Heckerling Institute 2008 Revs Up

On January 10, 2008, Joseph G. Hodges, Jr. announced next week's Heckerling Institute, to be held January 14-18, in Orlando, Florida.

He posted a message on the "Practice Listserv" of the American College of Trust & Estate Counsel, and on the "Probate & Trust Listserv" of the American Bar Association's Section of Real Property, Trust & Estate Law.

With Joe's permission (granted in the message copied at the end of this posting), I reproduce his announcement below (with some reparagraphing and link additions or realignments).

As we have done in January for the last eleven years, and again with the permission of the University of Miami School of Law Center for Continuing Legal Education, we will be posting daily Reports to this list containing highlights of the proceedings of the 42nd Annual Philip E. Heckerling Institute on Estate Planning that is being held January 14-18, 2007 at the
Orlando World Center Marriott Resort and Convention Center in Orlando, Florida, a new venue for the Institute starting in 2007.

A complete listing of the proceedings and speakers will be published here later and is also available on the Institute's Web site.

We also will be posting the full text of each of these Reports on the ABA RPPT Section's Web site, as we have since the 2000 Institute. Those Reports can be found [here].

In addition, each Report can also be accessed at any time from the ABA-PTL Discussion List's Web-based Archive [here].

Our on-site local reporters who are present in Orlando this year are Gene Zuspann Esq. of Zuspann & Zuspann in Denver, Colorado; Joanne Hindel Esq. of Fifth Third Bank in Cleveland, Ohio; Jason Havens Esq. of Howard, Mobley & Havens PLLC in Florida and Tennessee; Kimon Karas Esq. of McCarthy, Lebit, Crystal and Liffman Co., LPA in Cleveland, Ohio; Bruce Stone Esq. of Goldman, Felcoski & Stone, PA in Coral Gables, Florida; Craig Dreyer Esq. of McDonald Hopkins LLC in Cleveland, Ohio; Carol Sobczak Esq. of The Law Offices of Carol A. Sobczak in St. Helena, California; Ronda Martinez Esq. of Fifth Third Bank in Southfield, Michigan; and Mike Stiff Esq. of Hutchins & Stiff LLC in Denver, Colorado.

The editor again this year will be Joseph G. Hodges Jr. Esq, a solo practitioner in Denver, Colorado, who also is the Chief Moderator of the ABA-PTL List.

SCOPE OF THE INSTITUTE:

The Heckerling Institute on Estate Planning is the nation's leading conference for estate planning professionals. The program is designed for sophisticated attorneys, trust officers, accountants, insurance advisors, and wealth management professionals who are familiar with the principles of estate planning.

• The recent developments panel on Monday afternoon, featuring three of the nation's foremost estate planning experts, will guide you through the year's most significant developments in estate planning, including the latest developments on the tax front.

• The general session lectures, which begin on Tuesday morning and continue throughout the week, will provide in-depth analysis of topics of timely interest to experienced estate planners.

• On Wednesday and Thursday afternoons, a wide variety of workshops, panel discussions, and case studies will examine and provide practical guidance on sophisticated estate planning techniques, including the popular series on planning with financial assets. Sessions in the financial assets series are designated: [FIN]

• A second series of afternoon programs will focus on trust litigation and tax controversies, including current issues in estate and gift tax audits, trial-proofing FLPs, and the attorney or fiduciary as a witness. Sessions in the litigation series are designated: [LIT]

• The fundamentals programs are of interest to not only entry-level practitioners, but also to experienced planners who would benefit from a thorough review of three important topics. This year the programs will cover preparing the Form 709, planning with life insurance, and creating and administering charitable remainder trusts.

As the largest gathering of estate planning professionals in the country, with over 2,500 professionals in attendance, the Institute offers a unique opportunity to exchange ideas, to network, and to review the latest in technology, products and services displayed by over 100 vendors in an exhibit hall that is dedicated entirely to the estate planning industry.

