Estate Wise Planning Newsletter, Vol. 1, No. 9, September 2005

Knowledge promotes understanding . . . understanding breeds creativity. . . .

Estate Wise Planning TM

Since 1979

By: Doug H. Moy

Consulting Specialist in Estate and Gift Taxation and Planning
Member, National Association of Tax Professionals (NATP)
___________________________________________

Published by: Doug H. Moy, Inc., P.O. Box 254, Lake Oswego, OR 97034
(503) 636-5855
___________________________________________

Vol. I, No. 9. September 2005
___________________________________________

Savings Clause Against Public Policy: Taxpayer and his spouse formed a family limited partnership (“FLP”). According to the FLP Agreement, taxpayer held both general and limited partnership interests in the FLP. Taxpayer executed an Assignment, which reads: “Assignor (Taxpayer) desires to transfer as a gift to Assignee (a trust) that fraction of Assignor’s Limited Partnership Interest in Partnership which has a fair market value on the date hereof of $X.” Pursuant to this assignment, Trust received a percentage interest in the FLP from Taxpayer. Taxpayer filed a United States Gift (& Generation-Skipping Transfer) Tax Return (Form 709). On the return, Taxpayer reported the value of the gift, the Trust percentage interest, as $Y, an amount equal to $5,000 less than $X.




As in Commissioner v. Procter, 142 F.2d 824 (4th Cir. 1944), the Fourth Circuit Court of Appeals concluded that such a provision is a condition subsequent and void because it was contrary to public policy. The court of appeals explained that the condition was contrary to public policy because: (1) it has a tendency to discourage the collection of the tax by the public officials charged with its collection, since the only effect of an attempt to enforce the tax would be to defeat the gift; (2) the effect of the condition would be to obstruct the administration of justice by requiring the courts to pass upon a moot case. If the condition were valid and the gift was subject to tax, the only effect of the holding would be to defeat the gift so that it would not be subject to tax; and (3) the condition is to the effect that the final judgment of a court is to be held for naught [Commissioner v. Procter, 142 F.2d at 827].

The Tax Court reached a similar conclusion in Ward v. Commissioner, 87 T.C. 78 (1986). In that case, a husband and wife transferred 85 shares of stock in a closely-held corporation to each of their three sons. The donors and donees executed a gift adjustment agreement, providing that, if it should be finally determined for federal gift tax purposes that the fair market value of each share of stock transferred exceeded or was less than $2,000, an adjustment will be made in the number of shares constituting each gift so that each donor will give to each donee the maximum number of shares, the total value of which will be $50,000 from each donor to each donee and a total of $150,000 from each donor to each donee. The court concluded that the gift adjustment clause was void as contrary to public policy [see also, Estate of McClendon v. Commissioner, T.C. Memo 1993-459].

The Service reached a similar conclusion in Rev. Rul. 86-41, 1986-1 C.B. 300. In that ruling, “A” transferred an interest in a tract of income-producing real property to “B.” Under the deed, “B” received a one-half undivided interest in the property. The deed provided that, if, for federal gift tax purposes, the Service determined that the value of the one-half interest was more than $10,000, then, “B’s” interest would be reduced so that its value equaled $10,000. Under local law, the adjustment clause operated as a condition subsequent. Thus, if the Service determined the gift was more than $10,000, the adjustment clause would effectively reconvey to “A” a fractional share of the property sufficient to reduce the value of “B’s” interest to $10,000 as of the date of the gift. The revenue ruling concludes that the adjustment clause will be disregarded for federal tax purposes; and, consequently, the value of the gift will be determined without regard to the adjustment clause.

The “savings” clause language in the Assignment regarding the gift of the Taxpayer’s FLP interest to the Trust is similar to the clauses in Ward and Rev. Rul. 86-41. In the instant case, Taxpayer transferred a certain percentage interest in the FLP to Trust pursuant to the Assignment. However, if the Service determines that the value of the percentage interest transferred is greater than $Y, and the “savings” clause in the Assignment is given effect, then, pursuant to the “savings” clause, the percentage interest in the FLP which exceeds the value of $Y would be retransferred to Taxpayer. Such a clause is void as contrary to public policy [TAM 200337012].




Disclosure of Gifts: Whether the federal estate tax and generation-skipping transfer tax is repealed, the federal gift tax will remain. Presently, the lifetime federal gift tax exemption amount (applicable exclusion) is $1.0 million and will remain such after 2009; and the maximum gift tax rate will be 35 percent after 2009. Under the Taxpayer Relief Act of 1997 (“TRA ’97”), a gift made after August 5, 1997, for which the limitations period of gift tax assessment has passed, cannot be revalued for purposes of determining the applicable estate tax bracket and available federal estate tax unified credit, provided the gift has been adequately disclosed [IRC § 2001(f)(1); Reg. § 301.6501(c)-1(f)(2)]. A gift is adequately disclosed on the Form 709 only if it is reported in a manner adequate to apprise the IRS of the nature of the gift and how the value of the gift was determined. The information needed to adequately disclose the gift on the Form 709 is found in Reg. § 301.6501(c)-1(f)(2)]. Though gifts qualifying for the gift tax annual exclusion, presently $11,000, are not required to be reported on Form 709 (since such gifts are not taxable gifts), nevertheless, if the value of such a gift is subject to interpretation (or valuation adjustment; e.g., closely-held stock, real property, works of art, an interest in an FLP or LLC, etc.), then, the donor would be well-advised to disclose such a gift on Form 709. By doing so, the IRS may be precluded (or estopped) from revaluing the gift at its value on the date of the donor’s death for federal estate tax purposes. Adequate disclosure is required if the donor wants to commence the running of the period of limitations on assessment with respect to a gift made before August 5, 1997 [Rev. Proc. 2000-34, 2000-2 C.B. 186, § 5(7)].

No Discount for Retirement Accounts: For federal estate tax purposes, valuation discounts are highly prized; and some estates will push the envelope as far as possible in an effort to minimize the payment of federal estate tax. Such was the case with the claim made by the decedent’s estate that it was entitled to a partial refund of federal estate taxes because it overvalued certain retirement accounts held by decedent in calculating his total gross estate and, therefore, overpaid its federal estate taxes. According to the estate, the retirement accounts at issue should have been valued at a discounted amount to reflect the federal income tax liability triggered upon distribution to beneficiaries [this tax liability resulted from the fact that the retirement accounts at issue were not taxable to decedent at or before his death. As a result, the accrued income was taxable to the beneficiary of the accounts as income in respect of a decedent (“IRD”)].

