Sacramento California Estate Planning, Probate and Living Trusts Attorneys Northern California Estate Planning Counselors, LLP

Educational Alerts
Educational Alerts are written on topics that effect various aspects of estate planning and the laws that govern it. They are usually published and posted to this site at the end of each month. Occasionally newsworthy events will initiate the release of additional alerts at the time the news breaks. The purpose of an Estate Planning Update is to bring important information to the financial advisors in the community. Our hope is that this information better equips you to assist your clients.

Northern California Estate Planning Counselors, LLP releases important estate planning and related articles on a regular basis. Please take a moment to register to receive full access to our Educational Alerts and FYIs.

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Estate Planning Update
The Alert examines legislation pending in Congress which would extend 2009's $3.5 million applicable exclusion. The Alert goes on to discuss how the Service is handling estate and gift tax audits.

To download the referenced report Description and Analysis of Alternative Wealth Transfer Tax System, use the link below.

Description and Analysis of Alternative Wealth Transfer Tax System Report: http://www.house.gov/jct/x-22-08.pdf

Tax Court Issues Favorable Family Limited Partnership Ruling!
In a recent decision, the Tax Court sided with the taxpayer in a case involving a Family Limited Liability Company and a transfer near death.

Two Rulings of Interest on Retirement Assets PLR 200807025 and PLR 200811028
This Alert examines several private letter rulings in which the Service examines the complicated area of beneficiary designations for qualified plans and IRAs.

Congress Passes Economic Stimulus Package - Future of the Estate Tax Will Not Likely Be Resolved Until After the Presidential Elections
This month's alert highlights the recently enacted Economic Stimulus Act. The Alert covers the rebate provisions for individuals as well as the incentives for small business owners and closes with a comment that is unlikely we will see any "fix" of the current estate tax regime until after the election of a new President.

Retirement Asset Update - Non-Spousal Rollovers
The Alert examines two issues. First, it examines Congress' attempt to mandate allowing non-spousal rollovers and how the IRS continues to interpret the law to allow but not mandate such non-spousal rollovers. Second, it examines how new "wash sale" rules do not allow you to get the benefit of a loss if you sell an asset and then quickly re-purchase it in your IRA.

2008: The Calm Before the Storm
The article examines the upcoming uncertainties and scheduled changes in the laws concerning estate and gift taxation.

The Estate That Would Not Die
The recent litigation surrounding the publicity rights of the remainder beneficiary of the estate of Marilyn Monroe illustrates some of the problems with probate administrations and how a trust can help avoid some of these entanglements.

Court Approved Reformation Fails to Gain Approval from the Internal Revenue Service
The article looks at a recent reversal by the IRS on the issue of allowing non-spousal rollovers of retirement plans into IRAs. Then the article examines one private letter ruling in which the IRS did not allow the mistaken omission of a contingent beneficiary to be corrected. The primary beneficiary had predeceased. The result was that the assets in the retirement plan had to be withdrawn more quickly, thus depriving the beneficiary of the full extent of the tax deferral which would have been allowed had the contingent beneficiary been named.

Charitable in Death: Will Leona Helmsley's Testamentary CRTs Qualify for an Estate Tax Charitable Deduction?
This article examines Leona Helmsley's Will and the Trusts which it creates. It examines some of the oddities involved, including gifts to her dog and the disinheriting of some grandchildren.

IRS Rules That Tuition Paid for Special Needs Child is a Deductible Medical Expense
The Alert examines a recent private letter ruling which allowed the taxpayer to deduct school tuition for a special needs child as a medical expense.

Congress Passes Income Tax Bill - Estate Tax Repeal is Up Next The Internal Revenue Service Again Approves Spousal General Power of Appointment Planning Strategy
This article contains an update on The Tax Increase Prevention and Reconciliation Act of 2005, comments from leading Senators on the potential of estate tax repeal in the coming months, and a commentary on the third in the series of PLRs dealing with granting a testamentary general power of appointment over a surviving spouse's assets in order to more fully utilize the deceased spouse's applicable exclusion amount.

