STEP RIGHT UP: GETTING A
STEPPED-UP BASIS FOR ASSETS
NOT EVEN OWNED BY THE DECEDENT
MATERIALS FROM OUR BLOOMBERG BNA TAX & ACOUNTINGWEBINAR ON THE 10 BIGGEST 2013 ESTATE PLANNING STRATEGIES
TOM ELLWANGER’S CORNER:
709 DETAILS TO REMEMBER
CRAIG HERSCH’S ARTICLES: PART 2 OF A 3 PART SERIES: DON’T EXPECT ADULT CHLDREN TO BECOME YOUR MINI-ME
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.
STEP RIGHT UP: GETTING A STEPPED-UP BASIS FOR ASSETS NOT
EVEN OWNED BY THE DECEDENT
While researching the use of powers of appointment to facilitate receiving a stepped-up income tax basis on assets owned in a joint trust or in the revocable trust of a surviving spouse we came across the following analysis that was written by Howard Zaritsky in the Probate Practice Reporter in May 2002, which stands for the proposition that the stepped-up basis should occur notwithstanding the one year retransfer rule under Code Section 1014(b)(9) and 1014(e):
“The estate planner should consider the possible use of this special joint revocable trust, if the clients need to combine their assets to take full advantage of the first spouse’s unified credit. The law clearly supports the inclusion of the full value of the trust fund in the gross estate of the first spouse to die, and the IRS has thrice approved this analysis.
The estate planner should also consider reporting the income tax basis of assets held in such trusts without regard to Section 1014(e) because the IRS analysis denying such basis adjustments appears to be incorrect. A planner might not create a special joint revocable trust solely to obtain the additional basis increase at the first spouse’s death, but might still report the basis on such a trust that has been created for transfer tax purposes, based on a reading of sections 1014(b)(9) and 1014(e) that is more technically correct than what is proposed by the IRS in its Private Rulings and Technical Advice Memoranda.”
The language of Internal Revenue Code Section 1014 can be viewed by CLICKING HERE, and we have boxed the relevant provisions.
Nowhere does this language say that assets could be transferred to somebody within a year of their death and then are passed into a trust for the health, education and maintenance of the donee would not receive a stepped-up basis.
The regulations do not say this either.
We think that many married couples will be well advised to provide that each spouse will have the power to appoint assets under a joint trust or under the revocable trust of a surviving spouse to the extent necessary to fully fund a Credit Shelter Trust on the first death, and depending upon circumstances, to fund a QTIP Marital Deduction Trust so that the surviving spouse has the opportunity to sell the assets without paying capital gains tax which can now be at the 23.8% bracket for many families.
MATERIALS FROM OUR BLOOMBERG BNA TAX & ACCOUNTING WEBINAR ON THE 10 BIGGEST 2013 ESTATE PLANNING STRATEGIES
We presented a live webinar yesterday for Bloomberg BNA on the 10 biggest estate planning strategies. These are as follows:
- Run the Numbers.
- Do Not Rely on Portability (Usually)
- Get Aggressive on Full Funding of a Credit Shelter Trust
- Make Sure That a Credit Shelter Trust Can Become a Stepped-Up Basis Trust
- 3.8% Medicare Tax & Income Tax Planning
- Reconsider Creditor Protection Planning
- Do Not Forget Annual Gifting – It is Now $14,000 Per Year, Per Donee Plus the CPI Exemption Increase
- Lock In Discounts
- Adjust Life Insurance
- Real Estate Planning
Runner Up #1. Clean Up Time
Runner Up #2. Charitable Giving
Runner Up Lucky #13. Get Divorced
If you would like to see our 103 page PowerPoint on this presentation please let us know.
TOM ELLWANGER’S CORNER
709 DETAILS TO REMEMBER
We are happy to welcome Tom Ellwanger to our firm and to the Thursday Report. During our webinar on Gift Tax Return Form 709, Tom discussed coordinating generation skipping transfers and providing a suggested analysis. Below is a transcript of what he said:
Form 709 used to simply be titled the United States Gift Tax Return but now they have added United States Gift and Generation skipping transfer Tax Return. And we find that generation skipping transfers (GSTs) come into play more often than you might think. What I want to do is to suggest an analysis that you might go through if you are confronted with this issue.
