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May 4,
2009
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 |
May 4,
2009 |
GiftLaw Weekly eNewsletter -
May 4, 2009
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
|
WASHINGTON HOTLINE
Tax Quote of the Week
"If we don't do
something to simplify the tax system, we're going to end up with a
national police force of internal revenue agents."
-- Leon Panetta
Congress Passes
"Energy, Education and Health Care" Budget
By a 233 to
193 vote in the House and a Senate vote of 53 to 43, Congress passed
the 2010 fiscal budget for America. While the budget is not legally
binding, particularly in the Senate, it creates a very strong
indicator of the final tax and spending result for
2010.
Democratic leaders spoke in strong support of the
budget. Speaker Nancy Pelosi (D-CA) described the $3.5 trillion
budget as "a blueprint for the future." She noted that spending
increased for the three principal priorities of energy, education
and health care.
Energy expenditures include funding for
"renewables" and reduced tax breaks for fossil fuels. Health care
programs will lead to "entitlement reform" and move forward with
"universal quality, accessible health care for all Americans." The
education programs assist with tax credits for college, additional
Pell Grant scholarships and early childhood programs.
Sen.
Budget Chair Kent Conrad (D-ND) also agreed with the budget
priorities of energy, education and health care. He noted that the
deficit would be cut in half by 2012 and by "two thirds by 2014."
The deficit in 2014 is estimated to be 3% of gross domestic
product.
In response to strong criticism by Senate
Republicans who oppose using the budget reconciliation process to
pass major health care reform, Sen. Conrad stated, "I personally
believe reconciliation, which is a special process here, a
fast-track process, will not be used for health care because as
people get into it, I think they will find it is a very difficult
way to write major, substantive legislation."
With an
estimated $9 trillion in new deficits during the coming decade,
House "Blue Dog" Democrats have strongly advocated the "PayGo"
concept. Under "PayGo," any reductions in income taxes, estate tax,
alternative minimum tax or further growth of the Medicare program
will be offset by additional taxes. House Majority Leader Steny
Hoyer (D-MD) stated, "I worked with the Blue Dogs over the past few
days to ensure that statutory PayGo will get done this
year."
Senators Express Budget
Concerns
Three Republican Senators expressed great
concern about the increased spending and potential large deficits.
Sen. Judd Gregg (R-NH) is the ranking Republican on the Senate
Budget Committee. He predicted that the new budget "will go far
beyond simply taxing the rich." His concern is that the small
business owners who historically have generated most new jobs are
going to be penalized through higher taxes and the nation will
suffer.
Sen. Gregg also opposes "a national sales tax on
energy" that is estimated to cost each household over $3,000 per
year. Finally, he points out that over the next decade the proposed
budget will increase by three times the current publicly-held
national debt. At the end of that time, the debt may exceed 75% of
gross domestic product.
Sen. John Kyl (R-AZ) is not pleased
with the "$646 billion energy tax" in the budget. He suggests that
the tax will act as a "governor" on the American
economy.
Finally, Sen. Charles Grassley (R-IA) points to a
survey by the National Federation of Independent Business (NFIB).
Over 70% of new jobs in the last decade were created by small
businesses. With the struggling economy and the proposed budget
deficits, the NFIB annual survey shows that small businesses are
less willing to hire new employees than at any time during the past
35 years. Senator Grassley views the 2010 budget as constricting
credit and directing high taxes at "America's job engine -- small
business."
Graduated GRAT Estate
Inclusion
In REG-119097-05 published on June 7, 2007, the
IRS set forth rules for the inclusion of grantor retained annuity
trusts (GRATs) and similar trusts in estates. Sec. 2036 estate
inclusion applies if the GRAT or other trust pays for a lifetime or
for a term of years and the recipient passes away prior to the
expiration of that term.
In REG-119532-08;
74 F.R. 19913-19917 (30 Apr 2009), the IRS published supplemental
regulations that explain the inclusion of a graduated GRAT or
similar trust. The other types of agreements could include grantor
retained income trusts (GRITs), charitable remainder trusts (CRTs)
and grantor retained interest trusts (GRTs).
Under the prior
ruling, the portion of the corpus of a GRAT or similar trust is the
amount of corpus necessary to pay the desired annuity or income. For
a GRAT, the included amount equals the adjusted annuity divided by
the applicable federal rate under Section 7520. The included amount
is further limited to a maximum of the value of the
trust.
With a graduated annuity, the calculation is completed
sequentially for the base amount and then the value of each enhanced
payment. The total estate inclusion is a sum of the various
calculated amounts.
The regulations include two examples. In
the first example, trust income is paid to parent D and child C. The
income is paid equally to both for life and all to survivor. When
parent D passes away, half of the income is includable under Sec.
2036(a)(1). The other half of the trust is includable because the
parent holds a contingent income interest, with a reduction for the
value of the child's income interest.
A second example
describes a $3.2 million GRAT with a $100,000 initial payment and
20% increasing payments for a term of five years. Donor passes away
after two years. The includable value is the sum of the corpus
required for sustaining the payment for the remaining three years,
and the value of the additional corpus necessary to make the
increased payments in years four and five. The required corpus in
years four and five is discounted to year three by calculating two
discount factors using the deferral periods and the applicable
federal rate. The sum of the three values is $2,973,866 and equals
the estate inclusion.
