Posted on May 1, 2013 by Greg Herman-Giddens
Why would an individual renounce or disclaim an inheritance in North Carolina? An inheritance may not always be expected and it may not be desirable for the beneficiary. Certain assets, like real estate or personal items, may require complicated or expensive maintenance that the beneficiary does not want to manage. An inheritance may also come with a heavy tax burden. For senior citizens, an inheritance could affect their eligibility for Medicaid benefits. Instead, a beneficiary may want another family member to receive their inheritance.
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Posted on April 22, 2013 by Greg Herman-Giddens
Family members have the best intentions when they offer money to cover college expenses, but if they neglect to use a wise gifting strategy they could affect the student’s eligibility for federal aid. With hundreds of higher education institutions, state and private universities in North Carolina, students have no shortage of options. However, the cost of college can range from several thousand to over $45,000 per year.
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Posted on January 27, 2013 by Greg Herman-Giddens
As North Carolina business owners and other taxpayers adjust to the effects of the 2012 American Tax Payer Relief Act, they are starting to focus on asset protection strategies at the same time as minimizing taxes to the fullest extent possible.
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Posted on January 11, 2013 by Greg Herman-Giddens
Just over a week since tax legislation changes were made in the last-minute fiscal cliff deal, the Internal Revenue Service has confirmed the 2013 applicable exclusion amount (gift and estate tax exemption) will be $5.25 million.
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Posted on December 22, 2012 by Greg Herman-Giddens
Congress has failed to avert the fiscal cliff. We have only nine days until the estate tax exemption drops to $1 million (and the rate goes up to 55%). Not to mention the income tax increases.
To make matters worse, the IRS's online site for applying for tax identification numbers (EINs) will be unavailable from 4:00 pm. on December 27th through the rest of the year. This will hamper last minute planning efforts that require EINs, such as trusts and LLCs, and bank and brokerage accounts for same.
If you still want to take advantage of the $5.12 gift and estate tax exemption - now there's even more reason to act before it's too late.
Merry Christmas to all!
Posted on December 21, 2012 by Greg Herman-Giddens
Although this is the North Carolina Estate Planning Blog, much of what I blog about applies to folks all over the country. Since I am licensed in Tennessee and have clients there, I thought it was appropriate to report on these important changes in Tennessee transfer tax.
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Posted on December 15, 2012 by Greg Herman-Giddens
Estate Planning attorneys all across the country are frantically working to help their clients utilize the $5.12 million gift and estate tax exemption before it disappears at year end. Most people are making gifts to irrevocable trusts that will save taxes and provide creditor protection for generations of descendants.
We have only two weeks left, with Christmas intervening, but all is not lost. For those who want to provide a meaningful legacy this holiday season, we can still help. As my colleague Steve Oshins in Las Vegas suggested, here is the way last minute planning can be accomplished:
1. Set up a simple one-page gift trust with just the essential terms so you have a valid trust under state law.
2. Give the settlor’s best friend (or attorney/CPA) as Trust Protector the power to completely amend and restate the trust (maybe for a selected period of time like three months) in the Trust Protector’s sole and absolute discretion.
3. Get the trust fully executed and funded with the $5MM gift before year-end.
4. Reconvene in 2013 and have the Trust Protector restate the trust with regular provisions. The settlor can make recommendations, but it clearly must be done in the sole and absolute discretion of the Trust Protector to avoid IRC 2038 (estate tax inclusion).
So, if you are one of the tardy ones, don't despair. Email me early next week and let's get this done.
Greg Herman-Giddens - ghgiddens@trustcounselpa.com
Posted on December 11, 2012 by Greg Herman-Giddens
Ben Franklin said that the only two certainties in life were death and taxes. Tax exemptions and rates, however, are subject to change, and unless Congress acts soon, taxes are going up significantly next year.
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Posted on November 21, 2012 by Greg Herman-Giddens
A recent press briefing with Press Secretary Jay Carney touched on tax issues that will affect every American in 2013. Right now, Americans are ill-prepared for the approaching drop off the “fiscal cliff.” As tax cuts are about to expire in the New Year, how will individuals be affected?
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Posted on November 20, 2012 by Greg Herman-Giddens
When administering an estate, determining the date of death values of the decedent’s assets is essential. Filing federal and state estate tax returns and paying any taxes due can only be done when the value of all the decedent’s property is known. In addition, the date of death values establish the new cost basis for capital assets. Delays in probate may stem from valuation complications since the methods to determine date of death values is different for each asset.
