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April 7,
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 |
April 7,
2008 |
GiftLaw Weekly eNewsletter -
April 7, 2008
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"Friends and
neighbors complain that taxes are indeed very heavy, and if those
laid on by the government were the only ones we had to pay, we might
the more easily discharge them; but we have many others, and much
more grievous to some of us. We are taxed twice as much by our
idleness, three times as much by our pride, and four times as much
by our folly."
-- Benjamin Franklin
Unfinished
Business -- IRA Rollover and Tax Extenders
The Senate
Finance Committee staff is preparing a bill on the tax extenders. As
was proposed by the Senate last year, it is probable that the Senate
tax extenders bill will cover both 2008 and 2009.
In November
of 2007, the House passed a tax extenders bill that included 31
different provisions. One of the provisions was the extension of the
Charitable IRA Rollover for gifts up to $100,000 per year by IRA
owners over age 70˝.
Why was a tax extender bill not passed
in 2007? There was a major battle in Congress over the House
proposal to offset both the alternative minimum tax (AMT) relief and
the tax extenders with tax increases. After a strident struggle
between House and Senate, AMT relief was passed and tax extenders
were deferred to 2008.
House taxwriters led by Rep. Charles
Rangel (D-NY) prefer offsets for both AMT relief and tax extenders
for 2008. Senate Republicans strongly oppose the tax offsets, and
that difference of opinion is the challenge to passing the
forthcoming Senate tax extenders bill.
Sen. Charles Grassley
(R-IA) is the ranking Republican on the Senate Finance Committee.
Sen. Grassley has suggested that a compromise with some offsets for
tax extenders should be possible.
Rep. Jim McCrery (R-LA) is
the ranking Republican on the House Ways and Means Committee. He has
stated that "we could have a compromise" that includes AMT relief
and tax extenders such as the IRA Charitable Rollover. Rep. McCrery
thinks that there would be a partial offset though several tax
increases to cover a portion of the cost of the bill.
Sen.
Jeff Bingaman (D-NM) is also on the Senate Finance Committee.
Speaking after Rep. McCrery, he predicted that the tax extenders
were the only "major tax legislation" that Congress was likely to
pass this year.
Editor's Note: Hopefully, the House
and Senate will not repeat the battle of December 2007 over the tax
offsets. The tax extenders include very popular provisions such as
the deduction for teacher's supplies and the IRA Charitable
Rollover. It seems probable that members of the House and Senate
will not want to face voters in November without fulfilling their
responsibility to take action on this bill.
Senate
Estate Tax Duel Continues
At the request of estate tax
repeal advocate Sen. Jon Kyl (R-AZ), the Chair of the Senate Finance
Committee Max Baucus (D-MT) agreed to hold a series of hearings on
estate tax reform. The third hearing on April 3, 2008 discussed
specific provisions for estate tax reform. These included the
installment payment of estate tax, the portability of marital
deductions, a potential reunification of gift and estate tax
exemptions and provisions affecting charitable
gifts.
Chairman Baucus correctly noted that "Current estate
tax law is complicated. It lacks certainty for American families.
The law changes, and changes, and changes. We seriously need
reform."
Sen. Baucus referred explicitly to the problems with
uncertainty. He observed that regardless of the planning process,
the "estate tax their family will pay will largely be a matter of
chance. It can be pretty much up to heaven."
Sen. Charles
Grassley (R-IA) also expressed concern about the uncertainty. He
noted, "When I return to Iowa I want to be able to tell small
farmers who are getting ready to harvest their fields that they can
focus on the job at hand and don't have to worry about the potential
trouble on the horizon about the death tax." Sen. Grassley also
expressed a concern that is echoed by other Republican Senators. If
the current law were not changed, the estate tax would be repealed
in 2010 and then reinstated with a punitive 55% top rate in 2011. He
indicates that it will be important to avoid "the potential
disastrous effect of 2011."
Editor's Note: An estate
tax compromise is apparently out of reach for the year 2008. Given
the strident nature of the discussion, it seems unlikely the
compromise can take effect prior to 2009. In the pending Senate
budget resolution, Sen. Baucus proposes to extend the 2009 exemption
of $3.5 million and estate tax rate of 45%.
Debate
Over Specific Estate Tax Reforms
At the April 3rd estate
tax hearing held by the Senate Finance Committee, four witnesses
discussed very specific amendments and changes to the estate tax.
These changes included modification of the estate tax installment
payment rules, marital deduction portability, reunification of the
estate and gift taxes and charitable giving
adjustments.
