by Linda Suzzanne
Griffin
The lengths people will go to create a tax loss! In Yoakum v. Comm=r., T.C. Memo 2004-191, an investor, Michael Yoakum invested between $500,000 and $1 million in speculative securities at Paine Webber. From 6 a.m. until he left, he drank alcohol provided by Paine Webber. In 1980, he ceased trading at Paine Webber and Yoakum sued the brokerage account for fraud, negligence and breach of fiduciary duty. The lower court dismissed the suit and of course the deductions were disallowed. The Court of Appeals affirmed the dismissal. On his 1986 income tax return Yoakum claimed a deduction for a theft loss of $800,000, by arguing that Paine Webber stole the money from him by supplying him with alcoholic beverages and Aallowing@ him to make bad investments. A taxpayer deducting a net operating loss bears the burden of proving the existence of that loss. Yoakum failed to meet this burden.
Advice:
Well, obvious advice is don=t drink and invest. The secondary advice is when taking a loss for income tax purposes be sure you can prove the existence of the loss.
Transfer of Life Insurance
Individuals often create an irrevocable life insurance trust with the plan that life insurance on a Grantor=s life which is held by the irrevocable trust is excluded from the estate of the Grantor. TAM200432015 shows how not to do it. The taxpayer transferred a life insurance policy to an LLC he created with his wife and half of his contribution to the LLC was credited to his wife=s capital account. Several months later, he transferred his LLC interest to his children. A year after the transfer, the Grantor died and the personal representative did not include the value of the life insurance in the estate tax return.
Under '2035(a) of the Internal Revenue Code (the ACode@), the estate includes the value of the life insurance transferred within three (3) years of death if the value would have been included in the estate had the decedent retained the policy at his death (unless there is adequate consideration). The half credited to the Grantors=s wife was included in the Grantor=s estate because the transfer was a gift. As to the LLC interest transferred to his children, the Service determined that the transfer was a substitute for a testamentary transfer, and not a bona fide sale and therefore was includable in the Grantor=s estate.
Advice:
It is always better to have the trustee of the irrevocable trust purchase the initial policy but if you do have to transfer a policy be sure your client understands the three (3) year rule and the tax consequences (a CYA letter sounds good).
Living Will v. Health Care Power of Attorney
In Orlando, a recent newspaper article reported that Henry Pinette wrote a living will in 1998 and also designated his spouse as a health care surrogate. Currently he is on a life-support machine. His spouse does not want her husband to be taken off the machine in accordance with the Living Will and is arguing that her designation as health care surrogate to decide how he should be cared for, including life prolonging measures, Atrumps@ the Living Will.
Advice:
At this point, this author does not know the outcome of this case and if anyone does, then please let the author know. One suggestion is to provide in the Durable Health Care Power of Attorney that the Living Will overrides the Durable Health Care Power of Attorney.
Be Careful with those Disclaimers
In the Estate of Katz v. Comm=r., T.C. Memo. 2004-166, a disclaimer had the effect of increasing the amount distributed to the by-pass trust, and therefore increasing estate taxes. Mr. Katz created a by-pass trust with an amount equal to the federal estate tax exemption equivalent. The will directed that if the spouse disclaimed any interest, the portion was to be added to the by-pass trust. His wife filed a disclaimer, giving up her right to five named securities. The Service stated that the by-pass trust was over-funded
The estate argued that the disclaimer merely specified which assets were to pass to the trust, but did not increase the overall amount going to the trust. The Tax Court found that the defect caused the by-pass trust to be over-funded and thus an estate tax created.
Advice:
This is a good example as to why a formula disclaimer should be prepared when creating a disclaimer for the by-pass trust.
Trust as Beneficiary of Qualified Plans
Private Ltr. Rul. 200440031, favorably holds that plan distributions used for payments to creditors did not shorten the payout period to the designated beneficiary. The decedent was a participant in two (2) qualified plans and his trust was designated as the plan beneficiary. The trust became irrevocable at his death and plan proceeds would be held for his three (3) grandchildren. The trust authorized the trustee to pay from trust assets his expenses of funeral, burial, taxes, administrative costs and professional fees. The decedent=s estate was insolvent and the court ordered the trust to pay the estate taxes and expenses from the plan proceeds distributed to the trust.
Generally, when distributions are made to a trust the Adesignated beneficiary must be identifiable in order to use the life expectancy of the oldest beneficiary. The issue in this ruling was whether the Service would treat the insolvent estate=s creditors as a Apotential beneficiary.@ If so, then payments would have to be made within five (5) years of death. The Service found that the payments to creditors were okay and the distributions could be made over the life expectancy of the oldest beneficiary.
Advice:
Many trusts include language that any proceeds from qualified plans cannot be used to pay estate and expenses, thus, making sure that they are not Adesignated beneficiaries@ under the terms of the trust. This ruling helps when there is no such language in the trust or in situations where the trust is insolvent.
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Contents © Copyright Linda Suzzanne Griffin,
P.A.