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Posted on October 18, 2012 by Greg Herman-Giddens
In Rev. Proc. 2012-41, the IRS has announced various inflation-adjusted tax figures for 2013. Among them:
- The annual gift tax exclusion will be $14,000 (for gifts of a present interest to any person).
- The annual gift tax exclusion for gifts to a non-citizen spouse will be $143,000 (for gifts of a present interest).
Also, in IR 2012-77, the 2013 retirement account contribution limits were released. For 401(k) and 403(b) plans, the limit will be $17,500.
Posted on September 7, 2012 by Greg Herman-Giddens
The IRS charges hefty penalties for failure to timely pay taxes. Just like with the failure to file penalties, the failure to file penalty is 5% per month, with a maximum of 25%. Interest is also charged.
For those who need to pay taxes at the last minute, or simply like the convenience of paying online or by phone, the IRS offers The Electronic Federal Tax Payment System (EFTPS). In addition to income tax, gift and estate taxes can also be paid through EFTPS. This year only gifts and estates in excess of $5.12 million may incur taxes, but next year that amount is schedule to drop to $1,000,000.
Posted on May 9, 2012 by Greg Herman-Giddens
Yesterday I blogged about North Carolina's controversial Amendment One, which ended up passing by a large margin. I also have some thoughts about another matter in the headlines - the John Edwards trial. I have not been following the case closely, but I do know that central to the case is the money received in 2007 from wealthy donors Fred Baron and Bunny Mellon, Edward's knowledge of the donations, and whether they constituted campaign funds or simply gifts. Edwards former speechwriter Wendy Button testified that Edwards told her that the money was legal because the donors had paid gift taxes.
However, the matter of the gift taxes is not so simple. In 2007, the federal gift tax exemption was $2 million, meaning the Baron and Mellon could have each given someone that amount without paying any tax, provided they had not previously used up the exemption. In any event, a federal gift tax return would be required to report the gift to the donees since it exceeded $12,000 per person. But exactly who were the donees? John Edwards? He certainly benefited from the gifts, since they helped hide Hunter's pregnancy, even if he didn't receive anything himself. Rielle Hunter was certainly a donee, as she received. at least, free rent and a BMW. Andrew and Cheri Young? They apparently kept most of the money to build themselves a house.
So, if Baron and Mellon filed gift tax returns as required, whom did they list as donees? Somehow I doubt the correct names and amount were on the returns. Were the returns later amended to correct the information?
And what about subsequent gifts of the same money? Did Edwards effectively make a gift to Hunter? To the Youngs? Was there a gift from the Youngs to Hunter? Any such gifts in excess of $12,000 would also required to be reported, and the estate tax exemption of the donors would be reduced by the amount of the gifts..
Edwards and anyone else considered to be a North Carolina resident would also be required to report the gift to the North Carolina Department of Revenue, as North Carolina still had a gift tax in 2007 and 2008. In fact, North Carolina's lifetime exemption was just $100,000, and that only applied to close relatives. That means North Carolina gift tax would have been due.
Only a tax lawyer would think about such things - but, the tax laws are laws too, and they should be enforced. I would like to see how this would all unravel if the IRS and NCDOR conducted audits of those involved.
Posted on October 21, 2011 by Greg Herman-Giddens
The IRS has begun checking land records in certain states, including North Carolina, to compare uncompensated, mainly intra-family gifts of real property to filed gift tax returns. Generally, gifts of any property over the $13,000 annual exclusion (up from $10,000 a few years ago) must be reported on a federal gift tax return for the year. See this recent Forbes article.
I encounter situations frequently where no gift tax returns where filed for gifts of real estate. Real estate lawyers who draft the deeds often do not advise clients on the tax consequences of the gift. Before ANY gift of real estate, persons should consult with tax counsel. There are also income (capital gains) tax issues to consider
If you have made any such transfers in the past, see a CPA or tax attorney immediately about filing the overdue returns. For North Carolina real property, gifts prior to 2009 must be reported on a North Carolina gift tax return as well, and any applicable tax paid.