If the annuity is paid other than
annually, there is an adjusted factor. Once again, the total
inclusion amount may not be greater than the trust value at date of
death.
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PLR THIS
WEEK
PLR - 200917015 Trust Modification Will Not Affect
GSTT Exemption
Settlor
formed Trust on Date 1 for the benefit of Son and Son's children.
Trust became irrevocable on Date 2, which is before September 25,
1985. Trustees seek a ruling that a proposed modification to Trust
giving Son a non-cumulative power to withdraw the greater of $5,000
or 5% of Trust value will not destroy Trust's grandfathered exempt
status under Generation Skipping Transfer Tax (GSTT) Reg.
26.2601-1.
The Service ruled that Trust is exempt from GSTT
and that the proposed general power of appointment modification to
Trust will not destroy its exempt status under GSTT Reg. 26.2601-1.
Section 2601 imposes a tax on every generation-skipping transfer to
a skip person unless the trust is exempt. Reg. 26.2601-1(b)(1)(i)
and Sec. 1433(b)(2)(A) provide that GSTT is not applicable to trusts
irrevocable on September 25, 1985 and to which no additions have
been made since that date. Trust is exempt because it was
irrevocable on or before September 25, 1985 and no additions have
been made since that date.
Reg. 26.2601-1(b)(4)(i)(D)
provides that modification of an exempt trust will not cause GST tax
so long as the modification does not shift a beneficial interest to
any beneficiary occupying a lower generation than before, and does
not extend the time for vesting of any beneficial interest beyond
the original period. A shift of beneficial interest occurs if the
modification increases the amount of GSTT or creates a new transfer.
The proposed Trust modification does not shift a beneficial interest
to a lower generation or extend the time for vesting of any
beneficial interest beyond the original period, so the GSTT
exemption still applies.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Exit Strategies for Real Estate Investors, Part
4
Karl Hendricks was a man
with the golden touch. Throughout his life, it seemed every
investment idea that he touched turned to gold. By far, Karl was
most successful with real estate investments. It was definitely his
passion.
Amazingly, Karl continued to buy and sell real
estate at the age of 85. For instance, about three months ago, Karl
discovered a great investment property. It was a "fixer-upper"
commercial building in a great area. While other nearby buildings
sold for over $2 million, the seller needed to sell quickly and was
asking just $1 million.
The condition of the building turned
many buyers away. It was being sold "as-is." But Karl was not
deterred. He could see great potential with the building and knew it
would not take much to get it to market condition. Therefore, Karl
swooped in, bought the building for $1 million and instantly hired
contractors to refurbish the place.
After three months of
hard work refurbishing the building, the place looked like new! In
the end, Karl invested $250,000 in the building bringing his total
investment in the property to $1.25 million. One month after the
completion of the work, Karl was contacted informally by a company
that expressed an interest in the building - a $2 million interest!
This was no surprise to Karl. He knew the building was another great
buy.
After Karl learned about the benefits of a FLIP CRUT, he
eagerly wanted to move forward. (See Parts 1 and 2 for a full
discussion of this decision.) It looked like the perfect
solution.
However, there was still one issue unresolved.
There was a $100,000 debt on the property that Karl incurred at the
time of purchase. Thus, he wanted to know what effect, if any, the
$100,000 mortgage would have on the FLIP CRUT plan?
To
view the solution to this Case of the Week Click
Here.
|
ARTICLE OF THE
MONTH
Life Estate Plus Wind Farm
Will Jeffers Lives Off the West
Wind
Will Jeffers has resided in his modest home on 80
acres for many years. His land is located just downwind from two
mountain ranges that funnel prevailing winds toward his home.
Recently, Will was approached by a company with an offer to lease
his land and install a windmill farm. Will leased 70 acres and
retained his home on 10 acres. The lease will provide him with
future income of $200,000 per year! Will remarked, "My dad always
said you can't live on the west wind, but I am going to prove you
can. My windmill lease income is terrific. But my taxman now claims
I will have to pay an enormous income tax. What is an 80
year-old-rancher to do?"
Will now has an income tax problem.
In order to create a charitable deduction to offset his increased
taxable income, Will Jeffers contemplates transferring the remainder
in his home on ten acres to charity. With his lease income, savings
and IRA, he has substantial liquidity and will not need the value of
the home for living expenses.
Will decides to deed the
remainder interest in the home to his favorite charity. Based upon
his age and a 2.4% AFR, he receives a charitable deduction of
$236,611. This deduction is an appreciated-type deduction usable to
30% of adjusted gross income. With $200,000 of income, he can deduct
about $60,000 per year. Over a period of four years, this charitable
deduction will save over $78,000 in income taxes. The deduction is
based on assumed values for the residence of $100,000 and for the
land of $200,000. Will enjoys watching the windmills produce
electricity and earn income for him. He loves living well off the
"west wind" and saving taxes at the same time!
To view
the full Article of the Month Click
Here.
|
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.
|
| Immanuel St.
Joseph's Foundation |
May 4,
2009 |
| |
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
| |
