Thursday, March 9, 2017

PLR 201642019

Not only is strict adherence to the structure set out in prior favorable rulings best, it is essential when it comes to obtaining a favorable ING ruling. The provisions in the trust document need to carve a very fine line through the grantor trust/incomplete gift rules to obtain a favorable ING ruling. The goal is to have the Service rule that a trust is not a grantor trust for income tax purposes yet not a completed gift for gift tax purposes and included in the grantor’s estate to get a basis adjustment at death.

The earliest ruling, ILM 201208026, fell short of a favorable ruling with the Service finding that the retained testamentary power of appointment was insufficient to avoid a completed gift. By 2014, practitioners had carefully studied this early ruling and devised a set of trust provisions that successfully walked the tight rope through the grantor trust/incomplete gift rules to obtain favorable rulings in a series of private letter rulings. Each of those rulings contained the following elements:

• The Trust was created in an asset protection jurisdiction;
• The grantor was a discretionary beneficiary;
• A distribution committee with at least two adverse parties, acting unanimously, had total distribution discretion for distributions among the grantor and the other beneficiaries;
• A corporate trustee would make discretionary distributions among the grantor and the grantor’s descendants, as directed by a majority of the distribution committee, with the grantor’s consent but without the participation of any recipient;
• A corporate trustee would make discretionary distributions to the grantor’s descendants as directed by the grantor in a non-fiduciary capacity for the health, education, maintenance and support of any such descendant; and
• The grantor retained a broad testamentary special power of appointment.

Now in PLR 201642019, the Service has singled out one of those prior previously favorable rulings (identified in this ruling as PLR 140408-13) that deviated from this formulaic approach in a seemingly small way, and revoked that prior favorable ruling. This deviating trust provision directed the trustee to distribute the trust property to the grantor in the event (1) neither of grantor’s children was serving as a member of the Distribution Committee or (2) there remained only one member of the Distribution Committee. The Service now ruled that this provision resulted in the grantor having a reversionary interest in the trust corpus far exceeding the 5% threshold in § 673 of the Code. As a result the trust was a grantor trust for income tax purposes under § 673. In fact, the Service valued this reversionary interest at 100% of the value of the trust corpus because the members of the Distribution Committee could resign at any time, terminating the trust and distributing the whole trust corpus to the grantor.

The moral of this ruling is that when you attempt to copy a favorable tax structure, don’t vary the terms.

Tuesday, December 20, 2016

(This is an updated post from December 2015)

With the end of the year approaching, we thought now would be a good time to re-post and update this blog from the end of 2015.

For 2017, the annual exclusion gift amount will remain the same at $14,000 but the lifetime gift and estate tax exemption will increase to $5,490,000 (up from 2016’s $5,450,000).

With fourteen days left in the year, many people are still planning how to make 2016 gifts, whether by making “annual exclusion” gifts of $14,000 per beneficiary, or by taking advantage of the 2016 gift tax exemption amount of $5,450,000.  Whatever the reason for the last-minute gifting, as the end of the year approaches, people may be tempted to make a “quick and easy” gift to their beneficiaries by simply writing a check. As the year draws to a close, however, if your gift is dependent on utilizing 2016 tax law, beware of the potential trap of making a gift by check.

A gift is not complete for tax purposes until the gift is no longer revocable.  However, if you write someone a check, until that check clears, you could always “revoke” the check by alerting your bank to stop payment, or by emptying your account of sufficient funds to pay on the check.   Until the check clears the bank, your gift is still revocable.  Therefore, if your beneficiary doesn’t deposit the check in time for the banking system to clear the check, your gift may not be considered irrevocable until 2017, and you have therefore made a gift in 2017 instead of 2016.

If you are planning to make 2016 gifts over the next 10 days by means of a check, be wary and let your beneficiaries know that they need to deposit that check as soon as possible.  Better yet, make the gift by means of a cashier’s check, which is considered irrevocable as soon as you hand it over.  That way, you don’t have to rely on the promptness of your beneficiaries’ next trip to the bank, and the promptness of the banks in processing the checks.

