|
|
Tax Quote of the Week
"The income tax laws do not profess to embody perfect economic
theory." -- Oliver Wendell Holmes Jr.
Senate Passes Healthcare Bill
On December 24, 2009, the Senate passed The Patient Protection and Affordable
Care Act on a party-line vote of 60-39.
The two Senators deeply involved in negotiations for their respective
parties are Sen. Max Baucus (D-MT), Chair of the Senate Finance Committee,
and Sen. Charles Grassley(R-IA), who is the Ranking Republican on that
committee.
Sen. Baucus spoke on the Senate floor and listed the benefits of the bill.
He noted that the act will "prohibit insurance companies from
cancelling insurance policies when people get sick." People with
"pre-existing conditions" will be able to purchase insurance and
there will not be annual or lifetime caps on insurance coverage. Parents
will be able to include children up to age 26 on their policies. With these
changes and tax credits for lower-income persons, 30 million who are now
uninsured will be able to purchase health insurance.
Sen. Grassley highlighted the cost of the healthcare bill. He noted,
"Congress thinks this $2.5 trillion restructuring of the healthcare
system is a good idea. From rationing care to infringing on the doctor-patient
relationship, this government-run system will guarantee U.S. taxpayers a
staggering tax burden for generations to come." In his view, the bill
will not lower healthcare premiums, will not reduce the deficit and will
not reduce healthcare costs.
The House and Senate will create a conference committee in January to
reconcile their respective bills. Because the Senate bill passed with only
the required 60 votes, the conference bill is expected to incorporate most
of the Senate provisions.
Editor's Note: You editor and this organization take no specific
position on the above comments. This description is offered as a service to
our readers because healthcare is so very important to everyone.
2010 Tax Bill with Retroactive Estate Tax?
On Dec. 22, 2009, Sen. Finance Chair Max Baucus outlined his plan to
combine tax reform and a retroactive estate tax bill in 2010. He stated,
"It is very possible that estate tax reform will be folded into tax
reform next year."
Because the House passed an extension of the $3.5 million estate tax
exemption and the 45% estate tax rate but the Senate was unable to pass an
estate tax bill in 2009, the estate tax is repealed on Jan. 1, 2010. The
gift tax is retained with a 35% rate, and there is a step-up in basis for estate
assets valued at $1.3 million. Because there is no step-up in basis for
assets over $1.3 million, children and other heirs of estates over that
level who later sell property may pay large capital gains taxes.
Sen. Baucus and Sen. Grassley also promised quick action on tax extenders.
While the House passed the tax extenders (including the IRA charitable
rollover for 2010), the Senate again failed to act before the end of 2009.
Both Senators issued a press release promising to "take up legislation
as quickly as possible in the new year."
Editor's Note: There remains great uncertainty about estate taxes.
The fundamental political problem is that most actions in the Senate
require 60 votes. At present, there are not 60 votes in favor of an
extension of the $3.5 million exemption and 45% tax rate. Two or three
Democratic Senators are in agreement with Republicans that the limit should
be higher. In an election year, it will be very difficult for Sen. Baucus
to build a compromise acceptable to 60 senators. Even if a retroactive
estate tax bill passes, it is likely to be challenged as unconstitutional.
If that happens, the estate tax litigation over 2010 law may last for the
next decade.
$10 Million Gift Tax Included in Estate
In Estate
of Anne W. Morgens et al. v. Commissioner; 133 T.C. No. 17; No.
26212-06 (21 Dec 2009), the court determined that gift tax paid on gifts of
the income interests in a QTIP trust were included in decedent's taxable
estate under Sec. 2035(b).
Mr. and Mrs. Morgens were married in 1935 and had two sons Edwin and James
and daughter Joanne. In 1991 they signed and funded the Morgens Family
Living Trust. Mr. Morgens passed away on Oct. 25, 2000, and the amended
trust left Anne Morgens with her one-half of the community property in a
survivor's trust and Mr. Morgen's assets in a residual trust. The estate
filed IRS Form 706 and elected to qualify the residual trust for the
marital deduction under the QTIP provisions of Sec. 2056(b)(7).
Mrs. Morgens and all beneficiaries disclaimed various interests in that
QTIP trust, leaving ownership to Mrs. Morgens. The QTIP trust was split
into two trusts through a probate court order in Dec. 2000. Mrs. Morgens
then exercised a special power of appointment to transfer both trusts to
remainder recipients. A Form 709 was filed and approximately $10 million
paid in gift tax. Under an indemnity agreement, the obligation to pay the
gift tax was paid by the trustees of the trust.
Mrs. Morgens passed away eight months later on Aug. 25, 2002. Her estate
filed Form 706, but did not include the $10 million in gift tax in her
estate because her executors claimed that the tax had been paid not by her,
but rather by the trusts. The IRS issued a deficiency of over $4.6 million,
claiming that under Sec. 2035(b) the estate must include gift tax paid on
gifts within three years of death.
The estate maintained that under Sec. 2207A(b), the obligation to pay gift
tax was transferred by Congress to the gift recipients who are termed,
"the person receiving the property." However, the court cited
Reg. 25.2511-2(a), "the tax is a primary and personal liability of the
donor." While there is a secondary liability for the gift recipients
if the tax is not paid by the donor, he or she remains liable.
