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July 12, 2010 – Back after a brief
vacation. Hope you are enjoying your summer!
On July 2, 2010, President Obama signed the Homebuyer
Assistance and Improvement Act of 2010 (H.R. 5623). The bill permits
first-time homebuyers to qualify for the $8,000 credit. It also allows
homeowners who have lived for five years in their current residence to
purchase a new home and receive a credit of $6,500. In both cases, the
buyers must have signed a contract for purchase by April 30.
Following the signature by the President, the IRS published a letter with
explanations on how to claim the credit (IR-2010-80). New homeowners will
file Form 5405, First-Time Homebuyer Credit and Repayment of the Credit. With
this form the new purchaser should submit a copy of the settlement
statement, normally Form HUD 1, Settlement Statement. For mobile home
purchasers, include a copy of the retail sales contract.
Those existing home buyers who buy a new residence should include Form
1098, Mortgage Interest Statement for the past five years to show their
ownership. Further information on claiming the homebuyer credit is
available on www.irs.gov.
IRS on YouTube
The IRS has announced (IR-2010-81) that a new job search video is now on
YouTube. It will provide assistance for high school and college graduates
who are seeking employment with the IRS. The new video has the title,
"Working at the IRS."
The IRS currently has 82 videos on its YouTube channel with the title,
"IRSVideos." The most popular videos cover various helpful tax
tips. Other titles include "Receiving a Letter from the IRS,"
"Selecting a Tax Preparer" and "Extension to File a
Return."
The IRS videos are available by logging onto www.youtube.com. The user may
search for "IRSVideos" and a playlist with four pages of videos
will appear. Choose the title that you prefer and click to start the video.
Most of the videos are two to four minutes. It is best if you have
broadband Internet access in order to view the videos.
10-Year GRAT Language Released
On July 1, 2010, the House voted 215-210 to approve an Amendment to H.R.
4899. The supplemental spending bill has now been sent to the Senate for
its review.
The language included in the bill has now been released. While a grantor
retained annuity trust (GRAT) may currently be written for two years or
longer, the new minimum term will be 10 years. In addition, under the bill
there can be no declining payments and the GRAT may not have a zero
remainder value. The change in the GRAT rules is anticipated to raise $5.3
billion. It will be effective upon enactment.
The GRAT language is as follows:
SEC. 5101. REQUIRED MINIMUM 10-YEAR TERM, ETC., FOR GRANTOR RETAINED
ANNUITY TRUSTS.
(a) IN GENERAL. -- Subsection (b) of section 2702 of the Internal Revenue
Code of 1986 is amended --
(1) by redesignating paragraphs (1), (2) and (3) as subparagraphs (A), (B),
and (C), respectively, and by moving such subparagraphs (as so
redesignated) 2 ems to the right,
(2) by striking "For purposes of" and inserting the following:
"(1) IN GENERAL. -- For purposes of", and
(3) by striking "paragraph (1) or (2)" in paragraph (1)(C) (as so
redesignated) and inserting "subparagraph (A) or (B)", and
(4) by adding at the end the following new paragraph:
"(2) ADDITIONAL REQUIREMENTS WITH RESPECT TO GRANTOR RETAINED
ANNUITIES. -- For purposes of subsection (a), in the case of an interest
described in paragraph (1)(A) (determined without regard to this paragraph)
which is retained by the transferor, such interest shall be treated as
described in such paragraph only if --
"(A) the right to receive the fixed amounts referred to in such
paragraph is for a term of not less than 10 years,
"(B) such fixed amounts, when determined on an annual basis, do not
decrease relative to any prior year during the first 10 years of the term
referred to in subparagraph (A), and
"(C) the remainder interest has a value greater than zero determined
as of the time of the transfer.".
(b) EFFECTIVE DATE. -- The amendments made by this section shall apply to
transfers made after the date of the enactment of this Act.
Editor's Note: Many attorneys are now advising clients who are
considering a GRAT to complete the trust this month. While this GRAT limit
is a proposal, it is quite possible that the provision could be included in
the spending bill by the end of July. If the bill passes and the President
signs the provision, any GRATs thereafter will need to meet the required
10-year test. Particularly with the low applicable federal rate of 2.8% for
July, it is an attractive time to fund a short-term GRAT.
Charitable Tax Shelter Final Regulations
In T.D.
9492 (1 Jul 2010) the Service published final regulations on
participation by charities in tax shelters. Under Sec. 4965 a nonprofit may
not facilitate a prohibited tax shelter or be a party to a tax shelter
transaction. The final regulations deleted the penalty for a charitable
organization that participates in a listed transaction to reduce its
unrelated business taxable income.
The prohibition against charitable participation in tax shelters was
enacted in the Tax Increase Prevention and Reconciliation Act of 2005. As a
result of tax shelters facilitated by the participation of charitable
organizations, the Sec. 4965 penalties were enacted to incentivize
avoidance of tax shelters by nonprofits.