In contrast, the government moved for summary judgment on the sole ground that the decedent’s estate was not entitled to a federal estate tax refund and argued that the potential federal income tax liability of the beneficiaries of the decedent’s retirement accounts should not be considered in valuing such retirement accounts for federal estate tax purposes. The government argued the estate’s refund claim was based upon an erroneous valuation method in that the retirement accounts should not be discounted to account for the income tax liability generated upon distribution of the securities contained in the accounts.

The Court ruled that the fair market value of the retirement accounts was properly reported by the estate in its initial federal estate tax return [the estate valued the decedent’s Thrift Plan at $725,550.00 and the decedent’s Stock Plan at $42,808.00]. This valuation reflected the value of the securities held in the decedent’s retirement accounts as determined by reference to applicable securities exchange rates on the date of decedent’s death but did not include a discount for the IRD taxed to the beneficiaries of the retirement accounts [Estate of Louis R. Smith v. United States, 2004 TNT 31-49 (DC SD Tex., Jan 20, 2004)].

Quid Pro Quo Trusts: When a trust or a series of trusts are made quid pro quo for one another, the reciprocal trust doctrine apples. This doctrine dates back to 1940 to the case of Lehman v. Commissioner [109 F2d 99 (1940)]. The doctrine came about in response to estate tax situations where estate owners created reciprocal (“crossed”) irrevocable trusts to hold their property that, in form, removed the value of the property from their gross estates but left the estate owner some control over the transferred property through retained powers as trustee of the trust. In reality, therefore, each estate owner had the same lifetime enjoyment of his or her property; albeit, the property was in the other estate owner’s trust, which he or she would have enjoyed had he or she simply reserved the same entitlements in his or her own trust.

The doctrine was developed to deal with this situation by “uncrossing” the trusts and treating each trustor (creator of the trust) as if the trustor had created his or her own trust. As a result, a decedent was treated as the “transferor” of the property, which the other trustor had in form transferred, causing the value of the trust property to be taxed in his or her estate at death. In the majority of cases following Lehman v. Commissioner, the issue was whether the creation of one trust had been induced by, and represented a quid pro quo for, the creation of the other trust.

Finally, in 1969, the U.S. Supreme Court ruled on the issue of reciprocal trusts in the area of intrafamily transfers. In United States v. Grace [395 U.S. 316 (1969)], the Supreme Court held that application of the reciprocal trust doctrine requires only that the trusts be interrelated, and that the arrangement, to the extent of mutual value, leave the settlors in approximately the same economic position as they would have been in had they created trusts naming themselves as life beneficiaries.

The U.S. Tax Court has noted that [t]he reciprocal trust doctrine covers not only husband and wife, but brother and sister, parent and child, and very possible two complete strangers [Krause v. Commissioner, 57 T.C. 890 (1972), at 901, f.n. 8]. In view of the Supreme Court’s ruling, the IRS has taken the position that, with regard to gift tax, when two donors (related or unrelated, married or unmarried) establish similar trusts under circumstances such that the beneficial interests are matching, the transfers may be treated as reciprocal, whether or not the transfers were actually in consideration for each other [Rev. Rul. 85-24, 1985-1 C.B. 329; Ltr. Rul. 8813039].

Either the reciprocal trust doctrine or the reciprocal transaction doctrine has been used regarding reciprocal gifts qualifying for the gift tax annual exclusion (presently $11,000). In these regards, either doctrine is an application of substance over form for purposes of inclusion of the gifted property in the donors’ gross estates [See United States v. Estate of Grace, 395 U.S. 316, 321 (1969)]. In Sather v. Commissioner, T.C. Memo. 1999-309, the Tax Court applied the reciprocal trust doctrine to reduce the number of present interest annual exclusions for gift tax purposes [Estate of Robert V. Schuler v. Commissioner, 2001-1 U.S. Tax Cas. CCH ¶ 60,432, aff’g T.C. Memo 2000-392; see also, Furst v. Commissioner, T.C. Memo 1962-221; Schultz v. United States, 493 F.2d 1225, 1226 (4th Cir. 1974)].




Buy-Sell Agreement Disregarded: A major concern of many owners of closely-held businesses is how to maintain continuity of business ownership and management in the event one or more of the owners becomes disabled, decides to make a lifetime sale of his or her interest in the business or dies. In some cases, qualified family members are already active in the business and can carry on the company operations or an unrelated key employee may continue to manage the business or obtain ownership of the business or the business may be sold to a competitor. In any event, some mechanism is needed so that the closely-held business or its surviving shareholders or partners can acquire a disabled, departing or decedent shareholder’s, partner’s or sole proprietor’s interest in the business. Moreover, a well-designed buy-sell agreement can “peg” the value of the decedent’s interest in the closely-held business includable in the decedent’s gross estate for federal estate tax purposes, thus, dampening the Service’s efforts to assign unrealistic and unreasonable value to property includable in the decedent business owner’s gross estate.

Under present law, for purposes of federal estate and gift taxes, an enforceable buy-sell agreement must satisfy three requirements: (1) the option, agreement, right or restriction involving the business interest must be a bona fide business arrangement; (2) not be a device to transfer the business interest to members of the decedent’s family for less than full and adequate consideration in money or money’s worth [IRC §§ 2703(b)(1) and (2)]; and (3) the terms of the option, agreement, right or restrictions be comparable to similar arrangements entered into by persons in an arm’s length transaction [IRC § 2703(b)(3)].

The special valuation rules governing buy-sell agreements apply to agreements, options, rights or restrictions entered into or granted after October 8, 1990. The same rules apply to agreements, options, rights or restrictions amended or modified after October 8, 1990 [see, e.g., Estate of G. Blount v. Commissioner, T.C. Memo 2004-116], even though the original agreement, option, rights or restrictions were entered into or granted before October 9, 1990 [Revenue Reconciliation Act of 1990, Pub. L. No. 101-508, § 11602(e)(1)(A)(ii) (Nov. 5, 1990)].

In Blount v. Commissioner, cited above, the court held: (1) the modified agreement was disregarded for purposes of determining the value of decedent’s shares for federal estate tax purposes because the decedent had the unilateral ability to modify the agreement, rendering the agreement not binding during the Decedent’s lifetime, as required by Regulation Section. 20.2031-2(h); (2) IRC Section 2703 applies to the modified agreement because the modification, which occurred after October 8, 1990, was a substantial modification; and (3) the modified agreement was also disregarded because its terms were not comparable to similar arrangements entered into by persons in an arm’s-length transaction.

Question of the Month: Do I have to use a bank as trustee of my revocable living trust?

