Announcements

Nationally renowned estate planning and asset protection attorney, Steven J. Oshins, Esq., AEP (Distinguished), has just released his 4th Annual Domestic Asset Protection Trust State Rankings Chart.

Some of the Highlights:

1. South Dakota closes in on Nevada, but doesn’t quite get there.  These are still the top two states.

2. Ohio comes from nowhere to jump into the first tier.

3. Alaska, Tennessee, Wyoming and Utah all make positive changes.

4. Utah remains ranked low because of its state income tax uncertainty (but is now a great state for Utah residents).

5. For the first time ever, the State Rankings Chart has a column about “Ease of Use” and docks the states that require a new Affidavit for every transfer.  I personally believe that MORE points SHOULD have been taken away from the five states that have the affidavit requirement than the number of points I actually took away.  I will revisit this in next year’s chart.  I just wanted to slowly integrate this new feature into the chart and wanted to err towards underweighting that.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Thanks to the assistance of Michelle Ward of Keebler & Associates, LLP for bringing to our attention a recent case regarding bankruptcy exemption for inherited IRAs.

The 7th Circuit Court of Appeals has reversed a district court's ruling extending bankruptcy exemption to an inherited IRA (Download Case). In Clark, the Wisconsin district court had previously reversed the bankruptcy court's decision and allowed an inherited IRA to be exempt from the bankruptcy estate. The debtors, Mr. and Mrs. Clark, filed for chapter 7 bankruptcy in 2010. Mrs. Clark had inherited an IRA from her mother in 2001. Neither Mr. nor Mrs. Clark was retired. The debtors claimed the inherited IRA was exempt under Wisconsin law and 11 U.S.C. Sec. 522(b)(3)(C). The Court of Appeals (cases Nos. 12-1241 & 12-1255) stated that by the time the Clarks filed for bankruptcy, the money in the inherited IRA did not represent anyone's retirement funds and that to treat this account as exempt would be to shelter from creditors assets that can be freely used for current consumption. The Court further stated that an inherited IRA does not have the economic attributes of a retirement vehicle, because the money cannot be held in the account until the current owner's retirement.

Given this recent decision and the diversity of decisions on this topic, caution suggests having an IRA payable to a trust rather than to a beneficiary outright to strengthen creditor protection.

Keebler & Associates, LLP assisted the Law Firm of Kavesh, Minor & Otis in obtaining PLR 200537044, approving the IRA Inheritance Trust®, the use of a standalone trust as beneficiary of IRA assets for the purpose of ensuring the stretchout of RMDs and providing added protection of IRA assets.  For more information about the IRA Inheritance Trust®, click here.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Thanks to generosity of Robert Keebler, CPA, MST, AEP (Distinguished) of Keebler & Associates, LLP, AICPA and Leimberg Information Services, we are pleased to provide to you two free podcasts to download on the subject of President Obama's 2014 Proposed Budget.

Obama's proposed budget will have a negative impact on the following planning:

1. The estate tax rate would increase to 45% from today’s 40% rate.
2. The gift tax exemption would be reduced to $1,000,000
3. The estate tax and GST exemptions would be reduced to $3,500,000
4. The GST period would be limited to 90 years from today’s unlimited period
   1. Current dynasty trust transactions would be grandfathered
5. The IDGT trust transactions will be eliminated on a prospective basis
   1. Current dynasty trust transactions would be grandfathered
   2. Additional sales would not be protected
6. The GRAT transaction will be eliminated on a prospective basis
   1. Ten year rule
   2. No zeroing out GRATs
7. A Buffet rule would impact income greater than $1,000,000
8. Itemized deductions would be reduced to a credit for those with income greater than $250,000
9. Carried Interests capital gain treatment would be eliminated
10. A special provision would eliminate the ability to retain more than approximately $3,400,000 in an IRA or pension plan.

The 90-year GST rule may require some thought and attention.  Recall that for pre-1986 GST trusts any contribution after the effective date eliminates grandfather status.  It may be prudent  to sever/decant/reform insurance and other trusts before the end of 2013 if this provision becomes law.

AICPA Podcast
"Robert Keebler on President Obama's 2014 Proposed Budget"
DOWNLOAD

LISI's 60-Second Planner Podcast
"Key Elements of the President's 2014 Budget"
DOWNLOAD

The podcasts above are the copyrighted materials of Robert S. Keebler, CPA, MST, AEP (Distinguished), AICPA and Leimberg Information Services, Inc. These are provided to you as a courtesy from the permission granted to The Ultimate Estate Planner, Inc.  Reproduction in any form or forwarding to any person prohibited without the express permission of AICPA and Leimberg Information Services, Inc.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Reproduced with Permission by and Courtesy of Leimberg Information Services, Inc. (LISI).  For information about how to subscribe to LISI, click here.

"A DING trust (standing for Delaware Incomplete Non-Grantor trust) is a strategy designed to eliminate State income taxes on the Grantor’s investment income by having the Grantor transfer his investments to a trust domiciled in a non-tax state which transfer is, on the one hand, an incomplete gift and, on the other hand, not made to a grantor trust.  After a hiatus of some six years, the IRS has now ruled, in PLR 201310002 in favor of a DING  trust. 

The 2013 PLR seems, in large part, to be consistent with the immediately prior PLR in this area, and tells us that the IRS is again willing to issue rulings on DING trusts. Intrepid taxpayers will undoubtedly continue to create DING trusts in states such as Delaware and without the Grantor’s Sole Power. 

There is no reason to believe the IRS would reissue the 2006 PLR, wherein all beneficiary members of the Power of Appointment Committee were replaced upon death.  Cautious taxpayers will model their future trusts on the fact pattern of the 2013 PLR and will be exceedingly sensitive to the number of members of the Distribution Committee, their power to distribute to themselves and whether a member is to be replaced if he or she predeceases the grantor.  A revenue ruling from the IRS dealing with the issue raised by the 2007 News Release would be most welcome and helpful; the 2013 PLR does not give any hint, one way or the other.”

Now, Bill Lipkind provides members with commentary on PLR 201310002, an important development dealing with a powerful planning technique, the Delaware Incomplete Non-Grantor trust.

William D. Lipkind is Chair of the Tax Department of Lampf, Lipkind, Prupis & Petigrow, A Professional Corporation, West Orange, New Jersey, and New York, New York. The Law Firm concentrates its practice in the representation of high net worth individuals and entrepreneurs. It is especially active in domestic and international income and estate tax planning, wealth preservation, business transactional matters and asset protection. Bill has received degrees from Cornell University (B.A. 1964); Harvard University (J.D. 1967); and New York University (LL.M. in Taxation, 1972). He is the author of: “Protecting Assets from Creditors," The CPA Journal, September, 1993: "On The Road Offshore; The Struggle Between Protection of Assets and Fraudulent Conveyances," N.J. Lawyer, July/August, 1992; and "Gallagher Revisited: The Functionally Unrelated Corporate Reorganization," 13 Villanova Law Review 487, 1968.  Bill has been named a Super Lawyer and one of New Jersey’s Top Attorneys for the past five years. He has lectured extensively before professional and lay groups and has both been featured on television and quoted in financial publications. 

Bill wishes to thank Jonathan Blattmachr for his review and comments, but notes that any errors are the author’s responsibility.  

EXECUTIVE SUMMARY:  A “DING” trust (standing for Delaware Incomplete Non-Grantor trust) is a strategy designed to eliminate State income taxes on the Grantor’s investment income by having the Grantor transfer his investments to a trust domiciled in a non-tax state which transfer is, on the one hand, an incomplete gift and, on the other hand, not made to a grantor trust.  After a hiatus of some six years, the IRS has now ruled, in PLR 201310002 (the “2013 PLR”)[1] in favor of a “DING” trust. 

The 2013 PLR seems, in large part, to be consistent with the immediately prior PLR in this area.  However, unlike the prior ruling, the trust in the 2013 PLR contains a reserved power for the grantor to make lifetime distributions to his issue in a non-fiduciary capacity subject to a HEMS ascertainable standard.  The 2013 PLR states that in the fact pattern presented the beneficiary members of the Distribution Committee do not possess, for gift and estate tax purposes, general powers of appointment (at least as long as a member is not replaced in the event he predeceases the grantor) either for distributions back to the Grantor (as did the immediately prior PLR), or for distributions to other beneficiaries (a ruling not in the immediately prior PLR).  Not stated, but of necessity, the trust in the 2013 PLR must be domiciled in a state other than Delaware. 

