|
|
Tax Quote of the Week
[Responding to Chancellor of the Exchequer, Gladstone's question as to the
practical uses of electricity:] "Why, sir, there is every probability
that you will soon be able to tax it!"
-- Michael Faraday
Haiti Tax Deduction Passed
On January 20, 2010, the House passed H.R. 4462. This bill permits Haiti
relief gifts from January 12 to February 28 of 2010 to be deducted on 2009
tax returns.
Following the House passage on the unanimous voice vote, the Senate acted
quickly on January 21, 2010 to pass the bill. President Obama is expected
to sign the bill within the next week.
Senate Finance Chair Max Baucus (D-MT) stated, "Today, Congress
unanimously agreed to extend the tax deadline for charitable giving so
Americans can continue to help the relief efforts in Haiti."
The Ranking Republican on the Senate Finance Committee, Charles Grassley
(R-IA), continued, "Americans give generously to disaster relief and I
hope this extension encourages them to give even more. I also hope Americans
will make sure the charities they choose are above board. People should be
careful to give only to groups they recognize and trust."
The bill permits cash gifts (not property gifts) from January 12 to
February 28 of 2010 to be deducted on the 2009 tax returns. The gifts must
be "for the relief of victims in areas affected by the earthquake in
Haiti on January 12, 2010." All qualified charities may receive the
gifts, so long as they use the funds appropriately for Haiti relief.
Because many individuals have made gifts using their telephone, a deduction
is also permitted for cash gifts by phone during the above dates. For a
telephone gift, donors should retain the telephone bill with the name of
the charity, the date of the gift and the amount of the contribution.
Editor's Note: While some charities may assist donors by issuing
receipts "for the relief of victims in areas affected by the
earthquake in Haiti," donors should also make a written note of that
fact on receipts or a personal memo. Please note that you must receive a
receipt for gifts of $250 or more before filing your 2009 tax returns.
Healthcare Reform on Hold
For the past two weeks, Senate and House negotiators have been working on a
conference healthcare bill. However, following the election of Republican
Scott Brown in Massachusetts to fill the seat of the late Sen. Edward
Kennedy, there no longer are the required 60 Democratic votes in the
Senate. As a result, the Senate and House conferees have placed the
healthcare conference bill on hold.
Following the Massachusetts election, there was discussion in Washington
and the nation about the potential for the House to pass the Senate bill.
In late December, the Senate passed the healthcare bill with the required
60 votes. If the House were to pass the exact Senate bill, it would be sent
to President Obama for his signature.
Speaker Nancy Pelosi (D-CA) has been in discussions with many members of
her party. She stated on January 21, 2010, "In its present form
without any change, I don't think it is possible to pass the Senate bill in
the House." Speaker Pelosi indicated that many House Democrats oppose
the Senate plan to pay for healthcare reform with a 40% excise tax on "Cadillac"
healthcare plans.
House Democrats in districts with significant union membership have
received many calls and letters opposing the Senate bill with the excise
tax. Some union members have negotiated agreements with substantial
healthcare benefits. Many individuals believe that the 40% excise tax on
the insurers would be passed through to middle-income taxpayers as higher
premiums.
Editor's Note: The healthcare reform process now returns to the
House Ways and Means Committee. Members are discussing the possibility of
dividing the healthcare reform bill into separate areas. For example, there
could be one bill on patients' rights, a second on healthcare insurers and
a third to cover medical liability reform. Given the fact that this is now
an election year, it will be challenging to pass major legislation before
the November elections.
Budget Commission Debate Continues
Majority Leader Harry Reid (D-NV) has proposed a $1.9 trillion increase in
the federal debt limit. This would increase the authorized federal debt
from $12.4 trillion to $14.3 trillion.
On Jan. 21, 2010, Senate Budget Chair Kent Conrad (D-ND) introduced a bill
that would create a Budget Commission. Sen. Conrad proposed combining the
$1.9 trillion increase in the debt authorization with a new Budget
Commission. He was joined in the proposal by the Ranking Republican on the
Senate Budget Committee, Sen. Judd Gregg (R-NH). The Budget Commission
would be made up of eight Democrats, eight Republicans and two appointees
from the White House. The Commission would propose spending limits and tax
increases that would be voted on without amendment by the Senate.
Sen. Max Baucus (D-MT) opposed the concept. He notes that the Budget
Commission would have the power to make recommendations for cuts in Medicare,
Medicaid and Social Security. In the view of Sen. Baucus, this process
should only be done "through the regular order."
Vice President Biden and the White House were also involved this week. The
White House discussed the possibility of creating the Budget Commission
through an executive order. However, Sen. Gregg noted, "The creation
of a Fiscal Action Commission by executive order would be like a car
without an engine." Sen. Gregg observes that the White House Budget
Commission would not have power to force any votes on specific legislation.
Without that power, Sen. Conrad and Sen. Gregg believe that there will not
be the discipline to achieve deficit reduction.
