November 29, 2012 – 2013 Florida Advisor Calendar Checklist, When is a Check a Completed Gift for Year End Gifting, and A Greatest Hits Replay- What we Said on September 20, 2012 About the Step Transaction Issues Facerd by Estate Tax Planners Today
2013 FLORIDA ADVISOR CALENDAR CHECKLIST
WHEN IS A CHECK A COMPLETED GIFT FOR YEAR END GIFTING: Could Your Clients End up Paying Taxes on a $4,120,000 Gift Next Year Because Someone Forgot to Cash a Check?
A GREATEST HITS REPLAY – WHAT WE SAID ON SEPTEMBER 20, 2012 ABOUT THE STEP TRANSACTION ISSUES FACED BY ESTATE TAX PLANNERS TODAY
We welcome contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer please email Janine Ruggiero at Janine@gassmanpa.com
This report and other Thursday Reports can be found on our website at
www.gassmanlaw.com
Our 2013 Florida Advisor Calendar Checklist
We have prepared a 2013 Florida calendar for advisors to have a comprehensive reminder about important dates, including deadlines for filing the corporate and partnership annual reports, corporate income tax returns, and unique Florida events.
We also have the dates for Gasparilla, Fantasy Fest, and Bike Week. Plan ahead now!
Do not forget the beginning of hurricane season on June 1.
Click here for our 2013 Florida Advisor Calendar Checklist. Enjoy!
When Is a Check a Completed Gift for Year End Gifting: Could Your Clients End Up Paying Taxes On A $4,120,000 Gift Next Year Because Someone Forgot to Cash a Check?
Imagine the horror of finding out that a $5,120,000 gift intended for 2012 was actually completed in 2013, resulting in a $4,120,000 taxable gift.
This is sure to happen to someone, but hopefully not anyone that you know or that we know. To make sure it doesn’t happen to you or your clients, we offer the following summary of the law:
The delivery of a check to a non-charitable donee is not a completed gift for federal estate and gift tax purposes until the earlier of:
(1) The date on which the donor has so parted with dominion and control under local law as to leave in the donor no power to change its disposition,
OR
(2) The date on which the donee deposits the check (or cashes the check against available funds of the donee) or presents the check for payment, if it is established that:
- the check was paid by the drawee bank when first presented to the drawee bank for payment;
- the donor was alive when the check was paid by the drawee bank;
- the donor intended to make a gift;
- delivery of the check by the donor was unconditional; AND
- the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance.
Rev. Rul. 96-56, 1996-2 C.B. 161 (1996).
Prior to Revenue Ruling 95-56, only the first test was available. While the ultimate question was decided by state law, essentially the IRS looked to see whether under state law the donor “retained the power to stop payment and thereby defeat the claims of the donee.” Estate of Dillingham v. C.I.R., 903 F.2d 760, 763 (10th Cir. 1990).
The IRS issued Revenue Ruling 96-56 following the United States Fourth Circuit Court of Appeals decision Metzger v. C.I.R., 38 F.3d 118 (4th Cir. 1994). In Metzger, the IRS appealed a U.S. Tax Court decision allowing gift checks in the amount of the annual exclusion that were written on December 14, 1985, deposited on December 31, 1985, and then cleared on January 2, 1986, to relate back to 1985 for federal gift and estate tax purposes. Despite the gift not being complete in 1985 under Maryland law, the Fourth Circuit held that the relation-back doctrine applied, relating the checks back to December 31, 1985, when the checks were first presented for payment.
Pursuant to the Metzger decision, the IRS changed its position, issuing Revenue Ruling 96-56, and began allowing the relation-back doctrine to apply to non-charitable gift checks, provided all of the elements of test two are met.
But note the requirement that the check be deposited, cashed, or presented “within a reasonable time of issuance.” While the IRS has not issued guidelines, commentators have speculated that depositing, cashing, or presenting a check within 30 days is a reasonable period. Remember to make sure that your clients deliver end-of-the-year gift checks promptly, and then make sure the donees deposit, cash, or present their gift checks immediately. Otherwise, your clients may find themselves in a fight with the IRS over reasonable time periods—a fight no taxpayer wants!
A note of caution: The IRS has subsequently ruled that checks issued on a donor’s deathbed and not presented for payment before the donor’s death will not qualify under test two. See Estate of Newman v. C.I.R., 111 T.C. 81, 82 (1998) aff’d, 203 F.3d 53 (D.C. Cir. 1999).
