Tax Tips for Uncertain Times

When
we were kids we’d take turns twisting each other’s arm’s until someone screamed
“uncle.” Accountants across the country are screaming “Uncle” as in “Uncle Sam”
as they continue to get barraged by new tax rules and related changes, court
cases and other developments. The following tidbits are barely a drop in the proverbial
bucket but hopefully will alert you to some of the planning ideas or tax changes
you might have missed.

◙ The Dark
Side of Estate Planning.  Lower the
limbo stick for this one, ‘cause you’re gonna sink way low (if you miss the
play on words with “limbo” Google the term). Neither Darth Vader nor Jack
Kevorkian would even go where this planning tip goes. Consider the following idea
that a well known estate planning guru recently advised a conference.  The Guru suggested that attorneys contact any
client whose age or health indicates that they may not survive the 2010 year.
There is no estate tax in 2010 (well so far!). The guru recommended advising
these clients of the tax consequences of dying in December 2010 versus January
2011. He then suggested that the client might make a decision about updating his
living will and health care proxy. Hey what a Christmas present! Pull the plug
just before year end. If there is no estate tax this year and in 2011 we get a
$1 million exclusion and 55% rate that could be a whopping gift to the kids.
But hey, why stop there. The guru then intimated that perhaps the client might take
a trip to Washington State or Holland?
Those aren’t red or blue on the CNN map. They’re Kevorkian Black. The only
planning point he left out was buy a one way ticket and save a few more bucks
for the grateful heirs.

◙ Re-think
Testamentary Charitable Gifts. If you bequeath money to charity in your
will, that bequest won’t save any estate tax as it had in the past (since there
is no estate tax). So, instead of a tax-useless charitable bequest, make a
specific bequest to your heirs with a non-biding request that they make the
requested charitable contribution. The heir will obtain an income tax
charitable contribution deduction which is quite a tax improvement. Great tax
deal, but just hope Junior is able to resist writing the check out to the local
Porsche dealer.

◙ Generation
Skipping Transfer (GST). The GST tax remains repealed. This could mean a
once-in-a-lifetime opportunity or a costly tax trap if the GST tax is
retroactively reinstated. Consider out right transfers of property to skip
persons (e.g., grandchildren).  Simple —
just write a check to a grandchild. If there is a family trust that is not
exempt from the GST (perhaps a bypass trust for grandma when grandpa passed
away) and grandchildren are beneficiaries, the trustee can just write check. The
gift should be made outright and not to a trust (custodial accounts are treated
like trusts). If the GST tax is reinstated the gift or distribution to a trust
may later be subjected to GST tax so keep it simple and outright. If your gift triggers
gift tax the rate now is 35% not 45% (like 2009 law) or 55% (which is what it
will be next year if Congress doesn’t act). Doing an Alfred E. Neuman — “What
me worry?” Then use techniques to hedge your GST tax bets. If the grandkid is
tax savvy, they can refuse (renounce) the gift if the GST tax is reinstated.  Don’t trust the grandkid to give the dough
back? Make the gift subject to the grandkid’s obligation to pay GST tax if
there is any. If you gift interests in a family rental property or business,
the grandkid won’t have the cash and will have to renounce. Need to hedge the
bet on a trust distribution? The trustee can make the distribution subject to a
contractual arrangement that includes a formula. The grandkids get the amount
of the gift x a fraction. The numerator is the maximum amount that can be given
away GST tax free (that’s the whole shebang right now). The denominator is the
value of interest given. If the GST is reinsated and you’ve used up all your
GST exemption the grandkids get nothing but the tax is avoided.  Another GST approach is to put big bucks into
a marital trust (QTIP) for your spouse. The trust should say that if spouse
renounces the funds go to grandchildren.
If the GST is not reinstated your spouse can renounce within 9 months
and the dough passes outright to grandchildren listed in the trust. This gives
you a 9 month Ouija board to see the status of the GST tax. If the GST is
reenacted file a gift tax return electing for the trust to qualify for the
unlimited gift tax marital deduction and skip renouncing. If the GST is not
retroactive then your spouse can renounce and bring Kodak smiles to all the
grandkids.