Installment Estate Tax Payments. Dennis Belcher,
the former Chair of the Task Force on Federal Wealth Transfer Taxes,
spoke on behalf of the modification of the Sec. 6166 installment
payment rules. Under these provisions, there is a permitted four
year period of payment of interest and then ten equal payments of
estate tax. The 14 year payout has a favorable 2% rate on initial
estate tax amount ($1,280,000 for 2008) and generally favorable
terms on the balance. However, there are several recommended
changes.
Mr. Belcher suggests that Sec. 6166 should be
modernized to include limited liability companies, limited liability
partnerships and other business entities. Many businesses are also
operated through various types of holding companies and the code
section should also be updated to reflect new business structures.
In addition, many types of business entities include substantial
passive assets that are not included in current definitions.
Finally, it should be possible to obtain an advance ruling from the
IRS that the entity will qualify and to avoid an IRS lien on other
types of nonbusiness assets.
Marital Deductions. Shirley
Kover, Chair of the Transfer Tax Study Committee of the American
College of Trust and Estate Counsel, discussed marital deduction
portability. She suggested that it will be particularly important
when the exemption is $3.5 million for the first spouse to pass away
to be able to transfer his or her exemption to the surviving spouse.
This would simplify tax planning, provide security for the surviving
spouse and treat a "married couple as a unit."
Editor's
Note: Portability of marital deductions may solve a huge income
tax problem that will impact estates in 2009. For many individuals,
transferring the full $3.5 million into a 2009 bypass trust will
require using an IRA or other qualified plan. Because distributions
of income from the bypass trusts are typically to spouse and
children, the qualified plan will be distributed to the bypass trust
over the life expectancy of the spouse. This typically means a
distribution over 12 to 15 years, with payment of approximately 40%
state and federal income tax on the distributions. For example, with
a $2 million IRA transferred to a bypass trust, there is a near
certainty of an $800,000 income tax on that IRA. The $800,000 income
tax reduces the value of the trust that can produce income to spouse
and also reduces the inheritance for children. Too few surviving
spouses understand that their plan includes a mandatory $800,000
income tax. Portability of the marital deduction would solve this
coming income tax trainwreck. Alternatively, a simple solution to
save the $800,000 income tax is to turn the bypass trust into a
charitable remainder trust for the life of spouse and children. Of
course, this trust would need to qualify under the 10% minimum
deduction, so a 5% payout unitrust would be selected.
Reunify
Estate and Gift Taxes. CPA Roby Sawyers spoke on behalf of the AICPA
and suggested that it would be preferable to have the same gift and
estate tax exemption. Under 2009 law, the gift exemption will be $1
million and the estate exemption will be $3.5 million. By making
both $3.5 million, it will "simplify planning and provide an
incentive for small business owners to plan for orderly succession
of their business interests." He advocated increasing the gift
exemption to $3.5 million in order to facilitate lifetime transfers
of property to family members.
Charitable Givng. Finally,
Diana Aviv, President and CEO of Independent Sector, discussed the
impact of estate tax changes on charities. She observed that the
repeal of estate taxes would dramatically reduce charitable bequests
from large estates. For the year 2000, the Congressional Budget
Office (CBO) indicated that 70% of total bequests came from estates
over $3.5 million. If the estate tax had been repealed, the CBO
projected that estate donations to charity in 2000 would have been
reduced by $13 billion.
Ms. Aviv also mentioned that under
the existing law with an AFR of 3.4%, a charitable lead trust that
produced a return well in excess of that AFR could pass the large
amounts of property to family with little or no estate taxation. She
noted that a twenty year charity annuity lead trust requires use of
only $225,000 of exemption and yet transfers $2.5 million to family.
This is a ratio or leverage of 11 to 1. Ms. Aviv suggested that a
modification of the Sec. 7520 tables or assessment of estate tax as
the termination of the trust might be
appropriate.
Editor's Note: It is indeed true that the
charitable lead trust is very attractive under current rules.
However, modifying the Sec. 7520 tables for lead trusts would
potentially disadvantage the government for deductions for
charitable remainder trusts and charitable gift annuities. The
suggestion to tax the lead trust at its termination is very harmful
to charitable planning. Congress did create a similar rule on
generation skipping tax for charitable annuity lead trusts with
remainder to grandchildren, and virtually no charitable annuity lead
trusts for grandchildren are created. (The preferred solution for
lead trusts for grandchildren is to use a unitrust payout.) However,
using the same "assess estate tax at the end" method for all lead
trusts would greatly increase uncertainty. As is true with the
charitable annuity lead trust for grandchildren, this would greatly
reduce the use of the charitable lead
trust.
