North Carolina Estate Planning Blog

IRS Publishes Report on 2005 Gifts

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Tue, 19 Aug 2008 12:14:27 -0500

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!

Burke County, NC One of America's Fastest-Aging Counties

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Sun, 17 Aug 2008 15:15:56 -0500

Burke County, in the foothills of the Blue Ridge Mountains, is one of the fastest-aging counties in the country, according a recent article in Forbes. Morganton, Burke County's largest city, is a pleasant enough place, but apparently young people are moving out, and few are moving in, as the general population grew only .03% in the last five years. The 65 and over population grew by nearly 7% during the same time period, so the old folks are staying put. Query if Burke County has become a senior destination, like Chatham County.

Change to NC Estate Tax for Out--of-State Property

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Thu, 14 Aug 2008 16:49:48 -0500

I'm back from vacation, furiously trying to catch up on things (as if!), but thought I would quickly add this tidbit from the NC Department of Revenue. It only applies to returns of NC residents who owned real estate in one or more other states, and generally results in a reduced amount of tax.

The change became effective July 16, 2008, but amended returns can be filed for any returns for which the time to claim a refund had not expired as of December 31, 2007.

The recent session of the 2007 General Assembly enacted House Bill 2436 which modifies the formula for calculating the North Carolina estate tax when the decedent was a North Carolina resident at the time of death and the estate had property in more than one state.

For estates with property only in North Carolina, the North Carolina estate tax is the amount of the credit for state estate tax that, as of December 31, 2001, would have been allowed for federal estate tax purposes. If an estate has property in more than one state, the federal credit amount must be prorated between North Carolina and the other states in which the estate has property. Prior to the enactment of House Bill 2436, the amount of the 2001 credit was reduced by the lesser of the amount of the estate tax paid to the other state or the amount of the 2001 credit multiplied by a fraction, the numerator of which was the value of the property located out of state and the denominator of which was the value of the gross estate.

A complaint was filed in Superior Court of Mecklenburg County on December 28, 2007, captioned Stowe v. Department of Revenue, alleging that this formula was unconstitutional because it provided less than a full reduction of the tax attributable to the out-of-state property when the other state does not impose an estate tax or imposes an estate tax less than the prorated federal credit amount.

Under the new law, the "lesser of" language is removed and the amount of the North Carolina estate tax imposed is reduced solely by the ratio. The law became effective July 16, 2008, and applies retroactively to the estates of decedents for which the statute of limitations for claiming a refund had not expired as of December 28, 2007.

Estates affected retroactively by this change may file an amended estate tax return using Form NC-19, Claim for Refund of Taxes. "Estate Tax Law Change" should be written on the front of the return in the upper right-hand corner. Amended returns should be sent to the following address:

NC Department of Revenue

Attention: Estate Tax Refund, Workstation # 4546

PO Box 871

Raleigh, NC 27602-0871

Questions may be directed to the Personal Taxes Division at (919) 733-3565.

For Tithing or Other Gifts to Church - Get Valid Receipt

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Fri, 01 Aug 2008 12:40:04 -0500

If you regularly give to your church, make sure you get an acknowledgment letter that complies with IRS regulations - otherwise you are not entitled to deduct the gifts. Furthermore, tax preparers should not include deductions for gifts unless the taxpayer can produce the proper receipts.

Here's Professor Christopher Hoyt's report a recent decision from the Tax Court on this issue:

By way of background, a gift over $250 is not deductible unless the
charity delivers a letter to the donor that states (a) the amount of the
donation plus (b) a statement that there were no goods or services
provided to the donor. (If there were any goods or services, then the
statement must describe the goods or services and set forth a good faith
estimate of the value of those goods or services.) Sec. 170(f)(8)(C);
Reg. Sec. 1.170A-13(f)(3)

Here the donors made tithes to their church but the church failed to
give the statement with the magic language. Despite the cancelled
checks and the Tax Court's acknowledgment that the tithes were
charitable gifts, the charitable tax deduction was disallowed. The
church finally sent a letter with the magic statement that there were no
goods or services after the donors were audited, but since the letter
was received after the return was filed so it was not "contemporaneous"

The court case stresses the need for all charities to competently send
to their donors a contemporaneous written acknowledgment for all gifts
of $250 or more.

