by Linda Suzzanne Griffin
As many of you have undoubtedly read, PETRA was passed by the House Ways and Means Committee late on June 19, 2006. Of course it is now stalled in the Senate. PETRA would eliminate the one year repeal of the estate and GST taxes that is scheduled for 2010 but it would also substantially reduce the rates. Other items in PETRA:
1. Reunify the estate, gift and generation skipping transfer tax (“GSTT”) exemption amounts and rates.
2. Increase the estate, gift and GSTT exemption to $5 million dollars per person.
3. Lower estate, gift and GSTT rates on the first $25 million dollars to maximum capital gains rates (currently 15%) and to twice the maximum capital gains rates on transfers in excess of $25 million dollars.
4. Allow a surviving spouse to use any unused $5 million dollar exemption of the deceased spouse.
5. Make permanent the repeal of the state death tax credit.
6. Repeal the estate tax carryover basis.
7. Repeal the 2001 Act sunset provision.
Advice:
PETRA has far reaching implications, most of which could make estate taxes a non-factor in the planning of most “normal” estates. Keep an eye on this bill and if and when it is passed, all clients must be advised and trust planning may now focus more on asset protection and beneficiary planning and less on tax planning.
Asset Protection
In 2005 the Florida Revised Uniform Limited Partnership Act of 2005 was passed. The legislation makes clear that a charging order is the sole remedy for a judgement creditor and no foreclosure can be made on a limited partnership interest. The Florida Bar RPPTL section is now working on the same legislation as to limited liability companies. The new legislation makes Florida an excellent forum to form limited partnerships. Other exemptions available in Florida are the homestead exemption, the wage exemption, tenants-by-the entireties, pension and profit sharing plans, disability income benefits, prepaid college trust fund, medical savings accounts, life insurance and annuities.
Advice:
If you routinely provide estate planning advice, then asset protection planning may be a part of such planning. More and more clients are creating trusts primarily to avoid creditors of beneficiaries (and/or spouses of beneficiaries).
Charitable Gifts
Charitable gifts are a significant way to reduce estate taxes and provide a vehicle for charitably inclined clients. Thus it is critical that a planner understand how to obtain such deductions and the difference between an outright charitable deduction and a proper charitable deduction in trust. The Internal Revenue Code, (the “Code”) permits a charitable deduction in trust only, if it is a qualified split interest trust under Section 2055 of the Code.
In Galloway vs. United States (DC PA 5/9/2006) 97 AFTR2d 2006-900 a trust was created by a decedent who died on July 28, 1998. The trust provided that the residue would pass in four equal shares to his son, a relative and two charities. Each beneficiary was to receive 50% of their quarter share in early 2006 and the remaining 50% in equal one quarter (¼) shares on January 1, 2016. The estate claimed a charitable deduction for the portion of the trust corpus payable to the charitable beneficiaries. The Internal Revenue Service (the “Service”) denied the deduction and claimed the estate owed an additional $160,394. The Service argued that the trust was not a proper split interest trust under section 2055 of the Code. The estate argued that section did not apply because the split was not an interest in the same property. In effect, it was two separate trusts, one for the individual beneficiaries and one for the charitable beneficiaries. The court rejected those arguments.
Advice:
Many times this author sees charitable trusts drafted which do not properly qualify as a charitable split interest trust. This creates major challenges for the beneficiary’s, not to mention increased taxes. If this issue arises, then determine whether a disclaimer or a reformation can solve the problem.
Kiddie Tax
Under former income tax law a child under the age of 14 was subject to a “kiddie tax”, on unearned income. The “kiddie tax” is calculated on the child’s unearned income over $1,700 at the child’s parent’s highest marginal rate if that tax is higher than what the child would otherwise pay. The “kiddie tax” is now applicable to children under the age of 18.
Advice:
Many clients may be surprised to learn this was applicable retroactively to January 1, 2006.
Hybrid Tax Credits
IR 2006-56, 4/7/2006, IR 2006-57, 4/7/2006 and IR 2006-86, 06/01/2006 from the Service found the following vehicles qualified for the hybrid tax credit:
1. 2006 Ford Escape Hybrid front wheel drive-$2,600
2. 2006 Ford Escape Hybrid 4 wheel drive-$1,950
3. 2006 Mercury Mariner Hybrid 4 wheel drive-$1,950
4. 2005 Toyota Prius $3,150
5. 2006 Toyota Prius-$3,150
6. 2006 Toyota Highlander Hybrid 4 wheel drive-$2,600
7. 2006 Toyota Highlander Hybrid 2 wheel drive-$2,600
8. 2006 Lexus R400H 2 wheel drive-$2,200
9. 2006 Lexus R400H 4 wheel drive-$2,200
10. 2006 Honda Civic Hybrid CVT-$2,100
11. 2005 Honda Civic Hybrid MT-$1,700
12. 2005 Honda Civic Hybrid CVT-$1,700
13. 2005 Honda Insight CVT-$1,450
14. 2006 Honda Insight CVT-$1,450
15. 2006 Honda Accord Hybrid AT-$1,300
16. 2005 Honda Accord Hybrid AT-$650
Advice:
If you are looking to purchase a car, don’t forget to factor these credits into your purchase price.
Disclaimers
In Private Letter Ruling 2006-12001 the Service determined that if assets are invalidly disclaimed, then the executor cannot add them to the trust for which the executor made a QTIP election to qualify for the marital deduction.
Harold owned assets in a living trust which, at his death, were to be split between a marital QTIP trust and a family trust. Harold died survived by wife, Maude. Maude’s attorney recommended that their children execute a disclaimer on mom’s behalf (she was incompetent) allowing certain assets to pass outright to children and grandchildren. A QTIP election was filed on the estate tax return which did not list the disclaimed property. Another attorney determined the disclaimers were invalid both under state law and taw law and therefore all assets passed to trust for mom for tax purposes. (OOPS!) The estate asked the Service to rule as to whether the estate could include the disclaimed property in the QTIP election, and thus qualify such distributions for the marital deduction. As the executor made a timely QTIP election only as to the assets listed on Schedule M the QTIP election did not and could not apply to the disclaimed assets.
Advice:
Disclaimers can be a great help to fix an estate tax issue but the disclaimer has to be properly drafted in accordance with tax and federal law. Further, you must determine, before the disclaimer is signed where the assets are to be distributed.
All Contents © Copyright Linda Suzzanne Griffin, P.A.
