North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was please to read about the U.S. Tax Court's decision in Mirowski v. Commissioner, T.C. Memo 2008-74.  March 26, 2008.

Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses.  Then, in 2001, she formed a single member LLC, transferring substantial assets to it.  Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts.  A mere four days later, she died unexpectedly.

The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate.  The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.

The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable.  The Court stated that Mrs. Mirowski had "legitimate and significant  non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.

Some key points for Family LLCs to hold up for gift and estate tax purposes:

• Strictly follow the terms of the Operating Agreement
• State the reasons for the LLC in the Operating Agreement
• Have the Agreement reviewed by separate counsel for all initial members
• Leave enough assets outside the LLC to live on and pay taxes
• Don't mingle LLC assets with personal assets
• File the proper tax returns each year
• File the necessary documents with the Secretary of State each year
• Don't put your personal residence in a Family LLC
• Make sure the senior generation does not have the power to allocate profits and losses
• Require annual distributions
• Have the junior family members (or their trusts) make initial contributions to the LLC to provide for the pooling of assets
• Don't wait until the senior family member is near death

 The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages.  Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions. 

 

 

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Excerpts from a recent IRS Memo:

WASHINGTON — Taxpayers who have filed their federal income tax returns and are expecting their refunds can use the Internal Revenue Service’s online tool, “Where’s My Refund?,” to check on the status of their refunds.

“Where’s My Refund?” is fast, easy, safe and convenient. 

To get to personalized refund information, taxpayers should be ready to enter their:

• Social Security Number (or Taxpayer Identification Number),
• Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er)),
• Exact refund amount shown on their tax returns.

Taxpayers can check on the status of their refund seven days after e-filing a return. For a paper return, check four to six weeks after mailing the return. 

“Where’s My Refund?” also includes links to customized information based on a taxpayer’s specific situation. For example if “Where’s My Refund?” shows that the IRS was unable to deliver a refund, a taxpayer can change his or her address online. Taxpayers can avoid undelivered refund checks by having their refunds directly deposited into a personal checking or savings account.

If 28 days have passed after the IRS says it mailed a refund check, “Where’s My Refund?” enables taxpayers to initiate a trace.

Taxpayers without internet access can check the status of their refunds by calling the IRS TeleTax System at 800-829-4477 or the IRS Refund Hotline at 800-829-1954. The TeleTax refund information is updated each weekend. If you do not get a date for your refund, please wait until the next week before calling back.

Some scam artists are sending phony emails, including those relating to “Where’s My Refund?”, to trick individuals into revealing personal financial information that can be used to access their financial accounts.  People who want to access the genuine IRS Web site and the “Where’s My Refund?” feature should go directly to the IRS Web site by typing the address, www.irs.gov, into the address` line of their Internet window.  The only genuine IRS Web site is IRS.gov.

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On April 17, Senators Max Baucus (D-MT) and Charles Grassley (R-IA) introduced a bill for 2008 and 2009 which would extend certain tax laws until December 31, 2009. The bill includes an increase in the AMT exemption for 2008 to $46,200 for individuals and $69,950 for couples, energy credits and tax extenders.   The most notable extension is the Charitable IRA Rollover - IRA owners over age 70½ would be able transfer tax-free up to $100,000 directly to qualified charities, as was allowed last year.

I only had one client inform me that he did the full $100,000 charitable rollover in 2007, but I am certainly in favor of contuining this benefit.  Taking the $100,000 as income and then taking a deduction for the same amount, if possible, is generally not as favorable from a tax standpoint.

 

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For better or worse, this has been my busiest tax season ever.  That's the reason I haven't blogged in a while.  I do a lot of returns for decedents, estates and trusts, as well as gift tax returns, most of which are due April 15.  It's now after 7:00 p.m., and I'm getting ready to head out to the post office with the last two extensions.

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In an unexpected announcement (Notice 2008-30), the IRS has stated that it will allow non-spouse beneficiaries of qualified plans (such as a 401(k), 403(b) or employer pension plan) to convert those funds directly to a Roth IRA. 

However, at least for the time being, beneficiaries of an IRA do not have this option.  Another issue is that the employer's plan must allow rollovers to a Roth, since they are not required to do so.