Daniel Gomez et ux. v. Commissioner, T.C. Summ. Op. 2008-93 (July 30,
2008)

During 2005 petitioners paid a total of $ 6,548.27 to the Apostolic
Assembly by 20 separate checks. ... Ten of the checks, for a total of $
6,100, indicated that they were for tithes, and each check was over $
250. A letter from the Apostolic Assembly, dated January 22, 2008,
indicated that petitioners paid a total of $ 6,552 as tithes during
2005."

The letter from the Apostolic Assembly was not contemporaneous with
the claimed deduction. The letter was dated January 22, 2008, the date
of the Court's trial session in El Paso, Texas, and was not received by
the earlier of petitioners' filing their income tax return or the due
date of April 17, 2006. See sec. 170(f)(8)(C); sec. 1.170A-13(f)(3),
Income Tax Regs.

The letter from the Apostolic Assembly and the 10 canceled checks
indicating that they were for tithes are reliable. However, they do not
meet the substantiation requirements set forth by the Internal Revenue
Code or the Treasury regulations. According to the Internal Revenue Code
and the Treasury regulations, the required acknowledgment of the
charitable contribution not only must include the amount contributed,
but also must state whether the charity provided any goods or services
in consideration for the contributions and describe and set forth a good
faith estimate of the value of those goods or services. See sec.
170(f)(8)(B); Kendrix v. Commissioner, T.C. Memo. 2006-9; sec.
1.170A-13(f)(2), Income Tax Regs. Because petitioners failed to comply
with section 170(f)(8) and section 1.170A-13(f), Income Tax Regs., we
are constrained to hold that they are entitled to deduct as charitable
contributions only the $ 420.50 respondent conceded.

Phishing for Probate

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Mon, 28 Jul 2008 16:40:14 -0500

Today I received an email message that reads as follows:

    Good Day,

    My name is Sarah Brown. I work as an executive partner for the firm Mayer Brown Watford
    consulting,U.K. We are conducting an inquiry on
    behalf of Deutsche Bank, the German conglomerate. This inquiry involves a late client who                 shares your surname.
    1. Are you aware of any relative/relation who's last contact address was Brussels, Belgium?
    2. Who shares a similar name?
    3. Whose date of birth on file was 27/07/1932?
    Thank you for your co-operation and best regards,

    Sincerely,
    Mrs. Sarah Brown.
    mailmayerbrownwatford@googlemail.com

This is obviously a ploy designed to appeal to greedy folks who might provide false information in order to try to collect an "inheritance." Notice how the writer doesn't even say what the name is? And the email address doesn't have a company URL? I'm sure that if one were to respond, "Mrs. Brown" would require a "documentation" or similar fee to be paid up front before the inheritance can be received. Don't fall for it!

Schiavo, Rivera, Who's Next?

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Mon, 28 Jul 2008 12:39:38 -0500

I read in the paper this morning about the case of Janet Rivera, a comatose 46 year old California woman. A heart attack two years ago caused the condition. The Fresno County Public Guardian's office, who is serving as her guardian, had life support withdrawn on July 11, but Rivera's family was able to get the court to order temporary support until a hearing a hearing schedule for tomorrow. Five physicians have opined that Rivera will never recover.

Just like with Terry Schiavo, there are many groups weighing in on the case, but regardless of which side one might take, the important message here is for one to make one's wishes about such things known in advance, preferably in writing in the form of a valid Living Will. Doing so could help avoid a great deal of expense, and more importantly anguish on the part of family members and others involved.

Two Federal Estate Tax Bills Introduced

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Fri, 25 Jul 2008 17:43:39 -0500

This news is courtesy of Roger Brooks and the Association for Advanced Life Underwriting.