Applicable Federal Rate of 2.8% for July – Rev. Rul. 2010-18; 2010-27
IRB 1 (17 June 2010)
The IRS has announced the Applicable Federal Rate (AFR) for July of 2010.
The AFR under Sec. 7520 for the month of July will be 2.8%. The rates for
June of 3.2% or May of 3.4% 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 by clicking
here.
X funded a charitable remainder unitrust (Trust) on Date 1.
Trust was drafted by X's attorney and called for a payout of Y%. However,
due to a scrivener's error, Trust was drafted with a higher payout of Z%.
On Date 2, X petitioned the court to allow for a reformation of Trust to
lower the payout to Y%. The court permitted the reformation pursuant to a
ruling by the Service that Trust would be treated as a valid CRUT since its
inception on Date 1. Therefore, X requested a ruling that the reformation
will not disqualify Trust and that the reformation will not result in an
act of self-dealing under Sec. 4941.
To qualify as a valid CRUT, a trust must comply with the requirements of
Sec. 664(d)(2). The trust must pay a fixed percentage (not less than 5% and
no more than 50%) of the net fair market value of the trust assets (valued
annually) to one or more persons for a term of years, not to exceed 20 or
for the life or lives of the beneficiaries. At the expiration of the trust
term, the remaining interest in the CRUT must be transferred to a qualified
charitable organization described in Sec. 170(c). With respect to the
remainder interest, each qualified contribution to a CRUT must produce a
10% charitable remainder interest. The Service ruled that Trust meets these
requirements and is valid under Sec. 664(d)(2). Therefore, the reformation
due to a scrivener's error will not result in disqualification.
Self-dealing is defined in Sec. 4941(d)(1)(E) as any direct or indirect
transfer to or for the use of a disqualified person. A disqualified person
is defined in Sec. 4946(a) as, amongst other things, a substantial
contributor to the foundation. The Service determined that according to
Sec. 53.4947-1(c)(2), the income paid to X from a valid CRUT is not an act
of self-dealing. Furthermore, because X has repaid Trust the excess income
with interest and because CRUT is qualified as a valid CRUT, the excise tax
on acts of self-dealing under Sec. 4941 do not apply.
Note: At publication date the House and Senate are still not
in agreement on the provisions of the tax extenders bill. It is very likely
to be passed and enacted by the end of 2010, but has not yet been signed by
the President.
In The American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213),
which is still in negotiations in the Senate, Congress permits a 2010
rollover directly from an IRA to a qualified public charity.
This act enables an IRA owner age 70½ or older to make a direct transfer
to charity. The transfer may be up to $100,000 in one year. See Sec.
408(d)(8)(A). The IRA rollover first created by the Pension Protection Act
(PPA) of 2006 is (after enactment of H.R. 4213) extended to the end of
2010.
Donor Profiles
There are five donor profiles for IRA rollover gifts. First are the
convenience donor who finds it a very simple and easy method for an end of
year gift. The second is the generous donor, who wants to give past the 50%
of AGI limit. The third is a major donor. This person may be a board member
or trustee who is looking for a favorable opportunity to make a major gift.
Fourth, the Social Security recipient may reduce taxes with an IRA rollover
gift. Finally, a standard deduction donor will benefit from a direct IRA to
charity gift.
Several years ago Mother and Father built a very unique home
on 45 acres of beautiful rolling hills and woods. Father passed away three
years ago and Mother now solely owns the 45-acre parcel and home.
She enjoys the peaceful country view out her front window. However, the
university adjacent to the property is very interested in acquiring the
property for eventual future growth. Not surprisingly, Mother is concerned.
She does not want a new dormitory filled with college students in her front
yard. In fact, she enjoys the peace and protection of her lovely home in
the wooded countryside. However, at age 80, she recognizes that eventually
some planning will have to be accomplished.
After a thorough understanding of Mother's needs and desires, a wonderful
four-part solution was suggested which incorporated an outright sale, a
unitrust, a gift annuity and a gift of a remainder interest in her home.
(See Case Study "Peace in the Countryside" for a full
explanation.)
In addition, another component of the plan involves the potential sale of
the home to Son after Mother's death. Specifically, Son enters into an option
agreement with the university. It is a contingent agreement that permits
Son to purchase the home from the university. This transaction is not an
act of self-dealing, (See Case Study "Son's Intentions Paved with
Gold, Part 1.") So, naturally, it is part of the final plan.
However, Son wants an additional option contract with Mother's unitrust.
Specifically, Mother's unitrust will receive the 20-acre rear parcel, that
university intends to develop. In the event university does not develop the
land itself, Son wants the right to purchase back the "family
land" from the unitrust.
Can Son and Mother's unitrust enter into an option agreement? May Son later
purchase the 20-acre rear parcel from the unitrust at fair market value?
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.
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