Practical Planner: Checklist: More Heckerling Nuggets (Volume 7, Issue 1)

Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant who authors a number of publications each month, including his monthly e-mail newsletter, “Practical Planner“. Below is the second installment from Marty’s January/February 2012 newsletter. To be added to Marty’s monthly e-mail distribution list, e-mail [email protected].

√ Your Tax Reimbursement Clauses Might be Dangerous: Some grantor trusts (income taxed to you) include a provision that permit the trustee of a trust you create to reimburse you for taxes you pay on trust income. If reimbursement is mandatory, Go To Tax Jail, Do Not Pass Go. It causes inclusion in your estate. So does that mean a discretionary reimbursement is guaranteed not to cause inclusion of trust assets in your estate? Not so fast Charlie. If your creditors cannot reach the trust assets under state law the trust assets should not be included in your estate. But (all tax rules have a “but”) so long as there was no implied understanding between you and trustee. An actual pattern of distributions (e.g., taking all income, having all taxes reimbursed over a number of years) would probably sink your tax ship. But what if you and the trust sell stock in closely held business that you had used to fund the trust and you immediately get a tax reimbursement? Was there an understanding from the get go that you’d get the tax paid by the trust? Most folks probably don’t want these clauses anyhow since the tax payments reduce your estate. There are other options. Don’t let the trust reimburse you and thereby give the IRS the right to raise the “implied understanding argument.” Instead, the trustee can loan you money to pay the tax. See PLR 200944002; Rev. Rul. 2004-64.

√ Zapped by a Gift Tax: So here’s the law. A donee is personally liable for the tax, even if it is not their gift subject to tax. Ouch! Example: You made a large gift to your new spouse which qualifies for marital deduction – no tax. You make a separate large taxable gift to another donee, your kid from a prior marriage. You’re a bum and don’t pay the gift tax. Your kid should be liable. But, even your new spouse is on the gift tax hook if tax on other gifts is not paid! This is so even though the gift to her did not trigger any gift tax. IRC Sec. 6324. Here’s the reality TV version: Son is named agent under Dad’s power of attorney. Dad used up his $5 million gift exemption, then fell ill. Any new gifts will be taxable. Son makes gifts to his siblings of $2 million and to Dad’s New Wife of $1 million but doesn’t pay the gift tax from Dad’s funds as agent or from his funds. New Wife can be held liable for the gift tax of $700,000 on the $2 million gifts to Dad’s kids from a prior marriage.

√ Sunrise Sunset: If Tevye was setting up a dynastic trust today he might want to consider one trust for $1,390,000, the $1M inflation adjusted GST amount, and a second trust for the excess of the current 2012 $5,120,000 GST exemption amount over the $1,390,000 in a second trust. If the GST rules sunset in 2013 this might provide greater certainty. Use separate trusts to address potential risk of GST rules sun-setting. Don’t create trusts simultaneously in case there is an ordering rule. You could contribute the balance of your GST exemption to a direct skip trust (no non-skip beneficiaries like the kids are included), and do it in 2012 while the law is clear. What is affectionately called the “move down rule” should lock in your GST move. IRC Sec. 2653. Even if the GST rules sunset after 2012, the GST event that closed the year before. Importantly, if sunset happens, the grandchildren beneficiaries of that trust are not skip people for future years because of application of the move down rule.

√ No Backsies: Not All Roth’s Are Created Equal: If you do an in-plan rollover of your 401(k) into a Roth account in that plan, it could be a tax homerun. But, just as with a conversion of your traditional IRA into a Roth, you have to pay income tax on the value of the plan in excess of your basis. But with an in-plan rollover, you can’t change your mind like you can with a conversion of a regular IRA to a Roth. If plan assets decline in value you lose!

√ Just Say No Doesn’t Always Work with the Tax Man: If a loved one is diagnosed with Alzheimer’s disease plan and act quickly. Address elder care issues quickly while he still has testamentary capacity. If you have sufficient capacity (competence) sign a medical proxy, will, power, etc. Your spouse’s will should set up a trust for your benefit in case he or she predeceases you. This trust should be a special needs trust. Don’t rely on portability. Many people assume the spouse with Alzheimer’s will die first and if not he or she can disclaim assets bequeathed from the other. In New York a disclaimer is not treated as a fraudulent transfer by disclaiming beneficiary, except for Medicaid. This is the minority rule, so it might work elsewhere.

To download the complete newsletter and prior newsletters, click here.

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ABOUT THE AUTHOR: Martin “Marty” Shenkman, Esq., CPA, MBA is an estate planning attorney and Certified Public Accountant from Paramus, New Jersey. He received his Bachelor of Science degree from Wharton School, University of Pennsylvania 1977 with a concentration in accounting and economics. He received a Masters degree in Business Administration from the University of Michigan 1981, with a concentration in tax and finance.

Mr. Shenkman is a widely quoted expert on tax matters and is a regular source for numerous financial and business publications, including The Wall Street Journal, Fortune, Money, The New York Times, and others. He has appeared as a tax expert on numerous television and cable television shows including The Today Show, CNN, NBC Evening News, CNBC, MSNBC, CNN-FN and others. He is a frequent guest on radio talk shows throughout the country and has a regular weekly radio show on Money Matters Financial Network.

Mr. Shenkman is a prolific author, having published thirty-four books and more than seven hundred articles. Mr. Shenkman has served as contributing editor to a host of publications, including: New Jersey Lawyer, The Journal of Real Estate Finance, Real Estate Insight, Commercial Leasing Law & Strategy, The Journal of Accountancy, Real Estate Accounting and Taxation, Shopping Centers Today, and others.

Mr Shenkman is active in numerous charitable organizations, sitting on many boards and planned giving committees and lectures regularly for these and other organizations.

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