by Linda Suzzanne
Griffin
Smith v. Comm’r., T.C. Summary Opinion 2003-167 is a
reminder on how to successfully deduct alimony. Sheila
Smith wanted alimony at $500 per month for life. Instead
of $500 per month her husband offered to pay her a lump
sum of $32,000. The settlement agreement stated that the
$32,000 was alimony. Sheila’s husband then deducted this
amount on his income tax return. The IRS disallowed the
deduction. The court reiterated that payments are considered
alimony only if [1] it is received pursuant to a divorce
or separation agreement; [2] the instrument does not
designate the payment as not includable in its gross income
or allowable as a deduction; [3] the payee and the spouse
are not members of the same household at the time of payment; and [4] the liability
to make payment ends at death of the payee’s spouse. The first three criteria were
met but the agreement did not indicate that the obligation to pay terminated at
Sheila’s death. The court noted that, under Florida law, when a lump sum is
awarded the lump sum is a vested right, terminable neither by marriage nor death.
Advice:
Be sure when drafting settlement agreements that the alimony includes all of
the requirements pursuant to Section 71 of the Internal Revenue Code (“IRC”) to
make the alimony deductible to the payor and includable in income to the payee.
Disclaimers
As the use of limited liability companies are being used more often in Florida, IRS
Letter Ruling 200406038 provides interesting and helpful results. Jane died intestate
survived by her mother and two brothers. Jane’s mother was appointed co-personal
representative of Jane’s estate. Jane’s estate included an interest in an LLC which
passed to her mother under the intestacy laws. Jane’s mother proposed to disclaim
the interest in the LLC so the interest would pass to Jane’s brothers and the children
of a deceased brother. Jane’s mother was also co-manager of the LLC and members,
other than Jane’s mother, had engaged in discussions as to how the company could
be effectively managed. The LLC agreement would be amended and as Jane’s
mother was co-manager, she would have to agree to the amendment. After such
amendment Jane’s mother proposed to resign as co-manager of the LLC. Even
though Jane’s mother would vote on the amendment the Internal Revenue Service
(the “IRS”) determined that the disclaimer was valid and the execution by Jane’s mother of the amendment to the agreement
was not an acceptance of benefits
under Section 2518 of the Code.
Advice:
Be careful in this instance
because it appears that Jane’s mother
was voting in her capacity as the
representative of Jane’s estate. Thus,
there was no acceptance. If Jane’s
mother had voted only as a beneficiary,
then the IRS would probably have found
no valid disclaimer as Jane’s mother
would have accepted the benefits.
Individual Retirement Account
(“IRA”) Contributions
In the past when an individual received
proceeds from a qualified plan or an
existing IRA and then rolled it over into
a new IRA, many times the 60-day
rollover period was often violated. If
violated, then the proceeds would be
subject to the income tax and 10%
penalty. In recent IRS Letter Rulings
200401020; 200401023; 200401024;
200401025 and 200402028, the IRS has
granted waivers of the 60-day limit for
rollovers when the delay has been
caused by bank errors, investment
manager errors, and disability.
Advice:
If your client receives a notice of
deficiency for income taxes and/or the
10% penalty on early withdrawals, then
carefully review the above letter rulings to
see if the facts can fit within these rulings.
Health Savings Accounts
The Internal Revenue Service has issued guidance in Notice 2004-2, 2004-2 IRB, Code Section 223 Health Savings Accounts (HSA), created by the Medicare Act of 2003. The Notice has a question and answer format to advise who can create an HSA and the procedures regarding such an account.
Examples of questions are as follows:
- (1) What are HSAs and who can have them?
- Who is eligible to establish an HSA?
- What is a “high deductible health plan” (HDHP)?
A total of 38 questions and answers are listed.
Advice:
Carefully review this Notice to determine if you are eligible for an HSA.
Charitable Gifting
In Private Letter Ruling 200338006 an
individual intended to create a fixed
percentage charitable remainder
unitrust ("CRUT"). A CRUT provides
that, after an individual contributes
money to a charitable trust, the individual
is entitled to a fixed percentage
annually, with the remainder going to
charity. The individual gets a deduction
for the remainder charitable interest.
Unfortunately, a net income with make
up charitable remainder unitrust
("NIMCRUT") was drafted. A
NIMCRUT provides that the lesser of
income, or a percentage, is distributed
with the full percentage being "made up"
when the net income increases. The trust
was administered as a CRUT. The
trustee sought to amend the trust to
remove the net income with make up
payment and substitute a fixed percentage
but sought a ruling that it would not
be subject to certain "self-dealing rules." The IRS indicated that the trust was subject to the self-dealing rules but these
rules did not apply to amounts payable
to income beneficiaries and, therefore,
the self-dealing rules did not apply to the
reformation of the trust.
Advice:
Before preparing a CRUT be sure that you draft exactly what your client intends and explain the trust. The IRS now has CRUT forms.
Definition of Trust Income
The IRS has issued final regulations under Section 643(b) of the Code effective January 2, 2004 which define income for trust purposes. The regulations were necessary to reflect change in the definition of trust account income under state law and also clarify when capital gains are included in distributable net income (“DNI”).
Advice:
These regulations should be reviewed prior to drafting unitrusts under the new Florida principal and income act.
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Contents © Copyright Linda Suzzanne Griffin,
P.A.