The introduction of two estate tax bills - one in the Senate (S. 3284) and the other in the House (H.R. 6499) - enhances the likelihood of ultimate (more probable in 2009 than 2008) estate tax reform.

Senate Bill - $3.5 Million Exemption. Senator Carper (D-DE) introduced S. 3284 with two co-sponsors, Senator Voinovich (R-OH) and Senator Leahy (D-VT). The bill would permanently fix the lifetime estate tax exemption at $3.5 million (indexed for inflation) and the estate tax marginal rate at 45% (essentially freezing the exemption and rate levels slated by the current Revenue Code to be in place in 2009). Significantly, this initiative represents the first time, within our memory, Senators from both parties have co-sponsored such estate tax reform legislation.

House Bill - $2 Million Exemption. Representative McDermott (D-WA), a member of the Ways and Means Committee, has, without co-sponsors, introduced H.R. 6499 which sets the lifetime exemption at $2 million (indexed for inflation) and adopts other major reform approaches, such as gift and estate tax reunification. Rep. McDermott’s bill would repeal portions of the Economic Growth and Tax Relief Reconciliation Act of 2001 related to the estate tax. Its major thrust would be the adoption of the $2million lifetime exemption, indexed for inflation. The bill would be applicable for all “estates of decedents dying and gifts made after December 31, 2008” and would reunify the gift and estate tax exemption/exclusion amounts. Instead of the applicable exclusion amount for the gift tax being $1 million, it would equal $2 million in 2009 and would be indexed for inflation going forward.

The exclusion amount for the estate tax would also be increased by any unused exclusion from a deceased spouse. This provision (not previously introduced in the current Congressional session, but often described as implementing spousal exemption portability) would allow the surviving spouse to increase his or her exclusion amount by the unused comparable amount of a deceased spouse, if the executor makes an election at the time of the deceased spouse’s death. Furthermore, the exclusion amount could be increased by the unused amount of more than one deceased spouse if the surviving spouse had been married more than once, but the total for each such deceased spouse would be capped at the basic exclusion amount of $2 million, indexed for inflation.

The rate for the estate tax would be 45% for all estates between $1.5 and $5 million, 50% for estates between $5 and $10 million, and 55% for estates over $10 million. Furthermore, the bill would reinstitute the credit for State death taxes and would repeal the deduction for such taxes. The credit was taken away in 2001 and the deduction was put in its place. This bill would restore the credit as it was prior to the 2001 amendment.

S. 3284, the bipartisan co-sponsored bill, would set the exclusion equivalent for the estate tax at $3.5 million, indexed for inflation. The maximum estate tax rate would equal 45%. These levels are known as Freeze 2009. A similar amendment proposal passed in the Senate, 99-1, during the debate on the FY2009 Budget.

In comparison to H.R. 6499, the gift and estate tax exclusions would not be reunified by S. 3284. The gift tax exclusion would remain at $1 million, but with a top rate of 35%. The bill would also simplify the process by which all taxable gifts preceding the decedent’s death are calculated to determine the available credit against the estate tax. It would amend current law, which requires the use of the gift tax rates “at the time of the gifts,” so that the applicable gift tax rates would be those “in effect at the decedent’s time of death.” Sen. Carper’s bill would also require that it be paid for. The provision is titled “Sense of the Senate Regarding Revenue Neutrality” and puts Sen. Carper on record that this bill should, in fact, not add to any federal budget deficits.

The Senate Finance Committee held a hearing on these proposals in April (see our Bulletin No. 08-33), but the House Ways and Means Committee has not had a similar hearing. It is unlikely that H.R. 6499 will pass the House before the November elections, but its existence may flush out Congressional attitudes on amendment proposals.

Tired of Your CRT? Sell It!

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Thu, 24 Jul 2008 20:39:32 -0500

If you set up a Charitable Remainder Trust (CRT) in the past but now wish you could get a lump sum back from the trust, it may be possible to sell your interest in the trust. In a 2001 Private Letter Ruling (200127023), the IRS ruled that the sale of an income interest in a trust is a sale of a capital asset.