Answer: No. In some cases, a bank or an independent trust company is named as the ultimate successor trustee in the event of the resignation or inability of an individual successor trustee to serve. By naming a bank or independent trust company as successor trustee, the beneficiaries do not have to turn to a proper court of jurisdiction to appoint a successor trustee in the event none of the individual successor trustees can serve. Moreover, a corporate trustee may be better able to interface and handle a difficult beneficiary, such as an infamous or difficult child. A corporate trustee can be a formidable opponent in the event a difficult beneficiary becomes bent on overturning a subtrust established under the revocable living trust agreement for that beneficiary.

AFR: The September Applicable Federal Rate, under IRC Section 7520, for determining the present value of an annuity, an interest for life or a term of years or a remainder or reversionary interest is 5.0 percent (Rev. Rul. 2005-57, 2005-36 IRB 1). This bodes well for the grantor retained annuity trust (GRAT), charitable lead annuity trust (CLAT), charitable transfer of remainder interest in residence or farm and private annuities but not well for the qualified personal residence trust (QPRT), grantor retained income trust (GRIT) and charitable remainder annuity trust (CRAT). Lower AFRs have no impact on grantor retained unitrust (GRUT), charitable remainder unitrust (CRUT), charitable lead trust (CLT) and pooled income funds.

Copyright 2005 by Doug H. Moy. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the author and copyright holder of this material. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor Doug H. Moy, Inc. and/or employees is/are engaged in rendering legal or accounting services. If legal advice or accounting assistance is required, the services of a competent professional should be sought.

Contact Doug H. Moy at dougmoy@msn.com or at (503) 636-5855 in regard to:

Referrals — always welcome
Initial consultation appointment
Updating or reviewing an estate plan
Preparing Estate Tax Return Form 706
Client questions and concerns
Speaking/teaching opportunity

Doug H. Moy, President
Doug H. Moy, Inc.
PO Box 254
Lake Oswego, OR 97034-0030
Telephone: (503) 636-5855
Fax: (503) 697-7749

dougmoy@msn.com

Available at most book stores for $39.95: Moy, Doug H., Living Trusts, Third Edition. John Wiley & Sons, Inc., 2003. Or visit http://www.wiley.com/WileyCDA and enter “Doug Moy” in Product Search “by Author.”

This is an extremely accessible work, written in a clear,
conversational tone....This is a very commendable work,
equally appropriate in the professional’s office library
or at home on the den bookshelf.... Highly recommended.
Nancy Shurtz, “Estate Planning,” July 2004, Vol. 31/No.7,
p. 357.

Estate Wise Planning Newsletter, Vol 1, No. 8, August 2005

Knowledge promotes understanding . . . understanding breeds creativity. . . .


ESTATE WISE PLANNING TM

Since 1979

By: Doug H. Moy

Consulting Specialist in Estate and Gift Taxation and Planning
Member, National Association of Tax Professionals (NATP)
___________________________________________
Published by: Doug H. Moy, Inc., P.O. Box 254, Lake Oswego, OR 97034
(503) 636-5855
___________________________________________
Vol. I, No. 8. August 2005
___________________________________________


Deferred Installment Payment of Estate Tax: If the gross estate includes the decedent’s interest in a closely-held business, the estate tax attributable to the value of the decedent’s interest in the business may be paid in installments (interest at 2 percent on the first $1,170,000 for five years, payment of principal and interest at the going rate years six through fifteen). For an estate of a decedent dying in calendar year 2005, the dollar amount used to determine the "2-percent portion" [for purposes of calculating interest under IRC Section 6601(j)] of the estate tax extended as provided in IRC Section 6166 is $1,170,000 [Rev. Proc. 2004-71, 2004-50, I.R.B. 970 at .34].

The decedent must have been a U.S. citizen or resident of the U.S. at the time of death [IRC Sec. 6166(a)(1)]. The value of an interest in a closely-held business which is included in the gross estate must exceed 35 percent of the decedent’s adjusted gross estate (AGE) [IRC Sec. 6166(a)(1) and (b)(6)]. The value of any interest in a closely-held business does not include the value of that part of the interest which is attributable to passive assets held by the business. Generally, a passive asset is any asset not used in carrying-on an active trade or business [IRC Sec. 6166(b)(9)].

Perhaps the most controversial issue regarding passive assets is that of rental or income-producing real estate. The level of the decedent’s activity is the factor that distinguishes an active business from mere passive ownership of income-producing assets [with regard to oil and gas royalties being an active asset in the decedent’s gross estate, see Doug H. Moy, "Deferring the Payment of Federal Estate Tax Under Sec. 6166 in View of TAM 9214010," 18 Tax Management Estates, Gifts and Trusts Journal 107 (July-August 1993). The author defended against TAM 9214010 on behalf of the decedent’s estate in a Conference of Right in the National Office of the IRS in Washington, D.C., Sept. 12, 1991]. In determining the level of business activity carried-on by a proprietorship, partnership and/or corporation, the activities of its agents and/or employees are taken into account. The activities of persons, such as independent contractors or lessees who are neither agents nor employees, on the other hand, are not taken into account (Doug H. Moy, A Practitioner’s Guide to Estate Planning: Guidance and Planning Strategies, 2 vols., Aspen Publishers, Inc., 2003, Sec. 2.01[J][4] at 2-48).

The following rulings by the IRS provide additional guidance re the meaning of an active business interest in contrast to passive ownership: Revenue Rulings 75-365, 1975-2 C.B. 471; 75-367, 1975-2 C.B. 472; 75-366, 1975-2 C.B. 472; and Letter Ruling 9801009. Also, in Letter Ruling 9250022 the decedent’s interest in a corporation that owned rent-controlled and rent-stabilized apartment buildings was an active business for purposes of IRC Section 6166, and cash reserves held by the decedent’s corporations and a partnership are interests that constitute a "closely held business amount" for purposes of IRC Section 6166(b)(5). In Letter Ruling 9832009, the level of the decedent’s activity in various phases of commercial real estate development and a leasing business constituted an interest in a closely-held business for purposes of IRC Section 6166.

Finally, in Letter Ruling 200518047, where the decedent’s activities included the hiring and firing of all key employees; setting compensation; attending monthly meetings to inspect the properties; meeting with staff, customers, contractors; and making purchasing, maintenance and capital improvement decisions; personally reviewing daily operations reports for two to three hours per day; and consulting on all nonroutine decisions, decedent’s activity constituted an active business—not a passive investment interest—in his closely-held business operations.




