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…)
While constant attention is being given to Hillary Clinton’s potential decision to run for the presidency in 2016 and the release of her latest book, Hard Choices, last month, news sources recently reported that she and former President Bill Clinton have taken advantage of several of the estate planning techniques recommended by trusts and estates attorneys for high net worth individuals.
This is interesting, in part, because the Clintons support the estate tax and have not been in support of its repeal.
According to reported sources, each of the Clintons created a qualified personal residence trust and each contributed his or her 50% ownership interest in their Chappaqua, New York house to his or her respective trust. A qualified personal residence trust, commonly called by its acronym QPRT, is an IRS sanctioned estate planning technique. The creator of the trust places a residence or interest in a residence in the trust, retains the right to live in the trust for a term of years, and after the term the trust asset or the residence passes to a beneficiary.
The Internal Revenue Code has special rules which help calculate the value of the “gift” made by the creator to the QPRT. The gift portion, which could offset some of the $5,340,000 exemption allotted to individuals in 2014 is not the entire value of the residence, but the value of the residence when transferred reduced by the value of the retained use by the creator for the trust term.
By having each of the Clintons create a separate QPRT with only a 50% interest in the residence, the value of such interest may also be eligible for a discount for owning less than a majority interest.
In order for a QPRT to work, the creator of the trust must outlive the trust term. But for a relatively healthy individual, it is quite likely for this to happen.
Frequently, taxpayers are surprised by the fact that the ownership or receipt of a life insurance policy can result in taxable income, as was the case in Gluckman v. Commissioner.
Apparently, this life lesson was not learned, or if learned, was forgotten, by Roy Greenbaum, the Personal Representative in Estate of Tanenblatt v. Comm’r. The issue in this case concerned the valuation of a 16.667% interest in an LLC included in the Diane Tanenblatt’s gross estate. (more…)
Taxpayers/insureds are often surprised when they are taxed on the value of an old policy that was underwater, when it was transferred to them, causing them to assume that the policy had no value for the government to tax. Here again, the taxpayers in Schwab v. Commissioner (9th Cir. 2013), were surprised that they had recognized taxable income on the distribution to them of life insurance policies from their non-qualified plan, which had surrender charges that exceed their cash value.
Michael and Kathryn, a married couple, were employees of Angels and Cowboys, Inc., which sponsored a non-qualified multi-employer welfare benefit plan that was administered by a third party. Each of them caused the plan to purchase, with a single premium, a variable universal life insurance policy with a three-year no lapse guarantee. Just prior to the end of the three year no lapse period, due to a change in requirements for such an employee benefit plan, the plan terminated and the life insurance policies were distributed to Michael and Kathryn. However, the policies were both subject to substantial surrender charges at the time of the distribution that exceeded the policy cash value, so that nothing would be paid to either of them on a cancellation or lapse of the policy. At the time of the distribution, Michael’s policy would lapse in 54 days and Kathryn’s policy would lapse in 24 days unless each continued to pay the premiums due on the policies. $108,031 in premiums would need to be paid on Kathryn’s policy to keep it from lapsing, so she elected to let it lapse, and received nothing on the policy. Michael elected to pay premiums on his policy for a time to keep it in force. (more…)