The new headquarters hotel, the Orlando World Center Marriott Resort & Convention Center, offers nearly 2,000 hotel rooms as well as expanded meeting and exhibit space plus a full array of superior dining and resort services. In addition, in response to suggestions that were made by last year's registrants, complimentary evening shuttle service to selected local dining and entertainment areas has been added.

THE INSTITUTE'S 2008 FACULTY:

Roy M. Adams & Associates PLLC
A Partner of Constantine Cannon LLP
New York, New York

Susan T. Bart
Sidley Austin LLP
Chicago, Illinois

Martin E. Basson
Internal Revenue Service
Plantation, Florida

Sandy Baum
Skidmore College
Washington, D.C.

Edward J. Beckwith
Baker & Hostetler LLP
Washington, D.C.

Dennis I. Belcher
McGuireWoods LLP
Richmond, Virginia

Amy B. Beller
Miller & O’Neill P.L.
Boca Raton, Florida

Judith Bresler
Withers Bergman LLP
New York, New York

Lawrence Brody
Bryan Cave LLP
St. Louis, Missouri

Ann B. Burns
Gray Plant Mooty
Minneapolis, Minnesota

Patricia H. Char
Preston & Lockhart Preston Gates & Ellis LLP
Seattle, Washington

Timothy W. Chase
WMS Partners LLC
Towson, Maryland

Henry Christensen III
Sullivan & Cromwell LLP
New York, New York

Christopher P. Cline
Holland & Knight
Portland, Oregon

Aileen F. Condon
Internal Revenue Service
St. Louis, Missouri

Samuel A. Donaldson
University of Washington Law School
Seattle, Washington

Kenneth A. Feinfield
Wilmington Trust FSB
Los Angeles, California

Charles D. (“Skip”) Fox IV
McGuireWoods LLP
Charlottesville, Virginia

Jon J. Gallo
Greenberg Glusker
Los Angeles, California

Alan S. Halperin
Paul, Weiss, Rifkind, Wharton & Garrison LLP
New York, New York

Carol A. Harrington
McDermott, Will & Emery
Chicago, Illinois

Nancy G. Henderson
Henderson & Caverly LLP
Rancho Santa Fe, California

Charles E. Hodges II
Chamberlain Hrdlicka
Atlanta, Georgia

Joseph G. Hodges, Jr.
Attorney at Law
Denver, Colorado

Catherine V. Hughes
Department of the Treasury
Washington, D.C.

Donald O. Jansen
The University of Texas System
Austin, Texas

Ralph E. Lerner
Sidley Austin LLP
New York, New York

Stephanie Loomis-Price
Baker Botts LLP
Houston, Texas

Mary Ann Mancini
Bryan Cave LLP
Washington, D.C.

Carlyn S. McCaffrey
Weil, Gotshal & Manges LLP
New York, New York

Kathryn M. McCarthy
Consultant
New York, New York

Jerry J. McCoy
Law Office of Jerry J. McCoy
Washington, D.C.