Pre-1977 Joint Tenancy and IRC Section 1031: Recently, during my presentation to members of the Certified Commercial Investment Member (CCIM) meeting, a member inquired of me if the pre-1977 treatment of property owned jointly with right of survivorship by married spouses remains with respect to the property received in an IRC Section 1031 exchange. IRC Section 1031 provides that no gain or loss will be recognized when property held for the productive use in a trade or business or for investment is exchanged solely for property of like kind. If the exchange is for like-kind property, as well as other property or money, no loss will be recognized and gain will be recognized only to the extent of such money and the fair market value of the other property received. While the question may seem esoteric, nevertheless, it is a practical question, since at least two estate planning issues are involved as a consequence of the answer to it: (1) if the property received in exchange for the pre-1977 property is titled in the name of the husband and wife as joint tenants with right of survivorship, would the joint tenancy with right of survivorship ownership in the exchange property be deemed "created" before 1977? and (2) if the property received in exchange is subsequently transferred to a revocable living trust, the pre-1977 rule may no longer be applicable with respect to the acquisition date of the initial property given in exchange for the new property, since the "survivorship" element of the joint tenancy would be severed.

The answer to these issues on point is nowhere to be found in the Code, Regulations or case law. In this regard, it is elementary that the province of construction lies in the domain of ambiguity [Helvering v. Northwestern Nat. Bank & Trust Co., 89 F.2d 553, 556 (8th Cir., n.d.); United States v. Missouri Pacific R. Co., 278 U.S. 269, 277, 49 S.Ct. 133, 73 L.Ed. 322] and that the use by a legislative body of words having definite meanings creates no ambiguity and that such words are to be taken and understood in their plain, ordinary and popular sense [Bates Mfg. Co. v. United States, 303 U.S. 567, 572, 58 S.Ct. 694, 82 L.Ed. 1020; Old Colony R.Co. v. Comm’r, 284 U.S. 552, 560, 52 S.Ct. 211, 76 L.Ed. 484; Montgomery Ward & Co. v. Snuggins, 103 F.2d 458, 461 (8th Cir., n.d.); Von Weise v. Comm’r, 69 F.2d 439, 411 (8th Cir., n.d.)]. In this regard, it is safe to say that a sale is a transfer of property for a price in money or its equivalent and that an exchange is a transfer of property for other property of value [See and Compare: 55 C.J. 66, Sales Subsection 30-35; 23 C.J. 188, Exchange of Property, Subsection 5, 25; Norfolk & W.R. Co. v. Sims, 191 U.S. 441, 447, 24 S.ct. 151, 48 L.Ed. 254; United States v. Hendler, 303 U.S. 564, 566, 58 S.Ct. 655, 82 L.Ed. 1018; Fairbanks v. United States, 306 U.S. 436, 59 S.Ct. 607, 83 L.Ed. 855, aff’g, 95 F.2d 794 (9th Cir., n.d.); Wieboldt v. Comm’r, 113 F.2d 384 (7th Cir. n.d.); Bingham v. Comm’r, 105 F.2d 971 (2d Cir., n.d.); Rogers v. Comm’r, 103 F.2d 790 (9th Cir., n.d.); Felin v. Kyle, 102 F.2d 349 (3rd Cir., n.d.); Hale v. Helvering, 66 App.D.C. 242, 85 F.2d 819; Cary v. United States, D.C., 22 F.2d 298; Chicago, G.W.R. Co. v. Postal Tel. Cable Co., 249 F. 664 (7th Cir., n.d.); Baltimore & O.R. Co. v. Western Union Tel. Co., D.C., 241 F. 162; Crocker-Wheeler Co. v. Bullock, C.C., 134 F. 241, 248; Henderson v. United States, D.C., 22 F.Supp. 206; Polin v. Comm’r, 39 B.T.A. 951; C. L. Gransden & Co. v. Comm’r, 39 B.T.A. 985]. Thus, it may be reasonably assumed that, if the form of legal title is not altered, that is, for example, the joint tenancy with right of survivorship (or tenancy by the entirety with right of survivorship) is not destroyed with respect to the acquisition of the "exchanged" property, then, the pre-1977 rule should continue to apply to the real property received in the exchange.

Washington State Estate Tax Update: Recently, the Washington State Supreme Court declared the Washington State estate tax "inconsistent" in view of the repeal of the federal state death tax credit effective January 1, 2005 [see Estate Wise Planning, Vol. I, Jan. 2005]. In response to this action, the Washington State Legislature enacted a new stand-alone estate tax on estates of decedents dying on or after May 17, 2005, with a taxable estate of more than $1.5 million in 2005 and $2.0 million in 2006 and beyond. The tax rates are 10 to 19 percent of the taxable estate. Certain deductions are allowed farmers. The Washington State estate tax is expected to generate about $100 million per year, increasing slowly over time. An estate with a gross value of at least $1.5 million in 2005 and $2 million in 2006 and beyond must file a tax return within nine months of death. However, these amounts are deducted from the taxable value of the estate; and tax is due only on amounts exceeding these thresholds. The value of farm land and farm equipment can be deducted from the taxable value of an estate as long as either the land or equipment comprises at least one-half of the total value of the estate and meets other statutory requirements. This deduction is in addition to the applicable $1.5 million or $2 million deduction. Unlike the special use valuation requirements under IRC Section 2032A, the heirs (or beneficiaries) to the farm land and farm equipment are not required to repay the difference in the tax if the heirs (or beneficiaries) do not continue farming—that is, recapture of the estate tax that would have been imposed but for the value of the land and equipment used in farming if the decedent’s heirs (or beneficiaries) had not continued farming.

Transfer of LLC Interests to Revocable Living Trust: Often, real estate brokers create real property investment opportunities structured as limited liability companies (LLC). In such cases, the trustee of a revocable living trust should be empowered (but not directed by the trustor) to be subject to the LLC Operating Agreement, thereby, causing the trustee to be bound by the terms and conditions of the Operating Agreement and to be given the discretion to continue such business for such period as the trustee determines. Such power provides continuity of management by the trustee of the LLC with respect to the trustor’s interest in the LLC. For assistance in this regard when working with your attorney, please let him or her know of my knowledge in this specialized area.