Thus, a CRT income beneficiary who has had that interest in the CRT for a year or longer can, in many cases, sell their interest and pay taxes at the current 15% long-term capital gain rate. (State taxes would be additional).

Given that the capital gains rates are at historically low levels, this can be a way to turn a long term income interest into a lump sum that can be enjoyed currently, while avoiding potential future increases in tax rates.

There are companies that will purchase interests in trusts, including CRTs.

SSA Has New Retirement Calculator

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Thu, 24 Jul 2008 08:25:51 -0500

The Social Security Administration has a new calculator on its website called the Retirement Estimator. It allows one to estimate benefits based on different earnings estimates and expected retirement ages. I tried it out and it's quick and easy. I just hope I actually get those estimated benefits when I'm eligible in 20 years!

Parents - Don't Forget This Important Aspect of Parenting

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Sat, 19 Jul 2008 15:15:16 -0500

This afternoon I'm sitting in Koury Natatorium on the UNC Campus watching my son and hundreds of other kids compete in the Chapel Hill Summer Swim League Championship meet. This is my 15th year of doing this, so I have spent many, many hours watching my kids swim, volunteering, etc. And that's for only one of their activities. Of course, my situation is not unusual, but rather the norm for middle class parents.

What struck me, though, is that parents routinely spend dozens, if not hundreds of hours, and hundreds, or maybe even thousands, of dollars annually on their kids' activities. Yet most do not chose to spend a few hours, and as little as several hundred dollars, to put in place an estate plan that will protect their children in the event something happens to them.

So, parents, go ahead and schedule an appointment to meet with an estate planning attorney. The peace of mind is priceless.

NC Gift Tax Repealed After All

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Thu, 17 Jul 2008 17:26:55 -0500

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!

FDIC Insurance Coverage for Trust Accounts

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Wed, 16 Jul 2008 12:51:08 -0500

With the recent failure of IndyMac Bank and even large banks like Wachovia reporting astounding losses, some folks are becoming increasingly concerned about the safety of their money. As most everyone knows, the Federal Deposit Insurance Corporation (FDIC) covers cash deposit accounts up to $100,000 per person. Persons with over $100,000 in cash deposits often use multiple banks to obtain coverage for all or most of their money.

What about accounts in the name of trusts, since trusts generally have more than one beneficiary? Luckily, the FDIC has expanded coverage for trust accounts based on the number of beneficiaries. The FDIC website provides the exact rules.

Tax Extenders Bill Still in Limbo

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Mon, 14 Jul 2008 13:29:22 -0500

Democrat and Republican Senate leaders continue to clash over the tax extenders bill, which contains an extension of the $100,00 IRA charitable rollover and other income tax benefits. Stay tuned...

BB&T Wealth Management Ranked #1

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Mon, 14 Jul 2008 09:41:37 -0500

North Carolina's own BB&T Wealth Management was rated as the most prestigious regional bank wealth manager by high net-worth consumers, according to the 2008 Luxury Brand Status Index survey. The survey is conducted by the Luxury Institute in New York, but the results report must be purchased.

BB&T's personalized service was the key to its number one ranking.

Separate Retirement Plan Trust is the Best Choice

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Fri, 11 Jul 2008 16:53:35 -0500

I generally recommend that persons with IRA or qualified plan assets of at least $200,000 should consider a Standalone IRA/Retirement Plan Trust.

There are many reasons that justify creation of a separate trust just to receive retirement plan assets. Though most attorneys think it can be done with only one master trust, there are various drafting problems and post-mortem administrative problems that are lessened by using a separate trust for retirement benefits alone. Many of the benefits of a separate trust(s) established to solely hold retirement plan or IRA assets after death are included below.

This posting is adapted from a presentation by Ed Morrow, J.D., LL.M.

Specific Benefits

The Inexperienced Attorney

A separate trust increases the likelihood that the trusts will survive later planning by another attorney who does not understand or appreciate the complexities of estate planning with IRAs. Attorneys routinely revoke, restate or amend old trusts, but would take more care in doing so with a specially labeled trust.

