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June 20,
2008
June 23, 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 |
June 23,
2008 |
GiftLaw Weekly eNewsletter -
June 23, 2008
- WASHINGTON
HOTLINE
- PLR THIS
WEEK
- CASE OF THE
WEEK
- ARTICLE OF THE
MONTH
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WASHINGTON HOTLINE
Tax Quote of the Week
"Taxes, after
all, are dues that we pay for the privileges of membership in an
organized society."
-- Franklin D. Roosevelt
House
and Senate Override Presidential Veto to Pass Conservation
Easements
After passage of an initial Farm Bill,
President Bush vetoed the bill and claimed that the farm payments
were excessive. However, due to a clerical error, his veto was not
on the bill as passed by Congress. Therefore, the House and Senate
voted this week to override a second Presidential veto and pass
H.R.6124, The Food, Conservation and Energy Act of 2008. The
controversial Farm Bill is finally enacted.
Among the 1,500
provisions of the bill is an extension of the enhanced deduction for
gifts of conservation easements. A conservation easement is usually
a restriction on the use of land. For example, a person could create
a restriction "for conservation purposes" on property and select a
conservation organization to receive and monitor the easement. The
value of the conservation easement is established by a qualified
appraisal, and the charitable deduction may save income taxes for
many years.
Most real property used for conservation
easements is highly appreciated. The normal deduction limit for a
gift of appreciated real property is 30% of adjusted gross income
with a carry-forward for up to five years. For example, with an
adjusted gross income of $100,000, a charitable deduction for a gift
of land is limited to 30% or $30,000 this year with a carry-forward
of additional gift value for up to five years.
The favorable
news with the passage of the Farm Bill is that enhanced deductions
for conservation easements are now effective for years 2008 and
2009. The conservation easement gift may be deducted after all other
appreciated property gifts and there is a 50% of the adjusted gross
income limit for these gifts. In addition, the excess value may be
carried forward for as long as 15 years.
Farmers and ranchers
who receive more than 50% of their gross income from a qualified
farming or ranching activity enjoy an even more favorable charitable
deduction benefit. A farmer or rancher may deduct a conservation
gift up to 100% of adjusted gross income. And if the gift exceeds
his or her income, there is a 15-year carry-forward. Using this
rule, a farmer or rancher may create a perpetual easement on his or
her property and reduce taxable income to zero for up to 16
years.
Final Regulations on 100% Excise Tax on
CRT's
Sec. 424 of the Tax Relief and Healthcare Act of
2006 (TRHCA 2006) modified the rules on charitable remainder annuity
trusts and charitable remainder unitrusts with unrelated business
taxable income (UBTI). For the year 2006 and prior years, any
unrelated business taxable income under Secs. 512-514 would result
in loss of the exempt status of a charitable trust. Because this
loss of exempt status could occur in a year when a highly
appreciated property was sold, the potential penalty was severe.
To reduce the severity of the penalty, TRHCA 2006 modified
the unrelated business income rules with respect to charitable
trusts and created a 100% excise tax. In T.D.
9403 (19 Jun 2008), Treasury published final regulations that
implement this change.
Reg. 1.664-1(c)(1) indicates that the
charitable remainder trust with unrelated business tax will have an
excise tax "equal to the amount of such unrelated business taxable
income." The UBTI will be determined under Sec. 512. While the
income will be included for four-tier accounting purposes in the
ordinary tier-one, the 100% excise tax will be allocated to corpus.
For example, a charitable remainder annuity trust with $2
million in corpus and a 5% or $100,000 annuity requirement has
$10,000 of UBTI. Because there is a $1,000 UBTI deduction under Sec.
512(b)12, the net unrelated business taxable income is $9,000. The
annuity trust must distribute the $100,000 annuity and apply the
standard four-tier accounting to that distribution. However, the
$9,000 UBTI amount must be paid as an excise tax to the Treasury and
is allocated to the corpus. The $9,000 excise tax does not reduce
tier-one ordinary income.
Editor's Note: Even though
this 100% excise tax seems severe, in practice it is far preferable
to the prior rule. Most charitable trusts will be able to sell
potential UBTI assets quite quickly. This will minimize the
recognized and reported UBTI subject to the 100% excise tax. The
powerful feature of this rule is that nearly any business asset can
now be sold through a charitable remainder unitrust so long as there
is a probable buyer "waiting in the wings." In this respect, the
100% excise tax is very favorable because it opens the CRT door for
operating business assets.
Pro-Rata Income Source Rule
for Lead Trust Payments
In REG-101258
08; 73 F.R. 34670-34672 (18 Jun 2008), Treasury indicated that
lead trusts will not be able to select the character of income for
annuity or unitrust payments to charity. Rather, a proportional
allocation of all classes will be carried out with the
payments.
Charitable lead annuity trusts and charitable lead
unitrusts enable a donor to benefit charity for a term of years or a
lifetime and then transfer the corpus to the family. With low
applicable federal rates (AFR) and an opportunity to earn a total
return greater than the AFR, charitable lead trusts are an excellent
method for transferring very large principal amounts to families at
zero gift or estate taxes.
Some counsel have drafted
provisions in charitable lead trust documents that are intended to
preserve the most favorable tax benefits for family when the
principal is distributed. For example, a charitable annuity lead
trust may order the payouts as first from ordinary income, second
from short-term capital gain, third from 50% of unrelated business
income, fourth from long-term capital gain, fifth from the remaining
unrelated business taxable income, sixth from tax-exempt income and
seventh from principal.