I want to keep the discussion intelligible to the extent that is possible, so I am going to simply refer to “children” and “grandchildren.” Of course, the GST tax looks at “skip persons” and “non-skip persons.” They do not necessarily have to be related to the donor. But, we see children and grandchildren so much more than we see anything else, and the terms “skip person” and “non-skip person” harder to immediately grasp. This is why I am going to focus on children and grandchildren. For non-skip person, just think “child,” and for skip person think “grandchild.”
Do You Have A Generation Skipping Transfer?
The first question we are confronted with is this: Do you have a generation skipping transfer among the gifts that are going on the return?
Remember the concept here–Congress thought that a gift or estate TAX should be paid in every generation. Thus, if something goes directly to grandchildren or their descendants, whether outright or in a trust, you have a generation skipping transfer, because by definition something given to the grandchildren is not going to be subject to a gift or estate tax in the child’s generation. On the other hand, something that goes to children is not a generation skipping transfer unless it will not be subject to estate tax when the child dies.
If a trust for a child is set up to terminate during the child’s lifetime with all of the assets going to the child, there is no generation skipping transfer. If the trust is set up with the child having a general power of appointment under Section 2041 of the Internal Revenue Code, making the remaining trust assets subject to estate tax at the child’s death, there is no generation skipping transfer.
But, if the trust is set up so that (1) the assets will not go to the child during the child’s life, (2) the child has no general power of appointment of the trust, and (3) the trust continues on for the benefit of grandchildren, then you do have a generation skipping transfer.
OK, You’ve Got One—But What Kind Is It?
Knowing that you have a generation skipping transfer does not totally answer the question of how to prepare the Form 709. There are two kinds—direct skip and indirect skip. You need to know which kind you have to prepare the gift tax return correctly.
A direct skip occurs when everything being gifted is definitely going to skip persons (e.g. the gifted assets are definitely going to grandchildren instead of children). So what we are looking at there is first an outright transfer to a grandchild or grandchildren. Another example would be a transfer to a trust which is only for the benefit of grandchild or great-grandchildren or more remote descendants, where we do not have a child beneficiary who might receive distributions.
Direct skips must be listed on Part 2 of Schedule A of the return. When a direct skip occurs you will find GST tax is due except in two situations. First of all, it might be covered by the GST annual exclusion—which is not always the same as the gift tax annual exclusion. We will talk about that in a moment.
But there may not be enough GST annual exclusion. The second alternative is where the donor has GST exemption left and wants to allocate it to avoid paying the GST tax at this point—which is usually the case. GST tax on gifts, like gift tax, is voluntary because you don’t have to make the transfer; we don’t see a lot of people paying either. (Estate tax is not quite so voluntary.)
So what about an indirect skip? That occurs when the gifted property may later go either to skipped persons (grandchildren) or non-skip persons (children). In these situations a GST tax may or may not be due in the future.
This can occur with a trust substitute, such as a life estate, but you see it much more often with a trust which is for the benefit of both children and grandchildren. For instance, say the trust provides that the trustee takes care of the child for the child’s life and any remaining assets go to the grandchildren; the child has no power of appointment. No GST tax is due when the trust is set up. No GST tax is due on distributions to the child. But, since the assets will not be subject to estate tax when the child dies, a GST tax will become due when the child is no longer a beneficiary. A “taxable termination” occurs at that point. (Unless, of course, GST exemption as allocated to this trust.)
Another example would be a trust where the trustee can make current distributions to the child or the grandchildren. No GST tax applies when a distribution is made to the child, since the child would have to pay a gift or estate tax to pass that money on. But, there would be a GST tax payable if the trustee pays money out to a grandchild. That would be a “taxable distribution” (again assuming no allocation of GST exemption).
The GST Annual Exclusion
There is an annual exclusion for generation skipping transfers, equal in value to the gift tax annual exclusion. But, not every generation skipping transfer qualifies for the annual exclusion.
Outright transfers are easy, and they qualify for the GST tax annual exclusion. A $14,000 cash gift to a grandchild—you get a gift tax exclusion and a GST exclusion.
Transfers to trusts are trickier. (1) The trust must be limited to one present beneficiary. Thus, you cannot have a trust for five grandchildren where the trustee decides who gets what. You need a trust for one grandchild. (2) The trust terms cannot permit distributions to anybody other than that particular beneficiary, that grandchild. (3) Also, the trust property must be subject to the estate tax at the grandchild’s death, either because the trust is fully distributed to the grandchild before the grandchild’s death or because the grandchild has a general power of appointment under Section 2041, causing an estate tax.