Proper Drafting of Trust Protects Trust Assets from Creditors, Including the Internal Revenue Service
This article examines recent IRS guidance concerning the ability of the IRS to attach a beneficiary's interest in a trust. The article provides options for greater creditor protection by not using typical HEMS language.

IRS Issues Favorable Life Insurance Private Letter Ruling
This month's Alert covers a PLR in which the IRS approves a transfer of life insurance policies from one Irrevocable Life Insurance Trust structured as a grantor trust for income tax purposes to another Irrevocable Life Insurance Trust structured as a grantor trust. The Alert explains how this planning strategy avoids recognition of gain, the transfer for value rule and the three year rule. Call our office if you have clients with insurance trusts that might need to be re-thought.

Window of Opportunity for Medicaid Planning
This Alert informs advisors of the window of opportunity that still exists for planning for Medicaid eligibility under the old law, and encourages them to take action while planning under the old Medicaid law still exists. The Alert also briefly reviews once again the changes that are brought about by the Deficit Reduction Act of 2005.

Passage of the Deficit Reduction Act Will Not Mean the End of Medicaid Planning
On February, 8, 2006, the President signed into law the Deficit Reduction Act of 2005 (“the Act”). There have already been challenges to the Act but it appears it will be valid law. When the Senate and the House of Representatives voted in favor of passing the Act, many people were predicting the end of Medicaid planning.

Fifth Circuit Releases Long Awaited Strangi Opinion
This month's alert highlights the findings of the Strangi 4 FLP case. This is the second appeal to the 5th Circuit. The opinion is a partial victory for the IRS, but the key points of the case are the issues regarding implied agreements (and use of FLP assets to pay estate administration expenses, debts of the decedent and estate taxes) and what is business and non-business purposes are sufficient to meet the "bona fide transfer for fair value" exceptio under IRC 2036.

Mistake in Preparing Estate Tax Return Costs Taxpayer:IRS Provides No Relief
The facts in PLR 200422050 are as follows: a decedent’s will left her estate in trust for the benefit of her husband. The trust provided that the husband was to receive all income from the trust and he could compel the trustee to make trust assets productive. As a result of these provisions, the trust would qualify for the federal estate tax marital deduction under IRC § 2056 as a qualified terminable interest property (“QTIP”) trust if the executor made an election under IRC § 2056(b)(7).

FDIC Simplifies Trust Rules: Expanded Coverage Could Benefit Many Consumers
In 2003, the Federal Deposit Insurance Corporation ("FDIC") solicited comments to its two proposed alternatives for simplifying the rules for insuring bank accounts owned by trusts. After reviewing the comments it received, on January 13, 2004 the FDIC announced a new regulation for trust bank accounts.

Limited Liability Company Provides Answer to Trust Termination

It is becoming more common to leave assets at death in trust for children and other beneficiaries. In many instances, this strategy affords the beneficiaries protection from creditors and protection of their inheritances from divorcing spouses. When trust assets consist of business holdings, real estate or a diverse portfolio of securities, it also provides for centralized management and potential economies of scale.

Important Estate Planning Numbers for 2004
Starting in 2004, the estate tax and gift tax systems are no longer in pari materia. How will this affect your clients giving?

Distributions from Retirement Plans or Individual Retirement Accounts Can Reduce or Eliminate Estimated Tax Underpayment Penalties
Seniors and self-employed individuals often complain about having to make quarterly estimated income tax payments. Failure to make the payments can lead to underpayment penalties and interest (calculated using the federal short term rate plus an additional three percent) having to be paid on income taxes due.

Circumstances Surrounding Drafting, Execution, and Administration of a Prenuptial Agreement Determine Its Effectiveness
The planning done before marriage is often as important as planning after marriage in assuring that a client’s estate planning wishes are carried out. Laws governing prenuptial agreements vary somewhat from state to state, but often the circumstances surrounding the drafting, execution, and administration of a prenuptial agreement are crucial to the effectiveness of the agreement.

