without financial advisors growing increasingly apprehensive of closer scrutiny and restrictions being imposed. In 2001, those fears were realized when the IRS clarified its previous rulings (Rev. Ruls. 64-328 and 66-110) and provided additional guidance with regard to split-dollar arrangements for the first time in 35 years.
Two key areas of split-dollar arrangements were addressed in Notice 2001-10: How to value the term portion of a standard split-dollar arrangement, and how the split-dollar approach is to be treated for tax purposes. In both areas, the new guidelines restrict but do not eliminate the value of split-dollar arrangements. The bottom line is that if the cash value of life insurance benefits the employee to the extent it exceeds the value of premiums contributed by the employer, then a taxable transfer has taken place. That tax may be imposed under §83 as property transferred from an employer to an employee, or under §7872 as a loan or series of loan to which the imputed interest rules apply. A series of six rules are set forth in the Notice for determining which approach is applicable.
Legislative Impact: The Surreal Repeal
"Hello, I must be going," is the old Groucho Marx lyric that best describes the newly arrived repeal of the estate tax. Congress delivered the Economic Growth and Tax Relief Reconciliation package containing a repeal of the estate tax to the President during the Memorial Day weekend. By mid-June, Jonathan Blattmachr, Howard Zaritsky, Sanford Schlesinger, and Stephen Leimberg, all superstars of estate planning, went on the Rikki Lake daytime talk show to predict the repeal would be left by the side of the road long before its scheduled arrival in 2010. A chorus soon joined them. No repeal. And just in case one is inclined to disregard these cognoscenti, there is an amazing sunset provision which, courtesy of the obscure "Bryd" rule, would operate like some "undo" button that will reinstate the estate tax at 55% in 2011, wiping out a decade's worth of rates and credits being adjusted.
Note also two sleepers in the new tax law. First, the change to a carryover basis for assets passing at death for the estates of decedents dying after 2009 truly affects many long-range decisions about what assets should be retained and permitted to pass after death-the very mix of assets one invests in must be seen in the context of an eventual carryover basis. But it is troubling to note that the first attempt to convert to a carryover basis failed, and if the repeal of the estate tax is not completed, there would be less justification for imposing an additional tax on appreciated assets passing at death. But assuming that the law phases in on schedule, many planning efforts will no doubt focus on the two exceptions to the carryover basis-$1,300,000 can be transferred to anyone and $3 million can be passed to a spouse-will undoubtedly inspire trusts and other arrangements that are designed to take full advantage of these rules.
Second, the phasing out of the state death tax credit between 2002 and 2005 may prompt revenue-hungry states to enact their own State death taxes. In the absence of a Federal estate tax, these State death taxes will rise in their relative significance in estate planning.
Conservation Easements:
The EGTRRA also repealed distance requirements that land qualifying for an exclusion from estate tax based on a conservation easement had to be within 25 miles of a metropolitan area, wilderness area, or national park. Now any land in the United States can qualify. Another conservation easement issue arose in IRS Letter Ruling 200109017, which concluded that a vacation home, a separate cabin, a tennis court and a Jacuzzi, all on a large tract of land, were qualified as a "personal residence" for QPRT purposes under §2702. It was notable that the undeveloped portion of this property was large enough to warrant a conservation easement. While the IRS was not specific about how much raw land was involved, it was comparable to the acreage of other local residences, so the conservation easement land was found appropriate for QPRT purposes. This confirmed the QPRT/conservation easement combination that also was approved in Letter Ruling 200039031.
Estate-Planning Practice: The MDPs Have Landed
What a difference a year makes. One year ago the American Bar Association (ABA) came out against multidisciplinary practices (MDPs) and set off a round of public criticism by the Big Five accounting firms and the AICPA, a leading voice of the accounting profession. This year, New York became the first state to officially establish guidelines for MDPs, but with strict limits. Other states may soon follow suit.
New York's approach permits two forms of multidisciplinary practice (MDP) with nonlawyers, but partnerships with nonlawyers and multidisciplinary practice in which nonlawyers have any degree of ownership or control over the practice of law are prohibited. Lawyers and law firms are permitted to provide ancillary nonlegal services and to provide services to clients in cooperation with nonlegal firms, while providing safeguards for the public to protect against the risks of nonlawyer involvement in the practice of law.