Applicable Federal Rate of 3.4% for April --
Rev. Rul. 2008-20; 2008-14 IRB 1 (18 Mar. 2008)
The IRS
has announced the Applicable Federal Rate (AFR) for April of 2008.
The AFR under Sec. 7520 for the month of April will be 3.4%. The
rates for March of 3.6% or February of 4.2% 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 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 - 200813006 Special Trustee Power to Allocate
Income Permitted in a Two-Life CRUT
Husband (H) and Wife (W) created Trust providing for
payment of a unitrust amount of x% of the net fair market value of
trust assets each taxable year until the death of the survivor of H
& W, with remainder to Charity. Trustee must pay 25% of the
unitrust amount to H & W jointly (and then to the survivor of
them) and the other 75% of the unitrust amount to one or more of H,
W and any charity as a Special Trustee with absolute discretion
shall direct. Special Trustee cannot be related or subordinate to
either H or W. H & W retain the power jointly or as survivor to
replace the Special Trustee with another unrelated, non-subordinate
Special Trustee. H & W request rulings that Trust qualifies as a
charitable remainder unitrust (CRUT) considering the Special
Trustee's power to allocate a portion of the unitrust amount and H
& W's power to replace the Special Trustee with another
unrelated, non-subordinate trustee.
The Service ruled that
Trust qualified under Sec. 664(d)(2) as a CRUT because while Sec.
674(c) permits an independent trustee to apportion income within a
class of beneficiaries, power to allocate among charitable and
noncharitable beneficiaries on an annual basis is acceptable so long
as a reasonable portion of the unitrust amount is allocated and paid
to the noncharitable beneficiaries annually. Furthermore, even
though a grantor's unrestricted power to replace an independent
trustee may disqualify a trust under Reg. 1.674(c)-2(a), H & W's
power to replace the Special Trustee is sufficiently restricted
because in no event could the Special Trustee be a person or entity
related or subordinate to either H or W.
Editor's
Note: Generally, the power to allocate income among CRT
beneficiaries is used with a term of years CRT bacause distributions
can be made to a class. But here the Service approved an allocation
power in a CRT lasting for lives because the trust required that at
least a portion of the payments go to the noncharitable
beneficiaries. Additionally, any gift or estate tax complications
were eliminated because of unlimited marital
deductions.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
A Sign of Warning on Assignments, Part
6
Ken Richards, 70, is a
very charitable American. He consistently makes gifts each year to
various causes he supports. In fact, ten years ago, Ken created a
one-life Charitable Remainder Unitrust (CRUT). The unitrust was
drafted to have a 5% payout and named a local orchestra as the
charitable remainderman. Ken funded his unitrust with $1 million of
appreciated stock.
Currently, the local orchestra is raising
funds for a proposed expansion. In an effort to help with the
current fundraising project, Ken wants to give the local orchestra a
major gift for its campaign. However, Ken prefers not to invade his
stock and property holdings to satisfy the gift. Thus, the only
remaining available asset is Ken's CRUT.
Ken is financially
independent now and no longer relies heavily on the CRUT income
stream. Thus, he feels comfortable with the idea of making some
gifts from his CRUT. However, although he no longer relies heavily
on the CRUT income stream, Ken does not want to entirely terminate
his income-producing investment. As Ken reiterated, "It never hurts
to have a safety net."
May Ken assign his CRUT income stream
to the local orchestra in exchange for a gift annuity? What are the
consequences of such an assignment? Will this put current assets in
the hands of the local orchestra or is this still a deferred
gift?
To view the solution to this Case of the Week Click
Here.
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ARTICLE OF THE
MONTH
The New Form 990: Changes that Matter to Your
Organization
In June of
2007, the Internal Revenue Service published for public comment a
revised Form 990. Following a flurry of comments from charities,
legal counsel and accountants, the IRS redrafted Form 990 and
offered it for public inspection. In response to the comments it
received, the IRS made substantial changes. What follows is a basic
description of the most relevant changes to the draft Form
990.
The Service will phase-in the required use of the new
Form 990 between 2007 and 2010. For tax year 2008, a filing charity
may use the old Form 990EZ if the organization has gross receipts of
less than $1 million and total assets of not more than $2.5 million.
In tax year 2009 those limits fall to $500,000 and $1.25 million
respectively. Year 2010 will be the final year and organization may
submit the old Form 990, but even then it will be limited to those
organizations with gross receipts of less $200,000 and total assets
of not more than $500,000. For tax years following 2010,
organizations with gross receipts of less than $50,000 must file
Form 990-N, widely known as the 990 postcard. Organizations with
gross receipts exceeding $50,000 will be required to file the newly
drafted Form 990.
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 |
April 7,
2008 |
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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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