Is That Your Final Answer? IRS Issues Final Treasury Regulations for Split-Dollar Regulations
On September 11, 2003, the Treasury Department and IRS jointly released the Final Split-Dollar Treasury Regulations. Officially, the Regulations are called Split-Dollar Life Insurance Arrangements, Treasury Decision 9092. The Final Treasury Regulations apply to any split-dollar life insurance arrangement entered into after September 17, 2003. This means that IRS Notice 2002-8 remains the primary source of guidance for split-dollar arrangements entered into prior to September 18, 2003.

Walking Through the "Basic" Estate Plan
Start your clients off with the very basics so that they appreciate the value of each planning strategy you employ.

JGTRRA Brings Tax Relief for Businesses
In this e-alert, we summarize how JGTRRA brings tax relief to small businesses and corporations.

HIPAA Protected Health Information Provisions Become Effective – Clients Need to Take Action Now
On April 14, 2003, the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 45 CFR §§ 160–164, affectionately dubbed HIPAA, went into effect. The new regulations have caused much turmoil among "covered entities" (e.g., doctors, hospitals, nursing home facilities, and insurance companies), as they will now, for the first time, be subject to federally imposed sanctions and monetary fines for unauthorized disclosure of "private health information." The new law has caused many health care providers to clamp down on the release of medical records and other health care information to anyone other than the patient.

Federal Tax Lien Trumps State Asset Protection Law
Approximately half the states provide that a married couple may take title to real property as tenants by the entireties. This type of ownership, while similar to joint tenancy, offers superior asset protection from many creditor's claims. The question of whether an IRS tax lien can attach to tenancy by entirety property was the subject of U.S. v. Craft, 122 S. Ct. 1414, 89 AFTR.2d 2002-2005 (2002).

Bush Gets Some Temporary Income Tax Relief in New Tax Bill; No Changes to Estate Tax
On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief Reconciliation Act ("JGTRRA") of 2003. JGTRRA contains tax relief for individuals, business and corporations, although this Fax Alert will focus on the changes for individuals only.The new law accelerates several provisions that were a part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and provides for a reduction in the tax rate for capital gains and dividends. There were no changes to the gift tax or estate tax, so the increasing exemption amount, decreasing rates and sunset provisions of EGTRRA remain in place, at least for now.

Ninth Circuit Includes Gift Tax Paid by Wife in Husband's Estate
The opinion in Brown v. United States, 91 AFTR.2d 2003-2085 (9th Cir. May 1, 2003) opens with the following truism: "The estate tax combines into one sad transaction the only two certainties in life." Brown is very important because it applies the step transaction doctrine to defeat an estate tax planning strategy between husband and wife.

Reformation of Trust Saves Estate Taxes
Joint trusts for married couples have been used in community property states for over a decade. There had been speculation by some attorneys regarding the effectiveness of joint trusts in common law states. However, concerns over recognition of joint trusts by the IRS have largely been put to rest by PLRs 200101021 and 200210051 (see our previous FaxAlert dated April 30, 2001 titled "Joint Trusts in Common Law States" for more on this subject).

Tricks and Traps Concerning Annuities
Because there are many tax traps concerning annuities, it is important for the financial advisor to know the treatment of annuities when advising clients.

IRS Scores Another Victory in Family Limited Partnership Case
On January 14, 2003, Judge Buchmeyer of the United States District Court for the Northern District of Texas decided in favor of the Internal Revenue Service in Kimbell v. United States of America, Civil Action No. 7:01-CV-0218-R, 2003 U.S. Dist. Lexis 523.

IRS Issues Final Regs On Section 645
A living trust becomes irrevocable upon death and, as a separate legal entity, it requires a tax identification number to report income during its period of administration. If the decedent had assets subject to probate outside his or her trust, then the decedent’s estate may also need a tax identification number and an additional fiduciary income tax return (Form 1041) may be required.