Posted on October 20, 2011 by Greg Herman-Giddens
The IRS announced today that the amount exemption from estate taxes will increase next year. For an estate of any decedent dying during calendar year 2012, the basic exclusion from estate tax amount will be $5,120,000, up from $5,000,000 in 2011.
For Special Use Valuation for qualified real property, the aggregate decrease in the value of the property resulting from the election cannot exceed $1,040,000, up from $1,020,000 for 2011.
The annual exclusion for gifts will remain at $13,000.
IR-2011-104, which also lists income tax benefit increases - exemptions, standard deductions, tax brackets, etc. See also Revenue Procedure RP-2011-52.
Posted on June 29, 2011 by Greg Herman-Giddens
A June 22, 2011article on Trusts and Estates magazine's website contains a nice summary of President Obama's budget proposal measures effecting estate planning. However, with Republican control in Congress and the possibility of a Republican President being elected next year, there is no certainty that any of the changes will actually take effect. Obama already agreed to the temporary increase of the estate tax exemption to $5 million and reduction of the rate to 35% through the end of 2012, and there has been recent discussion in Congress of continuing the law beyond next year.
Posted on February 17, 2011 by Greg Herman-Giddens
Thanks to Keebler and Associates, LLP, CPAs for portions of this summary:
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Limit the tax rate that certain individuals will get a benefit for their itemized deductions - For investors filing joint returns and having income over $250,000 itemized deductions would only reduce the investor’s tax liability by a maximum of 28%. For those investors who purchase securities on margin this limitation could be very costly. Short-term capital gains and interest income would be taxed at a rate of 35% yet the interest expense would only receive a 28% benefit. If an investor earned $100,000 of interest income and incurred $100,000 of margin interest expense, while the investor would have broken even on a pre-tax basis, he would be liable for $7,000 in tax.
Require a minimum 10 year term for grantor retained annuity trusts (“GRATs”) – Currently, investors are able to contribute property to a trust and retain an annuity interest in the trust. Any excess may be left to anyone the investor desires. The present value of the annuity is subtracted from the contributed amount, and any excess is treated as a gift to the beneficiaries of the trust. The Treasury publishes a discount rate to be used to determine the present value of the annuity. Many investors retain an annuity whose present value equals the fair market value of the property contributed to the trust. In such case, no gift tax is due, and if the trust can earn a rate of return higher than the discount rate, such excess is passed on to the beneficiaries free of gift or estate tax. However, if the grantor dies during the term of the trust, the assets in the trust are included in the grantor’s estate. In order to mitigate that possibility, many of these trusts are set up as two to three year vehicles. The proposal would be to set a minimum term of 10 years for any GRATs established after the date of enactment of the law.
Require ordinary treatment of income from activities for dealers of equity options and commodities – Under current law dealers of equity options, commodities and commodities derivatives treat their income from their dealer activities in Sec. 1256 contracts as 60% long-term and 40% short-term capital gains/losses. Dealers in other types of securities treat all of their income from dealer activities as ordinary income. The proposal would require such dealers to treat all of their income from such securities as ordinary.
Tax carried interests in certain partnerships as ordinary income – Under current law, the character of income flows from a partnership to its partners. Some partners receive their partnership interests in exchange for services rendered to the partnership. Such interests typically give the partner the right to receive a share of future income from the partnership. At the time the interest is received, the partner would not be entitled to any proceeds if the partnership were liquidated, so there is no taxable income at the time the interest is received. In the future, the partners’ character of the income received from the partnership interest retains the same character that the partnership received. In many cases such income may be either qualified dividends or long term-capital gains, which are taxed at a maximum rate of 15%. The proposal would treat the income on a partnership interest that was not acquired for cash or property as ordinary income, if the partnership is an investment partnership. Gains upon the disposition of such an interest would also be treated as ordinary income. A partnership would be an investment partnership if the majority of its assets are investment type assets, such as securities, real estate, commodities, interests in partnerships, cash or cash equivalents.
Modify rules on valuation discounts – Based on judicial decisions and statutes enacted in many states, valuation discounts are allowed in determining the fair market value of property subject to gift and estate tax even though current tax law states that interests transferred intra-family should not be discounted for “applicable restrictions”. The proposal would grant the Treasury the authority to write regulations that would define a category of “disregarded restrictions” that would be ignored in valuing property for estate and gift tax purposes.