FACTS:

In the 2013 PLR, the IRS ruled that (i) the Grantor (who with his four sons constitute the Distribution Committee) would not be deemed the owner of any portion of the trust under IRC §§ 673, 674, 675, 676 and 677[2]; (ii) no other members of the Distribution Committee would be deemed an owner of any portion of the trust under IRC §678; (iii) the transfer of property by the Grantor to the trust would not be a completed gift; (iv) a distribution of property by the Distribution Committee to the Grantor would not be a completed gift by any member of the Distribution Committee; and (v) a distribution of property by the Distribution Committee to any beneficiary of the trust other than the Grantor would not be a completed gift by any member of the Distribution Committee other than the Grantor.  In other words, the Grantor made an incomplete gift, the trust is not a grantor trust and no member of the Distribution Committee, excluding the Grantor, has a general power of appointment for gift or estate tax purposes.

The “DING” trust strategy (DING standing for Delaware Incomplete Non-Grantor) contemplates a taxpayer in a high state income tax jurisdiction transferring a portfolio to a trust domiciled in a no state income tax jurisdiction (i.e., Delaware) so that if the trust is not a grantor trust and the transfer of assets thereto does not constitute a completed gift, the taxpayer, with no federal income or gift tax advantages or risks, can escape state income taxes on his portfolio income, at least to the extent the income is not distributed to beneficiaries.

Seven years ago, in PLR 200612002 (hereinafter, the “2006 PLR”), the IRS ruled (and there had been a number of prior rulings) that the trust was not a grantor trust, that the gift by the grantor thereto was an incomplete gift, and that the named members of the Power of Appointment Committee[3] did not possess general powers of appointment in the event distributions were made to the grantor (the ruling being silent on the question of distributions to beneficiaries other than the grantor).  The Power of Appointment Committee consisted of the Grantor’s sibling and another person, both of whom were discretionary beneficiaries of the trust during the Grantor’s lifetime; the Grantor was not a member.  If either member of the Power of Appointment Committee died prior to the Grantor, then that member had to be replaced so that the Committee always had two serving members. 

The Power of Appointment Committee had the sole power to direct distributions of income and principal to the Grantor, her issue, and certain other beneficiaries.  The Power of Appointment Committee acted in a non-fiduciary capacity and could act either unanimously or by the Grantor and one member of the Power of Appointment Committee.  The Grantor possessed a broad special testamentary power of appointment in favor of anyone other than herself, her creditors, her estate or the creditors of her estate.  In default of her exercise of her testamentary power of appointment, the assets passed, upon her death in part to charity and the balance to her spouse and issue.[4]

PLR 200729025 (the “2007 PLR”),  dated April 10, 2007, was similar to the 2006 PLR except that the Power of Appointment Committee consisted of three, not two members.  In the event one Committee member predeceased the Grantor, he would not be replaced.  However, should two members predecease the Grantor, that decedent would be replaced so that the Committee always consisted of at least two members.  The IRS ruled in the 2007 PLR similarly to the 2006 PLR, except that it added the statement “Accordingly, during the period the Power of Appointment Committee consists of B, C, and D, they will not be treated as making a taxable gift if Trust income or corpus is distributed to A [the Grantor] under the terms of the Trust”.  The IRS did not rule with respect to distributions to persons other than the Grantor.

Almost immediately following the 2007 PLR, in IR-2007-127[5] the IRS announced (the “2007 News Release”) that it was reconsidering “a series of private letter rulings” as to whether beneficiaries who direct distributions of trust income and corpus possessed general powers of appointment.  In the announcement, they suggested that the holdings in the applicable private letter rulings (the 2006 PLR was undoubtedly among the rulings they were contemplating), were inconsistent with two extant Revenue Rulings[6] because the beneficiary members of the Power of Appointment Committee were to be replaced in the event one of them died prior to the Grantor. 

The 2007 News Release invited comments.  Many comments were submitted:  comments agreed and disagreed with the inconsistency suggested by the News Release; agreed and disagreed with the holdings in the various private letter rulings; and offered a variety of recommendations as to potential clarifying revenue rulings and potential drafting solutions.  Regardless, no further DING rulings were issued until the 2013 PLR.

In 2008 the IRS invited public comments on a proposed Revenue Ruling[7] concerning Private Trust Companies.  This generated speculation about whether the issuance of DING rulings would also be subordinated to the actual issuance of this ruling.

Then, in a Chief Counsel Advice Memorandum[8] dated in 2011, the IRS held that a transfer to an irrevocable trust in which the grantor retained a testamentary power of appointment but no lifetime beneficial interest was a completed gift with respect to the life interest, though an incomplete gift with respect to the remainder.  This CCA led to a plethora of expert speculation on whether the IRS was establishing new criteria for the determination of whether a transfer constituted a completed gift or an incomplete gift.  In 2012, the IRS also announced it was considering issuing regulations concerning decanting.[9]  No ruling, including the 2013 PLR, discusses the effect of decanting.

And now the IRS has issued the 2013 PLR.

Facts of PLR 201310002
Interestingly enough, the facts of the 2013 PLR (save one) are essentially similar to the facts of the 2007 PLR.  Thus, in the 2013 PLR the Grantor established an irrevocable trust; during his lifetime all distributions of income and principal may be made by the Trustee to the Grantor and/or the Grantor’s issue, but solely at the direction of the Distribution Committee; the Distribution Committee consists of the Grantor and his four sons and functions in a non-fiduciary capacity; decisions of the Distribution Committee may be effectuated either by the Grantor and a majority of the other members, or unanimously by all members other than the Grantor; and the Grantor possesses a broad special testamentary power of appointment. 

Upon a beneficiary member of the Distribution Committee ceasing to serve, that member is not replaced provided that the Distribution Committee must always have at least two members in addition to the Grantor.  In other words, if three of the four sons predecease the Grantor, then upon the death of the third son, he is replaced.  That, of course, raises the question, not answered in the 2013 PLR, of whether from and after the death of the second son, the surviving two sons have general powers of appointment.

Differing from the 2006 PLR and the 2007 PLR, the Trust in the 2013 PLR also provides that the “Grantor, in a non-fiduciary capacity, may, but shall not be required to, distribute to any one or more of Grantor’s issue, such amounts of the principal (including the whole thereof) as Grantor deems advisable to provide for the health, maintenance, support and education of Grantor’s issue…(the “Grantor’s Sole Power”).”  This provision tracks IRC §674(b)(5).

An analysis of the 2013 PLR leads to a number of conclusions.

First:   It now appears that the IRS will not withhold further issuance of DING rulings merely on account of their pending ruling on Private Trust Companies or their contemplated regulations on the consequences of decanting.

Second:  Non-Grantor Trust Status.  The addition of the Grantor’s Sole Power (a power clearly permitted under IRC §674(b)(5)) does not alter the status of the trust as a non-grantor trust.  Accordingly, reaching a conclusion that the trust is not a grantor trust was just as easy and self-evident in the 2013 PLR as it was in both the 2006 PLR and the 2007 PLR.  The language of the 2013 PLR adds nothing to our collective understanding of the IRS perception of what constitutes a non-grantor trust.  Each beneficiary member of the Distribution Committee is an “adverse party” within the meaning of IRC §672(a).  Accordingly, the Grantor does not possess any of the powers under IRC §§ 674, 676 or 677 which would make the trust a grantor trust nor does the Grantor possess any of the powers described by IRC §675.

Third:   Incomplete Gifts and General Powers of Appointment. Notwithstanding the 2007 News Release, the plethora of comments and suggestions emanating therefrom and the passage of 5 years, the 2013 PLR does not manifest any new or changed views from the IRS on what constitutes an incomplete gift (excluding herefrom the discussion below concerning the Grantor’s Sole Power) and whether beneficiary members of the Distribution Committee possess, at some point, general powers of appointment.  In the 2013 PLR, the IRS must have concluded that, for Federal gift and estate tax purposes, the beneficiary members of the Distribution Committee, at least prior to there being only two members, did not possess general powers of appointment but that the Grantor, in effect, did.