In most cases I recommend that employer plans such as 401(k)s be rolled over to IRAs when eligible, since IRAs generally offer better investment options and more liberal distribution rules.  In North Carolina IRAs are protected from creditors, at least for the original account owner, but this may not be true in all states.  Also, some states (not NC) offer Medicaid eligibility protection for qualified plans but not for IRAs.

The $100,000 income limitation for Roth conversions will disappear in 2010, and the tax due for the conversion can be paid in equal installments in 2020 and 2011.

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Yesterday a public hearing on possible gift and estate tax reform was scheduled before the Senate Finance Committee.  Click "Continue Reading" for the full text of the report by the staff of the Joint Committee on Taxation.  I could not get the proper formatting to reproduce, so it's a bit difficult to read.

Of primary concern are potential limitations on Dynasty Trusts, discounts for Gifts of Interests in Family Limited Partnerships (and LLCs), and use of Crummy Withdrawal Powers in trusts (which allow use of the $12,000 annual gift tax exclusion for transfers to trusts).

Items for Immediate Consideration: 

1. Dynasty Trusts (page 33) - take action now to create or fully fund Dynasty Trusts.
2. Family Limited Partnerships (page 37) - those considering creating a Family Limited Partnership or  Limited Liability Company should do so now.  Those with existing entities should not delay making contemplated gifts of ownership interests. 
3. Crummy Powers (page 46) - fund Crummy trusts early in 2008 - review the three options.

By the way, the report references the "$11,000" annual gift tax exclusion, which is an error.  The exclusion was increased to $12,000 last year.

Continue Reading...

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The Revenue Laws Study Committee of the North Carolina General Assembly is taking a look at reforming the North Carolina Gift Tax.  I previously blogged about House Bill 235, describing the proposed changes.  In general the NC Gift Tax would be made similar to the federal gift tax, with a $1 million lifetime exemption.  The bill stalled last year, but is under study once again.

 

 

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According to the IRS Commissioner:

1. File Early.
2. File Electronically.
3. Use Direct Deposit.

IR 2008-51

 

 

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As reported in the TaxProf Blog, Citizens for Tax Justice has released a state-by-state ranking of the number of estates owing federal estate tax in 2006.  North Carolina ranked 13th, with 523 estates paying estate tax that year.  Not exactly a large number!  The estate tax exemption in 2006 was $2 million, as it is this year, so only estates valued over that amount owed tax.  Assets passing to a surviving spouse or charity are tax-free regardless of the amount.

With proper planning, married couples can pass on up to $4 million to their heirs without tax.

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Stimulus Payment Schedule for Tax Returns
Received and Processed by April 15

Direct Deposit Payments
If the last two digits of your Social Security number are:	Your economic stimulus payment deposit should be sent to your bank account by:
00 – 20	May 2
21 – 75	May 9
76 – 99	May 16
Paper Check
If the last two digits of your Social Security number are:	Your check should be in the mail by:
00 – 09	May 16
10 – 18	May 23
19 – 25	May 30
26 – 38	June 6
39 – 51	June 13
52 – 63	June 20
64 – 75	June 27
76 – 87	July 4
88 – 99	July 11

An online calculator is also available to determine eligibility and calculate the amount of the payment for those who are not eligible for the entire $300 or $600 payments.  IRS Announcement IR 2008-44.

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From this article in the New York Times yesterday: 

Beginning next year, the federal estate tax exemption will increase to $3.5 million. This means that the tax would apply to only about 0.3 percent of people who die each year.  Not exactly the average American.

However, as part of the 2009 budget resolution, Senator Max Baucus, Democrat of Montana and chairman of the Finance Committee, has proposed to keep the tax at those levels, with annual adjustments for inflation. The proposal is expected to pass.

Under current law, the estate tax will be eliminated in 2010 for that year only.  In 2011 the exemption would drop down to $1 million. Republican senators,, however, feel that Baucus’s proposal is not sufficient. After it passes, Senator Jon Kyl, Republican of Arizona, is expected to propose further cutting the estate taxes.

The government would have to borrow to make up for the $200 billion tax loss, worsening the deficit and adding about $100 billion in interest to the nation’s tab.

The Kyl proposal needs a simple majority to pass. So if every Republican votes yes, just one Democrat would have to join them for the proposal to pass.