Environmental Liability Real Estate: Generally, when the subject of environmental hazards enters into a discussion, one assumes that oil and gas pollution is the focus of conversation. While oil and gas may constitute a environmental hazard, a more serious growing threat to the environment is the manufacture of methamphetamine [42 USC Sec. 9602(a)]. This is particularly troublesome if the real property is income producing and the owner is unaware of the tenant’s drug manufacturing activity and either has or is in the process of conveying legal title to the property to the trustee of his or her revocable living trust. Under federal environmental laws, the trustee (defendant) of a revocable living trust may be liable for toxic clean-up costs associated with property transferred to the trust [42 USC Sec. 9601(35)(A)]. A defendant is not liable for such costs if the property is acquired under the terms of the decedent’s Last Will [42 USC Sec. 9601(35)(A)(iii)]. However, with respect to a revocable living trust, the trustee is not liable for the clean-up costs if, at the time the defendant (trustee) acquired the facility, the trustee did not know and had no reason to know that any hazardous substance was disposed of on, in or at the property [42 USC Sec. 9601(35)(A)(i)]. To establish that the trustee (defendant) had no reason to know that a hazardous substance existed on the property, the trustee must have undertaken, at the time of acquiring the property, all appropriate inquiry into the previous ownership and uses of the property consistent with good commercial or customary practice in an effort to minimize liability [42 USC Sec. 9601(35)(B)]. If the trustor owns property that he or she suspects or knows is contaminated, legal title to the property should not be conveyed to the trustee of a revocable living trust. Instead, such property should be made part of the trustor’s probate estate so that it will pass to his or her beneficiary(ies) under the terms of the decedent’s Last Will. By doing so, neither the decedent’s personal representative nor the beneficiary may be liable for the cost of toxic clean-up [See 42 USC Sec. 9601(35)(A)(iii)].

Question of the Month: May my spouse and I name different trustees under our revocable living trust? Answer: Yes. Though not common, a husband and wife may be the trustees of their respective property interests under a joint revocable living trust but, for a variety of reasons, may not want to designate one another as successor trustees. Such may be the case in second-marriage (or more) situations where each spouse wants to designate his or her children or a separate corporate entity as successor trustee as to that spouse’s property interests in the revocable living trust. In families where the children by each spouse’s former marriage have good relationships and are in accord as to their respective parents’ estate planning objectives, such a trustee arrangement can operate effectively. The same trustee arrangement can also be effective if each spouse has his or her own separate revocable living trust.

AFR: The August Applicable Federal Rate, under IRC Section 7520, for determining the present value of an annuity, an interest for life or a term of years or a remainder or reversionary interest is 4.8 percent (Rev. Rul. 2005-54, 2005-33 IRB 1). This bodes well for the grantor retained annuity trust (GRAT), charitable lead annuity trust (CLAT), charitable transfer of remainder interest in residence or farm and private annuities but not well for the qualified personal residence trust (QPRT), grantor retained income trust (GRIT) and charitable remainder annuity trust (CRAT). Lower AFRs have no impact on grantor retained unitrust (GRUT), charitable remainder unitrust (CRUT), charitable lead trust (CLT) and pooled income funds.

Copyright 2005 by Doug H. Moy. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the author and copyright holder of this material. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor Doug H. Moy, Inc. and/or employees is/are engaged in rendering legal or accounting services. If legal advice or accounting assistance is required, the services of a competent professional should be sought.

Contact Doug H. Moy at dougmoy@msn.com or at (503) 636-5855 in regard to:

Referrals — always welcome
Initial consultation appointment
Updating or reviewing an estate plan
Preparing Estate Tax Return Form 706
Client questions and concerns
Speaking/teaching opportunity

Doug H. Moy, President
Doug H. Moy, Inc.
PO Box 254
Lake Oswego, OR 97034-0030
Telephone: (503) 636-5855
Fax: (503) 697-7749

dougmoy@msn.com

Available at most book stores for $39.95: Moy, Doug H., Living Trusts, Third Edition. John Wiley & Sons, Inc., 2003. Or visit http://www.wiley.com/WileyCDA and enter "Doug Moy" in Product Search "by Author."

"This is an extremely accessible work,
written in a clear, conversational tone....
This is a very commendable work,
equally appropriate in the professional’s
office library or at home on the den bookshelf....
Highly recommended."
Nancy Shurtz, "Estate Planning,"
July 2004, Vol. 31/No.7, p. 357.

Estate Wise Planning Newsletter, Vol 1, No. 7, July 2005

Knowledge promotes understanding . . . understanding breeds creativity. . . .

ESTATE WISE PLANNING TM

Since 1979

By: Doug H. Moy

Consulting Specialist in Estate and Gift Taxation and Planning
Member, National Association of Tax Professionals (NATP)
___________________________________________
Published by: Doug H. Moy, Inc., P.O. Box 254, Lake Oswego, OR 97034
(503) 636-5855
___________________________________________
Vol. I, No. 7. July 2005
___________________________________________

Qualified Tuition Programs: Any contribution to a qualified tuition program (QTP) on behalf of any designated beneficiary is treated as a completed gift to such beneficiary, is a gift of a present interest for purposes of the gift tax annual exclusion under IRC Section 2503(b), but is not a qualified transfer under IRC Section 2503(e) [IRC Sec. 529(c)(2)(A)]. If the aggregate amount of contributions during the calendar year by a donor exceeds the gift tax annual exclusion (presently $11,000 per donee per calendar year), the donor may elect to treat such aggregate amount ratably over a five-year period beginning with the calendar year in which the contribution is made [IRC Sec. 529(c)(2)(B)]. Thus, for one donee, the donor may contribute $55,000 to a qualified tuition program and take advantage of the gift tax annual exclusion ratably over a five-year period without using-up any of the donor’s lifetime federal gift tax exemption amount of $1.0 million.


As a general rule, upon the donor’s decease, the value of the QTP established for the beneficiary is not includable in the decedent donor’s gross estate [IRC Sec. 529(c)(4)(A)]. However, in certain cases, amounts distributed on account of the death of a beneficiary are includable in the deceased beneficiary’s gross estate [IRC Sec. 529(c)(4)(B)]. With respect to a donor who elects to treat excess contributions ratably over a five-year period, and who dies before the close of the five-year period, the gross estate of the donor includes the portion of such contributions properly allocable to periods after the date of death of the donor [IRC Sec. 529(c)(4)(C)]. For example, if the aggregate amount is $55,000, and if the donor died after the end of the first ratable year, the donor’s gross estate would include $44,000 of the initial $55,000 amount contributed to the QTP. If the donor had created QTPs for five beneficiaries, then, $220,000 ($44,000 x 5 = $220,000) would be includable in the deceased donor’s gross estate for purposes of determining the federal estate tax.