To understand the Ruling, one needs to analyze separately the application of IRC §§ 2514 and 2041 to the Grantor on the one hand and to the beneficiary members of the Distribution Committee on the other.  To make the analysis even more complex, one must be sensitive to the fact that the IRS interprets the phrase “substantial beneficial interest" which would be “adversely affected” differently for income tax purposes (i.e., IRC §672(a)) than for gift and estate tax purposes (i.e., IRC §§ 2514 and 2041).[10]

Pursuant to the terms of the trust in the 2013 PLR, income and principal may be distributed to the Grantor and the other beneficiaries either (x) at the direction of the Grantor and a majority of the beneficiary members of the Distribution Committee (the “Grantor’s DC Power”) or (y) at the unanimous direction of all the beneficiary members of the Distribution Committee.

Grantor, Grantor’s Powers and General Powers of Appointment
Under the authority of IRC  Reg. §25.2511-2(c), IRC Reg. §2514-3(b)(2) and Rev. Rul. 79-63, 1979 C.B. 302, because the beneficiary members of the Distribution Committee are not takers in default of the Grantor’s failure to exercise the Grantor’s DC Power, and because the beneficiary members are mere permissible appointees under the Grantor’s testamentary power of appointment, they are not deemed to have a “substantial interest” which is “adverse” to the Grantor.

Accordingly, because pursuant to the Grantor’s DC Power, the Grantor with the consent of a majority of the other members of the Distribution Committee may distribute income and principal to himself and because those members are not “adverse” for gift and estate tax purposes,[11] pursuant to IRC §2514(c)(3)(B) and IRC §2041(b)(1)(C)(ii) the Grantor does possess (for gift and estate tax purposes, not for income tax purposes) such “dominion and control” which, conceptually, is the equivalent of a lifetime general power of appointment.[12]  The Grantor also possesses a testamentary broad special power of appointment.  Once one concludes that the Grantor has both the equivalent of a lifetime general power of appointment and a testamentary broad special power of appointment, the conclusion that the gift is incomplete is not at all surprising.  Indeed, Estate of Sanford v. Commissioner of Internal Revenue, 308 U.S. 39 (1939) requires the conclusion.  This analysis does not, and the corresponding analysis of the IRS in the 2013 PLR did not, require any consideration of the Grantor’s Sole Power under IRC §674(b)(5). 

Beneficiary Members of Distribution Committee and General Power of Appointment
IRC §2514(c)(3)(A) provides that a power exercisable in conjunction with the grantor is not a general power of appointment.  Accordingly, no beneficiary member of the Distribution Committee has a general power of appointment in the context of the Grantor acting with a majority of the Distribution Committee.

However, the beneficiary members of the Distribution Committee can also act without the consent of the Grantor if they act unanimously.  IRC §2514(c)(3)(B) provides that the power to act is not a general power of appointment if it is exercisable only with a person having a substantial interest in the property subject to the power which is adverse to the exercise by the power holder.

In the 2007 News Release, the IRS questioned whether the results in PLRs such as the 2006 PLR were inconsistent with the holdings of the two Revenue Rulings cited in Note 6.  Those two Revenue Rulings interpret IRC Reg. §25.2514-3(b)(2) to hold that where the power holders are not replaced upon death, the remaining power holders are adverse and the power is not a general power of appointment, but where they are replaced, then the remaining power holders are not adverse and the power is a general power of appointment.[13]

The 2007 News Release speculated that the PLRs may be distinguishable from the Revenue Rulings because the “the grantor’s gift to the trust is incomplete since the grantor retains a testamentary special power of appointment.”  The News Release does not explain how in the case of an incomplete gift, the Grantor’s retention of a testamentary power of appointment would make power holders adverse one to another and thereby avoid having general powers of appointment.

The 2013 PLR does not provide any insight into current IRS views on this issue because, consistent with the Regulations, the Revenue Rulings, and the 2007 PLR, a beneficiary member of the  Distribution Committee is not replaced upon his death prior to the Grantor’s, at least not until the third of them dies.

Fourth:  The Grantor’s Power to Distribute Corpus by an Ascertainable Standard.  The remaining item to be considered in the 2013 PLR is whether the inclusion of the Grantor’s Sole Power, (i.e., the IRC §674(b)(5) power) was necessary for the ruling.

In the 2013 PLR, having already concluded that pursuant to the Grantor’s DC Power, the transfer of property by the Grantor to the Trust would be “wholly incomplete” for Federal gift tax purposes, the IRS nonetheless went on in the succeeding paragraph to discuss the Grantor’s Sole Power and to conclude that said power gave the “Grantor the power to change the interests of the beneficiaries” and thus it, too, made transfers to the Trust “wholly incomplete”.  Although the Grantor’s Sole Power relates only to principal, and not at all to income, the IRS nonetheless held the transfer to be “wholly incomplete”.  This holding appears to be in addition to and separate and apart from the holding reaching the same conclusion with respect to the Grantor’s DC Power.[14]

If the Grantor’s Sole Power was, under some undisclosed theory, necessary for the Ruling, then the Ruling presents many problems with a number of state trust statutes.  Because the DING trust included the grantor as a potential beneficiary, the trust is characterized as a self-settled spendthrift trust.

If, for example, the trust were domiciled in New York, then the spendthrift provisions would not be applicable to the grantor and the grantor’s creditors would have full access to the trust.  In such a case, while there might be an incomplete gift, the IRS would characterize the trust as a grantor trust, thereby defeating the strategy.  However, in many of the states which both permit self-settled spendthrift trusts and have no state income tax, the statutes governing self-settled spendthrift trusts do not permit the grantor to retain a lifetime power of appointment[15]. 

Were he to retain such a power in those states, then the trust would not qualify as a self-settled spendthrift trust providing the grantor-beneficiary with creditor protection.  In short, in those states, the trust would be a grantor trust.  For the forgoing reason, although the 2013 PLR does not indicate the state in which the trust is domiciled, it clearly cannot be Delaware or any other state with a similar statute.

Note that the Grantor’s Sole Power only gives the Grantor power over corpus.  If its inclusion was necessary to cause the gift to be incomplete, then the analysis that the Grantor’s DC Power renders a transfer "wholly incomplete" would be questionable (an analytically inconceivable result).

Further, although the text of the ruling seems to say that the Grantor’s Sole Power in and of itself renders the transfer “wholly incomplete”, there are no provisions in the Trust (ignoring for this purpose the Grantor’s DC Power), nor does there appear to be extant authority (with recent commentators apparently taking differing positions), for the transfer to be incomplete as to the lifetime income interest.[16]

Accordingly, one is tempted to conclude that the inclusion of the Grantor’s Sole Power was not necessary for the PLR.  Perhaps the power was included for reasons unique to the Grantor’s personal circumstances; perhaps it was included merely as a gloss to enhance grantor retained rights and powers.

On the other hand, perhaps the inclusion of the ruling on the Grantor’s Sole Power means that, for ruling purposes at least, the IRS is requiring that a grantor retain more rights than were retained in either the 2006 PLR or the 2007 PLR; perhaps the inclusion was a signal that the IRS considers a grantor retained lifetime limited power of appointment over corpus (and not income) to be, in and of itself, sufficient to make a gift wholly incomplete.

Conclusion
The 2013 PLR tells us that the IRS is again willing to issue rulings on DING trusts; intrepid taxpayers will undoubtedly continue to create DING trusts in states such as Delaware and without the Grantor’s Sole Power.  There is no reason to believe the IRS would reissue the 2006 PLR, wherein all beneficiary members of the Power of Appointment Committee were replaced upon death. 

Cautious taxpayers will model their future trusts on the fact pattern of the 2013 PLR and will be exceedingly sensitive to the number of members of the Distribution Committee, their power to distribute to themselves and whether a member is to be replaced if he or she predeceases the grantor.  A revenue ruling from the IRS dealing with the issue raised by the 2007 News Release would be most welcome and helpful; the 2013 PLR does not give any hint, one way or the other.

CITE AS: LISI Estate Planning Newsletter #2076 (March 12, 2013) at http://www.leimbergservices.com. Copyright 2013 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

CITATIONS:  [1] Concurrently, four other PLRs were issued, one for each of the four sons of the Grantor.  These are PLRs 201310003, 201310004, 201310005, and 201310006.   

[2]  While ruling that the trust did not include provisions that would cause IRC §675 to be applicable with respect to the Grantor, there was an exclusion under that section with respect to the actual operation of the trust, stating that such a determination was a question of fact and could not be made prior to an audit of applicable income tax returns.  This exclusion is customary.