I personally feel that a $3.5 million exemption is quite generous, particularly given that married couples who do proper estate planning can pass double that amount to their heirs.  If persons with estates over the exemption amount don't want to pay taxes, a good estate planning attorney can certainly help!

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Tax scammers are creative - calling on telephone as well as sending emails.  Heres a liink to a recent list of scammers' ploys from the IRS.

The elderly are particularly vulnerable, so if you have an aging relative, make sure you alert them.

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For those folks who are not legally required to file federal income tax returns but want to get their tax rebates this Spring (who wouldn't?), the IRS offers free online filing.

Information about eligibility requirements.

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This from Professor Chistopher Hoyt at the UMKC Law School, with good news for S Corporation owners:

The IRS released a revenue ruling that confirmed many of our hopes  regarding charitable gifts of appreciated property by a Subchapter S corporation. Normally a shareholder's income tax deduction for an S corporation's business losses is limited to the shareholder's basis in the corporation's stock. The IRS confirmed that charitable gifts can qualify for better tax treatment. The IRS concluded that if an S corporation made a charitable contribution in 2006 or 2007 of appreciated property (such as real estate), the shareholder was entitled to claim a charitable income tax deduction that exceeded the shareholder's basis in the stock. This favorable tax treatment was a temporary measure contained in legislation that expired in 2007, but it is one of the "extender" laws (like "Charitable IRA rollover") and there is a good chance that it will be extended into 2008.

Rev. Rul. 2008-16; 2008-11 IRB 1

 

 

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The U.S. Supreme Court,  in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. ___, 128 S. Ct. 782 (2008), ruled that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2% floor for miscellaneous itemized deductions under Internal Revenue Code Section 67(a).

Later this year, the Treasury Department will issue final regulations under Reg. 1.67-4 in keeping with the Supreme Court's decision in Knight. The final regulations on bundled fees that include a portion for investment management will most likely include safe harbors or methods to calculate the portion fully deductible.

Since the final regulations will not be published prior to due dates for the 2007 returns, bundled trustee and executor's fees will be fully deductible for 2007 and prior years (tax years beginning before January 1, 2008)  IRS Notice 2008-32; 2008-11 IRB 1.
 
Notice 2008-32 does, for 2007 and prior year returns, require allocation of "readily identifiable" expenses that are subject to the 2% floor of Sec. 67.

This works to the disadvantage of trusts in which a "custodial' or "administrative" trustee is used, with relatively low trustee fees, with separate (and generally higher) fees paid to the investment advisor, who handles the investment management.  But, beginning this year, the playing field has been leveled to some degree.

Click "Continue Reading" the text of Notice 2008-32.

Continue Reading...

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The IRS has announced that it will soon propose new regulations governing 529 College Savings Plans, which will (I) contain an anti-abuse rule (to prevent using 529 Plans to skirt gift tax rules); (II) determine the estate, gift and GST tax results of contributions, transfers and withdrawals; and (III) create rules for making the 5 year election, address certain income tax issues, and create new record keeping requirements.

Here's the example the IRS gives as an abuse - quite a clever technique!:

Grandparents want to gift $1 million to a child without using any of their $1 million lifetime exclusion. So, the grandparents establish 529 Plan accounts for each of their 10 grandchildren, placing $120,000 in each (the $12,000 annual exclusion, times 2 for 2 grandparents, times 5 to use the 5 year averaging rule) times the number of grandchildren, and naming the child as the account owner. After the 5 years, the child designates a new beneficiary for each account, naming himself. Since Section 529 provides that no gift occurs if the new beneficiary is in the same family and at the same or a higher generational level, the grandparents have succeeded in giving the child $1.2 million without using any of their applicable exclusion.

The child would have to pay income tax and a penalty on any growth when withdrawals are used for non-educational expenses, but overall it would save the family a lot of tax.

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If you are of of the many Americans eligible for a tax rebate this year, and are expecting a check in May, don't procrastinate.  In order to receive a rebate, you must have already have filed your 2007 return.  So forget the extensions and get your returns done by April 15!

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Click "Continue Reading" for a concise summary of, and some commentary on, the Stimulus Bill signed into law last week by President Bush, courtesy of the GiftLaw eNewsletter.

Continue Reading...