◙ Carried
Interests. Hedge Fund fat cats are struggling. It’s tough to get by on a
few hundred million a year when you have to pay income taxes. So, they want
those buckaroos taxed as favorable capital gains, not as compensation subject
to ordinary income tax rates and payroll taxes. The tax tide may be turning.
Movement is afoot to tax what are called “carried interests” as ordinary income
regardless of character of the income at partnership the managers have interest
in. HR 4213. It’s been estimated that the tax revenue from these changes could
add $24 billion to the federal fisc. Green book JCX-59-09 p.5. Code Section 83
may be amended to tax partnership interests as compensation. New Code Section
710 will tax flow through items from partnerships as ordinary income without
regard to normal flow through rules of partnerships. What is especially cool
about this proposed new provision is it gives us tax geeks a new acronym
“IPSI”. That’s important because if proposed legislation eliminates GRATs, this
will avoid a disruption in the force by replacing the useless GRAT acronym with
a new one of equal size. Just to give you a leg up on the others in your golf
foursome, IPSI stands for Investment Services Partnership Interest. That’s an
interest in a partnership attributable to services rendered with respect to “Specified
Assets” (you’ll have to wait for your decoder ring to understand that one).  Code Section 1402 may be amended to make
carried interests subject to employment tax. While you might not loose sleep
over the fat cats paying more tax, be wary of the common Congressional approach
of using a sledgehammer instead of a scalpel. Lots of business deals on main
street (e.g., real estate development) may get snared in these changes. There
could be a lot of collateral damage on these changes.

◙
Expatriation Provision. A tough mark to market exit tax applies to US citizen and
green card holders who expatriate or give up their green card. Folks may assume
expatriation doesn’t apply to them but the rules cast a wide and unsuspecting
net. Green card holder executives if reassigned back to their home country are
in jeopardy of loosing green card when this happens. That may trigger the
expatriation tax. IRC 877A; Notice 2009-85.

◙
 FBAR Goes to Far. Persons with
signature authority over foreign accounts, but no interest in them, have an extension
to June 30, 2011 to file for FBAR relief. An agent holding power of attorney
over foreign assets has to file even if foreign entity would not respect the US document. Notice
2010-23, 2010-11 IRB 441, 02/26/2010; IRC Sec. 6011. If you make an FBAR filing
inform the people you’ve named agent under your power of attorney and possibly
the trustees under your revocable trust.

◙  Trust Protectors.  Lot’s of
folks have integrated a raft of new fangled positions into the ever
increasingly complex trust instruments that have become more common. There is
little law on these positions so that while potentially helpful, caution is in
order. In a recent case the trust protector was
sued for not monitoring trustees, not preventing theft of trust assets,
breach of loyalty (they argued that the protector was more loyal to trustees
then to the beneficiaries). The Court struggled with the issues since state law
didn’t provide direction. See UTC Sec. 808. This was a case of first
impression. The Court considered the trust document which gave powers and said
trust protector was a fiduciary. It gave the protector the power to remove the trustee
and appoint successor, but no standards for these acts were provided. The trust
protector had power to resign and appoint a successor. The Court held that the
trust protector had a fiduciary duty but did not define the scope of those duties.
The trust exonerated the trust protector for acts taken in good faith. The Court
said this implied that the protector would be liable for acts which were not in
good faith. What if the Trust Protector doesn’t even know they are appointed
trust protector. What are the duties? Are they a fiduciary? Is the protector
supposed to do the same things that a trustee is required to do? Some states
require that the protector submit to jurisdiction in the state of situs. Did
trust protector sign document accepting the position? If not, how can you hold
them liable. So given all the above, how can you protect the trust protector?
Can you protect the protector by stating that if they make a mistake they
should not be sued. Robert T. McLean Irrevocable Trust v. Patrick Davis, P.C.,
283 S.W. 3d 786  (Mo. Ct. App. 2009).   Hey
folks, you’ve read it hear dozens of times, hold an annual trust meeting with
all advisers, fiduciaries and other key people present. You cannot operate a
sophisticated trust successfully without doing this. It just won’t work! Got
it?