Care Must Be Taken When Disinheriting an Heir
It is not uncommon for a person to place provisions in his or her will or trust to exclude an heir from receiving an inheritance. Such was the desire of Mary Bartels, who wished to disinherit her daughter, Deborah Smith, and whose will was the subject of dispute in the case In the Matter of the Estate of Mary Alberta Bartels, Deceased, 184 Or. App. 448, 56 P.3d 501 (October 23, 2002).

Connecticut Department of Social Services is Seeking a Waiver from The Center of Medicare and Medicaid Services
The U.S. Census Bureau predicts that the fastest growing segment of our population over the next fifty years will be those over age eighty-five. Not far behind in growth rate is the segment of the population above age sixty-five. By 2020, the sixty-five and over segment is estimated to comprise fully 20% of the population. With the growing rise in seniors will come a growing need to finance long term stays in nursing homes.

IRS Issues Relief for Taxpayers Taking Pre-Age 59½ Retirement Plan Distributions
On October 3, the IRS released Rev. Rul. 2002-62, 2002-42 IRB, substantially modifying Notice 89-25, 1989-1 C.B. 662, with regards to the “series of substantially equal periodic payments” (“SOSEPP) option for avoiding the IRC § 72(t) 10% early withdrawal penalties from IRAs and retirement plans. (All the options were outlined in a previous Fax Alert. Call for our office for a copy).

Sarbanes-Oxley Act of 2002 May Kill Split-Dollar Plans for Corporate Executives
After many years of inactivity, the Internal Revenue Service in the past two years has focused its attention on Split-Dollar plans. In 2001, the Service issued Notice 2001-10, which it followed earlier this year with Notice 2002-8, and finally in July it released Proposed Treasury Regulations on Split-Dollar. For more on the content of the Proposed Regulations, see our July 2002 FaxAlert (call our office if you didn’t receive this FaxAlert previously).

Charitable NUA?
A previous FaxAlert covered the concept of net unrealized appreciation or “NUA”. As set forth in that FaxAlert, NUA applies to withdrawals of employer stock from the retirement plan and is an exception to the normal income taxation of retirement plan withdrawal rules that provides for taxation at lower capital gains rates. From a tax planning standpoint, a withdrawal of employer stock from a retirement plan is clearly superior to a rollover to an IRA in most circumstances. However, one potential disadvantage of the standard NUA strategy is that the taxpayer continues to hold what may be a substantial portion of the taxpayer’s retirement assets in the stock of an ex-employer. Such an undiversified investment portfolio carries substantial risks, as evidenced by the retirement plans of employees of Enron, Worldcom and Qwest.

IRS Issues Proposed Regulations for Split-Dollar Life Insurance!
On July 3, 2002, the IRS issued Proposed Treasury Regulations regarding the income, employment and gift taxation of split-dollar life insurance arrangements. As with Notices 2002-8 and 2001-10, this 92 page sequel answers many questions, but leaves a great many unanswered, as well as raising many new, questions. These Proposed Regulations will no doubt generate much discussion and commentary from the insurance, legal, and accounting communities. According to the IRS' paperwork reduction act report, the estimated total annual reporting and/or record-keeping burden will be 32,500 hours, but we'll try to save you some time by summarizing the main components of the Proposed Regulations below.

NUA: A Tax Advantaged Way of Removing Employer’s Stock from a Retirement Plan
Internal Revenue Code ("IRC") § 402(e)(4) provides a special income tax benefit for distributions of employer stock from qualified retirement plans. Any appreciation in value in the stock which has occurred between the date the stock was credited to the employee's account and the date of distribution is characterized as "Net Unrealized Appreciation" or NUA. If properly planned for, the NUA is not taxed on the date of distribution - it is taxed when the stock is subsequently sold. Only the retirement plan's cost basis in the stock is taxed on the date of distribution. This special treatment is only available if the employer stock is distributed as a part of a lump sum distribution, in which case all the NUA is non-taxable at the date of distribution. If the distribution of employer stock is not a part of a lump sum distribution then only NUA attributable to the employee's contributions to the plan is excludable.

Permanent Repeal of the Death Tax is Dead (For Now)
On June 12, the United States Senate debated the issue of making the repeal of the federal estate tax permanent.

