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January 21,
2008
Dear Professional Advisor,
Greetings from
Immanuel St. Joseph's Foundation. I am pleased to share with you the
latest news from Washington, tax law updates, PLRs, Case Studies and
timely articles. We provide this weekly eNewsletter and web site to
our professional advisor friends as a complimentary service.
Please feel free to call me at 507-385-2932 if I can run a proposal
or be of assistance to you.
Cordially
yours,
Bob Weiss
Immanuel St. Joseph's Foundation
1125
Mulberry St.
Mankato, MN 56001 |
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| Immanuel St.
Joseph's Foundation |
January 21,
2008 |
GiftLaw Weekly eNewsletter -
January 21, 2008
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Any one may so
arrange his affairs that his taxes shall be as low as possible; he
is not bound to choose that pattern which will best pay the
Treasury; there is not even a patriotic duty to increase one's
taxes."
-- Learned Hand
President Bush
Proposes Stimulus Package
On January 18, 2008, President
Bush proposed an economic stimulus package. With the housing
problems dragging down the economy, leaders of both parties now
strongly support immediate action.
President Bush suggested
that the stimulus package should equal 1% of the economy or
approximately $140 billion dollars. He stated, "By passing a growth
package quickly, we can provide a shot in the arm to keep a
fundamentally strong economy healthy and it will help keep economic
sectors that are going through adjustments, such as the housing
market, from adversely affecting other parts of our
economy."
The details for the package are anticipated to be
released by the date of the State of the Union Address later this
month. President Bush suggested that his plan will include tax
reductions for business and "rapid income tax relief" for
individuals. The rapid income tax relief could be a distribution of
a cash tax refund similar to the $600 refund in
2001.
Democratic Congressional leaders also advocated an
immediate stimulus package. In a letter to President Bush, House
Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid
(D-NV) indicated, "We want to work with you and the Republican
leadership of the Congress to immediately develop a legislative plan
based upon these principles so it can be passed and implemented into
law without delay."
Part of the impetus for a stimulus plan
was testimony by Federal Reserve Chairman Ben Bernanke before the
House of Representatives. During that testimony, he noted, "To be
useful, a fiscal stimulus package should be implemented quickly and
structured so that its effects on aggregate spending are felt as
much as possible within the next 12 months." Chairman Bernanke
indicated that the stimulus should focus on the "near-term" and
should be explicitly temporary to avoid increasing the long-term
government deficit.
Editor's Note: Change is certainly
a buzzword in the political arena today, but the extraordinary
change between December and January is noteworthy even in
Washington. During December, the Senate Republicans and House
Democrats conducted a strident battle over "pay-go" tax increases to
pay for both AMT relief and the tax extenders. The result was
passage of only AMT relief. House Ways and Means Chair Charles
Rangel (D-NY) has now agreed to eliminate the pay-go requirement for
a stimulus bill. He stated, "It's inconsistent to try to get money
to consumers and talk about raising taxes at the same time. You just
can't do it." The good news in this statement is that it may be
possible to combine the stimulus bill with the tax extenders such as
the IRA Charitable Rollover for 2008. A combined bill could pass
without offsets or tax increases.
Major Presidential
Candidates Support Stimulus
Five Presidential candidates
who have won at least one of the primaries released proposed
stimulus plans this week. These proposals are described with the
five candidates listed in alphabetical order.
Clinton,
Hillary (D) -- Proposes a $70 billion plan, sets aside $30
billion for a housing relief crisis fund, mandates a 90-day
moratorium on home foreclosures, a rate freeze on sub-prime
mortgages for five years, $25 billion for low-income energy
assistance and $10 billion for extended unemployment
benefits.
Huckabee, Mike (R) -- Suggests a plan that
would allow full deduction for college tuition, reduced rates for
personal income taxes, a lower corporate tax rate and repeal of the
estate tax.