The Inexperienced Trustee

A separate trust increases the likelihood of a successor trustee appreciating the complexities of administering separate trusts with IRAs and retirement plan assets. This is especially true of individual trustees where this is more of a problem.

Those Pesky Required Minimum Distributions (“RMD”)

A separate trust increases the likelihood of the successor trustee not overlooking RMD issues, especially when the decedent was already in pay status.

Inadvertent Loss of Designated Beneficiary Status

A separate trust increases the likelihood that debts, taxes and expenses will not and cannot be paid from the retirement plan trust, which helps to avoid losing Beneficiary Designation status. For the majority of attorneys who do not often customize their tax payment and apportionment clauses, this is an advantage.

Simplification of General Estate Plan

A separate trust allows the Will and/or Living Trust to be simpler and less confusing to the client. This is especially true for the engineers and other clients who insist on understanding every word and paragraph of the trust.

Segregates the Retirement Plan from Unintended Tax Consequences Attributable to Choices Made in General Estate Plan

A separate trust allows the main Will and/or Living Trust to easily name older beneficiaries, charitable beneficiaries and allow for normal marriage and adoption provisions. It allows the main trust to contain broad general and limited powers of appointment, and other clauses that permit great flexibility – clauses that are problematic in a trust designed to hold retirement plan assets.

Grantor Has More Flexibility in General Estate Plan

A separate trust allows the living trust to have the broadest spendthrift, in terrorem, incentive/disincentive or other clauses that act to restrict or eliminate income payouts to a beneficiary, which would be problematic in a trust designed to hold retirement benefits.

Simplified Fiduciary Accounting

A separate trust simplifies the fiduciary accounting issues after death involving division between income/principal and separate share rules.

Prevention of Co-mingling of Qualified Assets with Non-Qualified Assets

A separate trust simplifies tracing of the immediate payout of RMDs out to the beneficiary that is required in a conduit trust.

Easier Income Tax Filing

A separate trust can simplify income tax filing and planning for the trust and beneficiaries because it becomes much easier to plan exactly how much IRD is left trapped in the trust at potentially higher brackets and where the IRC 691 deduction will be used.

Maintained Flexibility for Tax Election Planning

A separate trust might prevent the executor/trustee from commingling retirement plan assets in a conduit trust from making a Section 645 election to use a fiscal year, which may jeopardize a conduit trust from qualifying as a Designated Beneficiary.

Greater Likelihood of Effective Utilization of GST Exemption

A separate trust might simplify and/or make more efficient use of the GSTT exclusion, as it is usually wise to use GST exemption for the non-IRD assets left in the standard living trust. Generally, but not always, GSTT exemption would be less valuable to a separate retirement plan trust and more valuable to a trust holding other assets. Moreover, a separate trust can more easily segregate Roth IRA/401(k) assets that have completely different tax planning involved. For instance, the GSTT allocation issue noted above involves quite different considerations for Roth assets. Coinciding with the last points about GSTT, the related issues surrounding the granting limited and general powers of appointment are also clearer with separate trusts. This is because it may be desirable to grant a general power of appointment via formula to avoid a generation skip as to some assets and not others, or, in the event that an accumulation trust is used, it is impermissible to use either a general or broad limited power of appointment. In other words, the criteria and use of LPOA/GPOAs are different and using separate trusts makes the practitioner and client see them as such. In addition, the trustee administering the trust would have clearer guidelines.

Greater Likelihood of Tax Efficient Use of Income Taxable Assets

A separate trust allows clearer directions to trustees to exhaust assets in order of tax preferred priority without worrying about diversification rules overriding tax preferences. For instance, discretionary distributions come out of the trust holding ordinary assets first, then retirement plan assets, then IRAs, then Roth IRA/401(k) trust assets. It would avoid the tremendous danger of having a pecuniary bequest in a master trust triggering IRD in such plans. See IRS Chief Counsel Memorandum (CCM) 200644020.