In other words, a GST exclusion will let you beat the gift tax, estate tax, and GST tax up to the limited extent of $13,000 last year and $14,000 this year. But, Congress is not going to let you do it for more than one generation. You can skip the child and get the property down to grandchildren, but the tax savings will stop there.
Whether Crummey trusts qualify for the GST annual exclusion depends on who has done the drafting. Crummey trusts work because the beneficiary with the withdrawal usually doesn’t exercise it. Not exercising the power raises a gift tax issue—has the withdrawal beneficiary made a gift by not taking the money? One way to avoid the gift tax problem is to have the trust be for one beneficiary and give that beneficiary a general power of appointment at death. Sound familiar? Yes, by a truly remarkable coincidence, solving the gift tax problem also allows gifts to the trust to qualify for the GST annual exclusion. So, don’t assume that you won’t get a GST annual exclusion on a Crummey trust. You might have to read the darn thing.
GST exemption is wonderful. If you allocate GST exemption to a trust, there will never be a GST tax on the trust property, nor any estate or gift tax until after the assets flow out to a beneficiary. Trusts do have to end sometime, but the period in Florida is 360 years (which, if you went backwards, would take you back to 1653, when hardly anybody could have accurately predicted very much about life today). The people in Washington would like to cut the tax savings down to a mere 90 years, but they haven’t yet succeeded
Where you have direct skips which exceed the annual exclusion, allocating the GST exemption is easy. The client will want it allocated to avoid a current GST tax.
Whether and how to allocate GST exemption is more complicated with indirect skips; it’s probably the most complex part of doing a gift tax return. You can allocate GST exemption to trusts where there may later be a GST tax; but maybe there won’t, in which case you would have wasted the exemption. It’s not always an easy question if you don’t have enough GST exemption to cover everything. On the other hand, the dramatic increase in the GST exemption has limited this problem to clients who can probably afford to have it solved.
One thing is clear. You never want a trust which partially exempt and partially nonexempt. If your GST exemption runs out, you want to split the trust up so that you can allocate GST exemption to make one part totally exempt, leaving the other part nonexempt. That way, when something goes to children, the trustee can pay it out of the nonexempt part, saving the exempt part for the grandchildren. Even if the trust document does not specifically split the trust up this way, there are tax laws and Florida law that allow the trustee to make such a division.
The GST law includes provisions automatically allocating GST exemption for certain kinds of transfers. My advice is to do what the IRS allows you to do and opt out of the automatic allocations. Or, to put it another way, do not be lazy here, save your laziness for somewhere else.
Opting out of the automatic allocation and manually doing the allocation makes you think about it. Here is an example. You might have two trusts set up for different children, eventually going to their children, but you have one child who will clearly need a lot of distributions and another who won’t. Well then, why automatically allocate the exemption half to each trust? Why not allocate more exemption to the trust where more is likely to eventually go to the grandchildren? At the risk of guessing wrong, of course, but that’s a risk most of us run every day anyway.
I wish I could give you a simple plan for GST exemption allocation, but unfortunately the GST tax system is, like most tax areas, dreadfully complicated and somebody will have to think about it. It probably won’t be the client.
CRAIG HERSCH’S ARTICLE: DON’T EXPECT ADULT CHLIDREN TO BECOME YOUR MINI-ME
“Mini Me? Mini Me? For God’s sake would someone put a _________ bell on him or something.” – Dr. Evil
We were very pleased with the response we had from those who read the article by Craig Hersch relating to lessons learned from athletes who squandered their earnings and savings.
In today’s guest column – Craig R. Hersch, Fort Myers board certified estate attorney describes how successful people sometimes alienate their children in their efforts to help them succeed. Rather than succumb to the temptation of creating younger versions of themselves, he asks whether it’s better to encourage each child’s unique and innate abilities. This is part of Craig’s “True Wealth/False Wealth” series that will soon be a book with supporting workshops.
Craig has been gracious enough to provide us with the following in sequel, which we hope you enjoy and consider sharing with friends, clients and family:
My father was an ecstatic eighteen year old when he received an admission letter to the Art Institute of Chicago. A fairly accomplished artist specializing in oil paintings by the time he graduated from Lew Wallace High School in Gary Indiana, he hoped to pursue a career following his passion.