IRS Scores Two Victories in Recent FLP Cases!
In recent years it has become rather common place for the attacks on Family Limited Partnerships ("FLPs") by the IRS in Tax Court and District Court to result in losses for the IRS. So it was rather unusual to see the IRS score a win, much less two wins, in recent months.

IRS Releases Final Regs for IRAs and Retirement Plans
The Internal Revenue Service recently released, in T.D. 8987 (April 16, 2002), the long awaited Final Treasury Regulations for Internal Revenue Code ("IRC") § 401. These regulations replace Proposed Regulations dating back to 1987, with modifications. The Final Regulations are effective starting January 1, 2003, but can be used in calculating Minimum Required Distributions ("MRDs") for calendar year 2002, as described below. Some of the key provisions of the Final Regulations are as follows:

New GST Allocation Rules Are Effective for Gift Tax Returns Filed by April 15
With the passage of the Economic Growth and Tax Relief Reconciliation Act ("EGGTRA") last year, the rules governing the automatic allocation of Generation Skipping Transfer Tax ("GST") exemption have been changed for tax years starting in 2001. According, all clients that made gifts in 2001 should have their situation reviewed to determine they may need to elect out of the new automatic allocation rules for gift tax returns due on April 15, 2002.

Making a "Freebie" Election on 2001 Income Tax Return
Lower Capital Gains Rate for Five Year Assets Internal Revenue Code ("IRC") § 1(h)(2) provides for a maximum 18% capital gains rate (8% for taxpayers in the 15% marginal income tax bracket) for capital assets acquired on or after January 1, 2001 and held for more than five years.

Qualified Plans Must Be Amended By February 28, 2002
The deadline for amending most qualified plans to meet "GUST" requirements is February 28, 2002. GUST is a series of pieces of legislation modifying the requirements for qualified plans, including: The Uruguay Round Agreements Act "GATT" (Pub. L. 103-465); the Uniformed Services Employment and Reemployment Rights Act of 1994 (Pub. L. 103-353); the Small Business Job Protection Act of 1996 (Pub. L. 104-188); the Taxpayer Relief Act of 1997 (Pub. L. 105-34); the Internal Revenue Service Restructuring and Reform Act of 1998 (Pub. L. 105-206); and the Community Renewal Tax Relief Act of 2000 (Pub. L. 106-554).

The Changing Landscape of Split Dollar Insurance: Notice 2002-8
Split Dollar insurance is an arrangement, typically between an employer and an employee, which provides for a split in the funding of the premium payments. See Rev. Rul. 64-328. The employer effectively advances the employee some portion of the premium and has this repaid upon the employee's death or termination of the agreement.

So You Thought Estate Taxes Were Going Down?
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") provides for a gradual decrease in the highest marginal federal estate tax rate between 2002 and 2007. EGTRRA also provides for a periodic increase in the Applicable Exclusion Amount, or the size of an estate that can escape the federal estate tax, between 2002 and 2009. For instance, in 2002, the highest marginal estate tax rate is scheduled to drop from 55% to 50%, and the AEA is scheduled to increase from $675,000 to $1 million. With these changes one would expect that estate taxes paid by all taxpayers will decrease in 2002. Unfortunately, that isn't true.

Year End Charitable Gifting
As the end of the year approaches, the issue of last minute income tax strategies often arises. One such year-end strategy is charitable giving. When making year-end gifts, donors must time the gift properly to assure the gift creates a charitable deduction in the current year. The Treasury Regulations under Internal Revenue Code ("IRC") § 170, which determine when a charitable deduction may be taken, deal primarily with when the donor has parted with dominion and control over the asset being given to the charity. The specific factors that determine the timing of payment or delivery may depend upon the type of asset being given.

Recent Events Affect Estate Planning
The tragedies of September 11th led to an erosion of consumer confidence and an increase in economic uncertainty that prompted the Federal Reserve to lower short-term interest rates to the lowest levels in over thirty years. Not only does the lower interest rates effect your clients' financial and retirement plans but, it also impacts the effectiveness of certain estate planning strategies.

