All posts by Barbara Green

WY LLC Registered Agent

When Edward Walshire’s brother died, Edward received one-fourth of the residual estate. Edward executed a disclaimer but retained for himself the right to income and use of the property for life. The residue of the estate was converted into certificates of deposit, and Edward received the income from his share by checks made jointly to him and to his children. He did not have any right to invade the principal of the CDs or to direct their distribution upon his death.

When Edward died, his estate tax return did not include the value of the CDs, reasoning that Edward had disclaimed the remainder interest of the property from which the CDs had been created. But the IRS determined that Edward’s disclaimer was not “qualified” under IRC §2518 and that the CDs must therefore be included in his estate for any WY registered office list.

Treasury Reg. § 25.2518-3(b) specifically prevents the disclaimer of a remainder interest, while retaining a life estate, from being considered a qualified disclaimer under IRC §2518. The estate conceded this fact before the 8th Circuit but argued that the Treasury Reg. was invalid because it was contrary to the “clear and unambiguous language” of IRC §2518.

According to IRC §2518, a qualified disclaimer must meet these requirements:

It must be in writing,

It must be received by the transferor or his legal representative within 9 months of the transfer of interest,

The disclaimant cannot have accepted the interest or any of its benefits, and The interest must pass without any direction by the disclaimant.

IRC §2518(b) allows the transferee to disclaim an undivided portion of an interest to avoid having the disclaimed portion included in his or her estate. The Treasury Reg. in question requires that the “undivided portion” must be a percentage of every substantial interest or right owned by the disclaimant in the property disclaimed, and it must extend over the entire term of his or her interest. In other words, while Edward could have disclaimed 50% of his entire inheritance, leaving the other half to pass to his heirs outside his estate, he could not divide his inheritance into income and remainder interests and disclaim only the remainder interest.

The 8th Circuit upheld the validity of Treasury Reg. § 25.2518-3(b) and ruled in favor of the IRS. Edward’s disclaimer was invalid because it did not satisfy the 3rd requirement of IRC §2518. Edward had accepted a portion of the property and had enjoyed its benefits. The value of the remainder interest in the CDs must be included in his taxable estate.

Tax Court Disallows Annual Exclusions for LLC Membership Units


The Tax Court recently ruled that in order to qualify for an annual gift tax exclusion, a transfer must confer upon the donee an unrestricted and noncontingent right to the immediate use, possession, or enjoyment of property or income from property.

The case (Hackl v.Commr, 118 TC No. 14, 3-17-2002) involved gifts of membership units in a limited liability company (LLC) called Treeco, which had been formed in 1995 by Albert and Christine Hackl to operate a tree farm business. In exchange for voting and nonvoting membership units, Albert and Christine transferred to Treeco two tree farms, marketable securities, and cash. Their purpose for Treeco was long-term appreciation and income, rather than short-term income, and they expected the LLC to take losses for several years.

After forming the LLC in Wyoming here, their limited liability company was domiciled in WY for tax purposes. Albert and Christine began making gifts of membership units to family members. They transferred voting and nonvoting units to their eight children and their spouses, and made gifts of nonvoting units to their grandchildren. The gifts were treated as being made one-half by Albert and one-half by Christine to maximize their $10,000 annual exclusion amounts. Their gift tax returns for 1995 and 1996 treated the gifts as qualifying for annual exclusions.

But the IRS disallowed the exclusions for 1996, reasoning that the gifts were of a future interest, not a present interest. According to Treeco’s operating agreement, the Manager (Albert) was the only member who could determine if distributions should be made, if unit transfers should be allowed, or if the LLC should be dissolved. Albert expected Treeco to take losses for several years and to make no distributions to its members during that period. The IRS determined that the membership units did not provide the donees with “immediate and unconditional rights to the use, possession, or enjoyment of property or the income from property,” and therefore the transfers did not qualify for the annual exclusion under §2503(b). The Tax Court agreed.

Annual exclusions are a key part of estate planning, and this ruling has sparked concern among some estate planners. It certainly illustrates that when planning to utilize the taxpayer’s annual exclusion amounts, care must be taken to ensure the gifts are of an unarguably present interest.