[3] The phrase “Power of Appointment Committee” as used in the 2006 PLR serves the same function as the “Distribution Committee” in the 2013 PLR.

[4] Some commentators speculated that the import of rulings such as the 2006 PLR was that a gift would be incomplete if the grantor were a discretionary beneficiary of income and corpus during his lifetime and possessed a testamentary power of appointment exercisable upon his death.  The potential income interest was sufficient, so the thought went, even though the grantor’s beneficial interest was solely at the discretion of income tax adverse persons.  However, such an analysis did not focus upon the holding in the ruling that with respect to the  Grantor, the members of the Power of Appointment Committee did not have a “substantial adverse interest” for purposes of IRC §2511.

[5] News Release IR-2007-127; 2007 IRB 589 (July 9, 2007)

[6] Rev. Rul. 76-503, 1976-2 C.B. 275 and Rev. Rul. 77-158, 1977-1 C.B. 285.

[7] Notice 2008-63, 2008-2 C.B. 261

[8] LTR 201208026 (September 28, 2011)

[9] In Notice 2011-101, 2011-2 C.B.932, the IRS invited comments from the public with respect to the income, gift, estate tax and GST tax consequences with respect to decanting.

[10] For an excellent recent article discussing the complexities surrounding powers of appointment and observing on the lack of symmetry between the income tax and gift and estate tax provisions, see Diana S.C. Zeydel, When is a Gift to a Trust Complete---Did CCA 201208026 Get It Right?, 117 J. Taxation 142 (September, 2012).

[11] Obviously, the beneficiary members of the Distribution Committee are “adverse” to the Grantor in the sense that acting unanimously, they can distribute 100% of the trust fund to someone other than the Grantor and concurrently impose on the Grantor a substantial gift tax.  Regardless until they exercise such power the Grantor retains sufficient powers such that his transfer to the Trust is incomplete.  What is important here is that the transfer does not become complete until the power is exercised, not that it merely exists.

[12] See Jonathan  G. Blattmachr, Mitchell M. Gans & Diana S. C. Zeydel, World’s Greatest Gift Tax Mystery: Solved, 115 TAX NOTES 243 (2007) for a discussion, under “Meaning of Power of Appointment”, of the IRC’s characterization of a reserved power that would, for local property law purposes, be characterized as a power reserved by the creator of the power for himself.

[13] A discussion of the logic, policy and reasonableness of those two Revenue Rulings is beyond the scope of this commentary.

[14] This appears to be a stand alone conclusion.  If one were to conclude that the Grantor’s Sole Power alone in and of itself rendered a transfer incomplete, then if the grantor were indifferent to being a potential beneficiary, it would appear that he could create a DING without a Distribution Committee, without a retained testamentary power of appointment, and with a single non-adverse trustee.  But see the text of this newsletter accompanying endnote 16.

[15] See, e.g., §3570(11)b.2 and §3571 of the Delaware Qualified Dispositions in Trust Act.

[16] See Joseph Goldstein, Transferee, et al v. Commissioner of Internal Revenue, 37 T.C. 897 (1962).  Compare Diana Zeydel, supra, note 10, with Jeff Pennell on Chief Counsel Advisory 201208026, LISI Estate Planning, Newsletter #1937 (March 7, 2012).

_______________________________________________________

Join us on Wednesday, April 3rd at 9am Pacific (12pm Eastern) for a special 60-minute teleconference on this timely topic with speakers, William ("Bill") D. Lipkind, J.D., LL.M. (Taxation) and Steven J. Oshins, J.D., AEP (Distinguished).  For more information and to register, click here.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  Connect with us on Facebook, Twitter or LinkedIn.

Sources: Leimberg Information Services, William D. Lipkind, J.D., LL.M. (Taxation) and Steven J. Oshins, J.D., AEP (Distinguished)

Yesterday's sunset was exceptionally beautiful at our new Redondo Beach office location, so we thought we should share.  Many wishes for a successful year from our office to yours!

Picture by Megan DeLaGarza

Review Your Will, Living Trust and Plan in 2013. Congress has just concluded tax legislation as part of its effort to avert the fiscal cliff. While the Senate called it the “American Taxpayer Relief Act of 2012,’’ likely it will have a 2013 moniker. While the 157 pages have not been analyzed yet, a number of key points may be made about the impact on estate planning, bearing in mind that final legislation, interpretations, and more are to follow. For those who think estate planning no longer is relevant because they are safely under the $5 million inflation adjusted exemption amount, think again. Estate planning never was only about federal estate taxes. Asset protection, succession planning, insurance and retirement planning, and much more, remain relevant. For those taxpayers, the good news is that the focus of planning can now more securely be on those issues. For wealthier taxpayers thinking they’ve finished planning in 2012, think again. There are three more “fiscal cliffs” coming up and Congress will have to deal with other aspects of deficit reduction, which may further impact estate planning for the ultra-wealthy. True, you’ve been given a bit of breathing room on planning, but don’t squander it. The bottom line for everyone is that now is the time to act, but how you should do so has be decisively and perhaps permanently affected but the recent tax legislation.

All Taxpayers. Many taxpayers’ initial reaction to the 2013 tax law is that nothing needs to be done. Moderately wealthy taxpayers may believe, since the federal estate tax will not apply to them, that no planning is necessary. Wealthy taxpayers may think they completed all of their planning in 2012. But, just like those late night TV infomercials, “There’s more!”

• FLPs and LLCs. Family LLCs or partnerships (“FLPs”) will continue to be vital to control assets, protect assets from creditors and irresponsible heirs. Even if the federal estate tax benefits wane, these entities should remain the cornerstone of many plans. But given the restrictions on itemized deductions, and that it is pegged at a lower income level then the maximum income tax rates, many high income taxpayers will find deductions disappearing. For these taxpayers, creative and careful use of LLCs and FLPs to shift income (subject to the family partnership rules) and shift qualifying deductions to their LLC or FLP, may provide valuable income tax benefits. Thus, LLCs and FLPs that had been intended for estate tax discounts may morph into income tax planning tools. The asset protection and control benefits will continue to be useful regardless of the tax changes. This will continue to make FLPs and LLCs, when properly planned for in the new tax environment, great tools for a broad cross-section of taxpayers.

• Itemized Deductions, Residency and Domicile. The restrictions on itemized deductions will push wealthy taxpayers who can shift their domicile and residency to a no or low tax state to do so with greater vigor. This will not only save state estate taxes and property taxes for which deductions may be fare more limited, but it will have a significant impact on where you should revise and sign new estate planning documents.

• Roth Conversions. Under prior law there are only a limited number times that you can roll a 401(k) or certain defined contribution plans into a Roth IRA. Specifically, unless you changed jobs, retired or reached age 59 ½, rolling into a Roth was not allowed. Now, however, conversion will be permitted for anyone. This will require you to pay current income taxes on the value of the plan rolled over, but perhaps that was the point. It may generate income tax to help the deficit. Why would any taxpayer undertake this type of planning? Simply because in the right circumstances it can be quite valuable. If you fear greater tax rates in the future (not so likely at this point) it would be advisable. If you do convert likely you will want income tax projections to try to minimize rate bracket creep from the additional income. A meaningful advantage for some taxpayers will be that a Roth has no required minimum distributions so that the money might stay protected from creditors and claimants. If your state law (check first) protects Roth funds this may prove an advantageous asset protection benefit from some. For ultra-high net worth clients rolling into a Roth and paying income tax may reduce your taxable estate.

Moderate Wealth Taxpayers. For those who are wealthy, but not super-wealthy, what might appear to be a permanent $5 million exemption makes the confiscatory estate tax possibly a worry of the past. The combination of the $5 million estate tax exemption, inflation indexing, and the ability of spouses to use their deceased spouse’s exemption under the portability rules, makes federal estate tax worries academic for the vast majority of Americans. Even more so, it appears that there is some permanence and confidence to the new $5 million exemption level so the worries that should have had moderate wealth taxpayers planning until now (but really had most stuck in the mud and not planning) are changed. But plenty of other worries remain. Estate planning is just as important for you, only it will be different.

• Review and Revise. The prudent step to take is to re-evaluate your estate plan and documents. Since the estate tax exemption remains at $5 million, to be indexed for inflation, most wealthy Americans will remain below the federal tax threshold. For most taxpayers who have deferred planning waiting for more estate tax certainty, wait no more. Review, revise and update your plan. However, don’t forget the lessons of the estate tax roller coaster ride of the past few years: draft and plan flexibly.