Retention of Greater Flexibility in Adapting to Future Tax Law Changes

A separate trust makes later amendments when tax law or retirement asset mix changes the dynamics of the planning. Especially where trusts are designed to potentially accumulate retirement plan assets (aka accumulation trusts) - the state of the tax law is ever evolving with PLRs still coming out to explain the 2002 Regulations. Changing just the beneficiary designation or separate trust years later when things change is easier than reworking the entire master trust.

Conclusion

Many of the problems noted above are also solved through using a trusteed IRA, which as noted above can have even greater administrative simplicity and advantages. But trusteed IRAs are only available for larger accounts through a handful of wealth management firms. They cannot be of help when working clients have significant retirement plan assets that cannot be rolled over. Nor are they a solution when a client does not want to change IRA custodians or their current investment advisor. Nor do they provide the maximum restrictions on beneficiaries needed for special needs trusts or other extreme situations. For these situations you need a separate trust. Consider a separately drafted trust apart from the master living trust for the reasons noted above.

Assignment of IRA by Estate to Charity is Not a Transfer

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Tue, 08 Jul 2008 11:16:19 -0500

These are the facts from a recent Private Letter Ruling from the IRS:

The Decedent had a "pour-over" will requiring that his probate estate be added to his living trust. The trust provided that upon Decedent's death distributions are to be made to certain beneficiaries with the remainder going to four charitable organizations. The Decedent had an IRA at the time of his death but there was no designated beneficiary as the named beneficiary was deceased. Therefore, the Decedent's estate became the beneficiary by default. The Trustee of the living trust and the personal representative of the estate proposed to satisfy the residuary bequest to the charities by assigning the IRA to the four named charities.

IRC Section 691(a)(1) provides that income in respect of a decedent (IRD) assets owned at death are included in the gross income of the estate or the person, who, by reason of the owner's death, acquire the right to receive the asset. A traditional IRA is an IRD asset (Rev. Rul. 92-47, 1992-1 C.B. 198). Under Sec. 691(a)(2), if a right to an item of IRD is transferred by an estate who received the asset by reason of the owner's death, the asset is included in the gross income of the estate.

However, the term "transfer" under Sec. 691(a)(2) does not include the transmission of an IRD asset at death if the transmission occurs pursuant to the right of the person receiving the asset by reason of a decedent's death by bequest, devise or inheritance. The IRS held that the transfer of the IRA in satisfaction of the Decedent's residuary bequest from his trust is not a transfer within the meaning of Sec. 691 and is thus not includable in the gross taxable income of decedent's estate.

The IRD will be considered income to the four charities, but since they are tax exempt organizations, no tax will be due.

To see the full text of PLR - 200826028, click "Continue Reading."
Dear * * *:

This letter responds to the letter dated November 5, 2007, submitted on behalf of Estate and Trust by their authorized representative, requesting a ruling under § 691 of the Internal Revenue Code.

FACTS

Decedent, who died on Date, was the grantor during life of Trust. Decedent's will provides that Decedent's residuary probate property should be added to Trust. Trust provides that upon Decedent's death, certain distributions should be made from Trust's assets to specific legatees. Trust also provides that after the specific distributions are made, the residuary of the trust assets should be distributed equally to Charity #1, Charity #2, Charity #3, and Charity #4. The terms of Trust provide that the trustees are authorized to distribute income and principal in cash or in kind, or partly in each, to allocate or distribute undivided interests or different assets or disproportionate interests in assets.

Decedent was the owner of assets including an individual retirement account (IRA). The named beneficiary of the IRA did not exist at the time of Decedent's death and, therefore, Estate was designated, by default, as the beneficiary of the IRA. The trustees of Trust and Personal Representative of Estate propose to fund the residuary bequests by assigning the IRA to Charity #1, Charity #2, Charity #3, and Charity #4 in satisfaction of their residuary shares of Trust. Estate and Trust represent that Trust has sufficient assets to satisfy the specific legatees without utilizing the IRA proceeds.

