by Linda Suzzanne Griffin
(1) We sometimes advise our clients that they could owe $100,000 or more in estate taxes and they are okay (because “their kids will have to pay it”) but if they owe ANY increase in real estate taxes then their blood boils over! In the past if a client named a child on a deed “to avoid probate” then the 3% “save our home cap” would come off, and real estate taxes would be assessed based on the current fair market value. Effective July 1, 2006, Section 193.55 (3)(a)3 of the Florida Statutes provides that if the change of ownership arises when the owner is listed as both grantor and grantee of the real property and one of more other individuals are additionally named as grantee then the 3% cap will not come off, BUT IF the other individual owner applies for a homestead exemption then a change of ownership will result and the 3% cap will come off. While this may seem advantageous to avoid probate there are a few issues that need to be considered:
(A) If you put an individual on a deed you have a gift tax issue and if the amount is more than $12,000 you have to file a gift tax return.
(B) If you want to sell the property then you have to have all owners
consent to such sale.
(C) Medicaid issues (I will leave that to much smarter lawyers).
(D) Creditors of the other owners will have access to the real estate.
(E) Spouses of the other owners may have access to the real estate.
(2) Effective January 1, 2007 the intangible tax has been repealed. You should
advise your clients regarding the Florida intangible trust that you may have prepared for them and terminate or stop funding those trusts.
(3) Should you put the homestead in the revocable trust? Continuous
controversy exists regarding putting homestead in the revocable trust. This author does not recommend doing so only because of the inadvertent traps for the unwary. The judge in a recent bankruptcy case, In Re Merry Alexander, argued and won by Clearwater’s Harvey Spinowitz, determined that homestead placed in the revocable trust would retain its homestead status even though a few years ago another bankruptcy judge in Bosonetto, determined that a homestead in a revocable trust was not a owned by an individual and therefore did not qualify for homestead status. This author recommends that homestead not be placed in trust. The summary probate costs are minimal and orders of homestead often make dealing with the title company easier. Of course there are always exceptions and each decision is based on the needs of the individual client.
Advice:
Obviously all of the above changes in the law need to be conveyed to your clients. This author also recommends including these issues in your questionnaire regarding homestead. For some reason homestead seems to be a hot topic in grievance proceedings (as to probate matters) because of the improper advice by attorneys. Homestead needs to be given a big red flag.
Allowance Rate for 2007
Revenue procedure 2006-49,2006-47 IRB, IR 2006-168 provides that the optional mileage allowance for owned or leased vehicles is 48.5 cents per gallon for business travel which is 4 cents more than 2006 business travel.
Advice:
When reimbursing employees use this mileage rate.
What Exactly is “Personal Property”?
In University of Southern Indiana Foundation vs. Baker, 82S04-0510-CV-488, a trust was created by the decedent who left her IRAs, automobiles, furnishings and other “personal property” to her brother and the residue of the estate was to be distributed to the University of Southern Indiana Foundation. The decedent’s brother claimed that the personal property not only included her tangible personal property but also her bank accounts, CDs, treasury notes, etc. leaving only her real estate for the foundation. The probate court determined that personal property included both tangible and intangible property and because the trust was not ambiguous parole evidence could not be admitted. The Supreme Court of Indiana reversed noting that the term “other personal property” at the end of the language “automobiles, furnishings” should be interpreted to include only personal property of a like kind. The Supreme Court found the term “personal property” to be ambiguous and allowed parole evidence. The court ultimately found that the foundation was to receive the bank accounts, CDs, treasury notes, etc.
Advice:
This author had a client named as a personal representative who argued that a paragraph in the decedent’s will which provided that the personal property was to be distributed to the personal representative also included cash, CDs, notes and bonds because they were “personal property”. She was determined that she, as personal representative, was entitled to those items even though the will specifically referred to “TANGIBLE personal property”. She advised me that she was going to take those items against my advice. I filed a petition to withdraw and fortunately the judge advised her that the “tangible” personal property did not include CDs, etc. which was to go to certain charities. DRAFTING IS CRITICAL.