Like-Kind Exchange: The IRS has ruled that a testamentary trust may hold replacement property received in a like-kind exchange of real property within the meaning of IRC Section 1031(a), notwithstanding that the trust must terminate by its own terms and, thus, distribute all of its properties, when the like-kind exchange is independent of the impending termination. With respect to the proposed exchange, the taxpayer had two concerns: (1) that the proposed transfer of the replacement property to a single-member limited liability company (LLC) not taxed as a corporation would violate the holding requirement of IRC Section 1031(a) (i.e., that the replacement property must be held by the taxpayer for productive use in a trade or business or for investment) as applied in Revenue Rulings 75-292 and 77-337; and (2) that, as a result of the Trust’s terminating distribution of membership interests in the LLC to multiple beneficiaries, which would then result in a de facto partnership between the beneficiaries for federal income tax purposes, the holding requirement of IRC Section 1031(a) as applied to the revenue rulings would be violated with respect to the replacement property. As to the first concern, the IRS has ruled that, because the Trust intends to hold the replacement property for investment purposes, the transfer by the Trust of the replacement property to the LLC will not violate the holding requirement of IRC Section 1031(a). Finally, as to the second concern, the like-kind exchange is wholly independent from the distribution of the properties from the Trust under the Plan of Termination, the date of which was fixed by the date of the decedent’s death and cannot be modified or changed. Thus, the facts of this exchange are distinguishable from those in Revenue Rulings 75-292 and 77-337 [Ltr. Rul. 200521002 (Feb. 24, 2005)].

Lifetime Estate Management Plan: Taxes should not become the tail that wags the dog. Estate planning is not just about minimizing or eliminating estate tax. A well-designed comprehensive estate plan includes a lifetime estate management plan that addresses how the estate owner’s financial affairs are to be managed in the event of physical or mental incapacity. In this regard, if the estate owner does not have such a plan and becomes physically and/or mentally incapacitated, a proper court of jurisdiction will appoint a guardian (of the person) or a conservator (of the person’s financial affairs) to manage the estate owner’s personal needs and financial affairs. On the other hand, the estate owner may choose not to involve the courts and be subject to a personally humiliating, degrading, emotionally traumatic and financially expensive court-supervised process to determine whether he or she is legally incapacitated. Only the following options are available for the protection and management of a person’s property and financial affairs: (1) ownership of property (real or personal property [tangible or intangible] as joint tenants with right of survivorship. The co-tenant not incapacitated may continue to manage the incapacitated co-tenant’s interest in the property; however, the court may require the entire property owned as joint tenants with right of survivorship to come under the umbrella of the court; or (2) designation of an immediate family member or close trusted friend as attorney-in-fact under either a durable general or special power of attorney; or (3) creation of a well-designed and correctly funded revocable (or irrevocable) living trust; or (4) implementation of a combination of these options.


Disclaiming Vow of Poverty: When making a charitable bequest intended to qualify for the unlimited charitable estate tax deduction, such gift must be made to the qualified charity—not to an individual member of the charity. Where there is a decedent’s residuary bequest to a beneficiary who is a member of a religious order and who has taken a vow of poverty prior to the effectuation of the bequest, such bequest does not qualify for the charitable estate tax deduction under IRC Section 2055(a). In this particular case, the decedent’s Last Will provided: "I direct that all the rest, residue and remainder of my estate, both real and personal property, of whatsoever kind, nature and description and wheresoever the same may be situated shall be given to [Beneficiary]. If [Beneficiary] predeceases me, it shall be given to [Order]." Decedent’s estate consisted primarily of securities and cash. Beneficiary, serving in her capacity as executrix (i.e., personal representative) of the decedent’s estate, transferred title to the securities to the name of the Order and transferred cash to the Order.


In effect, the Beneficiary, as executrix of the decedent’s estate, renounced the gift by transferring it to the Order. However, such renunciation is not a qualified disclaimer under IRC Section 2518 and is not recognized for claiming the charitable estate tax deduction. In this regard, a bequest to an individual, where the individual is required to transfer to a religious order pursuant to a vow of poverty in effect at the time of the decedent’s death, does not qualify for an estate tax charitable deduction under IRC Section 2055. Under these circumstances, the property does not pass from the decedent to the religious order pursuant to the terms of the testamentary instrument. Rather, the property passes to the religious order from the individual (i.e., in this case, the Beneficiary who served as the executrix) subject to the vow of poverty pursuant to the contractual arrangement between the individual and the Order [Rev. Rul. 68-459, 1968-2 C.B. 411; Rev. Rul. 55-759, 1955-2 C.B. 607; Estate of Callaghan v. Comm’r, 33 T.C. 870 (1960); See also, Estate of Lamson v. United States, 338 F.2d 376 (Ct. Cl. 1964); Estate of Barry v. Comm’r, 311 F.2d 681 (9th Cir. 1962); Cox v. Comm’r, 297 F.2d 36 (2nd Cir. 1961); Estate of Pickard v. Comm’r, 60 T.C. 618 (1973); Estate of McGuire v. Comm’r, 59 T.C. 361 (1972)].


Relying on the court’s holding in Callaghan and other cases cited above, the IRS ruled that, under the terms of the decedent’s Last Will, the residuary estate passed to the Beneficiary and not to the Order. The residuary estate was distributed to the Order pursuant to the Beneficiary’s obligation under the vow of poverty. Thus, in accordance with the cited cases and revenue rulings, the IRS ruled that the decedent’s residuary bequest did not qualify for the unlimited estate tax charitable deduction under IRC Section 2055 [TAM 200437032]. Had the decedent named the Order directly as the beneficiary, instead of the beneficiary indirectly, then, the bequest would have qualified for the estate tax charitable deduction.


Pre-1977 Jointly-Owned Property: Under present law, property owned by married spouses as joint tenants with right of survivorship (including tenants by the entirety with right of survivorship) is deemed to be owned one-half by each spouse (spouse’s joint property rule). Thus, only one-half the fair market value of the property owned by the spouses as JTWROS is includable in the gross estate of the first spouse to die—no matter who had provided the consideration for the purchase of the property [IRC Sec. 2040(b)]. However, with spousal joint interests (i.e., property owned by the spouses as JTWROS) created by the spouses before 1977 ("pre-1977"), 100 percent of the value of the property is includable in the gross estate of the first spouse to die, if that spouse provided the sole consideration for the property (consideration furnished test or the Gallenstein rule) [M. Lee Gallenstein v. United States, 92-2 U.S. Tax Cas. (CCH) ¶ 60,114 (6th Cir. 1992), aff’g (D.C. E.D. Kentucky, September 16, 1992)].