Gift checks to charitable donees are treated differently than gift checks to non-charitable donees. Checks made payable to charity are complete gifts at the time of delivery of the physical signed check to the charity, assuming there is sufficient funds in the account for the check to clear. It is certainly safer to wire the money to the charity or to have the check clear before the end of the year to eliminate doubt if the charitable deduction is an important part of the planning.
A GREATEST HITS REPLAY – WHAT WE SAID ON SEPTEMBER 20, 2012 ABOUT THE STEP TRANSACTION ISSUES FACED BY ESTATE TAX PLANNERS TODAY
1. IS IT TOO LATE TO MAKE A “STEP TRANSACTION GIFT” BEFORE YEAR END?
Many affluent clients are still trying to make $5,000,000 of gifts before January 1st when the gift tax exemption goes down to $1,000,000.
Oftentimes one spouse has most of the assets and would like to give $5,000,000 worth of assets to the other spouse, who can in turn make a gift to use his or her $5,000,000 exemption. For example, Husband (H) has a $10,000,000 asset. H and Wife (W) each wish to use the $5,000,000 gifting exclusion. H could transfer $5,000,000 of the asset to W, who can in turn gift this portion of the asset, thus maximizing both spouses’ exemptions.
Unfortunately, the IRS, under the “step transaction” doctrine, may characterize a grantee-spouse’s gift as coming from the originating spouse, particularly if a significant amount of time does not pass between the first transfer and the second transfer. “The ‘step-transaction’ doctrine collapses ‘formally distinct steps in an integrated transaction’ in order to assess federal tax liability on the basis of a ‘realistic view of the entire transaction.’” Brown v. U.S., 329 F.3d 664 at 671 (9th Cir. 2003) (quoting Comr. v. Clark, 489 U.S. 726, 738 (1989)).
For example, a transfer from B to C, followed by a transfer from C to D may be considered as a transfer directly from B to D. The step transaction doctrine was developed under the common law to provide that the substance of a transfer or transaction will be considered to have occurred, notwithstanding intermediary steps for predetermined intermediary structuring.
To avoid application of the step transaction doctrine, the assets and the economic risk associated therewith should be owned and held exclusively by the grantor for a reasonable period of time. In case the IRS argues that the contribution to the trust was really made by the grantor’s spouse (in which case even the grantor’s spouse may be subject to federal estate tax under I.R.C. § 2306(a)(1) – retained life interests), it may be important to have trust language providing that any trust assets considered as transferred to the trust by the spouse/beneficiary will be held in a separate subtrust of which the spouse will not be a beneficiary.
Our Estate Tax Planning in 2011 and 2012: Recent Developments and 2012 Supplement contains a more in-depth discussion of this issue as well as sample trust language, and can be accessed by clicking here.
Here we are with only 32 days remaining in 2012, so it may be too late to be completely safe from avoiding application of the step transaction doctrine. If in doubt and the transfer is going to take place, make it happen now!
The Trick: Get transfers done now if you want to have any hope of avoiding the step transaction doctrine.
The Trap: Do not forget to make every piece of paper and document involved with the transfer completely sound and to follow up to make sure that any and all transfers or documentation that clients or other third parties were to provide have already been handled.
2. THE OTHER STEP TRANSCATION DOCTRINE ISSUE
What about transferring assets to a limited partnership and LLC and then transferring the limited partnership or LLC interests by gift and expecting to be able to take a discount for lack of marketability and lack of control?
Do not forget the line of cases described by the chart that you can view by clicking here, which has basically found that no such discount can be taken if sufficient time does not pass between the date of funding the entity and the date of the gift or sale of entity interests.
For instance, in Senda v. Commissioner of Internal Revenue, the court found that an indirect gift was made when taxpayers transferred stock to a partnership and then transferred partnership interests to their children. Regardless of the characterization of the transactions, because the transactions were integrated and, in effect simultaneous, application of the step transaction doctrine made the transfers indirect gifts.
Conversely, in Holman v. Commissioner of Internal Revenue, the court held that the step transaction doctrine did not apply to a similar transaction as in Senda, primarily because the transactions took place six days apart. The petitioners, at least for the six days, bore the risk of changes in value to the interest in question, thus giving the transfers independent significance.
The Trick
To avoid application of the step transaction doctrine, an estate planner should ensure that each transaction in a multiple-step transfer has independent legal significance as under Holman. Fortunately, Holman creates a simple two-step blueprint for ensuring independent legal significance. First, ensure that any interests being transferred are held for a reasonable amount of time between transfers. While a minimum holding period has not been established, a six day period was sufficient in Holman. Second, ensure that during the intermediate holding period, any transferred interests could potentially change in value.