Steven Krane, President of the New York State Bar Association, emphasized that the new rules are not making a fundamental change in the way lawyers practice law. "Multidisciplinary practice has been part of our legal culture for years," said Krane. "What we have done is draw the line to prevent multidisciplinary partnerships." Nevertheless, clients want the benefit of integrated professional services. Otherwise, said Krane, "then all we're talking about is one set of professionals trying to convert another set of professionals into another item on their balance sheets."
Miscellaneous
Rosebud:
No, it was not the famous sled from the movie, Citizen Kane, but rather a guitar owned by the late Jerry Garcia. Rosebud, together with other guitars named Wolf, Tiger, and Headless, were the subject of claims against Garcia's estate and had to be divided by a California Court between the woodworker who made them and Grateful Dead band members. The whereabouts of a fifth guitar, Wolf, Jr., remain unknown.
Staying Alive:
What advice should financial planners give clients about waiting eight years for the estate tax repeal to take effect in 2010? "Don't die," advises Sanford Schlesinger, an attorney with Kaye, Scholer, Fierman, Hays & Handler, LLP, in New York.
Outrage:
After a plane crash in January, 2000, led to wrongful-death lawsuits, grieving family members of four of the victims were contacted in 2001 by lawyers from Guatemala who claimed to represent heirs that had been allegedly fathered by the victims. One of the victims was a wealthy physician whose wife and four children perished in the crash. These efforts were exposed as a sham.
A Deal Is A Deal:
In 1888, R.C. Hill purchased $500 of prepaid tuition certificates that entitled heirs and assigns to free tuition at an Oregon college in perpetuity. At the time, tuition was $50 per year, but is currently $20,000 per year. An heir of Mr. Hill has filed suit to require the school to honor the certificates.
Inheriting Britain:
Could King Lear validly revoke his bequest of one-third of Britain to his daughter Cordelia, or did it pass through her estate to her daughters Goneril and Regan? Sandra Day O'Connor agreed to preside over a fund-raising bit of advocacy for the Shakespeare Theater in Washington, D.C.
Protecting Names:
The estate of George Orwell filed a $20-million lawsuit against CBS for using the name "Big Brother" for its television show. The term "big brother" was coined in Orwell's 1949 novel "1984." Another legal action was filed by the heirs of the composers of "The Girl From Ipanema," against Helosia Pinheiro, the Brazilian woman who inspired the song. The plaintiffs object to her operating a boutique called "The Girl From Ipanema."
Dark Humor:
Larry Laprise, who wrote the Hokey Pokey in the 1940s, passed away this year at the age of 83. Having sold the rights to the song, which appeared in the "B" side of the Bunny Hop, Laprise never was able to cash in on the song. An Internet report noted the great loss to the entertainment world and commented on the difficult time the family had keeping Larry in the casket. "They'd put his left leg in…and....well ... you know the rest..."
A Final Lesson:
Confronted with a terminal illness, Marty Geltman held his funeral in advance of his death so that he could be with the mourners in a celebration of life featuring songs, satire, and testimonials. Geltman, who was an elementary school teacher for 34 years, said, "I wanted to teach people how to die."
No Tooth Fairy?:
It's bad enough that people don't think estate tax repeal will actually happen, but now there are apparently doubts about the Tooth Fairy as well. Norman Lofgren, the Dallas-based attorney for the plaintiff in the FLP case of Strangi, commented on the likelihood of the estate tax repeal: "I don't believe in the Tooth Fairy, and the estate tax isn't going anywhere."
Seasons Greetings
|
About Us
|
News
|
Alerts
|
Articles
|
Caveat Emptor
|
SNSFE News
|
Research
|
Calendar
|
Contact
Register
|
Free Opinion
Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment advisor when building and protecting your wealth.
All content Copyright © 2005-2007 FinancialCounsel.com, Inc. except where noted. All rights reserved.
20 North Wacker Drive, Suite 2900, Chicago, Illinois 60606
Telephone: 312-621-4400 | Fax: 312-621-0268
|
|
|
|
|
