Featured Article - Really?

Featured Article - Really?

Article posted in Transfer Taxes on 10 November 2010| comments
audience: National Publication | last updated: 18 May 2011


As Congress moves into lame duck session, the repeal of the estate and generation-skipping tax for decedents dying in 2010 is seeming more like a reality. In this article, Owings Mills, Maryland attorney Jonathan Ackerman shares his thoughts regarding planning for the balance of 2010 and next year along with charitable planning techniques that may be in vogue and those at potential risk.

By Jonathan Ackerman, Esquire

Yesterday is history, tomorrow a mystery and today is a gift: that’s why we call it the PRESENT - Aish Hatorah Weekly

It appears that Congress will make no change in the estate tax law for the year 2010, and thus, the repeal of the estate and generation-skipping tax for decedents dying in 2010 is likely to be a reality. Many have noted that families of wealth have already publicly announced that heirs will fight the IRS in the event Congress determines to reinstate the estate tax retroactive to January 1, 2010.

Here are a few random thoughts about the rest of this year and a few thoughts on next year –

What may be in Vogue in Charitable Gift Planning?

Charitable Remainder Trusts – The Economic Growth and Tax Relief Reconciliation Act of 2001 (which created the 2010 estate tax repeal) also contains a carryover tax basis rule – thus, assets received by a beneficiary pursuant to a will, trust or intestacy from a decedent dying in 2010 will generally take those assets with a carryover basis (for instance, the same basis as in the hands of the decedent). However, current law also provides for a step-up in basis for assets up to One Million Three Hundred Thousand Dollars, plus another Three Million Dollar step-up for transfers to a spouse or to a QTIP trust. So, those beneficiaries receiving assets at a carryover basis may be looking for a means to avoid the capital gains on the ultimate sale of those assets. And if the capital gains rates rise (as under current law and discussed more fully below), those beneficiaries may be even more motivated donors, seeking vehicles to avoid those taxes while placing an irrevocable deferred gift to charity.

Inter Vivos Charitable Lead Trusts - In a world with a continuing gift tax (as we have right now), but no estate tax, CLTs, as well as other estate planning techniques, such as a GRAT or a sale to a defective grantor trust, continue to be viable, as these vehicles provide the family with an opportunity to leverage lifetime transfers that will not be subject to a gift tax, See, CAR Newsletter Volume 1.1 – 2009 – What’s Hot Now and Also See, the Fundamentals Article in this CAR Newsletter 2.1.

As you likely know, a charitable lead annuity trust should not be established for the benefit of a grandchild, because for technical reasons, the GST exemption cannot be effectively allocated to a CLAT upon creation. However, in 2010, when there is no GST tax, some may consider funding an inter vivos CLAT for the benefit of grandchildren, as well as accelerating taxable distributions from and taxable terminations of GST Trusts, But See the GENERAL CAVEAT below, and a complete analysis must be done to consider the effectiveness of any such plan.

What’s at Potential Risk?

Charitable Bequests – one could assume that a no-estate tax world would produce less charitable bequests. In 2004, the Congressional Budget Office estimated that if the estate tax had not existed in 2000, charitable donations would have been $13 – 25 Billion lower that year.

Philanthropy and charitable giving is at the core of our societal fabric. Do I believe that no one would contribute to charity without an estate tax incentive – of course not. However, if the estate tax was permanently repealed, it is my belief that charitable bequests would significantly decrease. Interestingly, families may to some extent alter their giving methodology, taking into account this new no-estate tax terrain. For instance, parents may delay the charitable transfers at death and request, but not direct, their children to make subsequent charitable transfers in order for the kids to take advantage of the income tax deduction.

Independent Sector (IS) has taken a strong position in favor of retention of the estate tax regime. In a letter to Congress, Diana Aviv, President of IS, stated, [A]s you have observed, the estate tax provides significant revenues for the federal government, helping to fund a variety of federal programs and services, including those that are delivered through or in partnership with nonprofit organizations, upon which Americans rely. It is also a very strong incentive for people of great wealth to give back through their estates to support services vital to healthy communities and the wellbeing of Americans of all ages. Our nation cannot afford to let the estate tax disappear or be further eroded …

Charitable Remainder Trusts & IRS Notice 2010-9 – there are a series of questions that have arisen due to the enactment of Code Section 2511(c), which became effective as of January 1, 2010, and the subsequent issuance of IRS Notice 2010-9. Basically, Congress was attempting in Code Section 2511(c) to prohibit gifts being made through non-grantor trusts for the purpose of shifting income taxation to lower income earners.

Section 2511(c) provides that a transfer in trust is a transfer by gift, unless the trust is a grantor trust (where the grantor continues to incur the income tax consequences of the trust, See the Fundamentals Article in this CAR Newsletter 2.1). Here is an example of a potential problem that can be raised in this regard. A CRT cannot, by definition, be a grantor trust. In many two-life CRTs, the donor retains the right to revoke the income interest of the secondary beneficiary (thus causing no immediate gift tax consequence). Section 2511(c), however, would appear to cause a current gift to the secondary life beneficiary in that instance. Since this Section raises a series of questions, a number of practitioners have requested guidance from the IRS, and we are still awaiting a favorable response from the IRS.

GENERAL CAVEAT – the sunset provision contains language that the one year repeal shall be applied as if the provisions and amendments described in subsection (a) had never been enacted. Subsection (a) is the provision stating that the estate and GST tax repeal will not apply to decedents dying after December 31, 2010. Estate planners are pondering how this language will affect planning done this year and its implications into next year. If you can believe it, there is even more uncertainty in the law today and looking forward.

DON’T FORGET – Certain states will likely continue their new estate tax regimes, notwithstanding federal activity or inactivity in this regard.

Also note that on September 16, 2010, Senate Finance Committee Chairman Max Baucus (D – MT) introduced the Job Creation and Tax Cuts Act of 2010, which is intended to create jobs and extend critical tax provisions for individuals, families and employers. This bill includes an extension of the Charitable IRA Rollover for 2010; however, it fails to address the estate tax issues.

Source: Charity Advisor Resource Newsletter - Volume 2.1 - 2010

Copyright 2010. Jonathan D. Ackerman, Esq. Used by permission. All rights reserved. The author may be contacted at (410) 363-1187 or jonathan@ackermanlaw.net.

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