His father (my grandfather) quickly put an end to those dreams. “What are you going to be – a starving artist your whole life?” he asked. So instead of studying what he loved, my father enrolled in Indiana University to pursue a business degree.
Dad was never happy in the business world. He wasn’t cut out for it. He continues to dabble in art as a hobby, painting to this day. I believe that he would have found his niche and provide nicely for his family had he been encouraged to do what he enjoyed rather than what was considered “practical”. Perhaps he would have become a famous commercial artist or successful graphic designer. We’ll never know.
Personally I lucked out that my grandparents forced my father to attend Indiana University because that is where he met my mother. Had he not gone there then I wouldn’t exist.
But what my grandparents did to my father isn’t uncommon among many families, particularly those that own family businesses or run professional practices. Because Mom or Dad found success in a particular career, Junior is often expected to follow in the family footsteps.
But what Mom or Dad excels at isn’t necessarily Junior’s unique ability. Each of us has a propensity to be exceptional at something. If it’s in the family business, law, medicine or a similar endeavor then our pursuits are approved and encouraged. But when passion turns to other “less practical” occupations, parents wonder whether the cost of pursuing is worth it.
In other words, parents are more comfortable creating “Mini-Me”s – younger versions of themselves – because they feel that it is a proven road to success and will therefore be easier for their children to follow suit.
Just because Mom built a thriving internet consulting business however, doesn’t mean that her daughter will share the same enthusiasm or enjoy the types of interaction with clients that business requires.
I suggest that the family play to the inherent strengths of its members instead of trying to fit a round peg into the proverbial square hole. The first obvious step is to discover what those strengths are. Often it’s evident from the interests and pursuits that each member naturally follows.
Other times it’s less evident. There are a variety of helpful personality profiles that one can take with the help of a skilled counselor. You may have heard of the Myers-Briggs Indicator™, although my personal favorite is the Kolbe Profile™.
The Kolbe Profile™ is interesting because it doesn’t point you directly to a certain career choice. It rather categorizes your propensities – how you typically react to given situations.
Kolbe scores your propensities in four major categories, what she calls “Fact Finder”, “Follow Through”, “Quick Start” and “Implementer”. Most people strongly favor one such category, and are resistant in two, with the fourth being a medium range score. Using these categories, the Kolbe Profile™ helps you understand why you typically react to given situations the way that you do – and can therefore assist with everything from building a new career to optimizing the one that you’ve been in for decades.
Having taken the test and administered it to my colleagues, associates and assistants, I can tell you that the reaction upon reading the explanation of one’s score is one of tremendous personal insight.
Dan Sullivan, founder of the Strategic Coach program, has his clients take the Kolbe Profile to help them discover their “unique ability”. Sullivan coaches his clients to focus on their unique abilities and little else. Instead of trying to shore up your weaknesses, Sullivan instructs to play to your strengths and to build a team around you who are strong where you are weak to deliver your goods and services.
That way, everyone is happiest doing what he or she does best, rather than trying to follow a path that is unnatural. Forcing a child to follow one’s footsteps without understanding that child’s propensities can lead to an unfulfilled lifetime of frustration and anxiety. It also fails to build family team where everyone is contributing at his or her highest level, even if in different businesses and occupations.
So what does my eldest daughter – the progeny of an estate-planning attorney – wish to pursue as she closes in on a college choice? Creative writing! Am I worried that she’ll be a starving writer? You betcha. But that’s her passion, and she’s quite good at it. Unlike what happened to my father, I am encouraging her to play to her strengths.
Who knows, maybe she’ll be the next J.K. Rowling!
Craig can be reached at:
Craig R. Hersch
Sheppard, Brett, Stewart, Hersch & Kinsey, P.A.
9100 College Pointe Ct.
Fort Myers, FL 33919
FREE WEBINAR FOR BETA
TESTERS OF OUR SOFTWARE:
Today at 5 p.m. we are having a 15 minute estate tax projection software clinic for any and all interested individuals. This will be a live webinar demonstrating how this software works on screen. We will demonstrate the $28,000,000 mistake and show you how to use this very easy system, which can be a great help to your practice and clients.
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.
