by Linda Suzzanne
Griffin
Generally, in the past, if a married couple filed jointly, then the tax for the couple would be lower than if the married couple filed separately. Today, however, the tax may be the same whether a couple files jointly or separately because the end point of the 15% bracket is now twice the end of the 15% bracket for a single filer or a married person filing separately, and the standard deduction for a married couple filing jointly is twice the standard deduction of a single person or for a married person filing separate. Generally, married couples have the option of filing joint or separate returns unless either spouse is nonresident alien or they have a different tax year-end. Remember, that if you file jointly, then each spouse is jointly and severally liable for tax on the combined income including tax, interest and penalties. If you are considering whether to file jointly or separately, then you should consider the availability of tax deductions and credits, including, but not limited to, the child and dependent care credit, the earned income credit, the deduction for higher education expenses, the credit for the elderly and qualified education loan interest which are generally only available if a married couple files jointly.
Advice:
Several items need to be considered to determine whether to file separately or jointly. You should have your accountant "run the numbers" and determine the best way to file.
No Estate Tax Marital Deduction
Most of the readers know that, upon the first to die of a married couple, no tax is due because of the unlimited estate tax marital deduction and the use of the applicable credit amount. Unfortunately, in IRS Letter Ruling 200505022, a spouse did not have enough power over the income and corpus of a trust for the distribution to the trust to qualify for the estate tax marital deduction.
Don executed a Will before 1981. When Don passed away he gave his personal residence and all personal property to his spouse. The rest and residue passed to his spouse for her benefit. The Will stated that the trustee should distribute the net income to her in such amounts and such times as she "in her sole discretion" but "in consultation with Trustee," should desire for her maintenance, education, health or support, commensurate with her station in life. The Will contained no reference to the estate tax marital deduction and no specific language that the trust qualify for the estate tax marital deduction. The estate tax return was filed and a marital QTIP election was taken because the spouse had a right to obtain all income by making her request to the trustee.
Generally, under 2056(b) of the Internal Revenue Code (the ACode@), a terminable interest does not qualify for the estate tax marital deduction, but if a spouse is entitled to income for life, the income is payable annually or at more frequent intervals and a spouse has the power to appoint the entire interest free of trust to either herself or her estate and such power is exercisable by her alone, then a marital deduction is allowed. Unfortunately, the Internal Revenue Service (the "IRS") found that the spouse's income interest fell short of the qualified right to receive income. This Will was prepared prior to the Economic Recovery Tax Act of 1981 (ERTA) when there was a dollar limit on the estate tax marital deduction. ERTA made the QTIP exception available.
Advice:
Obviously, any old Wills need to be carefully reviewed and revised based upon current law. To qualify the QTIP deduction, do not get fancy - just use the language in the Code.
Once Again A Disclaimer Saves The Day!
In Private Letter Ruling 20050324, the IRS ruled that a wife made a qualified disclaimer of assets in a joint brokerage account held with her husband even though the wife changed the account to her name, withdrew cash and sold securities. Prior to husband's death, husband and wife owned a joint brokerage account with right of survivorship. Each one had contributed equally and each one could unilaterally withdraw his or her contribution.
In the eight months after husband's death, the wife sold stocks and withdrew cash. After the sales, the wife hired an attorney and the attorney advised her to disclaim her interest in the survivorship share in the account. After the disclaimer the attorney directed the stockbroker to establish and fund three accounts. The Wife's Account, the Estate Account and an TIC (held by Wife and Estate) Account which held assets that could not be evenly divided. This account did not include any proceeds from the securities sold in the eight months after death.
The IRS noted that because husband and wife each contributed equally to the brokerage account and each spouse could unilaterally withdraw each spouse's contribution the transfers were incomplete gifts until husband's death. The wife properly executed a written disclaimer in which she disclaimed her survivorship interest and as a result, was deemed to predecease the husband with respect to the disclaimed property. Even though the wife transferred title in the brokerage account to her name, the IRS said this action did not result in an acceptance by the wife of husband's share. The IRS also found that there was a qualified disclaimer even though the wife withdrew cash from the account during eight months following the husband's death because the cash and securities are severable assets. The IRS allowed wife to accept the benefit of the cash withdrawals and stock sales but could make a disclaimer of the remaining assets.
Advice:
Obviously, the best route is to discuss the disclaimer possibility with the surviving spouse as soon after death as possible. Many brokerage houses and clients will act on these matters shortly after the death. This is a great Private Letter Ruling if the spouse has only dealt with his or her share.
Taxation Of Contingent Attorney Fees
In Commissioner v. Banks, (S. Ct. 1-24-05) the Supreme Court resolved a conflict among the Federal Circuit Court of Appeals by holding that contingent fees paid to an attorney out of taxable damage awards are includable in the client's gross income. This case reversed the Sixth and Ninth Circuits which held such fees were not includable in income.
Advice:
You should advise your clients that all contingent attorney fees payable from the damage award are includable in the client's income and therefore, although such fees may be partially or fully deductible as a miscellaneous expense, the client may be paying tax on monies the attorney received. If you do not advise the client, then the client could argue that they were not advised properly. Put it in the retainer agreement so there is no question they were advised.
Charitable Trust
In Private Letter Ruling 200447033, an individual hired an attorney to prepare a charitable remainder unitrust ("CRUT"). The grantor wanted to retain the power to change the charitable beneficiaries and the percentages each would receive. When the Grantor sought to change the beneficiaries several years later, he discovered that the document did not include such language. The Trustee sought a court order to amend the document and the court ordered that, due to a scrivener's error the trust could be reformed. The IRS ruled that the judicial reformation of the trust did not violate the qualifications in Code assuming that the terms of the reformed trust are otherwise valid.
Advice:
When reviewing certain charitable trusts you may find such documents are not drafted properly. The IRS has been very lenient in reforming same.
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Contents © Copyright Linda Suzzanne Griffin,
P.A.