Require accrual of income from the forward sale of stock by a corporation – Under IRC Section 1032 a corporation does not recognize income or loss from purchases and sales in its own stock. This rule applies when a corporation enters into a contract to issue shares in the future for a sum certain. However, if the corporation issued shares currently and received payment for those shares in the future, a portion of the payment would be treated as taxable interest income. The proposal would impute interest income on the transaction in which the shares are issued in the future. While there are real differences between the two transactions in that there are new shareholders at the time the shares are issued, the Administration believes that the two are economically equivalent and should receive the same tax treatment.
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Limit Generation-Skipping Transfer Tax Exemption to 90 Years - GST tax exemption (currently up to $5 million) allocated to trusts would last for only 90 years, after which it would expire. This would mean that distributions from the trust after that time would be subject to the 35% GST tax.
Since many states have eliminated or lengthened the rule against perpetuities that limited the time trusts could be in existence, this provision would have a substantial effect on trust creation and administration, severely limiting the use of dynasty trusts.
Make Permanent Portability of Estate Tax Exemption Between Spouses - For 2011 and 2012, a surviving spouse make make use of the predeceased spouse's unused $5 million estate tax exemption. The proposal would make this permanent.
Click here for the Green Book that contains explanations for the proposals.
Posted on February 4, 2011 by Greg Herman-Giddens
Since the enactment of TRA 2010 in December of last year, tax practitioners have been concerned that gifts made during 2011 and 2012 may, partially because of the way in which the current Federal Estate and Generation-Skipping Transfer Tax Return (Form 706) is worded, be subject to an estate tax for decedents dying in years after 2012 if the federal estate tax exemption is reduced at that time. This is generally referred to as the "claw back" scenario.
The February 2, 2011 AALU Bulletin article on this subject indicates that taxpayers should not hesitate to take advantage of the $5 million gift and generation-skipping transfer tax exemptions available this year and next and should not be concerned that such gifts will be subject to a claw back in later years:
"What is reasonably clear is that Congress did not intend that gifts made during 2011 and 2012 would be subject to an additional estate tax in 2013 and thereafter. Furthermore, it is likely that some type of administrative or legislative relief will be forthcoming assuming that an unintended “glitch” does exist. This relief may be as simple as revising the Form 706."
Posted on December 17, 2010 by Greg Herman-Giddens
This afternoon, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation, negotiated by the White House and select members of the House and Senate, provides for a short-term extension of tax cuts made in 2001. It also addresses the Alternative Minimum Tax (AMT) and Estate, Gift and Generation-skipping Transfer taxes.
HIGHLIGHTS
Two-year extension of all current tax rates through 2012
- Rates remain 10, 25, 28, 33, and 35 percent
- 2-year extension of reduced 0 or 15 percent rate for capital gains & dividends
- 2-year continued repeal of Personal Exemption Phase-out (PEP) & itemized deduction limitation (Pease)
Temporary modification of Estate, Gift and Generation-Skipping Transfer Tax for 2010, 2011, 2012
- Reunification of estate and gift taxes
- 35% top rate and $5 million exemption for estate, gift and GST
- Alternatively, taxpayer may choose modified carryover basis for 2010
- Unused exemption may be transferred to spouse
- Exemption amount indexed for inflation in 2012
AMT Patch for 2010 and 2011
- Increases the exemption amounts for 2010 to $47,450 ($72,450 married filing jointly) and for 2011 to $48,450 ($74,450 married filing jointly). It also allows the nonrefundable personal credits against the AMT.
Extension of “tax extenders” for 2010 and 2011, including:
- Tax-free distributions of up to $100,000 from individual retirement plans for charitable purposes
- Above-the-line deduction for qualified tuition and related expenses
- Expanded Coverdell Accounts and definition of education expenses
- American Opportunity Tax Credit for tuition expenses of up to $2,500
- Deduction of state and local general sales taxes
- 30-percent credit for energy-efficiency improvements to the home (IRC section 25C)
- Exclusion of qualified small business capital gains (IRC§1202)
Temporary Employee Payroll Tax Cut
- Provides a payroll tax holiday during 2011 of two percentage points. Employees will pay only 4.2 percent on wages and self-employed individuals will pay only 10.4 percent on self-employment income up to $106,800.