McCain, John (R) -- Recommends reducing
corporate rates from 35% to 25%, increasing the ability to deduct or
expense equipment acquisitions in the first-year and a 10% tax
credit for research and development expenditures.
Obama,
Barak (D) -- Prefers a $250 immediate tax cut, a $250 bonus for
Social Security recipients, creation of a relief fund for homeowners
facing foreclosure and extension of the unemployment
benefit.
Romney, Mitt (R) -- Proposes making the Bush
tax cuts permanent, reducing personal tax rates, lowering the
corporate tax rate, increasing the AMT exemption and repealing the
estate tax.
Editor's Note: Your editor and this
organization do not endorse any of these individuals or concepts.
This information on Presidential candidates from both parties is
offered as a public service.
Supreme Court -- 2% Floor
on Trust Fees Upheld
In a unanimous opinion by Chief
Justice John Roberts, the Supreme Court in Michael
J. Knight v. Commissioner, S. Ct. Dkt. No. 06-1286 (16 Jan
2008), upheld the 2% floor for fiduciary investment advisory
fees.
Under Sec. 67(a), miscellaneous deductions are subject
to a 2% floor. Only the excess of the deduction over 2% of adjusted
gross income is permitted. This rule is intended to minimize
recordkeeping, since many types of miscellaneous expenses fall below
the 2% floor and, therefore, are not deductible.
While
investment advice for individual taxpayers is subject to the floor,
the trustee in Knight claimed that Sec. 67(e)(1) created an
exception. This provision states, "Costs which are paid or incurred
in connection with the administration of the estate or trust and
which would not have been incurred if the property were not held in
such trust or estate" are deductible without regard to the 2%
floor.
After a split in the Circuits in which the Second
Circuit applied a "could have" instead of "would have" standard, the
Supreme Court granted certiorari.
Chief Justice Roberts
rejected the "could have" rationale as contravening the meaning of
the statute, but determined that the 2% floor would still apply. He
developed a new standard in which the investment counsel costs for a
fiduciary would be subject to the 2% floor, but that "uncommon,
unusual or unlikely" costs could be deductible in full. Because the
prudent individual investor may also seek counsel that is subject to
the 2% floor, Chief Justice Roberts applied that floor to
fiduciaries.
Editors Note: With the decision by the
Supreme Court, Treasury will eventually publish final regulations on
the issue. In proposed regulations, the Treasury suggested a full
deduction for "unique" expenditures. The final regulations will
probably adopt the standard suggested by Chief Justice Roberts for
uncommon, unusual or unlikely expenses. Financial services companies
are likely to "unbundle" or state expenses separately for those
items that qualify under the Supreme Court standard for full
deductibility.
Applicable Federal Rate of 4.2% for
February -- Rev. Rul. 2008-9; 2008-5 IRB 1 (17 Jan.
2008)
The IRS has announced the Applicable Federal Rate
(AFR) for February of 2008. The AFR under Section 7520 for the month
of February will be 4.2%. The rates for January of 4.4% or December
of 5.0% 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 2008, pooled income funds in
existence less than three tax years must use a 4.8% deemed rate of
return. Federal rates are available by clicking
here.
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PLR THIS
WEEK
PLR - 200744019 Splitting Unitrust in Two
Approved
H and W created a
charitable remainder unitrust (CRUT) under Code Sec. 664(d)(2).
Trust provides trustee pay annual amounts to H for life and at his
death to W. Trust operates as a FLIP and pays a fixed 9% of the fair
market value of the assets valued annually. H retains the power to
appoint a different charitable beneficiary. The Trust terminates at
the death of both H and W and the Trustee distributes all remaining
principal and income to Charity. After Trust assets sold, H and W
commenced divorce proceedings. The marriage separation agreement
(MSA) into which they entered provided that Trust will be divided
into two separate and equal trusts (Trust A and Trust B) with the
intention that each qualifies as a CRUT under Sec. 664(d)(2).