“Grandfathering” the Generation Skipping Transfer Tax (“GSTT”) Exemption
In Estate of Eleanor R. Gerson, Deceased, Allan D. Kleinman, Executor, 27 TC No. 11(2006), the Tax Court judges determined that treasury regulation section 26.2601-1(b)(1)(i) was valid. This regulation discusses grandfathering certain trusts (created before September 25, 1985) from the generation skipping transfer tax and provides that GSTT does apply to certain of those trusts (even if they would be otherwise grandfathered) in which a transfer of property is made pursuant to the exercise, release, or lapse of a general power of appointment that is treated as a taxable transfer under the gift or estate rules. As most of you know the GSTT applies to gifts to grandchildren with certain exemptions and exclusions. The taxes are draconian in that it taxes, at the highest estate tax rate, the transfer and these taxes are in ADDITION to the estate tax. Therefore, it is important that grandfathered trusts be kept intact and nothing be done to upset the grandfathered status.
Mr. Gerson created a trust which was irrevocable in 1973 and which created a marital trust in which the wife had a general power of appointment. She died in October of 2000 and left a will which she exercised the general power of appointment in favor or her grandchildren. The representatives of her estate argued that the above noted regulation was invalid and the transfer was made from a “grandfathered” trust. The Internal Revenue Service argued that the GSTT transfers were made at her election and therefore she was deemed the owner (by virtue of the general power of appointment)of the property and therefore the transfer was subject to the GSTT tax. The court found for the Internal Revenue Service.
Advice:
Anytime you have a trust created prior to September 25, 1985 carefully review the terms of the trust before modifying or reforming the trust to be sure that you do not affect the GSTT status of such trust.
The Net Income Makeup Charitable Remainder Trust
When the Income beneficiary does not want the money.
In private letter ruling 9550026 an individual, Clarence, established a net income makeup trust with income to him and then to his wife. A few years later they wanted to renounce their income interest and their right to change the remainder beneficiary. The Internal Revenue Service ruled that they would be entitled a gift tax charitable deduction for the value of the new trust interest passing to charity.
Advice:
Believe it or not there are some individuals that are so wealthy that they do not need income from their charitable remainder trust. This ruling provides directions on how to obtain an income tax gift deduction.
Alternate Minimum Tax (“AMT”) and Why It Matters to Your Clients
A detailed explanation of the AMT is beyond the scope of this column. However it is important to know how it may apply to your client. The AMT tax was originally created to tax those individuals who took advantage of tax shelters such as losses from certain real estate transactions, to avoid paying income taxes. The AMT was added to the Internal Revenue Code (the “Code”) to tax the “alternative” income by adding certain deductions to the “regular” income. Thus, a taxpayer may owe no tax under the “regular” income tax but could owe tax under the AMT. Congress has since enacted passive loss rules and other anti-sheltering provisions but the AMT tax remains.
Attorney Jeff Coleman forwarded to me a presentation on how AMT can bite you! If a lawyer obtains a settlement for a client on a contingent fee basis then the gross settlement is included in the client’s income (assuming of course the settlement is not otherwise excludible from income under another section in the Code). The US Supreme Court has held “that, as a general rule, when a litigant’s recovery constitutes income, the litigant’s income includes the portion of the recovery paid to the attorney as a contingent fee” Banks, 543 US 426. After your client reports the settlement monies as income, he or she can only deduct attorney fees to the extent such fees exceed 2% of adjusted gross income. Fees below the 2% are lost as deductions. Further any deductions allowed (because the deductions exceed 2%) are NOT allowed for purposes of calculating the AMT. Thus, the client could owe AMT on money he or she does not have because those fees were actually paid to the attorney!
Advice:
Anytime you are involved in this situation you must advise your client of this exposure. Further, it appears that this exposure should be addressed in initial pleadings or settlement offers.
All Contents © Copyright Linda Suzzanne Griffin, P.A.