Source: Financial Planning Association
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Posted on December 10, 2010 by Greg Herman-Giddens
The Senate Finance Committee has produced a summary of the Reid Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which extends the Bush tax cuts for two years. Here's what the proposal says regarding estate, gift and generation-skipping transfer taxes:
Temporary estate, gift and generation skipping transfer tax relief. The EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010. The proposal sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The proposal sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The proposal is effective for estates of decedents dying after December 31, 2010.
Reunification. Prior to the EGTRRA, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The EGTRRA decoupled these systems. The proposal reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.
Note: under the portability heading, the reference to the current $7 million exemption per couple is erroneous, as there is no estate tax this year. The estate tax exemption was $3.5 million per person in 2009.
Posted on December 3, 2010 by Greg Herman-Giddens
The legislative text and summary of the Middle Class Tax Cut Act of 2010, released yesterday by Senate Finance Committee Chairman Max Baucus (D-Mont.), is now available at the Finance Committee’s website at http://finance.senate.gov/legislation/. A summary of some of the estate tax provisions is set out below.
Permanent estate, gift and generation skipping transfer tax relief. EGTRRA phased-out the estate and generation-skipping transfer taxes so that they were fully repealed in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million for 2010.
The proposal reinstates the 2009 law for the estate, gift, and generation skipping transfer taxes permanently, setting the exemption at $3.5 million per person and $7 million per couple and a top tax rate of 45 percent. The exemption amount is indexed beginning in 2011. The proposal is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before the date of introduction. The proposal is effective upon date of introduction for gift and generation skipping transfer taxes.
Portability of unused exemption. Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The proposal allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning.
Deferral of estate tax for farmland. The proposal allows taxpayers to defer the payment of estate taxes on farmland of a family farm until the farmland is sold or transferred outside the family or ceases to be used for farming. The proposal also increases the valuation adjustment for donations of a conservation easement.
Increase of special use revaluation amount. The proposal increases the amount of the revaluation to the exemption amount, allowing up to a $3.5 million adjustment.
Minimum 10-year term for grantor retained annuity trusts (GRATs). The proposal requires that GRATs be set up for a minimum 10-year term. The proposal applies to transfers for which returns are filed after the date of enactment.
Basis for estate and income taxes. The proposal clarifies that the basis of property in the hands of the heir is the same as its value for estate and gift tax purposes. The proposal also requires the executor or donor to report the value to the IRS and heir. The proposal applies to transfers for which returns are filed after the date of enactment.
Thanks to Robert Keebler, CPA for this summary.
Posted on February 3, 2010 by Greg Herman-Giddens
Based on what appeared to be a giant "loophole" in the gift tax law applying to gifts made in 2010, taxpayers could arguably make gifts to a wholly-owned grantor trust free from gift tax. Last week at the Heckerling Estate Planning Institute, commentators said this was too good to be true, and opined that the IRS would soon close the loophole. No sooner said than done:
Yesterday the IRS published Notice 2010-19, which applies to taxpayers making gifts in trust during 2010. Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property. To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.
Posted on January 9, 2010 by Greg Herman-Giddens
This is from Steve Akers' recent presentation, Estate Planning in Light of One-Year 'Repeal' of Estate and GST Tax in 2010:
"the Administration proposes to dramatically change the rules regarding valuation discounts (emphasis added). If there is an estate and gift tax reform package adopted next year, it could include that provision. If there is no legislation, there are indications that the IRS will issue regulations under §2704 that would place significant restrictions on valuation discounts on entities that are valued on the basis of their liquidation value (such as family limited partnerships holding marketable securities or other assets other than operating businesses.) Therefore, to have a chance to take advantage of the lower 35% rates in 2010 and to avoid the coming restrictions on valuation discounts, clients should consider make desired gifts and sales as early in the year as possible (Emphasis added).
Since the estate tax is sure to return, I am advising clients for whom a family limited liability company makes sense to form it now, and if possible use their $1 million lifetime gift tax exemption now to take advantage of discounting before it is legislated away.
Posted on November 19, 2009 by Greg Herman-Giddens
Many people are aware that they can give any number of other people up to $13,000 per year under the federal gift tax annual exclusion (IRC Section 2503(b)). Staying under this number means that no gift tax return has to be filed and that there will be no reduction in the amount that can be passed free of estate taxes at the donor's death.