Requiring inclusion of the full value of the property owned as JTWROS in the estate of the first spouse to die can generate an income tax advantage for the surviving spouse, since the basis of the property will be stepped-up to 100 percent of its fair market value as of the date of the decedent spouse’s death (or the alternate valuation date). Combining this result with the unlimited estate tax marital deduction in the decedent spouse’s gross estate, in conjunction with a credit shelter trust to be funded with assets having a value of up to the federal estate tax exemption amount in the year of the decedent’s death (presently, $1.5 million), would allow the surviving spouse to receive the property free of federal estate tax, sell it at the decedent spouse’s date-of-death (or alternate-valuation-date) value free of capital gain tax, and minimize or entirely eliminate federal estate tax on the value of the surviving spouse’s taxable estate upon his or her subsequent death, provided the value of the surviving spouse’s taxable estate is less than or equal to the federal estate tax exemption amount in the year of his or her decease.
IRC Section 2040(b) does not require absolutely that the spouse’s joint property rule must always apply. Except for Field Service Advice 1998-332, which only addressed the issue of the noncontributing spouse predeceasing the contributing spouse, to my knowledge, the IRS has not issued any other rulings regarding the Gallenstein rule. Conceivably, a husband and wife could take ownership of real property as tenants by the entirety (or securities as JTWROS) with, say, either spouse providing 100 percent of the consideration from his or her separate funds. If the 100 percent consideration furnished by either spouse is designated in the instrument evidencing ownership, then, 100 percent of the value of the property may be includable in the value of the first decedent spouse’s gross estate. Such a designation on the deed of real property may be indicated as follows: "John Smith and Mary Smith, husband and wife, as tenants by the entirety with right of survivorship and with the following interests in the property: John Smith, 100 percent; Mary Smith, zero percent." The same allocation may apply for any fractional interest, provided the spouses designate the amount in the instrument evidencing ownership of the property. This may be an important income tax saving benefit for the surviving spouse.

Caution: The benefit of owning property as JTWROS created by spouses before 1977 ("pre-1977") may be lost if the title to such property is conveyed to the trustee of a revocable living trust. Once title to the property previously owned as JTWROS is conveyed to the trustee, the property is no longer deemed owned by the spouses as JTWROS; instead, each spouse holds a beneficial undivided one-half interest as a tenant in common in the property. In effect, upon the decease of the first spouse to die, only one-half the fair market value of the property on the date of the decedent spouse’s death, or the alternate valuation date, will be included in the first decedent spouse’s gross estate for federal estate tax purposes. Accordingly, only that one-half interest will receive a step-up (or step-down) in basis to the fair market value of the property in the hands of the trustee or the surviving spouse. Of course, the spouse who furnished 100 percent of the consideration for the pre-1977 jointly-owned property created by the spouses may, with the noncontributing co-tenant spouse’s agreement, convey 100 percent of his or her interest in the property to the trustee of his or her revocable living trust.


Question of the Month: I want to give the trustee of my revocable living trust a power not specifically addressed under state statute (local law); does this mean that such a power is not permissible in the revocable living trust? Answer: Not necessarily, unless the trustor resides in the state of Louisiana, whose laws are based on the Napoleonic Code. At the risk of oversimplification, in Louisiana, if the law is not part of the statutes, then, it is illegal to do what is not covered by the law. This may be a flagrant interpretation, but it is done purposely to emphasize the caution needed when designing a revocable living trust for a trustor who resides in Louisiana. In most other states, however, any fiduciary power is probably acceptable, so long as it does not violate public policy.


AFR: The July Applicable Federal Rate, under IRC Section 7520, for determining the present value of an annuity, an interest for life or a term of years or a remainder or reversionary interest is 4.6 percent (Rev. Rul. 2005-38, 2005-27 IRB 6). This bodes well for the grantor retained annuity trust (GRAT), charitable lead annuity trust (CLAT), charitable transfer of remainder interest in residence or farm and private annuities but not well for the qualified personal residence trust (QPRT), grantor retained income trust (GRIT) and charitable remainder annuity trust (CRAT). Lower AFRs have no impact on grantor retained unitrust (GRUT), charitable remainder unitrust (CRUT), charitable lead trust (CLT) and pooled income funds.


Copyright 2005 by Doug H. Moy. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the author and copyright holder of this material. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor Doug H. Moy, Inc. and/or employees is/are engaged in rendering legal or accounting services. If legal advice or accounting assistance is required, the services of a competent professional should be sought.

Estate Wise Planning Newsletter Vol 1, No. 6, June 2005

Knowledge promotes understanding . . . understanding breeds creativity. . . .

ESTATE WISE PLANNING TM

Since 1979

By: Doug H. Moy

Consulting Specialist in Estate and Gift Taxation and Planning
Member, National Association of Tax Professionals (NATP)
___________________________________________

Published by: Doug H. Moy, Inc., P.O. Box 254, Lake Oswego, OR 97034
(503) 636-5855
___________________________________________
Vol. I, No. 6. June 2005
___________________________________________

Estate Planning Investment: An estate is comprised of myriad assets, not the least valuable of which may be the estate owner’s home. Frequently, I am asked, "How much will it cost me to plan my estate?" Regardless of the estate owner’s estate planning objectives and goals, estate planning fees should be viewed as an investment—not a cost. In the words of the world’s greatest life insurance salesman, the late Ben Feldman, "Your estate represents a lifetime...your lifetime. If it was worth spending a lifetime to accumulate, it must be worth keeping. You didn’t build it for the tax collector." [Andrew H. Thompson, The Feldman Method: The Words and Working Philosophy of the World’s Greatest Insurance Salesman, Farnsworth Publishing Company, Inc., Lynbrook, New York, 1973, 163] Taxes are not the only cost of transferring one’s estate to others. Too often we associate transfer costs with taxes when we should also consider the cost of lifetime court-supervised conservatorship proceedings and the transfer costs associated with selling a home.