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Family Limited Partnerships, or more commonly now, Family Limited Liability Companies, are great vehicles for management and protection of family businesses, real estate, and investments.  They also can be used to facilitate gifting, since interests in the entity given to junior family members typically qualify for minority interest and lack of marketability discounts.  These discounts can provide powerful leveraging. 

However, to stand up to IRS scrutiny, it is important the FLP or FLLC be properly formed and administered.  Click "Continue Reading" for a checklist to help determine if your family entity meets the necessary criteria.

 

Continue Reading...

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The IRS issued a warning today about new telephone and email scams.  Click "Continue Reading" to view the official notice.  In my inbox the phony IRS emails are almost as common as the emails from people in Nigeria or London or Hong Kong who want to share their found millions with me.

Continue Reading...

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The IRS recently published a notice naming four new frivolous income tax claims:

• Misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending.
• Erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States or the IRS.
• A nonexistent “Mariner’s Tax Deduction” (or the like) related to invalid deductions for meals.
• Certain instances of misuse or excessive use of the section 6421 fuels credit.

Needless to say, do not take any of these positions on your return!

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This week I'm in Orlando at the University of Miami School of Law's Heckerling Estate Planning Institute.  Yesterday there was a discussion of what may be coming down the pike as to the federal estate tax (death tax):

Date of New Legislation:  It's unlikely there will be any action until after the November 2008 election.  There are 35 seats open in the Senate, 23 of which are currently occupied by Republicans.  The democrats will probably end up with the majority.  In any event, we will probably see no movement until 2009.

Chance of Outright Repeal: No way, even if the Republicans are in charge.

Exemption Amount: The current amount exempt from federal estate taxes is $2 million, and it is scheduled to rise to $3.5 million in 2009. With a Democrat in the White house and a Democrat controlled Senate, the exemption would probably stay at $3.5 million for a number of years.  If the Republicans are in control, the exemption will most likely be increased to $5 million.  Any increases in the exemption as part of the 2009 legislation over $3.5 million per person would not be available in that year, but would instead be phased in over several years. The phase-in could be similar to what was proposed in HR 5970 in July 2006.

Rate:  We will probably see the top rate decrease from the current 45% to 35%, although very large estates may face a higher rate.

"Portability" of Exemption Between Spouses:  Very likely that the new legislation would provide that the surviving spouse could utilize both exemptions, in a manner similar to that proposed in HR 5970 and HR 5638. 

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I previously blogged that employers would be required to allow post-death non-spousal rollovers of their retirement plans to IRAs starting in 2008.  However, that did not come to pass:

This information is courtesy of attorney Phil Kavesh in California:

The IRS had previously announced that it would accept as part of the Technical Correction Bill to the Pension Protection Act of 2006 a provision that would require all corporate retirement plans to offer non-spouse beneficiaries a trustee to trustee lump sum rollover to an Inherited IRA, thereby allowing non-spouse beneficiaries to take advantage of RMD stretchout and avoid the one-year and five-year rules under most corporate retirement plans.

The Technical Corrections Bill recently passed did NOT include this provision and the IRS has decided not to move from its previous position that permitted each corporate retirement plan to decide whether or not to offer this rollover.  This development means that those with corporate retirement plans who have reached normal retirement age and can take an in-service distribution or have retired and left their money in the plan should consider rolling it out to an IRA now, so that non-spouse beneficiaries may take full advantage of RMD stretchout.  You may want to check the individual plan first, to see if it has been amended to allow the non-spouse rollover, as I anticipate that many plans will start to make this change over time.  If the plan has already made the change, a current rollover would not be necessary.  

For creditor, divorce and other protections for an inherited IRA, while still allowing the stretch, a standalone IRA/Retirement Plan Trust makes sense for most persons with retirement account values in excess of $200,000.  See my posting on IRA Trusts.

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This in information is courtesy of the NC State Giftlaw Newsletter.  Of broadest interest in probably the increase in the AMT exemption and the delay it will cause for early filers who expect refunds.

Continue Reading...

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This article discusses in brief the history of the federal estate tax and its effect on the U.S. budget. Also examined are the ways in which the economic behavior of the population affected by the estate tax has changed over time due to market, technological, and political stimuli.

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Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.

This represents a 2 cent increase for business miles, and 1 cent decrease for medical/moving.  Doesn't make sense to me to have a decrease, given gas prices!