Reg. 1.642(c)-3(b) and Reg. 1.643
(a)-5(b) indicate that a charitable lead trust document may specify
the ordering of the payouts. But under the proposed regulations,
Treasury creates an "independent economic effect" rule for ordering.
Only in the cases in which the ordering has independent economic
effect will it be permitted.
Because the ordering provisions
with a charitable lead annuity trust are for tax purposes and not
for determining the amount of the payout, there is no independent
economic effect and the ordering is not permitted. The proposed
regulations effectively require the annuity to carry out "the same
proportion of each class of the items of income of the trust as the
total of each class bears to the total of all
classes."
Applicable Federal Rate of 4.2% for July --
Rev. Rul. 2008-33; 2008-27 IRB 1 (18 Jun. 2008)
The IRS
has announced the Applicable Federal Rate (AFR) for July of 2008.
The AFR under Sec. 7520 for the month of July will be 4.2%. The
rates for June of 3.8% or May 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 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 - 200824022 Division of CRT is Not
Taxable
H created Trust X
as a charitable remainder unitrust (CRT) under Sec. 664(d)(2). Trust
X directed the trustee to make unitrust payments to H for his
lifetime and then to W, H's surviving spouse, for her lifetime. Upon
the death of H and W, the trustee would distribute the remainder to
a qualified charitable organization. H and W separated and entered
into a marriage separation agreement which provided that Trust X
would be divided into two equal trusts, known as Trust A and Trust
B. Trust A and Trust B are identical to Trust X except that H will
be the unitrust beneficiary of Trust A and W will be the unitrust
beneficiary of Trust B. Each spouse will have a right to designate
the charitable remainder beneficiaries for his or her respective
trusts and each will retain a survivorship interest in the other's
unitrust amount. Parties sought IRS approval of the proposed
division.
The Service ruled that because the proposed
transfer of 100% of Trust X's assets to Trust's A and B will qualify
as transfers meeting the requirements of a "significant disposition
of assets" under Regs. 1.507-3(c)(1) and (2)(ii), the division of
Trust X will not result in a Sec. 507(c) termination tax.
Furthermore, the distributions from Trust A and Trust B will not
constitute acts of self-dealing under Sec. 4941. While H and W are
disqualified persons, they are insulated from self-dealing
concerning their income interests under Reg. 53.4947-1(c)(2) because
the unitrust payment is the same before and after the division of
the trust and no disqualified person receives any interest in trust
principal. The Service concluded that because Trust A and Trust B
are treated the same as Trust X, there are no expenditure
responsibility requirements that must be exercised by Trust under
Sec. 4945(d)(4) or (h) with respect to the
transfers.
Editor's Note: Here the IRS reaffirms its
position that division of a CRT's assets in a marital separation or
dissolution case is not a taxable event if certain precautions are
taken. The key to avoiding taxation is to transfer 100% of the trust
assets to two equal trusts where the original beneficiaries receive
the same payment as before, but no interest in trust
principal.
To view the full PLR Click
Here.
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CASE OF THE
WEEK
Marketing Ideas During Soft Markets and Dropping
Interest Rates, Part 7 - Relinquishing your
CRAT
After attending a
planned giving presentation, Bill Braun created a charitable
remainder annuity trust a.k.a. Rate of the Month) was very
high and thus the CRAT computation used the February AFR of 9.6%. As
a result, Bill was entitled to a charitable income tax deduction of
approximately $235,000 (47% of the original gift). For the past
seven years, Bill happily received his $35,000 a year from this
CRAT. In addition to this CRAT payment, Bill receives another
$100,000 each year from his other investments and retirement plan.
His financial needs have since changed and he no longer needs the
income from the CRAT.
To view the solution to this Case
of the Week Click
Here.
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ARTICLE OF THE
MONTH
Avoiding the Boats, Cars and Vacations
Disaster
What is the basic
purpose of inheritance? Most parents will respond that the purpose
of an inheritance is to help the child "become a better person."
Let's listen into a discussion between an advisor and John and Mary
Parent as they discuss an inheritance plan for their three
children.
Advisor: John and Mary, how do you feel
about the way your children are progressing in
life?
John: Well, all three children are doing fine.
They have all finished their education and are working. We know that
they will be making a good contribution to society in some
manner.
Mary: Yes, they are all working. We've tried
to teach them good principles and that they should be honest and
caring persons.
Advisor: Do both of you think that it
is good for them to have jobs and to eventually buy a house and
acquire some savings?
John: Yes, they should have jobs
and they should be responsible citizens.
Advisor: But
with an inheritance you have the opportunity to give them additional
security.
Mary: Yes, we think that is important. We
recognize that we have been fortunate over the years to have
acquired substantial resources, and we do want to help
them.
Advisor: Have you thought about the difference
between giving principal or giving income? I find that many people
in your situation have been careful and built up their estate. They
have substantial resources. And frequently they leave a substantial
inheritance outright to the children. Have you seen examples of
parents who have done that?
John: We certainly have.
An uncle of mine passed away and left the estate to two children.
One of them did fine. But the other spent his entire inheritance in
18 months.
When he was asked what happened to the inheritance
he replied, "Well, I spent most of it on boats, cars and
vacations -- and I wasted the rest!"
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 |
June 23,
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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