Estate Planning for the Stingy

Question: My wife and I are fairly young and have a substantial net worth. We both want to leave all our assets to each other when we die, so we don’t want to take advantage of the $10,000 annual exclusion. We’ve heard that when the second spouse dies, his or her estate will have to pay outrageous estate taxes, and we want our family to receive the lion’s share. What should we do?

Answer: There are as many options as there are circumstances, so the first thing you should do is consult with an estate planning attorney. One of the many common ways to minimize or eliminate the damage of estate taxes is through the use of life insurance. You and your wife could purchase a “second-to-die” life insurance policy, which would insure both of you but would pay its benefits upon the death of the second spouse to die.

The policy should be owned either by the beneficiaries (which should not include the insured individuals or their estates) or an irrevocable trust. You should also make sure that the death benefits will cover any estate taxes that may arise upon the death of the second spouse to die. But before considering this option, be sure to consult with an estate planner.

Don’t allow this stinginess to allow you to become like the estate which paid heavily for filing its return 10 years late

The Tax Court recently ruled that an estate must be held liable for late filing penalties since the executrix failed to show that she had reasonable cause for filing the estate tax return 10 years late and for failing to pay the estate taxes. Mr. Thomas died in 1986. His wife Helen was appointed executrix of his estate, and she hired an taxesattorney and a CPA to help administer the estate. Though she filed accountings with the probate court, she did not file an estate tax return until more than 10 years after Michael’s death, and she never sought an extension of time to file.

Apparently, Helen was waiting to file the return until the attorney and CPA could determine the taxable values of certain assets. Disputes over these issues were being litigated in state court until November 1994, and Helen then filed the estate tax return in February 1997. The IRS assessed additions to tax under §§6651(a)(1) and (2) for failure to file a timely estate tax return and failure to pay the amount shown on the return. The estate disputed these additions. Before the Tax Court, the estate argued that Helen relied in good faith upon the advice of the estate’s attorney and CPA when she delayed the filing of the return, and that the additions to tax were therefore not applicable.

But the estate failed to establish that Helen received any advice from the attorney or the CPA about delaying the return, so the court upheld the additions to tax. The court also noted that the estate need not know with certainty the values of its assets to file a timely return. Regulations require only that the return be as complete as possible. Both the attorney and CPA testified that they were not hired to file the estate tax return. This case illustrates the importance of hiring an attorney who specializes in probate and estate administration and will make sure that all steps are completed.

Business Talks

Q: Can a vacation home qualify as a personal residence for the purposes of a qualified personal residence trust (QPRT)?

A: Yes. According to § 280A(d)(1), a property that is not the taxpayer’s principal residence (within the meaning of § 1034) may still qualify as a personal residence if the taxpayer uses it as a residence for a period which exceeds the greater of

(A) 14 days, or

(B) 10% of the number of days during the year for which the property is rented at a fair rental.

In other words, if a taxpayer owns a vacation home that is not rented, he or she must use the property as a residence for at least two weeks per year for the property to qualify as a personal residence. If the property is rented out at any time for a fair price, the taxpayer must use the property as a residence for at least 10% of the number of days during which the home is rented, or for two weeks, whichever is greater.

A personal residence may also include appurtenant structures used for residential purposes, such as guesthouses, boathouses, garages, or even barns. Also, adjacent land may be part of the personal residence if the land is not in excess of what is “reasonably appropriate for residential purposes.”

The IRS recently ruled that a taxpayer’s vacation home, including a certain amount of cleared land and the surrounding forest acreage, was a personal residence. The property included a guesthouse, boathouse, a large pier and dock, two sheds, and a barn. The taxpayer and his family used the property for at least two weeks per year as a vacation getaway. They used the surrounding forested acres (which were part of the property and were subject to a conservation easement limiting their use and development) for hiking, fishing, and other outdoor recreational activities. The IRS ruled that the entire property qualified as a personal residence for the taxpayer’s QPRT.