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I often prepare Living Trusts for clients, who like the idea of avoiding the cost, time, and hassle of probate.  However, probate can only be avoided completely if there are no probate assets.  One type of asset that is often overlooked is vehicles.  If someone dies with only a $15,000 vehicle in his or her name, probate will often be required in order to transfer title. 

In the past clients have told me that when they have tried to transfer their cars to a living trust, the Division of Motor Vehicles requires them to pay the 3% highway use tax upon transfer in addition to the new title fee.

However, under North Carolina law, there should be maximum of only $40 due.  Thus, assuming you can get the folks at the local DMV office to agree, the cost of transferring a vehicle to a trust should be fairly reasonable, and certainly less than the cost of probate.

N.C. General Statutes Section 105-187.6 provides, in pertinent part (emphasis added):

(b) Partial Exemptions. – A maximum tax of forty dollars ($40.00) applies when a certificate of title is issued as the result of a transfer of a motor vehicle:

(2) To a partnership, limited liability company, corporation, trust, or other person where no gain or loss arises on the transfer of the motor vehicle under section 351 or section 721 of the Code, or because the transfer is treated under the Code as being to an entity that is not a separate entity from its owner or whose separate existence is otherwise disregarded, or to a partnership, limited liability company, or corporation by merger, conversion, or consolidation in accordance with applicable law.

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I previously blogged about the 2007 income tax deduction available to North Carolina residents to contribute to a North Carolina 529 College Savings Plan account.  A deduction of up to $2,500 is available for single taxpayers and up to $5,000 for married couples filing jointly.  Initially the deductions were subject to income limitations, but no longer.

In addition, rollovers from 529 plans in other states are considered contributions, so those taxpayers (like me) who set up accounts in another state years ago when the NC Plan was lousy, can now do a rollover to the NC Plan and take a deduction, even without making any new contributions.  Rollovers are allowed only once every 12 months.

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A veto would also kill the extension of the $100,000 IRA Charitable Rollover, which is scheduled to expire at the end of this year.  Tax expert Professor Christopher Hoyt of the University of Missouri (Kansas City) Law School is betting there will be no veto.  The following was released by Tax Analysts:

The White House November 8 threatened to veto the House's alternative
minimum tax patch and extenders package.

According to a statement of administration policy, the Bush
administration opposes the Temporary Tax Relief Act of 2007 (H.R. 3996)
because it couples an AMT patch with what it called "a tax increase on
other taxpayers."

The measure would provide a one-year patch of the AMT at a cost of
roughly $ 50 billion in 2008 and extend for one year several popular tax
breaks, including the research credit and the deduction for teachers'
classroom expenses, at a total cost of roughly $ 21 billion over 10
years, according to a Joint Committee on Taxation revenue estimate. Two
of the bill's largest offsets include provisions that would tax
nonqualified deferred compensation paid by offshore hedge funds to
investment managers and tax as ordinary income the carried interest
income of private equity partners performing investment management
services. A third large offset would implement an eight-year delay in
allowing worldwide allocation of interest expense.

The administration highlighted its opposition to tax provisions that it
warned would "undermine the competitiveness of U.S. businesses in the
global economy." The administration cautioned that lawmakers should
remove those tax provisions before passing the final bill.

The White House also said it disapproved of a provision in the bill that
would eliminate the IRS private debt collection program.

The House is expected to take up the bill November 9, but House Speaker
Nancy Pelosi, D-Calif., indicated November 8 that due to scheduling of
other bills, a vote on the package could slip into the following week,
since its timing was "not absolutely certain."

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The IRS will be offering a number of workshops for small to medium sized 501(c)(3) organizations on tax compliance issues.  The cost is a bargan - only $45!

The closest one to North Carolina will be in Columbia, South Carolina on December 4,5 and 6.  Click here for details.

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The following is from the North Carolina State University GiftLaw newsletter:

House Ways and Means Chairman Charles Rangel (D-NY) introduced this week the Tax Reduction and Reform Act of 2007 (TRRA 2007). The primary goal of TRRA 2007 is repeal of the AMT. As incomes have grown and the AMT exemptions have failed to keep pace, millions of American taxpayers are now facing a higher tax payment under AMT than under the regular income tax system. If AMT is left unchanged, millions of future taxpayers would transition from the regular income tax to the alternative minimum tax.