Trustee of Trust seeks a ruling that the proposed division of Trust
into Trust A and Trust B will not disqualify Trust, Trust A, or
Trust B as CRUTs under Sec. 664(d)(2).
Under Sec. 664(d)(2),
a CRUT must distribute payments each year based on a fixed
percentage of the net fair market value of its assets valued
annually to individual(s) for a term of years or for the life or
lives of the individual(s) at which time the trust terminates and
pays all remaining principle and income to a qualifying charitable
organization. The Service ruled that the division of Trust into two
separate trusts will not disqualify Trust, Trust A, or Trust B as
CRUTs under Sec. 664(d)(2). The trusts conform to Sec. 664(d)(2)
because Trust A and Trust B will be identical to Trust except that
each spouse will be the sole beneficiary of their respective trust
(Trust A for H, Trust B for W), each spouse will retain a
survivorship interest in the other's unitrust amount, each spouse
will be the only possible contributor to their respective trust,
each spouse will retain the right to appoint a different qualified
charitable beneficiary and each trust will pay each year 9% of the
net fair market value of its assets valued annually to the
respective beneficiary.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Dealing with the Five &
Dime
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 a home. (See Case Study "Peace in
the Countryside" for a full explanation.) This solution seemed like
the perfect fit until Mother requested a special favor.
After
Father's death, Mother began making small arts and crafts to pass
the time. Apparently, Mother has a real talent because friends and
neighbors have been buying up everything Mother creates. Seeing the
joy this newfound hobby brings, Mother, with the support of her
family, wants to open a small "five and dime" general store on the
rear 20-acre parcel where she could sell her arts and crafts.
Because the rear 20-acre parcel borders on a major country road, it
would get plenty of passer-by traffic.
As one component of
the four-part solution, Mother really likes the idea of putting the
rear 20-acre parcel into a unitrust. Given her new business idea,
she wonders if she can lease a very small portion of the rear
20-acre parcel from the unitrust. Mother would agree to any fair and
reasonable lease agreement. Moreover, the university does not object
to such a simple and modest use.
Can Mother, the university
and the trustee agree to this "five and dime" lease arrangement?
Must the lease arrangement represent a fair market lease value to
both parties? What are the rules governing transactions between
donors and charitable remainder trusts?
To view the
solution to this Case of the Week Click
Here.
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ARTICLE OF THE
MONTH
"Green" Unitrusts
On December 19, 2007, President Bush signed the
Energy Independence and Security Act (H.R. 6). This energy act
included several provisions. The most notable is a required increase
in auto fuel mileage to 35-mile-per-gallon fuel efficiency by the
year 2020. However, it also strongly supports increased production
of bio-fuels. The Renewable Fuels Standard increases greatly the
requirements for use of renewable fuels in motor vehicles. By 2008,
there must be nine billion gallons of renewable fuel each year, and
that number increases to 36 billion gallons by 2022.
With a
goal of 36 billion gallons per year of bio-fuels, the farm belt is
nearly certain to be planted to the fence lines. It seems very
probable that the agricultural economy will be entering another
"Golden Age" and there is no foreseeable end in sight. With the
growing demand for energy by our nation and the ability to convert
farm products to ethanol, it is highly probable that both crop
quantity and crop prices will be very positive during the coming
decades.
Crops are a type of tangible personal property that
may be used to fund a charitable remainder unitrust. Crops are
generally inventory for the farmer, and thus would usually produce
ordinary income when sold. In order to bypass this ordinary income,
the farmer could transfer the crops into a charitable remainder
unitrust.
To view the full Article of the Month Click
Here.
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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 1999-2008
Crescendo Interactive, Inc.
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| Immanuel St.
Joseph's Foundation |
January 21,
2008 |
| |
Thank you for your interest in
gift planning. To access any of this updated GiftLaw information,
please select our web page by clicking here.
Cordially
yours,
Bob Weiss
Immanuel St. Joseph's Foundation
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