Thursday, September 22, 2016

 

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Based on the Consumer Price Index for the 12-month period ending August 31, 2016, Thompson Reuters Checkpoint has released their projected inflation-adjusted Estate, Gift, GST tax, and other exclusion amounts for 2017, as follows: (more…)

Thursday, December 17, 2015

With the end of the year approaching, we thought now would be a good time to re-post and update this blog from the end of 2014.

For 2016, the annual exclusion gift amount will remain the same at $14,000 but the lifetime gift tax exemption will increase to $5,450,000 (up from 2015’s $5,430,000).

With fourteen days left in the year, many people are still planning how to make 2015 gifts, whether by making “annual exclusion” gifts of $14,000 per beneficiary, or by taking advantage of the 2015 gift tax exemption amount of $5,430,000.  Whatever the reason for the last-minute gifting, as the end of the year approaches, people may be tempted to make a “quick and easy” gift to their beneficiaries by simply writing a check. As the year draws to a close, however, if your gift is dependent on utilizing 2015 tax law, beware of the potential trap of making a gift by check.

A gift is not complete for tax purposes until the gift is no longer revocable.  However, if you write someone a check, until that check clears, you could always “revoke” the check by alerting your bank to stop payment, or by emptying your account of sufficient funds to pay on the check.   Until the check clears the bank, your gift is still revocable.  Therefore, if your beneficiary doesn’t deposit the check in time for the banking system to clear the check, your gift may not be considered irrevocable until 2016, and you have therefore made a gift in 2016 instead of 2015.

If you are planning to make 2015 gifts over the next 14 days by means of a check, be wary and let your beneficiaries know that they need to deposit that check as soon as possible.  Better yet, make the gift by means of a cashier’s check, which is considered irrevocable as soon as you hand it over.  That way, you don’t have to rely on the promptness of your beneficiaries’ next trip to the bank, and the promptness of the banks in processing the checks.

Wednesday, November 11, 2015

ThinkstockPhotos-475946938

 

Open up any newspaper or magazine across the county and likely you will read an article about the difficulties facing young adult looking for their first jobs.  More and more young adults are turning to their parents for financial assistance. How can parents help their children? And what are the gift tax implications of such assistance?

Each individual has the ability to gift $14,000 a year to each person without using up any of his or her lifetime exclusion. A married couple can then gift $28,000 to an adult child without any gift tax impact at all. However, you must keep in mind that this $14,000 amount is inclusive of all gifts. You cannot give $14,000 directly to your child and then give them additional withdrawal rights under a trust. (more…)

Friday, October 30, 2015

ThinkstockPhotos-475606957

Even though you think you have done everything right, the statute of limitations may not have started to toll if your Form 709, Gift (and Generation-Skipping Transfer) Tax Return, contains errors. Once a properly completed (how much can we stress the words PROPERLY COMPLETED?) Form 709 is filed, the Service must assess the amount of any gift tax within three years of the filing date. Under the Regs, a transfer is adequately disclosed when the return provides the following:

(i) A description of the transferred property and any consideration received by the transferor; [and]

(iv) A detailed description of the method used to determine the fair market value of property transferred, . . . including any financial data . . . utilized in determining the value of the interest. (more…)

Thursday, March 5, 2015

459482489The Treasury Green Book provides explanations of the President’s budget proposals.  One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning is found on page 203 of the Green Book and is re-printed here for your convenience:

MODIFY GENERATION-SKIPPING TRANSFER (GST) TAX TREATMENT OF HEALTH AND EDUCATION EXCLUSION TRUSTS (HEETS)

Current Law

Payments made by a donor directly to the provider of medical care for another person or directly to a school for another person’s tuition are exempt from gift tax under section 2503(e). For purposes of the GST tax, section 2611(b)(1) excludes “any transfer which, if made during the donor’s life, would not be treated as a taxable gift by reason of section 2503(e).” Thus, direct payments made during life by an older generation donor for the payment of these qualifying expenses for a younger generation beneficiary are exempt from both gift and GST taxes. (more…)

Tuesday, March 3, 2015

459482489The Treasury Green Book provides explanations of the President’s budget proposals.  One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning is found on page 204 of the Green Book and is re-printed here for your convenience:

SIMPLIFY GIFT TAX EXCLUSION FOR ANNUAL GIFTS

Current Law

The first $14,000 of gifts made to each donee in 2015 is excluded from the donor’s taxable gifts (and therefore does not use up any of the donor’s applicable exclusion amount for gift and estate tax purposes). This annual gift tax exclusion is indexed for inflation and there is no limit on the number of donees to whom such excluded gifts may be made by a donor in any one year. To qualify for this exclusion, each gift must be of a present interest rather than a future interest in the donated property. For these purposes, a present interest is an unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (including life estates and term interests). Generally, a contribution to a trust for the donee is a future interest. (more…)

Monday, February 23, 2015

459482489

The Treasury Green Book provides explanations of the President’s budget proposals.  One such proposal (remember…these are just proposals, not actual changes in the law) that may affect your estate planning is found on page 197 of the Green Book and is re-printed here for your convenience:

MODIFY TRANSFER TAX RULES FOR GRANTOR RETAINED ANNUITY TRUSTS (GRATS) AND OTHER GRANTOR TRUSTS

Current Law

Section 2702 provides that, if an interest in a trust is transferred to a family member, any interest retained by the grantor is valued at zero for purposes of determining the transfer tax value of the gift to the family member(s). This rule does not apply if the retained interest is a “qualified interest.” A fixed annuity, such as the annuity interest retained by the grantor of a GRAT, is one form of qualified interest, so the value of the gift of the remainder interest in the GRAT is determined by deducting the present value of the retained annuity during the GRAT term from the fair market value of the property contributed to the trust.

Generally, a GRAT is an irrevocable trust funded with assets expected to appreciate in value, in which the grantor retains an annuity interest for a term of years that the grantor expects to survive. At the end of that term, the assets then remaining in the trust are transferred to (or held in further trust for) the beneficiaries. The value of the grantor’s retained annuity is based in part on the applicable Federal rate under section 7520 in effect for the month in which the GRAT is created. Therefore, to the extent the GRAT’s assets appreciate at a rate that exceeds that statutory interest rate, that appreciation will have been transferred, free of gift tax, to the remainder beneficiary or beneficiaries of the GRAT.  (more…)

Monday, December 22, 2014

With the end of the year approaching, we thought now would be a good time to re-post this blog from the end of 2012.  While the Mayan calendar is no longer in play, nor is the fiscal cliff, the rules of completed gifts still apply.  For 2014, however, increase the annual exclusion gift amount to $14,000 (instead of 2012’s $13,000) and the gift tax exemption amount to $5,340,000 (instead of 2012’s $5,120,000).

With nine days left in the year, many people are still planning how to make 2012 2014 gifts, whether by making “annual exclusion” gifts of $13,000 $14,000 per beneficiary, or by taking advantage of the 2012 2014 gift tax exemption amount of $5,120,000 $5,340,000. Maybe they couldn’t make up their mind before now, maybe they were waiting for the election results, or maybe they wanted to see whether the Mayan calendar was accurate before making any gifts. Whatever the reason for the last-minute gifting, as the end of the year approaches, people may be tempted to make a “quick and easy” gift to their beneficiaries by simply writing a check. As the year draws to a close, however, if your gift is dependent on utilizing 2012 2014 tax law, beware of the potential trap of making a gift by check.

A gift is not complete for tax purposes until the gift is no longer revocable.  However, if you write someone a check, until that check clears, you could always “revoke” the check by alerting your bank to stop payment, or by emptying your account of sufficient funds to pay on the check.   Until the check clears the bank, your gift is still revocable.  Therefore, if your beneficiary doesn’t deposit the check in time for the banking system to clear the check, your gift may not be considered irrevocable until 2013 2015, and you have therefore made a gift in 2013 2015 instead of 2012 2014.

If you are planning to make 2012 2014 gifts over the next 9 days by means of a check, be wary and let your beneficiaries know that they need to deposit that check as soon as possible.  Better yet, make the gift by means of a cashier’s check, which is considered irrevocable as soon as you hand it over.  That way, you don’t have to rely on the promptness of your beneficiaries’ next trip to the bank, and the promptness of the banks in processing the checks.