• Will Update. With the estate tax exemption fixed at $5 million, it may significantly affect how your assets are distributed under old wills and revocable trusts. Too many people have deferred updating their documents for years because of the uncertainty in the law. If you were one of those that ignored estate planning since the 2010 Tax Act first raised the exemption to $5 million thinking that estate planning didn’t apply to you, now that there seems to be some permanency, move forward on updating your planning. With the uncertainty apparently resolved, stop delaying. Protect your goals and loved ones. If a new estate tax law is passed, which is what most tax professionals anticipate, your will, living trust and overall plan will certainly need to be reviewed and possibly updated. Most wills and revocable trusts had plans that are formula based. Make sure the formulas work in the new tax environment. Many states still have estate taxes so you need to be sure that the formulas not only work in the current $5 million federal environment, but in the context of any state estate tax you might face.

• 2012 Remorse. If you’re having buyer’s remorse because the exemption will remain high, be mindful that the return of inflation, increasing longevity and other factors could all work to make your planning prove invaluable. So don’t unwind your plan. Further, no one knows which way the fickle political tax winds will blow in the future. It may not have been coincidence that on New Year’s Eve CNN coverage bounced from interviews of Honey Boo Boo to updates on Congressional fiscal cliff matters. It is also important to recognize that most sophisticated trust plans provide a range of valuable benefits, which are in addition to federal estate tax benefits. The odds are that your plan, even if the exemption stayed the same, is well worthwhile. See “Reconsidering Irrevocable 2012 Gifts,” below.

• Life Insurance. If you have owned life insurance for the purpose of paying an estate tax you will never face, don’t cancel the policy before having it evaluated. A good policy might make sense to retain as a ballast against other investments you hold, or to secure other purposes. If that policy is held in an irrevocable life insurance trust, after you have your insurance consultant review the policy, have your estate planner review the trust. Often there is tremendous flexibility in an insurance plan (both the policy and trust) that might facilitate your remaking a plan that was intended to pay estate tax into a new and more useful tool. If you held life insurance inside a pension plan, your advisers may have cautioned you to remove it because of adverse estate tax consequences. If your estate is safely below the new estate exemption, it may no longer matter. If you have an old insurance trust it undoubtedly has annual demand (so called “Crummey” powers) that make the gifts you make to the trust qualify for the annual gift tax exclusion. If your estate, inclusive of insurance and likely future appreciation, will remain below the threshold, you might not want to bother issuing these annual notices. Don’t simply ignore them. Your insurance trust provides valuable asset protection benefits as well and ignoring its terms may undermine that protection. See “Irrevocable Trusts,” below.

• Irrevocable Trusts. You should evaluate any existing irrevocable trusts. If you had a trust, for example for children or grandchildren to hold annual gifts, with the possible permanency of the $5 million exemption these may no longer be needed for estate tax purposes. However, before you simply cancel and distribute the funds, consider the impact of an outright distribution on divorce of your heirs/beneficiaries. The bottom line is that all irrevocable trusts, just like the insurance trusts discussed in the preceding section, should be reviewed in light of the new estate tax paradigm, and determine how they can be modified, or even eliminated, to provide you the best result in the current environment. Some irrevocable trusts may permit an independent trustee to distribute “so much or all of the principal….” This type of clause may suffice to distribute the trust to current beneficiaries and terminate the trust. Caution, however, is in order. What of contingent or other beneficiaries? Will terminating a trust that is no longer needed to address estate tax issues simply put those assets in harm’s way in the event of a recipient beneficiaries divorce? There may be other options to clean up an old trust and revitalize it. See “Reconsidering Irrevocable 2012 Gifts,” below.

Ultra-High Net Worth Taxpayers. The $5 million exemption is positive news, but relative to the size of your estate the $3.5 million exemption initially proposed by President Obama compared to the $5 million compromise is not significant to you. The 40% maximum tax rate is higher than 2012, but much lower than it could have been. That is great news, but a 40% rate can still decimate a closely held business, or undermine wealth accumulation goals.

• It Ain’t Over. With Congress having more bites at the tax apple in coming rounds of deficit reduction negotiations, those with ultra-high net worth that think they can breathe a sigh of relief, think again. Restrictions on grantor retained annuity trusts (“GRATs”), valuation discounts, and perhaps even on excluding grantor trusts from your estates, may all be up for grabs in future legislation. The fact that these matters appear not to have been addressed in the current legislation may only be due to time constraints. These could all show revenue additions to the federal budget part of future deficit reduction activities. Given that the estate tax exemption is now an inflation indexed $5 million, doubled for married couples because of portability, there may be little resistance to these changes as they will only affect a tiny fraction of the wealthiest Americans.

• Finish a Good Thing. Consider “topping” off gifts to GST exempt grantor trusts that you started in 2012. Many of these trust plans fell short of the $5 million gift goal because time was too limited to complete all desired transfers. Use the recent legislation as a reprieve to complete the transfers of as much as you can to your trusts.

• Plan Before the Next Adverse Tax Change. Take advantage of this current window of opportunity to consummate note sale transactions and other steps to shift greater future values into protective trusts, and freeze the value of your remaining estate while you can. The bad news is that a 40% tax rate is very high, and if your estate is, or will be, well in excess of the $5 million inflation adjusted exemption, you should take maximum advantage of sophisticated estate freeze techniques before Washington deficit cutters attack them. If you completed sophisticated 2012 trust planning you may have the estate planning infrastructure in place to complete more planning with modest cost and effort. If your irrevocable trusts were created as grantor trusts in states with favorable trust laws, they may be just what is needed to complete a sale transaction (or perhaps an additional sales transaction) now. If you had costly appraisals done in 2012 if you make additional transfers of the same assets (e.g., selling interests in a business that you made a $5 million gift of in 2012) you may be able to use the same appraisal report.

Asset Protection Planning. Whatever happens in Washington, it will have no impact on the litigious nature of our society. Use the $5 million exemption to implement (or if you started in 2012, to continue to implement) asset protection planning. Don’t dismantle existing family partnerships or LLCs, use them as asset protection tools, even if the discounts no longer affect your planning. Use the newly liberalized rules on Roth conversions to convert retirement assets into Roth IRAs. Roth IRAs, in contrast to regular IRAs, have no required minimum distributions, so assets can remain in the protective Roth envelope for as long as you wish. So long as your state law provides creditor protection for Roth IRAs, this can be a simple asset protection homerun.

Divorce Protection Planning. Whatever changes affect the tax law, the reality of a high divorce rate will not change. Too many moderate wealth taxpayers will fall into the “gee I can get a simple will,” attitude because “I won’t face an estate tax.” But the 50% purported oft quoted divorce rate can decimate an estate to a more significant degree than a 40% estate tax rate. And, unlike the estate tax, the divorce courts won’t give your heir the first $5 million free of claims. All assets might be at risk. So, regardless of whether estate taxes will ever be a concern, you should almost assuredly use similar trust planning for heirs to protect their assets from the ravages of divorce.

Income Tax Planning for Most Income Taxpayers. For most Americans the new tax law effectively eliminates the worries most Americans will ever have about becoming ensnared by the Alternative Minimum Tax (“AMT”). It also makes permanent the tax cuts enacted as part of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”). This means, for most Americans, the prior tax rate brackets of 10%, 15%, 25%, 28%, 33% and 35% remain.

Income Tax Planning for High Income Taxpayers. Income tax planning will become the new estate planning for many moderate wealth taxpayers. For those who had previously been more worried about estate tax, income tax worries may become paramount. While most Americans are breathing a sigh of relief that the Bush era tax cuts did not end for them (although they are struggling with a not insignificant payroll tax increase), for high income taxpayers a combination of higher rates and phase out of itemized exemptions will create significantly more tax cost. When this is combined with the 3.8% tax on passive investment income, the overall income tax costs are pretty substantial.

• Higher Income Tax Rate. A new 39.6% tax bracket has been added. This higher rate will apply to those earning over $400,000 for single taxpayers, $425,000 for head of household taxpayers, and $450,000 for married taxpayers.

• Capital Gains. A new higher 20% capital gains rate will apply to capital gains and dividends at the same threshold the higher 39.6% rate above will apply. For middle income taxpayers the 15% rate is retained and for taxpayers in the lowest 10% and 15% brackets a 0% rate will apply. See the discussion about using FLPs and LLCs to shift income.