Phantom Property: Phantom property is property the value of which is includable in the gross estate; yet, the property itself may not pass to the decedent’s heirs or beneficiaries. The most common examples of phantom property are property owned as joint tenants with right of survivorship (JTWROS) and real property subject to a mortgage where the mortgage is satisfied with mortgage-cancellation life insurance paid to the lender–not to the decedent’s surviving spouse or other beneficiaries. Regarding property owned as JTWROS, consider the following: Dad, Mom and their two adult children own a street-name brokerage account as JTWROS. Upon Dad’s decease first, the account will "pass" by right of survivorship to Mom and the two adult children. One-hundred percent of the fair market value of the account is includable in Dad’s gross estate as of his date of death, or the alternate valuation date. Dad’s estate is denied the estate tax marital deduction for the one-third share of the account passing to Mom (his wife) because it is a terminable interest. It would be a terminable interest since the two adult children could defeat Mom’s interest in the account by making withdrawals or by terminating the account. Dad’s estate tax exemption amount is reduced by an amount equal to two-thirds of the account passing to his adult children, thereby, reducing his available estate tax exemption amount to fund a credit shelter trust for his wife. With respect to titling the account as JTWROS, 100 percent of the fair market value of the account is includable in the gross estate of the first co-tenant to die, except to the extent that the other co-tenants can prove contribution to the initial acquisition of the securities composing the account (i.e., the consideration furnished test). The same result would occur if Dad had named his wife and his two adult children to receive the account payable on death (POD) or transferable on death (TOD).

Regarding mortgage-cancellation life insurance: phantom property is created when the lender is the beneficiary of the life insurance. In such case, the value of the life insurance proceeds is includable in the decedent insured’s gross estate; the fair market value of the real property is also included in the value of the decedent’s gross estate; no deduction for the mortgage is allowed the decedent’s gross estate, since the mortgage has been satisfied; and the beneficiary(ies) of the decedent’s estate are not entitled to the continuing mortgage interest income tax deduction, since the mortgage has been satisfied.

FDIC and Revocable Trust Accounts: Bank funds owned by the trustee of a formal revocable living trust are insured by the federal deposit insurance corporation up to $100,000 per named qualifying beneficiary of the trust separately from any other accounts of the trustee or the beneficiaries. A qualifying beneficiary(ies) means the trustor’s spouse, child(ren), grandchild(ren), parent(s), brother(s) or sister(s). For example, Jack is the owner (trustor) of a revocable living trust account with a deposit balance of $300,000. The trust provides that, upon Jack’s decease, his wife will receive $100,000 and each of their two children will receive $100,000—but only if the children graduate from college by age twenty-four. Assuming Jack has no other revocable trust accounts at the same depository institution, the coverage on Jack’s revocable living trust account would be $300,000. The trust names three qualifying beneficiaries. Coverage would be provided up to $100,000 per qualifying beneficiary, regardless of any contingencies as to when and how the beneficiaries are to receive their shares of the trust estate. Further, assume a revocable living trust has an account with a deposit balance of $200,000. The trust provides that, upon the trustor’s death, the trustor’s husband is to receive the $200,000 but, if the husband predeceases the trustor, each of their two children will receive $100,000. Assuming the trustor has no other revocable trust accounts at the same depository institution, and the trustor’s husband is alive at the time of the institution’s failure, the coverage on the trustor’s revocable living trust account would be $100,000. This is because the trust names only one beneficiary (trustor’s husband) who would become the owner of the trust assets upon the trustor’s death. If, when the institution fails, the husband has predeceased the trustor, then, the account would be insured to $200,000 because the two children would be entitled to the trust assets upon the trustor’s decease. If the revocable living trust provides for a life estate for designated beneficiaries [e.g., QTIP Trust, qualified domestic trust (QDOT), credit shelter trust] and a remainder interest for other beneficiaries, unless otherwise indicated in the trust, each life estate holder and each remainderman will be deemed to have equal interests in the trust assets for FDIC purposes. Coverage will then be provided up to $100,000 per qualifying beneficiary.

For a depositor to qualify for the revocable living trust account coverage, the title of the account must be in the name of the trustee of a written revocable living trust (i.e., a "formal" trust agreement). The account records of the depository institution are not required to identify the beneficiaries of the revocable living trust and their ownership interests in the trust.

Estate Tax Repeal Update: S. 988, Jobs Protection and Estate Tax Reform Act of 2005 (JPETRA ’05), was introduced in the Senate May 10, 2005. The federal estate and generation-skipping transfer taxes would be repealed effective for estates of decedents dying, and generation-skipping transfers, after December 31, 2004. If this bill becomes law, the following rules would apply: (1) step-up (step-down) in basis would be replaced by modified carry-over basis effective for estates of decedent’s dying after December 31, 2004. In this regard, the basis of the person acquiring property from a decedent will be the lesser of the adjusted basis of the decedent or the fair market value of the property at the date of the decedent’s death; (2) the maximum federal gift tax rate would be 35 percent for gifts made after December 31, 2004. The lifetime federal gift tax exemption amount would be $1.0 million for gifts made after December 31, 2004; and (3) a lifetime transfer (i.e., a gift) of property in trust after December 31, 2004, would be treated as a taxable gift under IRC Section 2503, unless the trust is treated as a grantor trust owned by the donor or the donor’s spouse under the grantor trust rules (IRC Sections 671-679). This means that a gift to a charitable remainder trust established by the donor during lifetime would be subject to federal gift tax. The prospects of the federal estate and generation-skipping transfer taxes being repealed in the 1st Session of the 109th Congress are uncertain and are, in my view, slim and none; and "Slim" just left town!

Nonresident Alien Estate Tax Exemption Amount: A nonresident alien is a person who is not a U.S. citizen not a resident of the U.S. Only property of a nonresident alien situated in the United States is subject to the federal estate tax. A unified credit of only $13,000 is allowed against a nonresident alien’s U.S. estate tax on property situated in the United States. This unified credit amount exempts the first $60,000 in value of the nonresident alien’s estate from federal estate tax. If the nonresident alien’s estate includes worldwide assets, then, the nonresident alien’s estate is entitled to a unified credit of that proportion of $46,800 which is attributable to the value of assets situated in the U.S. at the time of death which bears to the value of the decedent’s entire gross estate wherever situated. The value of real property acquired by nonresident aliens in the U.S. is subject to federal estate tax. Federal estate tax can be avoided on the value of such property if legal title to the property is in the name of a foreign corporation. However, if the property has already been purchased in the name of the nonresident alien and has appreciated after the purchase, a post-acquisition transfer of such property to a foreign corporation will not be protected from gain. This dilemma can be overcome by transferring the appreciated property to a U.S. corporation and, then, transferring the stock in the U.S. corporation to a foreign corporation. A sufficient amount of time should elapse before the transfer to the foreign corporation [Andrew M. Curtis, "Real Estate Offers Many Planning Opportunities," 19 Estate Planning 30, 35-36 (January/February 1992)].

Copyright 2005 by Doug H. Moy. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of the author and copyright holder of this material. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor Doug H. Moy, Inc. and/or employees is/are engaged in rendering legal or accounting services. If legal advice or accounting assistance is required, the services of a competent professional should be sought.