Editor's Note: At present, the Budget Commission bill is not likely
to be passed. There are three basic obstacles to any meaningful effort to
resolve the budget deficit. First, members of Congress have been elected to
represent constituents and many believe that protecting spending is their
first responsibility. Second, other members of Congress are reluctant to
allow a Budget Commission to take effect because they are concerned it will
lead to large tax increases on the entire nation. Third, Sen. Baucus and
House Ways and Means Committee Chair Charles Rangel (D-NY) oppose the
Budget Commission because it would reduce the power of the chairman of the
tax-writing committees.
Applicable Federal Rate of 3.4% for February -- Rev. Rul. 2010-6; 2010-6
IRB 1 (20 Jan 2010)
The IRS has announced the Applicable Federal Rate (AFR) for February of
2010. The AFR under Section 7520 for the month of February will be 3.4%.
The rates for January of 3.0% or December 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 from the IRS by clicking
here.
Decedent and Spouse (Trustors)
created a revocable trust (Trust) on Date 1. Upon the death of the first
Trustor, the assets in the revocable trust will be divided equally between
a bypass trust, a marital trust and a survivor's trust. Terms of the Trust
direct the Trustee to pay the surviving spouse's expenses and taxes from
the property in the bypass trust, except that the non-qualified marital
trust (if any) shall bear any estate, gift, generation-skipping or other
transfer taxes imposed on such trust. Upon review of the trust documents,
the drafting attorney noticed an error: the payments for expenses and taxes
should not be covered by the bypass trust but by the survivor's trust. Upon
petition by Spouse, the local court granted an amendment to the trusts.
Spouse then requested a Letter Ruling that (1) the amended bypass trust
does not provide a general power of appointment over the trust assets and
(2) Spouse is not deemed to have made a gift of an interest in the trusts
as a result of the court authorized modification and (3) the modification
of the bypass trust will not result in the imposition of gift tax.
The Service determined that the documentation submitted by Spouse strongly
indicates that Decedent and Spouse did not intend to have control over
assets held in the bypass trust and that the provision to charge Spouse's
expenses and taxes from the bypass was a scrivener's error. In reforming
the Trust, the local court found that the proposed modification of the
Trust did not defeat a material purpose of the Trust, but will serve to
carry out the intent of the Trustors. Therefore, the value of the bypass
trust will not be included in Spouse's estate. Next, the Service determined
that, as in the first ruling, the Trust, as modified, will not provide
Spouse with a testamentary general power of appointment. Accordingly, the
modification of Trust will not constitute the exercise or release of a
general power of appointment by Spouse, within the meaning of Sec. 2514(b).
Further, the modification of the Trust will not be treated as a deemed
transfer of an interest in Trust by Spouse for gift tax purposes under Sec.
2501.
When a charity receives a gift annuity, it has the option to
retain the annuity contribution amount in a designated reserve fund or to
reinsure. If the charity retains the contribution, it is self-insuring the
gift annuity. In that case, the contribution is invested and the charity
makes payments from the fund.
An alternative is for the charity to pay a premium to a financial services
company that will then make the required annuity payments. The second
choice is commonly called "reinsurance" of the gift annuity.
Should a charity reinsure? Reinsurance involves evaluating the factors that
will benefit the charity with self-insurance, or the favorable factors that
might lead to reinsurance. The primary questions relate to the life
expectancy of the donor, the estimated return of the charity's annuity
reserve fund and the cost of reinsurance.
Barbara Banker started with nothing. Not only did she not own
a bank, she had nothing to place in the bank. Barbara lived in a midsized
town and worked in the local hardware store. But the store owner noticed
her industrious efforts and strong work ethic. When he decided to retire,
he suggested that Barbara take over the hardware store and pay him over a
term of ten years from store profits. Barbara did exactly that. In fact,
when the town drugstore owner wanted to retire, she bought it under a
similar plan. Later, Barbara started buying apartment buildings in town.
Since she needed financing, Barbara became good friends with the town
bankers.
Two bankers approached Barbara about starting a new local bank. She agreed
to be one of the initial directors and they all invested in the new local
bank (with the name LoBank). Years later, the bank services and value have
greatly increased. Barbara is a respected businesswoman, and now has a
large block of stock in LoBank.
As a strong community supporter, Barbara gives regularly to favorite local
charity. She would like to make a large gift of bank stock to local charity
for a new youth center. But as a director, she knows that LoBank directors
voted in favor of the sale of all stock to MegaBank from a nearby large
city. Barbara met with her CPA to discuss the gift.
Barbara explained, "My favorite charity would like to name the new
youth center after me. I am interested in supporting youth, and this center
would be a fine addition for our town. The LoBank stock has gone way up in
value, but I have heard that there may be problems with this gift now that
the board voted to accept the offer from Megabank and 75% of the
shareholders have also voted in favor of the sale. Can I still make this
gift? Are there any problems?"
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 1999-2010 Crescendo Interactive, Inc.
|
|