• Medicare Tax. Starting January 1, 2013 a 3.8% Medicare tax will apply to net investment income. Wages are subject to a 2.9% Medicare payroll tax. Workers and employers each pay half, or 1.45%. The Medicare tax is assessed on all earnings or wages without a cap. Starting in 2013, a 0.9% Medicare tax will be imposed on wages and self-employment income over $200,000 for singles and $250,000 for married couples. IRC Sec. 3101(b)(2). That will make the marginal tax rate 2.35%. Under 2012 law only wages/earnings were subject to the Medicare tax. Starting January 1, 2013 a 3.8% Medicare tax will apply to net investment income if adjusted gross income ("AGI") is over $200,000 for single taxpayers or $250,000 on a joint tax return. IRC Sec. 1411. The lesser of net investment income or the excess of modified adjusted gross income (“MAGI”) over the threshold, will be subject to this new tax. Investment income derived as part of a trade or business is not subject to the new Medicare tax on investment income unless it results from investment of working capital.

• Itemized Deductions. Personal exemptions and itemized deductions will be phased out at new thresholds: $250,000 for single taxpayers, $275,000 for heads of household and $300,000 for married taxpayers filing jointly. Note that every tax rule has different income thresholds. This was certainly intentional in that the Republicans can claim partial victory by having kept “tax increases” to taxpayers making over $400,000 single and $450,000 married, when the reality is that, as the itemized deduction phase out proves, the tax increases occur at lower levels. From a planning perspective, having different thresholds for almost every tax benefit/reduction makes planning very complicated. Having rules of thumb as to what level of income triggers tax implications won’t be practical.

• Medical Expenses. Deductions for certain medical expenses will be reduced, and for many eliminated. Under prior law you could only deduct medical expenses to the extent exceed 7.5% of adjusted gross income (AGI). This restriction is in addition to the others that limit the tax benefits of itemized deductions, above. Starting with 2013 you’ll only be able to deduct medical expenses as an itemized deduction if they exceed 10% of your AGI. IRC Sec. 213.

• FLPs and LLCs. The use of family partnerships and LLCs to shift income will take on new importance for some families.

• Minimizing Higher Capital Gains Taxes. Charitable remainder trusts (“CRTs”) had fallen into disuse because of the low capital gains rates. The new tax rate structure should increase the use of CRTs to minimize or defer capital gains taxes for those selling businesses or valuable assets, such as a large concentrated stock position. Better coordinating the harvesting of gains and losses to minimize the now higher income tax rates will have increased importance. Since many wealthy taxpayers created one or more complex grantor trusts (trusts on which they remain liable for the income even though the earnings remain in the trust) the “pots” over which the harvesting will have to be coordinated will be broader.

Trust Income Tax Planning. Planning for trusts and estates to address the higher rates and compressed brackets, and timing distributions to beneficiaries to minimize overall trust/beneficiary tax burdens, will take on new importance and complexity. It may even change historical distribution patterns for some trusts.

Understanding Your 2012 Planning. Given the incredible sophistication and highly technical nature of much of the better 2012 planning, it is advisable to review the planning and documentation you implemented in 2012 and be certain you and the various individuals named in your plan (trust protector, individual trustee, loan director, investment trustee, etc.) all understand their respective roles. Ideally, a meeting with all these people present to review the trust document terms that relate to operations should take place.

2012 Follow Up. 2012 planning will require follow up and review of critical steps if it is to succeed. Consider the following:

• Loose Ends. No plan completed under the pressure of 2012 deadlines and the veritable tidal wave of work every adviser is facing will be free of loose ends, typographical errors or the need for other “housekeeping.” The way to address these potential loose ends is to review all the documents, calculations and organize them for future follow up.

• Additional Legal Documents. Most plans will require additional legal work that was deferred until after the 2012 crush as not being essential to complete by year end. For example, it was common when interests in an entity, such as a corporation or limited liability company were given or sold to a trust that the legal work completed in 2012 was limited to the assignment of the interest involved. The shareholders’ agreement or operating agreement and other ancillary documents may remain to be completed. Stock certificates may not have been issued. Since the focus for many transactions was completing the essentials of a gift or sale before year end, in many cases most other documents and steps were left for follow up after year end. You should, with your advisers, endeavor to identify any such missing documents or incomplete steps and set up meetings or milestone dates to assure that they will be addressed and not overlooked.

• Gift Tax Returns. Importantly, for any significant 2012 planning a gift tax return will have to be filed in 2013 reporting the 2012 gifts. There are disclosures and steps which must be taken on gift tax returns that are critical to the success of your plan. Generation skipping transfer (“GST”) tax exemption, perhaps, should be affirmatively allocated to protect your 2012 gifts. In order to run the period of time during which the IRS can audit a gift tax return (“toll the statute of limitations”) your gift tax return will have to fully disclose all relevant information concerning a gift. This is referred to as “adequate disclosure.” This will require that your CPA will have to be provided with copies of legal documents your attorney created (or as discussed above, will still have to create), financial documentation corroborating values and transfers from your wealth manager, and complete appraisal reports (see below). Given the massive number of gift tax returns and the complexity involved your CPA might well advise that you extend the date of filing your 2012 gift tax return so decisions can be made once the law is known (e.g., late allocation of GST exemption). If you sold assets to a trust, even thought it was not intended to be a gift, such “non-gift” transactions are commonly reported on gift tax returns to run the period of time during which the IRS can audit the transaction. There are also a number of technical issues that your CPA may have to address when filing your gift tax return. If you are married can your spouse elect to “split-gifts” with you by treating your gifts as if ½ were made by him or her? Will this be advantageous if it is permitted? Etc.

• Income Tax Returns. Income tax returns will have to be filed in a manner that reflects the planning that was done. For example, if on November 1 you transferred 50% of your interests in what had been a single member (you were the only owner/member) limited liability company (“LLC”) to an irrevocable trust, the LLC would no longer be a single member disregarded entity but rather, in most instances, a partnership for income tax purposes. If you gave 25% of your 45% interest in a family S corporation to your trust on November 1, the income from the S corporation for the 2012 year will have to be allocated between you and the trust for the portion of the year you each owned that 25% transferred interest. There are a host of other steps your CPA may have to consider in light of 2012 planning.

• Grantor Trust Status. Many, perhaps most, trusts set up in 2012 were “grantor trusts.” The income of such trusts is reported on your return even though the earnings may be held in the trust. You should endeavor to have your CPA and wealth manager project the tax consequences in advance so that you can appropriately plan for the tax payments and future impact.

• 2013 Sale Transactions. Many people who started planning later in 2012 would have benefited from selling assets to their grantor trust, however, due to time constraints, many of these transactions were not completed. When evaluating possibly completing such transactions in 2013, watch the dates on appraisals. If too much time elapses the appraisals will be stale and new or updated ones will be required. Also, carefully monitor with your tax advisers how new law changes may affect the planning for such a sale.

• Reconsidering Irrevocable 2012 Gifts. If you have second thoughts or new concerns about the planning you finished in 2012, perhaps as a result of the contents of any new tax law, the flexibility of many trusts, the use of disclaimers (refusing to accept interests in a gift), some of the options on gift tax return decisions, decanting (pouring one trust into a new and typically better crafted trust), may all afford opportunities to adjust planning that you are not as comfortable with as you initially thought. This should be addressed with your advisers as early as possible in 2013. Make appointments now to meet with your CPA, estate planner, wealth manager, trust officer, insurance consultant and other critical advisers so you can address these points quickly. For example, if you accept the benefit of an asset, you may no longer be able to disclaim your interests in it.

• Appraisals. If you had an appraisal started in 2012 for your 2012 gifts or sales to trusts, be certain to follow up and obtain a final complete appraisal. Many appraisals were issued only as numbers with the full reports to be completed after year end. Your CPA will require a complete appraisal to file a gift tax return and you certainly want the detailed report for your records as well.

• Approvals. Third party contractual approvals were essential for many transactions. If you have not received them, you need to make a judgment call. Should you follow up now and get the approvals you should have had risking opening up a proverbial Pandora’s Box? You should also bear in mind that if approvals were required and not received, the IRS might argue that the lack of required approvals made the transfer incomplete.