However, writing gift checks to children, grandchildren or others at the end of the year can cause the donee lose the benefit of the annual exclusion unless:
- The check was paid by the drawee bank when first presented for payment;
- The donor was alive when the check was paid by the drawee bank;
- The donor intended to make a gift and delivery of the check was unconditional; and
- The check was deposited, cashed or presented in the year for which completed gift treatment is sought and within a reasonable time after issuance.
Bottom line: make sure your donee deposits the check no later than the last business day of the year.
Example: Bob gives his $13,000 gift check to his granddaughter Lucy on Christmas Day, 2009. Lucy deposits the check in her bank on December 31, 2009. The check is paid by the drawee bank on January 7, 2010. This would be completed gift for Bob in 2009.
Posted on August 26, 2009 by Greg Herman-Giddens
Unlike in the income tax and asset protection arena, single member limited liability companies (LLCs) are not disregarded for gift tax purposes. Pierre v. Commissioner, 133 T.C. No. 2 (Aug. 24, 2009). See Paul Caron's recent TaxProf Blog entry for a brief summary.
Posted on August 2, 2009 by Greg Herman-Giddens
This is from the latest edition of the GiftLaw eNewsletter:
Note from Greg: Family Limited Partnerships (FLPs) were previously the preferred entity for obtaining discounts on transfers of wealth to younger family members. FLPs have largely been replaced by Family Limited Liability Companies (FLLCs). The writer of the article below often refers to FLPs even though the case involved FLLCs.
Indirect Gifts through FLP Trigger $1 Million Gift Tax
In David E. Heckerman et ux.v.United States; No. 2:08-cv-00211 (27 Jul 2009), the District Court determined that gifts of cash to an FLP together with gifts of FLP interests were indirect gifts valued at fair market value.
On November 28, 2001, David and Susan Heckerman created trusts for each of their two children, then ages five and two. They also created the Heckerman Family LLC and two solely-owned LLCs, Heckerman Investments LLC and Heckerman Real Estate LLC. Heckerman Investments LLC was designed to receive liquid securities and Heckerman Real Estate LLC was designed to hold realty.
On December 28, 2001, David and Susan Heckerman transferred a $2.05 million beach house in Malibu, California to Family LLC, with an immediate quitclaim deed to Real Estate LLC. On January 11, 2002, they transferred $2.85 million in mutual funds to Investments LLC and signed gift documents "effective on January 11, 2002" to transfer the majority of Family LLC units to the children's trusts.
Appraiser Mark Wellington of Private Valuations, Inc. completed an appraisal of the value of Family LLC units gifted to the children's trusts. He determined that the transfers would be subject to a 58% discount for lack of marketability. Therefore, both David and Susan had transferred a gift value of $1,022,000. Using their four annual exclusions (two parents times two children) and two $1 million gift exemptions, there was no gift tax payable.
The IRS audited the return, claimed that the securities transfer was an indirect gift and assessed gift tax of $511,497.56 for each donor. The Heckermans paid the gift tax and filed for a refund.
The IRS contended that under Reg. 25.2511-1(a), "whether the gift is direct or indirect," there is a transfer. Because the transfer to the FLP was completed on the same date as the gift of the units and there was no clear evidence that the transfer of the FLP units was after the funding of the FLP, the IRS claimed that this was an indirect gift. The IRS also claimed a step transaction.
The court supported both positions by the IRS. First, the gifts of FLP interests were apparently not signed until after January 11, 2002, but were "effective as of January 11, 2002." Therefore, the transfer process created an indirect gift on the theory that the children's trusts owned the FLP units when the cash was transferred.
In addition, following the rationale of Senda v. Commissioner, 433 F.3d 1044 (8th Cir. 2006), there was a "step transaction" that also created the indirect gift. Because the transfer of $2.85 million in cash to Investments LLC and the gifts of the LLC units were an "integrated transaction," the step transaction doctrine applied.
Editor's Note: It is significant that the IRS did not object to the FLP discounts for the transfer of the real estate on December 28, 2001 and gift of FLP units two weeks later on Jan. 11, 2002. With even a period of two weeks between the funding and the FLP unit gifts, the transfer was effective in producing a substantial FLP discount.
Posted on July 11, 2009 by Greg Herman-Giddens
Loans among family members, especially from parents to children, are very common. However, most people are not aware of the tax laws regarding such loans. With certain exceptions, if you make an interest free to loan to a family member (or friend, for that matter), the IRS will impute the interest income to you, meaning that you are required to pay tax on a certain amount of interest, even though you never received it. Here are the basics:
- Loans of $10,000 or less. No interest income will be imputed provided that the borrower does not use the money for income-producing investments.