Furthermore, the Sec. 2519 transfer of the QTIP income interests was a
"deemed transfer" by the surviving spouse. The intent of Sec.
2056(b)(7) was to permit a terminable interest to qualify for a marital
deduction. The effective result is that the property is treated for estate
and gift tax purposes as owned by the surviving spouse and therefore,
taxable in her estate. As owner, she remains liable for the gift tax on the
deemed transfer.
Applicable Federal Rate of 3.0% for January -- Rev. Rul. 2010-1; 2010-2
IRB 1 (21 Dec. 2009)
The IRS has announced the Applicable Federal Rate (AFR) for January of
2010. The AFR under Sec. 7520 for the month of January will be 3.0%. The
rates for December of 3.2% or November of 3.2%% also may be used. The
highest AFR is beneficial for charitable deductions of remainder interests.
The lowest AFR is best for lead trusts and life estate reserved agreements.
With a gift annuity, if the annuitant desires greater tax-free payments the
lowest AFR is preferable. During 2010, pooled income funds in existence
less than three tax years must use a 4.6% deemed rate of return. Federal
rates are available at www.irs.gov/businesses/small/article/0,,id=112482,00.html
N is a charitable remainder trust (CRT). M, a Sec. 501(c)(3)
charity classified as an educational organization under Secs. 509(a)(1) and
170(b)(1)(A)(ii), is both the trustee and charitable remainder beneficiary
of N and several other CRTs. M proposes to create a contractual
relationship with its CRTs to issue units of M's endowment to them so that
the CRTs may benefit from its investment returns. M's endowment is mostly
invested in passive income but some assets are debt financed and otherwise
create unrelated business taxable income (UBTI). The CRTs would have no
right to the underlying assets of M's endowment but would receive payments
based on its quarterly performance. N requested a ruling that the issuance
of units in M's endowment would not give rise to UBTI in the CRTs.
The Service ruled that if M is to charge a fee for investment advice or
management of N's endowment units, the service may be considered a trade or
business regularly carried on which would result in UBTI. However, M is not
proposing to charge a fee. Therefore, no UBTI would be created under the
arrangement as proposed. Finally, the CRTs will have no ownership in the
assets of the endowment. The relationship between M and the trusts does not
establish a partnership or agency agreement and the income earned by the
CRTs will be all ordinary income. Therefore, no UBTI will flow through the
endowment to the CRTs.
Depression Babies Seek Security – Baby Boomers Move to
Retirement
With the massive changes in our financial system the past two years, baby
boomers and the depression babies are asking, "What is likely to occur
in the future?" While predictions are indeed difficult, by examining
the past and the present it is possible to make several projections about
the future. Part I of this article discussed the economy and wealth, the
impending tax increases on the affluent and the probable boom in financial
counseling. Part II will analyze charitable financial planning options for
the depression babies group and the baby boomers.
The sections for each will include a prediction, an analysis of the factors
surrounding that prediction, and an explanation of the likely impact on
major and planned gift donors.
Lucky Lucy Lindstrom finished college and headed west. She
started as a financial analyst with a large company in Seattle. After just
four years, she became a Registered Investment Advisor (RIA) and began
advising clients. Lucky Lucy also managed her own investments. With her
keen insight into financial markets, Lucy soon began to move from
traditional stocks and bonds into futures and commodities. Lucky Lucy was
so successful in these markets that she now manages only her mega-dollar
personal portfolio.
Somewhat late in life, Lucky Lucy discovered the wonderful world of
philanthropy. She volunteered at her favorite charity, and learned that
giving someone in need a helping hand is even more gratifying than making
another million in the futures market.
Lucy had invested $1,000,000 in stock in a Canadian oil
"wildcatter" with the name Northern Long Shot, Inc. This company
has been drilling new exploratory wells in the far north. Recently, the
stock rose from the $1 per share that she paid to over $5 per share. After
this success, Northern Long Shot decided to "spin off" a smaller
company - Northern Lite Shot, Inc. with a portion of the successful wells.
Lucy exchanged her $5 million in stock for 60% of the stock in Northern
Lite Shot, Inc. After the exchange, Lucy decided to give the Northern Lite
Shot stock to a private charitable foundation to help those in need.
Lucy discussed options with her attorney. She also asked her attorney
whether Northern Lite Shot Foundation would pay any tax. Her attorney noted
that private foundations are subject to various rules on self-dealing,
minimum distributions and excess business holdings, and taxable
distributions. In addition, a private foundation pays an excise tax on
income. Lucy exclaimed, "What! Pay tax? This is a charitable
foundation! Why should a charitable foundation have to pay tax? And how
much tax will be paid?"
Note: Case studies, articles, commentary and other materials in the
GiftLaw system are included solely as educational information. Articles and
editorial comments are offered as an educational service to friends of this
organization, and may not always reflect our official position on any
issue. Since case studies or articles may not always reflect the current
AFR or tax law, it may be necessary to run any illustration with a current
version of Crescendo to obtain updated information. If professional
services are required, all persons shall consult with their qualified professional
advisors. Tax Quotes are courtesy of Jeffery L. Yablon, Washington, D.C.
©
Copyright 1999-2009 Crescendo Interactive, Inc.
|
|