• Defined Value Clauses. Many gifts and sales completed in 2012 were planned using a mechanism to reduce the risk of a tax being triggered if the IRS increases the value of the assets given (e.g., stock in a hard to value closely held business). Review with all of your advisers how these mechanisms should be handled post-transfer. For example, what should be reported on a Form K-1 for an S corporation if the actual percentage (number of shares) of stock cannot be known until an audit is finalized? Who votes the equity interests during the period before an audit occurs? Reasonably addressing these practical implications may be important to the ultimate success of the mechanism used.

• Distributions. Distributions from entities have to reflect the new ownership interests. Distributions from trusts must reflect the intent of the trusts. If a goal of a trust is to assure that the assets are removed from your estate, regular distributions might be used by the IRS to argue that you had an understanding with the trustee to receive distributions and serve as a basis of including the trust assets in your estate.

• Developing Case Law. It is not only major tax bills that are important to consider. Other laws can change that affect your planning. For example, some of the recent developments that affect self-settled asset protection trusts (trust you give assets to but remain a beneficiary of) might have you reconsider how certain aspects of such a trust might be handled. It might be feasible to disclaim certain interests in such a trust to enhance the likelihood of the trust being respected.

More Information. We have emailed to our data base a regular stream of planning materials. We have mailed numerous articles in hard copy to all clients that we can identify that engaged in 2012 planning. Our newsletter has for several issues addressed specific planning steps. In 2013, articles will address post-2012 planning and new developments in the estate tax laws. If you have not, or do not, receive these materials, or would like materials on a particular issue please email me shenkman@shenkmanlaw.com and I’ll send whatever materials we have that might help you.

Contact Us if We Can Help. We are here to help during throughout the uncertainty and changing estate planning environment. Let us know how we can assist you and your other advisers with reviewing or revising your will and planning, and in follow up on completing and implementing your 2012 planning. Please call or email at your convenience.

Also, you may be interested in our special 60-minute teleconference entitled, "Fiscal Cliff Legislation and What It Means for Your Clients" on January 4th or January 9th with Robert S. Keebler, CPA, MST, AEP (Distinguished).

ABOUT THE AUTHOR
Martin M. Shenkman, J.D., CPA, MBA

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.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

The House has just approved the Senate bill. President Obama will sign it later this week.  Now what?  [Hint:  You’ll be doing NEARLY EXACTLY what you’ve been doing the past few months, but without the time pressure.]

Estate Planning:

1. We now have a “permanent” $5MM (indexed for inflation) estate, gift and GSTT exemption and a 40% tax rate.  Remember that the word “permanent” really means “until they change it next time”.  This is an opportunity for all of your clients to continue to use their $5MM gift and GSTT exemptions by making gifts into Dynasty Trusts.  All of our wealthy clients should continue to make these gifts.  This is a great opportunity.  We don’t know when Congress will next change the exemption.  Don’t procrastinate.  It might be one year, might be two years, might be three years, etc.  Look at Nevada as the jurisdiction of choice.  See the Dynasty Trust State Rankings Chart.
2. Congress hasn’t touched valuation discounts, GRATs and other techniques.  Again, keep using them.  Great news that our tools are intact.
3. Income taxes were raised for the wealthy.  So CRTs should be more on your mind.  Don’t rush and do them for everyone.  They’re still overused.  But at least consider them more than before.
4. High early cash value life insurance should be used even more than before given the higher income taxes.  Those of you who don’t understand this product should take your favorite life insurance agent out for lunch and get up to speed.

Asset Protection Estate Planning:

1. The congressional bill DID NOT change the fear of law suits and divorces.  You should continue to suggestion Dynasty Trusts for asset protection planning and also Domestic Asset Protection Trusts – especially using the Hybrid Version (see http://www.oshins.com/images/Hybrid_DAPT.pdf).  And I can’t find any reason not to use Nevada as the jurisdiction of choice given that it’s ranked #1 in the DAPT State Rankings Chart (Download Chart)
2. Combine the DAPT with the Double LLC strategy for extra protection.

Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada.  Steve is a nationally known attorney who is listed in The Best Lawyers in America® and has been named one of the Top 100 Attorneys in Worth magazine.  He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011.  He has written some of Nevada's most important estate planning and creditor protection laws, including the law making the charging order the exclusive remedy of a judgment creditor of a Nevada LLC and LP (in 2001, 2003 and 2011), the law changing the Nevada rule against perpetuities to 365 years (in 2005) and the law making Nevada the first and only state to allow a Restricted LLC and a Restricted LP creating larger valuation discounts than any other state allows (in 2009).  He is also the author of the Annual Domestic Asset Protection Rankings which you can download from our Free Resources page.  Steve can be reached at 702-341-6000, x2 or at soshins@oshins.com.  His law firm's web site is http://www.oshins.com.

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.

All of us here at The Ultimate Estate Planner want to wish you and yours a wonderful holiday season filled with lots of love, joy and time with your family and friends! Thank you for all that you do and we look forward to continuing to help you unlock your practice's potential!

Here are our holiday hours:

Dec. 21st - Closed at 12pm PT

Dec. 24th - CLOSED
Dec. 25th - CLOSED
Dec. 26th - 8:30am to 12:30pm PT
Dec. 27th - 8:30am to 12:30pm PT
Dec. 28th - 8:30am to 12:30pm PT

Dec. 31st - CLOSED
Jan. 1st - CLOSED
Jan. 2nd - Regular Hours

Also, here is a preview of what's coming in January so that we can help you kick-start 2013 with a BANG!  Hope that you'll join us!

The Ins & Outs of Correct 709 Prep
Speaker: Robert S. Keebler, CPA, MST, AEP
Date: Tuesday, January 8, 2013
Description: You may be getting ready to bang out a bunch of Form 709's for 2012 gifts and think "this will be quick and easy!"... but watch out!  There are lots of traps for the unwary.  And if you fall into any of them, you'll face a lot of liability risk - - not so much because of a gift tax audit in the next couple of years - - but rather when the client dies many years from now and a mountain of penalties and interested may have accrued (or tens of hundreds of thousands more in estate taxes may be incurred)! Avoid the big 709 traps by joining us for a straight-forward, practical discussion of what every gift tax return preparer needs to know!   >>MORE INFO

___________________________________________

The Installment Sale to an Intentionally Defective Grantor Trust
Speaker: Steven J. Oshins, Esq., AEP
Date: Thursday, January 10, 2013
Description: The year 2012 was the year of the Dynasty Trust.  More Dynasty Trusts than ever have been set up and funded with $5 million gifts.  There was a mad rush to get these trusts finalized by year-end.  Some of our clients were lucky enough to get their trusts in place, while others waited too long and were unable to take advantage of the greatest opportunity in the history of gift tax planning.  Those who got their trusts funded now have $5 million in them that they may want to further leverage.  Since they are out of gift tax exemption, the next step is to utilize a combination of valuation discount planning and installment sales to these trusts to further leverage their gift tax exemption.  And those clients who failed to use their $5 million gift tax exemption are now wondering if there is anything left to do. Join us as we go over ways to leverage a smaller exemption for 2013 with one of the nation's leading estate planning attorneys!  >>MORE INFO

___________________________________________

How to Be a 1040 Diagnostician - 2-Part Program
Speaker: Robert S. Keebler, CPA, MST, AEP
Dates: Wednesday, January 16, 2013 & Thursday, January 17, 2013
Description: If you know how to read and properly utilize a prospect's or client's 1040 (Federal Income Tax Return), you'll generate a lot more revenue - - more investment, annuity and insurance sales, more asset management fees, more tax planning fees and more estate planning fees.  We've enlisted the expertise of renowned CPA and tax planning specialist, Robert S. Keebler, CPA, MST, AEP, to take you through a thorough line-by-line discussion of the Form 1040 and how to spot valuable planning opportunities. >>MORE INFO

___________________________________________

The Capital Gains Bypass Trust
Speaker: Philip J. Kavesh, J.D., LL.M. (Tax), CFP®, ChFC, CA State Bar Certified Specialist in Estate Planning, Trust & Probate Law
Date: Wednesday, January 23, 2013
Description: Would you be a hero if you could show clients a 100% IRS-approved way to sell appreciated assets tax-free? (By the way, it's not an exchange!) There is a little-known solution that has been right in the Internal Revenue Code since 1969 and if you know what it is and can simply explain how it works, you can capture a lot more high net-worth clients, and either generate more planning fees, place more assets under management or even sell more life insurance and annuities!  Join us as we explain this common overlooked planning strategy in plain-English so you can begin applying what you learn into your practice right away!  >>MORE INFO

Please be advised that we are currently moving our office location.  Our office will be closed on Friday, November 30th and will re-open for business at 8:30am Pacific Time on Monday, December 3rd.  We look forward to our brand new office (right next to the beach!).