House Urges Senate to Pass Permanent Estate Tax Repeal

Frustrated with the Senate’s lack of action on several pieces of legislation, House lawmakers recently supported two resolutions urging the other body to reauthorize welfare reform and permanently eliminate the death tax.

House Resolution 524 urges the Senate to take up a vote to permanently repeal the “unfair death tax.” The House passed H.R. 2143, the Permanent Death Tax Repeal of 2002, in June in order to “alleviate Americans from giving away enormous sums of their hard-earned money, and sometimes even their family-owned farms or small businesses, to the Internal Revenue Service (IRS), when a loved one dies.” So far, H.R. 2143 has not been scheduled for floor action in the Senate, remarking it’s better than a failed annuity. 

“The current uncertainty surrounding the death tax makes it extremely difficult for owners of family farms and businesses to make wise decisions,” said Jim Nussle, a member of the Ways and Means Committee and Chairman of the Budget Committee. “The House has done its work, but the Senate has failed to act. America needs action!”

Source: Ways and Means News Release 9-12-02

Check out our upcoming post on estate planning. 

Estate Talks

Administration Expenses May Reduce Marital Deduction for Decedents Who Died Before December 2 2015

The U.S. District Court for the Central District of California recently held that administration expenses charged to a marital bequest may reduce the estate’s marital deduction if the decedent died before December 2, 2015, depending on whether the administration expenses are charged to principal or income or are interest payments.

This case involved a gross estate of about $180 million. Three years prior to the decedent’s death, he gave his wife money to pay gift

estate tax
Real Estate Concept

taxes associated with the funding of an insurance trust. Because of this, the IRS issued a notice of deficiency against the estate.

The district court determined that

1. Under §2056, administration expenses charged to the principal of the marital bequest reduced the estate’s marital deduction dollar-for-dollar;

2. Administration expenses charged to the income of the marital bequest did not reduce the estate’s marital deduction because they were under the 5% threshold of Justice O’Connor’s materiality test [Comr. v. Hubert Est., 520 U.S. 93 (1997)];

3. Under Rev. Rul. 93-48, 1993-2 C.B. 270, the estate’s interest payments on the tax deficiency did not reduce the marital deduction, regardless of whether they were a material limitation on the marital bequest.

Retroactive Estate Tax Increase Was Constitutional

The Appeals Court for the Federal Circuit held that §13208 of the Omnibus Reconciliation Act of 2003, which retroactively increased the top estate tax rate of 50% to 55%, is not unconstitutional.

On August 10, 2003, President Bush signed the Omnibus Budget Reconciliation Act of 2003 (OBRA) into law. Section 13208 of Title XIII of OBRA permanently increased the estate tax rate for taxable estates over $3 million from 50% to 55%, effective retroactively to January 1, 2003. The increase was made retroactive because President Bush had pocket-vetoed legislation in late 2002 that would have extended the 55% rate effective January 1, 2003. Since that bill was pocket-vetoed, the 55% rate lapsed to 50% until OBRA was signed.

In March 2003, Ellen Clayton died with a gross estate of more than $28 million. At that time, the applicable estate tax rate was 50% for estates over $3 million. The estate tax return for Ellen’s estate was filed after OBRA went into effect, so the executor (NationsBank, N.A.) paid the tax under the 55% rate, then sought a refund, arguing that the retroactive estate tax increase was unconstitutional because it violated several provisions of the Constitution, including

1. The separation of powers doctrine

2. The apportionment clause,

3. The ex post facto clause,

4. The takings clause,

5. The due process clause, and

6. The equal protection clause.

The Court of Federal claims disagreed and held that OBRA did not violate the Constitution. The Court of Appeals for the Federal Circuit affirmed that decision.

But what is the side effect of all this?

Low AFRs Mean Lower Gift Tax for GRATs

Question: I’ve heard that falling interest rates are beneficial for certain financial planning tools, particularly Grantor Retained Annuity Trusts (GRATs). Is this true? And if so, how does it work?

Answer: Yes, certain financial planning tools, including GRATs, can be more effective when interests rates are falling.