SEMINARS AND WEBINARS
FRIDAY, MARCH 8 and SATURDAY, MARCH 9, 2013
The Florida Bar Continuing Education Committee and the Health Law Section present Advanced Health Law Topics and Certification Review 2013. Location: Hyatt Regency, Orlando, Florida. Topics to be discussed include: Federal Anti-Kickback Prohibitions and Self-Referral by Lester Perling; Florida Restrictions on Anti-Kickback, Fee Splitting, Patient Brokering and Self-Referral by Sandra P. Greenblatt; Healthcare Tax Issues by Alan S. Gassman and many others.
WEBINARS OF INTEREST:
MONDAY, February 25, 2013, 5:00 – 5:35 pm
Alan S. Gassman will be joined by Jeff Howard of Ray Howard & Associates in Jacksonville, Florida, and Lester Perling of Broad and Cassell in Ft. Lauderdale to speak on the subject to Medicare and Medical Compliance Disasters – What To Do Before and After the Explosion.
THURSDAY, February 28, 2013, 4:00 – 4:50 pm
Please join us for The 444 Show, sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month we are pleased to have attorney David Brittain of Trenam Kemker as our guest speaker. His topic is What Real Estate Attorneys Don’t Tell Other Attorneys – What You Need to Know to Stay Out of Trouble. This webinar qualifies for 1 hour of continuing education credit. To register for the webinar, please visit www.clearwaterbar.org or email Janine@gassmanpa.com
MONDAY, March 4, 2013, 12:30 – 1:00 pm
Colleen Flynn, Esq. of the Johnson Pope Law Firm will speak on Lunch Talk this month on the topic of Hiring Procedures: What To Do and What Not to Do When You Hire a New Law Office Employee. Lunch Talk is a free webinar series moderated by Alan S. Gassman, Esq. and sponsored by the Clearwater Bar Association. To register for the webinar, please visit www.clearwaterbar.org or email Janine@gassmanpa.com
HAPPY PRESIDENT’S WEEK FROM GASSMAN LAW ASSOCIATES!
Alan S. Gassman, J.D., LL.M. is a practicing lawyer and author based in Clearwater, Florida. Mr. Gassman is the founder of the firm Gassman, Crotty & Denicolo, P.A., which focuses on the representation of physicians, high net worth individuals, and business owners in estate planning, taxation, and business and personal matters. He is the lead author on Bloomberg BNA’s Estate Tax Planning and 2011 and 2012, Creditor Protection for Florida Physicians, Gassman & Markham on Florida and Federal Asset Protection Law, A Practical Guide to Kickback and Self-Referral Laws for Florida Physicians, The Florida Physician Advertising Handbook and The Florida Guide to Prescription, Controlled Substance and Pain Medicine Laws, among others. Mr. Gassman is a frequent speaker for continuing education programs, publishes regularly for Bloomberg BNA Tax & Accounting, Estates and Trusts Magazine, Estate Planning Magazine and Leimberg Estate Planning Network (LISI). He holds a law degree and a Masters of Law degree (LL.M.) in Taxation from the University of Florida, and a business degree from Rollins College. Mr. Gassman is board certified by the Florida Bar Association in Estate Planning and Trust Law, and has the Accredited Estate Planner designation for the National Association of Estate Planners & Councils. Mr. Gassman’s email is Agassman@gassmanpa.com.
Thomas J. Ellwanger, J.D., is a lawyer practicing at the Clearwater, Florida firm of Gassman, Crotty & Denicolo, P.A. Mr. Ellwanger received his B.A. in 1970 from Northwestern University and his J.D. with honors in 1974 from the University of Florida College of Law. His practice areas include estate planning, trust and estate administration, personal tax planning and charitable tax planning. Mr. Ellwanger is a member of the American College of Trusts and Estates Council (ACTEC). His email address is email@example.com.
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. He 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 Practical 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.
Eric Moody graduated from Stetson University College of Law in December 2012 and is currently seeking admission to the Florida Bar. He is considering pursuing an LL.M. in estate planning. 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.
Carly Ross is a third-year law student at Stetson University College of Law. She is the Notes and Comments Editor for Stetson Law Review, and a member of Stetson’s Jessup Moot Court Team. She graduated from the University of North Carolina at Chapel Hill in 2010 with majors in History and Political Science. Carly’s email is Carly@gassmanpa.com.