- Loans of $100,000 or less. No imputed interest income provided that the borrower has less than $1,000 of total net investment income each year.
- Other loans. Make sure you charge (at least) the Applicable Federal Rate in place in the month during which the loan is made. These rates, set by the government, change monthly and depend on the length of the loan [(1) up to 3 years, (2) 3 to 9 years, and (3) over 9 years)].
- Promissory Note. Make sure you properly document the loan, with interest rate, payment terms and length of loan. Otherwise the IRS may treat it as a gift, which would require a filing a gift tax return and possible payment of gift tax. It also can help avoid family disputes in the event of the death of one of the parties to the loan.
- Deed of Trust/Mortgage. To secure the payment of the loan by the borrower's personal residence, the borrower can sign a deed of trust, which is then filed in the county Register of Deeds. The borrower can then deduct the interest payments for income tax purposes.
- See a Lawyer. To ensure that you don't run afoul of tax laws and otherwise protect yourself, consult with a tax lawyer, and have him or her prepare the necessary documents.
Posted on June 1, 2009 by Greg Herman-Giddens
In the recent case of Estate of Valeria M. Miller v. Commissioner; T.C. Memo. 2009-119; No. 5207-07 (27 May 2009), the U.S. Tax Court allowed a 35% discount for gifts of family limited partnership interests. No discount was permitted for the FLP interest owned by the decedent at her death.
This case shows that a properly planned and executed family limited partnership or limited liability company is still a very effective way to pass on wealth to younger generations. However, Obama's tax proposals would do away with such discounts in most cases.
Click here for a summary and the full text of the case, thanks to NC State's GiftLaw eNewsletter.
Posted on February 5, 2009 by Greg Herman-Giddens
The U.S. Tax Court issued an opinion on January 29, 2009 in the Estate of Marjorie deGreeff Litchfield v. Commissioner (T.C. Memo. 2009-21). The case involved the determination of appropriate (estate tax) discounts for built-in capital gains tax liabilities, and lack of control and lack of marketability for minority interests in two closely held family corporations, including one that had recently converted to a subchapter S corporation. The court allowed a discount of 91% for the built-in capital gains tax for the C corporation, and 52% for the S corporation. The minority interest (lack of control) discount was determined to be 14.8% for the C corporation and 11.9% for the S corporation. The lack of marketability discounts were established at 25% and 20%, respectively, for the two entities. The FMV Valuation Alert offers a nice summary.
This case involved farmland and marketable securities. Discounts for transfers of entities owning marketable securities and cash will be history if HR 436, the Certain Estate Tax Relief Act of 2009, passes.
Posted on December 21, 2008 by Greg Herman-Giddens
What is an LLC?
In 1977 Wyoming was the first state to enact laws permitting the creation of a Limited Liability Company. An LLC combines the best features of a corporation with the best features of a partnership. Among other things, an LLC has the limited liability of a corporation and the ease of management and flow-through income tax treatment of a partnership.
In 2000, Wyoming again led the nation by enacting its Close LLC statute. This type of LLC is designed specifically for a small closely held family business. Family assets (such as stocks, bonds, farms, ranches, rental property, CDs and family businesses) can be managed under the protective umbrella of a Wyoming Close LLC.
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Posted on October 16, 2008 by Greg Herman-Giddens
The IRS has announced many annual inflation adjustments for 2009, including an increase in the annual gift exclusion.
The annual gift tax exclusion for present interest gifts will be $13,000.
The annual exclusion for present interest gifts to a non-citizen spouse will be $133,000.
As I previously reported, North Carolina will no longer have a gift tax starting in 2009.
Click "Continue Reading" for the full text of Revenue Procedure 2008-66.
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Posted on August 19, 2008 by Greg Herman-Giddens
The IRS recently published a report on lifetime wealth transfers in 2005 as disclosed to the IRS on federal gift tax returns. The statistics are interesting to review - for tax and estate planning nerds, anyway. The report also contains a history of the federal gift tax. In 1924 the annual exclusion was only $500!