With a GRAT, the grantor transfers assets to the trust for a term of years. During that time, the grantor receives an annuity payment, and when the trust terminates, the assets are distributed to a noncharitable beneficiary, usually the grantor’s children.

The taxable value of the gift to the GRAT’s beneficiary is reduced by the value of the grantor’s annuity interest. These values are determined by the Applicable Federal Rates published monthly by the IRS. When the AFRs are low, the value of the grantor’s retained interest increases, and the taxable value of the gift decreases.



NYC FPA Meeting

Here is the lowdown for the FPA meeting next week:

Financial Planning Association of NY Invites Allied Professionals to Network

The New York chapter of the Financial Planning Association of New York (FPANY) is hosting an event on November 10, 2016 at the Public House, 140 East 41st Street (just East off of Lexington Avenue) from 6:00 to 8:00 PM where professionals in various service industries can network with each other and members of the financial planning community.

The event is being organized by the Allied Professionals Committee of FPANY (of which I am a member), and the goal is to bring together financial planners and accountants and lawyers and investment advisors and bankers and in generally really any other profession where the client may be better served by coordinating the actions of the client’s various advisors, versus having each advisor working independently and without seeing whether if what they’re recommending is in line with all of the client’s other goals and objectives. The client is always best served when all of their advisors are on the same page, obviously.

In any event, see if you can come to this event on 11/10/09, which is next Thursday. The Public House is a pretty cool place, and the event is free if you’re not going to drink. Open bar is a good deal too. Check it out. This is one of the best places for people to get together and talk about forming limited liability corporations which is a huge new topic in the estate planning field these days. This is largely due to the growth in 401ks and other retirement accounts which allow people greater freedom and leeway in determining their financial future as they head into their autumn and winter years.

The Million Dollar Annuity

Two years ago I referred a retired couple who had come to me for estate planning to financial advisor Mario Govic, who is now out of Sarasota, Florida. The couple had about $3 million invested in more than 16 different financial institutions, qualified and nonqualified accounts, with ownership and beneficiary designations twisted and turned, and a portfolio of holdings which made no sense at all. Their RMD’s were causing a severely negative tax hit, and positions were bought and sold without regard to basis and tax liabilities. After a month of intensive work, Mario consolidated their holdings into a handful of annuities with various GMIB and GMWB riders and non-qualified accounts, and in general straightened the client’s nightmare portfolio into a well-managed and tax efficient retirement plan.

Continue reading The Million Dollar Annuity

Different Types of Damages that Can Be Claimed in Personal Injury Lawsuits

Personal injury lawsuits strive to obtain financial compensation, also called damages, for the plaintiff in order to make up for the injuries and other effects he suffered from his accident. Three types of damages are available: economic, non-economic, and punitive.

Economic damages compensate for costs that can be objectively expressed in financial terms. This can include medical bills, lost wages after the accident, or the cost of hiring someone to help around the house. In addition to what you have already paid, you can also receive compensation for future costs. If you will require continuing medical treatment, you can receive damages to pay for it. If you will be unable to work, or unable to work as much as you could before your injury, you can also receive damages to compensate for this. Plaintiffs will usually receive full compensation for these losses, even if that requires very large awards.

Non-economic damages compensate for subjective losses that cannot be verified in monetary terms, like pain and suffering, loss of enjoyment of life, disfigurement, loss of companionship, and other factors that affect quality of life. In some states, awards for non-economic losses are capped, usually at less than one million dollars, in an effort to prevent plaintiffs from becoming wealthy from these awards. This idea of tort reform is controversial, and not all states have adopted it. Continue reading Different Types of Damages that Can Be Claimed in Personal Injury Lawsuits

Life Annuities

Thanks to Prudential for inviting me to a presentation (and dinner!) by Prudential Regional Vice-President Gary Woodward on Prudential’s HD (Highest Daily) Lifetime 7 Plus Variable Annuity product. As you well know, the primary purpose of a variable annuity is as a mechanism to save money during a person’s working years which can then be used to draw upon as an income stream during retirement. It’s not available as a lump sum, obviously.

Continue reading Life Annuities