Because AMT was never intended to apply to middle income taxpayers, Chairman Rangel has proposed its repeal. However, under the "Paygo" rules of the Democratic Party, he must find an offset or tax increase to replace the estimated revenue loss under AMT of $831 billion over ten years. Therefore, Chairman Rangel proposes to replace the AMT with a new tax on higher-income persons. The new proposed tax is 4% on adjusted gross income over $200,000 and 4.6% on adjusted gross income over $500,000 ($250,000 for single taxpayers).

TRRA 2007 also includes a number of tax extenders and various other tax increases. Chairman Rangel recognizes that a comprehensive tax bill cannot pass this late in the legislative session and plans to hold hearings on major tax reform in early 2008.

TRRA 2007 would also extend the $100,000 IRA charitable rollover for year 2008. The unfavorable news is that the proposed surtax is on adjusted gross income and not taxable income. If a surtax were to pass on adjusted gross income, that would be a significant negative incentive for higher-income donors to make large cash gifts because they would lose part of their charitable deduction. Surtaxes previously have applied to taxable income. A surtax on taxable income is actually a charitable tax incentive, since a cash or appreciated property gift from a higher income person reduces both the income tax and the surtax.

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Beginning in 2008, retirement plans (such as 401(ks) must allow non-spouse beneficiaries to roll over to an IRA.  The following is from Ed Slott, CPA:

The Pension Protection Act of 2006 included a provision that would permit non-spouse plan beneficiaries to do direct transfers from the plan to a properly titled inherited IRA and take stretch distributions over their lifetimes instead of being subject to the harsh payout rules of most company plans. This provision became effective in 2007.

The purpose of the provision was to allow non-spouse plan beneficiaries the same ability to stretch post-death distributions over their lifetime as if they inherited from an IRA. That was the plan. But in January 2007, IRS issued Notice 2007-7 which stated that the provision was not mandatory for plans. This created confusion and controversy and took the wind out of sails of this provision. This was contrary to what Congress intended. Congress realized this and has proposed a technical correction to the law stating that the plans MUST allow the non-spouse direct rollover to an inherited IRA.

In light of the pending Congressional technical correction, IRS reversed its position and now says that the non-spouse rollover provision will be mandatory beginning in 2008. 

Click here for the posting on the IRS website.

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Here's an update from the North Carolina Department of Revenue.  There are no significant changes to the estate and gift tax rules, but clarification was made about penalties for those taxpayers who fail to report any changes in the federal estate and gift tax returns to the NC Department of Revenue.

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Maximum deferral limits for 401(k) and 457 plans remain at $15,500.  The limit for defined contribution plan increases to $46,000, while the SIMPLE limit is $10,500.  See IRS News Release IR-2007-171 for full details.

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The IRS has issued a news release warning small businesses about certain trust arrangements being sold as welfare benefit plans.  These arrangements are considered abusive  from a tax standpoint in that they provide extra benefits to the business owner or key employees.

Small business owners should not adopt such plans unless the plan has been cleared with their tax adviser.

 

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Considering a second home? Read the Vacation Home Survival Guide on forbes.com.  A couple things to keep in mind that aren't mentioned are that second home in other states can trigger probate in that state, even possibly additional estate or inheritance taxes.  Owning the home in a limited liability company (LLC) or living trust can help avoid probate, and an LLC can help protect your other assets if you rent out the home and are ever sued by a tenant.

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Estate planners love acronyms, and one of the most common when referring to a particular type of trust is QTIP, which stands for Qualified Terminable Interest Property.  A QTIP trust provides a way for someone to leave property in a trust for a spouse free of tax by way of the unlimited marital deduction, but yet control where the assets go at the death of the spouse.  The QTIP assets are included in the estate of the surviving spouse for estate tax purposes even though he or she has little or no control over them.

As you can imagine, QTIP Trusts are especially favored in second marriages where there are children from the first marriage.  This article on bankrate.com discusses estate planning in second marriages, including QTIP Trusts.  However, the article fails to mention the use of Credit-Shelter (or Bypass) Trusts, which can also provide support for the surviving spouse but are used in larger estates because the assets are sheltered from estate taxes at the death of the second spouse to die.  Also, the article seems to say that the estate tax exemption is $1 million, which is erroneous.  The federal lifetime gift tax exemption is $1 million, but the estate tax exemption is $2 million.