Tax-Driven Estate Plans May Need to Be Revised
Many clients with children from a previous relationship have a strong desire to benefit those children, while at the same time providing for the care of their new spouse. Unfortunately, this type of planning often becomes complicated because of tax ramifications.

Clients Should Use Attorney-Drafted Powers of Attorney for Property
After the incapacity of an individual, powers of attorney often are used to initiate or continue annual gifting programs to reduce the size of the incapacitated individual's estate for estate tax purposes - or as part of a Medicaid qualification strategy. Using a generic power of attorney obtained off the internet or from the legal forms department of a book, stationery or office supply store can often lead to problems. This is even true of the use of statutory power of attorney language provided by a state's legislature.

Tax Court Disregards Buy-Sell Agreements
In Estate of True v. CIR, TC Memo 2001-167 (July 6, 2001), the U.S. Tax Court held that the Buy-Sell Agreements that governed the transferability of ownership in over twenty-six businesses were not controlling for estate tax purposes.

New Tax Law Yields Mixed Results
The recently enacted Economic Growth and Tax Relief Reconciliation Act ("the Act") brings with it many income tax benefits, but for some taxpayers the results may be illusory.

New Tax Law Brings about Many Changes in Retirement Planning
The Economic Growth and Tax Relief Reconciliation Act (referred to hereafter as "the Act"), which was signed into law by President Bush on June 7, 2001, incorporates many changes which are beneficial to taxpayers.

Liability for Failure to Conduct Post Mortem Estate Planning and Administration
More and more, the failure to properly discharge fiduciary duties and to find and exploit various post-death options and elections to reduce estate taxes have resulted in large damage awards against executors, trustees and their professional advisors.

Congress Repeals Estate Tax - Or Did They?
On Saturday, May 26, H.R. 1836, the Economic Growth and Tax Relief Reconciliation Act of 2001 ("the Act"), was passed by both houses of Congress. Now, all that is required is President Bush's signature for the Act to become law.

Joint Trusts in Common Law States
The use of a joint revocable living trust for the estate planning needs of married couples has been quite common in community property states for almost two decades now. In common law states the use of joint trusts for planning for married couples has become increasingly prevalent, but some pundits continue to proclaim that a joint trust cannot be effectively used for estate planning in common law states.

Alternative Valuation Provisions and Other Basis Provisions Under the Internal Revenue Code
In our last Fax Alert, we defined basis step-up (or step-down) and discussed how it was calculated with regard to Spousal Joint Tenancy (or Tenancy by the Entireties), Non-Spousal Joint Tenancy and Community Property. In this edition, we will start off by discussing how the use of the Alternative Valuation provisions under Internal Revenue Code ("Code") Section 2032 affects the basis of property; how basis is determined for assets where special valuation has been elected for estate planning purposes, such as with farm land (Code Section 2032A), family business interests (Code Section 2057), and conservation easements (Code Section 2055(f)).

Getting a "Step-Up" Under the Internal Revenue Code
Many people have heard of the "step-up" in basis for property received by inheritance, but don't know exactly what that means. One's "basis" in property is what determines if there is a gain or loss upon sale and Internal Revenue Code (hereinafter "Code") § 1012 generally defines basis as the cost of such property. But what about property that doesn't have a cost to the holder, such as property acquired by inheritance or gift?

IRS Issues Surprise Revisions to Proposed IRA Regulations
In an unanticipated move, the Department of Treasury has issued a substantial revision to the Proposed Treasury Regulations ("Proposed Regs.") that govern Minimum Required Distribution ("MRD") from IRAs and qualified retirement plans. The changes affect distributions both after age 70 ½ and after the owner's death. These alterations substantially change the MRD rules that have been in place since 1987! The new Proposed Regs. considerably simplify the distribution rules and are retroactive to January 1, 2001.

Tax Court Unanimously Validates Formula Clause
The Alert examines a powerful planning tool, valuation clauses, the use of which was recently approved by the Tax Court.

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