Posted on July 17, 2008 by Greg Herman-Giddens
In what comes as a surprise to me, based on the last news as reported in my postings in the last week or so, yesterday Governor Easley signed
HB2436, which includes (page 201) a complete repeal of the North Carolina Gift Tax (Article 6 of Chapter 105 of General Statutes), effective January 1, 2009.
This will certainly make estate tax planning and Medicaid planning easier (and less expensive, in some cases) for North Carolinians. I personally will miss the NC gift tax, since I enjoyed advising people about its peculiarities as compared to the federal gift tax. After all, it it weren't for taxes, my job would be much less interesting!
Posted on July 4, 2008 by Greg Herman-Giddens
Yesterday the North Carolina General Assembly reached an agreement on the budget, but it did not include a repeal of the gift tax in 2009. Instead, the repeal was put off until 2010. However, given the state of the economy and continuing budget woes, I for one won't count on repeal until it actually takes place.
Most North Carolina residents and even many attorneys aren't even aware of the NC gift tax. In my practice I have learned of many, many gifts that have been made over the years and not reported as required.
If the General Assembly ultimately decides to keep the gift tax, I believe they should provide funds to the Department of Revenue to hire me as a consultant! I have a few ideas that would result in a marked increase in tax collected.
Posted on July 3, 2008 by Greg Herman-Giddens
My last entry was about SB1756, which includes a complete repeal of the North Carolina gift tax. However, Governor Easley and others have been strongly urging the General Assembly to delete the repeal provisions.
If you would like to see the gift tax repealed, please email or call the office of your legislators and ask them to support repeal of the gift tax, effective 1/1/09. Go to
www.ncleg.net and look under House Finance committee for names and email addresses of finance committee chairs.
Posted on June 27, 2008 by Greg Herman-Giddens
Budget negotiators for the North Carolina House and Senate agreed on tax breaks in the 2008-09 spending plan, which include, most notably for me and many of my clients, a repeal of the state gift tax. North Carolina is one of only four states with a gift tax. The others are Tennessee, Connecticut and Louisiana.
Posted on May 11, 2008 by Greg Herman-Giddens
As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was pleased 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.
Posted on April 4, 2008 by Greg Herman-Giddens
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:
- Dynasty Trusts (page 33) - take action now to create or fully fund Dynasty Trusts.
- 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.
- 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.
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Posted on March 31, 2008 by Greg Herman-Giddens
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.
Posted on March 1, 2008 by Greg Herman-Giddens
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.
Posted on February 9, 2008 by Greg Herman-Giddens
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.
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Posted on July 4, 2007 by Greg Herman-Giddens
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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Posted on June 8, 2007 by Greg Herman-Giddens
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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Posted on February 19, 2007 by Greg Herman-Giddens
On February 15, 2007, bill H235 was introduced in the North Carolina General Assembly to reform the North Carolina gift tax so that it would be based on the federal gift tax. Under the proposed legislation, NC gift tax would only be due if federal gift tax is due. The change would be effective January 1, 2007. Click "Continue Reading" to see the text of the bill.
Under current law, North Carolina allows the same $12,000 annual exclusions as the federal system, but rather than a $1 million lifetime exemption, there is only a $100,000 lifetime exemption, which applies only to ancestors and descendants.
The NC gift tax catches many residents (and even professional advisors) unaware, and many gifts are never reported, mainly because of ignorance of law, so the reform is probably a good idea. I'm not sure how much tax revenue would be lost.
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Posted on October 8, 2006 by Greg Herman-Giddens
I recently had a client come in who had made a gift of over $120,000 to her brother several years ago, using funds that had originally come from their mother. She used the mother's accountant in Florida to prepare her gift tax return. The accountant, apparently unaware that North Carolina had a gift tax, failed to prepare an NC gift tax return or advise her about the tax.
The North Carolina Department of Revenue, by checking the federal gift tax returns filed by NC residents, became aware of the federal return and contacted my client. She now faces penalties and interest in addition to the tax due.
North Carolina allows the same $12,000 annual exclusions as the federal system, but rather than a $1 million lifetime exemption, there is only a $100,000 lifetime exemption, which applies only to ancestors and descendants.
I have seen other clients incur unexpected tax liability when their advisers were ignorant of NC gift tax laws. If you are considering make any large gifts, make sure you seek qualified tax counsel so that you don't have any unpleasant surprises down the road. The taxman will cometh!