Don't forget to update your address book!

212 Yacht Club Way, Suite A-7
Redondo Beach, California 90277

Thanks for your understanding and patience during this entire process!

In observance of the Thanksgiving holiday, our office will be closed at 12pm Pacific on Wednesday, November 21st and will re-open at 8:30am Pacific on Monday, November 26th.  We hope that all of our customers, prospective customers, readers, followers, fans and their loved ones have a wonderful and safe Thanksgiving, filled with great food, fun, memories and thanks.

Please enjoy this special Thanksgiving story from our President, Philip Kavesh.

A Truly American Thanksgiving Feast!
By Attorney Philip J. Kavesh, President

Growing up in a small farm town in Southern New Jersey, Thanksgiving was always one of my favorite days of the year.

Of course, there was the sheer natural beauty of seeing the tree leaves change color and carpet the ground with shades of yellow, orange and brown. And all the pumpkins - - each rivaling the next in shape and size - - literally sprouting up from all the local fields.

But, what I remember most about Thanksgiving was the feast - - of football!

My family's holiday ritual began with my Dad and me getting up early and putting on our "uniforms" (layering up with enough clothing to sit outside in the chilly morning air). Because by 8am we were off to attend the annual bragging rights game - - between Millville High School (boo!) and our beloved Vineland High School (yea!) - - which began promptly at 10am every Thanksgiving Day. It was a classic battle between two neighboring towns, pitting the factory mill workers against the farm boys (I'm not kidding! A glass factory was the major employer of Millville, while the Vineland team was known as the "Poultry Clan" because of all the chicken farms and, believe it or not, our school mascot was a fighting rooster! Imagine the insults we heard every other year when we had to travel to Millville!)

This was more than a mere football game. It was about respecting an ages-old tradition. Every year, I was reminded that the Millville-Vineland game was one of the oldest high school battles in the nation! (By the way, just before writing this, I looked it up for the first time and, sure enough, it's still the third or fourth longest-running high school football rivalry, since 1894, and remarkably both schools are about tied in number of wins!).

The Thanksgiving morning game was also a unique social and bonding event for the members of each community, no matter their "status" or place in life. This was particularly true for the home team, as neighbor after neighbor streamed from their houses, most of them walking in groups, to attend this revered event at the local stadium. I remember always struggling to squeeze into the packed bench-style seats (on the Vineland side, of course) and along the way to finding seats, saying hello with my Dad to about everyone we knew in town!

I also remember a few goofy events that occurred over the years at this Thanksgiving football classic. One time, the visiting Millville stands collapsed! (No matter where the game occurred, rickety open wooden stands were reserved for the away team, while the home team sat in the comfortable concrete supported stadium seats.) The Millville fans had been jumping up and down boasting of the success of their boys during the game, much to our dismay, so we all thought on the Vineland side when they fell, "Ha! Ha! You deserved it!" (Actually, I thought that it might have been a result of some unseen mischief by a few leather-jacketed Vineland High dropouts.)

The back and forth mischief between the fans seemed to escalate over the years until it was decided there simply had to be an end put to it! One year, the visiting Millville fans tore down both goalposts after the game and pulled up big chunks of the field too. So the next time the game was played in Vineland, the police brought in the "K-9 Corps" - - and most of the fourth quarter was played with snarling and barking attack dogs leashed to the goal posts in each end zone!

Mostly, though, the game was good, clean fun. But the day was only getting started when the game ended. The next event on schedule was the annual Thanksgiving parade down the main street of town. (At least my time-filtered memory of Thanksgiving has the parade on that same day - - but it may have been on Friday or Saturday!) Both towns held essentially the same parade. Whichever school was the visitor had its marching band play in the home town's parade, which invariably ended with Santa Claus passing by in his sleigh, tossing to the cheering onlookers (much to the delight of younger kids) miniature candy canes. Then, most of the parade moved on to the other town! I remember how thrilling it was to stand just a few feet away, on the curb, as the local marching bands shook the street with their pounding feet and loud brass horns and drums! (I guess it's no coincidence that my Dad chose to play the lead, Professor Harold Hill, in an off-Broadway production of The Music Man and that I still consider that show, including the song "76 Trombones", one of my favorites to this day!)

 

After the game and the parade, the day was still only half over. Next came the early afternoon family Thanksgiving dinners, with plenty of turkey and every other kind of food you can imagine. Then, everyone crowded around the television (a color one, if you were really lucky!) to watch the only NFL game of the day, the Green Bay Packers at the Detroit Lions. (No matter how good the Packers were and how bad the Lions were, I remember it was always an exciting fight to the finish!) During the halftime of that game, the neighborhood Dads and sons gathered in the street or a nearby field for a friendly game of touch football. Then, it was back to the televisions (and more eating until everyone was too sleepy to do anything else!). What a wonderful day Thanksgiving Day was!

For years, until I graduated high school and left our small town to go off to college, I thought (or took for granted) that everyone in America - - and all over the world - - enjoyed a Thanksgiving holiday like this. Of course, I soon learned nothing was farther from the truth. It was only after breaking away from the wonderful Thanksgiving tradition with which I had been raised that I truly understood the meaning of Thanksgiving. We are so very lucky and truly blessed to live in such a free country with all its opportunities and bounty.

I know many people are experiencing hard times these days and I believe it's not just the obligation, but the duty, of those of us who are well off to help others less fortunate. Give of your time to assist others in need or of your spare money to contribute to worthy charitable causes. Consider placing a special bequest in your estate plan to charity, even if it's just 1% of what you've accumulated over a lifetime! Your family will hardly miss that 1%, but imagine what good it will do in the world, particularly if others join you to do the same.

In hope of getting us all into the true spirit of Thanksgiving, I'll leave you with these moving words from an anonymous source...

Be Thankful

Be thankful that you don't already have everything you desire;
If you did, what would there be to look forward to?

Be thankful when you don't know something...
For it gives you the opportunity to learn.

Be thankful for the difficult times;
During those times you grow.

Be thankful for your limitations...
They give you opportunities for improvement.

Be thankful for each new challenge...
That's how you build strength and character.

Be thankful for your mistakes;
They will teach you valuable lessons.

Be thankful when you're tired and weary...
Because it means you've given your all.

It's easy to be thankful for the "good" things;
Yet a life of rich fulfillment comes to those
who are thankful for the setbacks.

Gratitude can turn a negative into a positive...
Find a way to be thankful for your troubles,
and they can become your blessings.

Happy Thanksgiving, everyone! I hope you and yours have a safe and memorable holiday, filled with love, cheer, fun - - and your own tradition!

We are pleased to announce that we have extended the deadline to receive 3 free bonuses to those who purchase a copy of the new book, 2012 Estate Tax Planning Steps to Take Now, by the 3 of the industry's leading tax and estate planning experts, Martin Shenkman, J.D., CPA, MBA, Jonathan Blattmachr, J.D. and Robert S. Keebler, CPA, MST, AEP (Distinguished).

These 4 bonuses include:

BONUS #1: Access to a special website where you can immediately customize, address and mail out the provided marketing postcard, so you can get clients and prospects to start calling you for appointments!*

BONUS #2: A 50% discount toward estate tax and asset protection expert, Steve Oshins’ “Advanced Estate Tax Planning Sales Tools” - - extremely helpful sales tools to help you get clients and prospects to engage you!

BONUS #3: A sample client marketing letter used by Phil Kavesh for his law firm clients to get them to move before it’s too late!

*Does not include discounted printing fee and postage.

For more information and to get your 4 special bonuses, order your book today!

This post has been brought to you by The Ultimate Estate Planner, Inc., providing practical, tested and proven technical and marketing products to help estate planning professionals throughout the country build their practices.  If you are interested in a personal consultation for your office regarding how to make your office more efficient and how to improve the productivity of your attorneys, staff and advisors, contact us today at 1-866-754-6477 to find out how you can receive a free 30 minutes consultation.  Connect with us on Facebook, Twitter or LinkedIn.