LAW AND ANALYSIS

Section 691(a)(1) provides that the amount of all items of gross income in respect of a decedent (IRD) which are not properly includible in respect of the taxable period in which falls the date of the decedent's death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.

Section 691(a)(2) provides that if a right, described in § 691(a)(1), to receive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or such person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair market value. For purposes of § 691(a)(2), the term "transfer" includes sale, exchange, or other disposition, or the satisfaction of an installment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.

Section 1.691(a)-4(b) of the Income Tax Regulations provides that if the estate of a decedent or any person transmits the right to IRD to another who would be required by § 691(a)(1) to include such income when received in his gross income, only the transferee will include such income when received in his gross income. In this situation, a transfer within the meaning of § 691(a)(2) has not occurred.

Section 1.691(a)-4(b)(2) provides that if a right to IRD is transferred by an estate to a specific or residuary legatee, only the specific or residuary legatee must include such income in gross income when received.

Section 1.691(a)-4(b)(3) provides that if a trust to which is bequeathed a right of a decedent to certain payments of income terminates and transfers the right to a beneficiary, only the beneficiary must include such income in gross income when received. If the transferee described in § 1.691(a)-4(b)(2) or (3) transfers his right to receive the amounts in the manner described in § 1.691(a)-4(a), the principles contained in § 1.691(a)-4(a) are applied to such transfer. On the other hand, if the transferee transmits his right in the manner described in § 1.691(a)-4(b), the principles of § 1.691(a)-4(b) are again applied to such transfer.

Rev. Rul. 92-47, 1992-1 C.B. 198, holds that a distribution to the beneficiary of a decedent's IRA that equals the amount of the balance in the IRA at the decedent's death, less any nondeductible contributions, is IRD under § 691(a)(1) that is includable in the gross income of the beneficiary for the tax year the distribution is received.

CONCLUSION

Based solely on the facts and representations submitted, we conclude that the assignment of the IRA to Charity #1, Charity #2, Charity #3, and Charity #4 in satisfaction of their share of the residue of Estate and Trust will not be a transfer within the meaning of § 691(a)(2). Only Charity #1, Charity #2, Charity #3, and Charity #4 will include the amounts of IRD of the IRA in their gross income when the distribution or distributions from the IRA is received by Charity #1, Charity #2, Charity #3, and Charity #4.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter.

Pursuant to a power of attorney on file with this office, a copy of this letter is being forwarded to Trust and Estate's authorized representative.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,

James A. Quinn
Senior Counsel
Branch 3
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Easley Wins - Gift Tax Here Until at least 2010

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Fri, 04 Jul 2008 13:17:06 -0500

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.

Easley Wants the Gift Tax to Stay

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Thu, 03 Jul 2008 10:47:47 -0500

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.

Extension Period Shortened for Forms 1065, 1041and 8804

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Wed, 02 Jul 2008 11:40:38 -0500

Today the IRS issued temporary and proposed regulations that reduce the extension of time to file tax returns for certain businesses that generate Schedules K-1 and other similar statements to five months. (The current period is six months.)

This change will be effective for extension requests for tax returns due on or after January 1, 2009, and applies to entities that file the following returns and forms that have a tax year ending on or after September 30, 2008:

• Form 1065, U.S. Return of Partnership Income
• Form 1041, U.S. Income Tax Return for Estates & Trusts
• Form 8804, Annual Return for Partnership Withholding Tax (Section 1446)

The final and temporary regulations finalize the simplified procedures for obtaining an automatic extension of time to file returns, doing away with the requirements for a signature and an explanation of the need for an extension of time to file. They also complete the elimination of Form 2688, Application for Additional Extension of Time to File U.S. Individual Income Tax Return, granting individual taxpayers an automatic six-month extension with their filing of Form 4868, Application for Automatic Extension of Time to File a U.S. Individual Income Tax Return.

Thanks to Bob Keebler, CPA for this news.

NC Gift Tax to be Repealed?

ghgiddens@trustcounselpa.com (Greg Herman-Giddens) — Fri, 27 Jun 2008 17:34:01 -0500

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.