 

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On September 7,  the U.S. House of Representatives passed H.R. 1908, The Patent Reform Act of 2007. Section 10 of that bill prohibits patenting tax strategies. While the bill prevents future patents on tax strategies it is neutral on the validity of patents that have already been issued.

Some tax strategies have already been patented, including one dealing with funding a Grantor Retained Annuity Trust (GRAT) with stock options.  The owner of that patent actually sued someone who used the technique without obtaining permission.  Several other patents involving charitable gifting strategies have been submitted to the Patent Office - assuming the bill becomes law, those should be stopped.

This bill is good for both for taxpayers and tax professionals, preventing undue restrictions on the ability to adopt tax-saving techniques.

Click here to access the text of the bill.   The ban on tax patents appears on pages 55 through 57.

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The IRS recently announced that the total number of estate tax returns filed fell by 58 percent to about 45,000 in 2005 from about 108,000 in 2001. The total amount of assets represented by these returns also fell, although by a lesser percentage. The total gross estate (assets) on these returns fell by 14 percent to $185 billion in 2005 from $216 billion in 2001. Net estate taxes reported on these returns declined by even less, only 8 percent.  Click here for the IRS Estate Tax Facts.

With the estate tax exemption now at $2 million, I am doing fewer estate tax returns as part of my estate administration practice.  Since, strangely enough, I enjoy preparing tax returns, that's disappointing.  Death may be certain, and taxes may be certain, but death taxes are becoming a relative rarity.

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I previously blogged about former U.S. Attorney, state judge and North Carolina Republican Chairman Samuel T. Currin and attorney Rick Graves being indicated for tax fraud.  Mr. Graves was acquitted by unanimous jury verdict, but Mr. Currin plead guilty to the tax fraud charges as well as securities fraud.  Earlier this week he was sentenced to 70 months in federal prison.

Mr. Currin conspired to launder almost $1.5 million through his law firm's trust account, and failed to disclose an offshore debit card account. He also manipulated stock prices of several companies by disseminating false information, and then profited from the increased stock prices that resulted.

Chapel Hill's own John McCormick was also recently arrested in Arizona.  The former attorney, who was disbarred after his disappearance, is accused of stealing more than $1 million of his clients' money.

Finally,  former Durham D.A. Mike Nifong reported to the Durham jail to serve his one day sentence for contempt of court.

We lawyers have a hard enough time with our public image even in the absence of newsworthy cases like these.  Please rest assured that the vast majority of attorneys are law abiding, honest, and loyal to our clients.  I personally place the utmost importance on the trust of my clients, and do everything I can to maintain that trust at the highest level.  Beyond the obvious specialization in trust law, that is the reason I named my firm TrustCounsel, P.A.

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The North Carolina Long-Term Care Insurance Premium Tax Credit has been reenacted effective for the 2007 tax year through 2012.  A credit of 15% of the premium costs, up to a maximum of $350, is allowable for each policy.  The credit is restricted those under the following AGI limits:

Married filing jointly - $100,000

Head of Household - $80,000

Single - $60,000

Married filing separately - $50,000

Also, those that take a deduction as part of health care expenses on their Federal income tax return cannot take the NC LTC tax credit. 

Click "Continue Reading" for the text of the statute.

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I have gotten several email messages that supposedly originate from the IRS, promising refunds if you provide your bank account information.  Check out this announcement from the IRS about a new email scam.

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Having just ridden a motorcycle through the endless farms of Iowa on my way to and from Sturgis, South Dakota, this news item caught my attention.  Last month a bill was introduced to defer federal estate taxes on family farms as long as the land is used for farming or conservation purposes.  See this article on the Save the Family Farm and Ranch Act of 2007.

While proper estate planning, including the use of life insurance trusts and family limited liability companies, could avoid much of the impact of estate taxes on family farms, I think this bill is a good move to help protect our nation's farmers and their contributions to our food supply.