The Trap
The trap is relying on the form of the transaction instead of the substance. Application of the step transaction doctrine is made on a factual basis, and the circumstances in which it will be applied are “notably abstruse.” Estate planners should be wary of transactions that could appear to be integrated, mutually dependent, simultaneous, and/or focused towards a particular result.
APPLICABLE FEDERAL RATES
To view a chart of this month, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3 please click here.
DO NOT FORGET TO BUY OUR BOOK – ANNIHILATION OF WEALTH BEFORE WE HAVE TO REWRITE IT FOR THE NEXT LAW CHANGE. USE CODE 4MAUFGPL AND THE BOOK IS YOURS FOR $9.95 IF YOU ORDER BEFORE MONDAY. PROCEEDS FROM ALL SALES WILL PAY FOR OUR OFFICE BAR BILL. PLEASE CLICK THE BOOK BELOW TO BE DIRECTED TO THE PAGE TO PURCHASE THE BOOK.
SEMINARS AND WEBINARS
FREE WEBINARS OF INTEREST:
MONDAY, December 3, 2012,12:30 – 1:00 p.m.
Join us for Lunch Talk. A FREE webinar series sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman, Esq. This month’s topic is Incredible Cool Things You Can Do To Your Website with marketing expert John Graden. To register for this webinar please visit the Clearwater Bar Association at www.clearwaterbar.org
TUESDAY, December 4, 2012 12:30 – 1:30 pm
Pension actuary Jim Feutz will join Alan Gassman for a free CLE and CPE webinar on Update of Pension, Labor and Tax Laws, Including 2012 Law Changes and Anticipate Changes for 2013. This webinar qualifies for 1 hour of continuing education credit.
TUESDAY, December 4, 2012, 5:30 – 6:00 pm
Alan S. Gassman will be joined by health care attorney Lester Perling to speak on What Physicians Need to Know About “Excluded Persons” and How to Make Sure You Do Not Have One.
WEDNESDAY, December 5, 12:30 – 1:00 pm
The Whistleblower Threat: Do You Have It and What Can You Do About It? Lester Perling, J.D., M.H.A. and Alan S. Gassman, J.D., LL.M. will be presenting a webinar on the whistleblower threat.
Tuesday, January 8, 2013 5:00 – 5:30 pm
How to Land That First Job After College or Graduate School – What the Placement Office Hasn’t Told You. Recent college and graduate school graduates are having a difficult time finding their first professional job and are unaware of many proven techniques to help them find their first position. Job consultant Darry Griffis has an excellent track record in this area and will be sharing ten important techniques that your children or the children of your clients need to know to help find their first professional position.
FLORIDA BAR SEMINAR:
FRIDAY, JANUARY 18, 2013
Florida Bar Seminar Save the date for a three day weekend in Ft. Lauderdale! The Florida Bar Continuing Legal Education Committee, the Health Law Section and the Tax Law Section present Representing the Physician 2013: Practical Considerations for Effectively Guiding Physicians and Their Practices. The seminar will be held at the Sheraton in Ft. Lauderdale, Florida. Please Click Here to register. Speakers include Lester J. Perling, Esq., on the topic of Federal and Florida Health Law: Hypothetical Situations that Are Often Overlooked by Physicians and Alan S. Gassman on the topic of It is Not Just Health and Tax Laws: Charting Florida Waters When Designing Physician and Medical Group Arrangements. Laws you Knew or Wish you Knew.
Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters and the Florida Bar Journal. is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law and his LL.M. (Estate Planning) from the University of Miami. His email address is Christopher@gassmanpa.com.
Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practial Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is ken@gassmanpa.com.
Thank you to our law clerks that assisted us in preparing this report:
Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.
Alexandra Fugate earned her B.A. in English from the University of Florida in 2008, and J.D. from Stetson University College of Law in 2012. She has been a Guardian ad Litem for the past two years, a judicial intern for the Twelfth Circuit in Bradenton, and was recently admitted to the Florida Bar. She wants to pursue a career in business, employment, and labor law. Her email is Alexandra@gassmanpa.com
Eric Moody is a third-year law student, scheduled to graduate in December 2012, at Stetson University College of Law and is considering pursuing an LLM in estate planning upon graduation. Eric is also an Articles and Symposia Editor for Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is Eric@gassmanpa.com.