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Whoever said the IRS isn't on your side?  Click here

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A recent U.S. Tax Court case held executors liable for the penalty for the late filing estate tax return despite their attempt to blame their lawyer for the untimely return.  Decedent, a U.S. citizen domiciled in Germany, died on September 10, 1999. She had two wills - U.S. and  German. Two individuals, Roisen and Helman, were nominated as executors. They hired an attorney, who sought an extension of time for filing the estate tax return. The return was eventually filed on September 19, 2001, although the last date is could be timely filed was December 10, 2000. The IRS imposed a $233,359 penalty for late filing the return. The surviving executor argued the penalty should not be imposed because the return was late filed as a result of reasonable cause, not willful neglect. He argued that his attorney failed to advise him the return was due. The court found that the executor’s expectation that an attorney will file a return does not relieve the executor from his statutory duty to timely file the return. An executor might be excused if he reasonably relied on incorrect advice, such as no return was required, but here there was no evidence the executors even knew the filing deadline had passed, much less any evidence that they received errant advice.

Estate of Zlotowski v. Commissioner, T.C. Memo 2007-203 (July 24, 2007)

Lesson learned:  You can't always blame the lawyer!  Executors need to keep themselves informed about estate matters, including tax and other deadlines.

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While non-citizens who reside in the U.S. are subject to U.S. income tax on their worldwide income, and U.S. estate tax for worldwide assets, they do not receive the same treatment as citizens when it comes to U.S. gift and estate taxes.  Thus, when one or both spouses in a married couple are not U.S. citizens, special planning may be required to avoid adverse tax consequences for transfers during lifetime or at death.

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On June 25 the U.S. Supreme Court agreed to hear a case on whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuit Courts are in disagreement on this issue. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue.

North Carolina is in the Fourth Circuit, which has held that the fees are subject to the 2% floor.  If the Supreme Court rules the other way, it will be a big benefit for beneficiaries of North Carolina trusts.

 

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Do you have a dispute or other matter pending with the IRS and are tired of dealing with them over the phone?  There are a number of IRS offices in North Carolina

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Effective January 1, 2008, the "kiddie tax," which applies the parent's tax rate to children's unearned income over $1,700 (for 2007) will apply to dependent children under age 19 and dependent full-time college students under 24.  Prior to 2006, the tax only applied to children under 14, but it was raised to 18 in 2006.  See this article on Kiplinger.com for details and planning tips.

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Gifting property can be an effective way to spend down assets for future Medicaid eligibility and to reduce estate tax liability. Many people are not aware, however, that unless an exclusion or exemption applies, one must file federal and state tax returns on all gifts of property. Failing to file returns and paying gift tax when required can result in hefty penalties and interest.   

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Last week the North Carolina Senate produced its version of the state budget, which included:

• Reducing the state sales tax and the top income tax rate each by 1/4 percentage point, eliminating the last of a 2001 increase in both taxes. This would bring the highest income tax rate down to 8%.  The top rate only applies to those with income over $120,000 per year. The House version of the budget did not reduce either.

        - While the sales tax cut would benefit everyone, a quarter percent would not provide significant relief for anyone.  A low-income person spending $10,000 annually on items subject to sales tax would only save $25 over the course of the year!  Likewise, the cut in the income tax will not produce appreciable savings for high income earners.  For someone with taxable income of $220,000 per year, there would be a savings of just $250.  A taxpayer with income of $150,000 would pay only $75 less.  Not that I'm complaining....

• No state version of the federal Earned Income Tax Credit and no funds to help counties pay their share of rising Medicaid costs. The House version did both.

 

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North Carolina is not known for its attractive estate planning and asset protection laws, but NC residents can avail themselves of certain out-of-state planning strategies that can provide significant estate tax savings and creditor protection.  One state that has some of the most favorable laws is Nevada.

As a write this, I'm sitting in a hotel room in Las Vegas, having just finished up a meeting with nationally known estate planning and asset protection attorney Steve Oshins, whose office is located here.  Mr. Oshins, who is published frequently in Trust & Estates magazine and Estate Planning magazine, has developed several innovative trusts and trust-related strategies, such as the Megatrust, the Inheritors Trust and the Opportunity Shifting Trust. 

I have joined Mr. Oshins' Advanced Planning Legal Network to be able to bring these same types of techniques to my clients.

Click  "Continue Reading" for a brief description of the advantages of using Nevada laws for estate planning.

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