Steven K. Mignogna
Archer & Greiner P.C.
Haddonfield, New Jersey

Daniel M. Miller
Reed Smith LLP
Pittsburgh, Pennsylvania

M. Read Moore
McDermott Will & Emery LLP
Chicago, Illinois

Michael D. Mulligan
Lewis, Rice & Fingersh, L.C.
St. Louis, Missouri

William T. Norris
JP Morgan Private Bank
Chicago, Illinois

Jeffrey N. Pennell
Emory University School of Law
Atlanta, Georgia

John W. Porter
Baker Botts LLP
Houston, Texas

John R. Price
Perkins Coie LLP
Seattle, Washington

Charles A. (“Clary”) Redd
Sonnenschein Nath & Rosenthal LLP
St. Louis, Missouri

Bruce S. Ross
Luce, Forward, Hamilton & Scripps LLP
Los Angeles, California

Gideon Rothschild
Moses & Singer LLP
New York, New York

Robert N. Sacks
Sacks, Glazier, Franklin & Lodise LLP
Los Angeles, California

Max Schanzenbach
Northwestern University School of Law
Chicago, Illinois

Roger L. Shumaker
McDonald Hopkins LLC
Cleveland, Ohio

Robert H. Sitkoff
Harvard Law School
Cambridge, Massachusetts

Thomas E. Spahn
McGuireWoods LLP
McLean, Virginia

Todd I. Steinberg
Greenberg Traurig LLP
McLean, Virginia

Bruce M. Stone
Goldman Felcoski & Stone P.A.
Coral Gables, Florida

Conrad Teitell
Cummings & Lockwood LLC
Stamford, Connecticut

Steven Thomas
Irell & Manella LLP
Los Angeles, California

Steven E. Trytten
Anglin, Flewelling, Rasmussen, Campbell & Trytten LLP
Pasadena, California

Lynn Wintriss
Atapco Financial Services, Inc.
Baltimore, Maryland

Glen A. Yale
Stumpf Craddock Massey Farrimond
San Antonio, Texas

Institute's Advisory Committee:

Tina Portuondo, Institute Director
University of Miami School of Law
Coral Gables, Florida

Byrle M. Abbin, Wealth & Tax Advisory Services, Inc.
McLean, Virginia

Steve R. Akers, Bessemer Trust
Dallas, Texas

Mark L. Ascher, University of Texas School of Law
Austin, Texas

Ronald D. Aucutt, McGuireWoods LLP
McLean, Virginia

Dennis I. Belcher, McGuireWoods LLP
Richmond, Virginia

Norman J. Benford, Greenberg Traurig, P.A.
Miami, Florida

Lawrence Brody, Bryan Cave LLP
St. Louis, Missouri

J. Donald Cairns, Spieth, Bell, McCurdy & Newell, Co., L.P.A. Cleveland, Ohio

S. Stacy Eastland, Goldman, Sachs & Co.
Houston, Texas

David M. English, University of Missouri School of Law Columbia, Missouri

Joseph G. Gorman, Jr., Sheppard Mullin Richter & Hampton LLP Los Angeles, California

Max Gutierrez, Jr., Morgan, Lewis & Bockius LLP
San Francisco, California

Carol A. Harrington, McDermott Will & Emery LLP
Chicago, Illinois

Donald O. Jansen, The University of Texas System
Austin, Texas

Carlyn S. McCaffrey, Weil, Gotshal & Manges LLP
New York, New York

Jerry J. McCoy, Law Office of Jerry J. McCoy
Washington, D.C.

Judith W. McCue, McDermott Will & Emery LLP
Chicago, Illinois

Louis A. Mezzullo, Luce, Forward, Hamilton & Scripps LLP
Rancho Santa Fe, California

Malcolm A. Moore, Davis Wright Tremaine LLP
Seattle, Washington

Jeffrey N. Pennell, Emory University School of Law
Atlanta, Georgia

Lloyd Leva Plaine, Sutherland, Asbill & Brennan LLP
Washington, D.C.

Susan Porter, U.S. Trust - Bank of America
Private Wealth Management
New York, New York

Bruce S. Ross, Luce, Forward, Hamilton & Scripps LLP
Los Angeles, California

Pam H. Schneider, Gadsden Schneider & Woodward LLP
King of Prussia, Pennsylvania

Bruce M. Stone, Goldman Felcoski & Stone P.A.
Coral Gables, Florida

Howard M. Zaritsky
Rapidan, Virginia

Emeritus Members:

Alan D. Bonapart, Bancroft & McAlister LLP
Greenbrae, California

Marcia Chadwick Holt, Davis, Graham & Stubbs LLP
Denver, Colorado

Dave L. Cornfeld, Husch & Eppenberger, LLC
St. Louis, Missouri

Fred J. Dopheide, Newtown Square, Pennsylvania

John R. Price, Perkins Coie LLP
Seattle, Washington

GENERAL INFORMATION ABOUT INSTITUTE:

Inquiries/Registration:

Philip E. Heckerling Institute on Estate Planning
University of Miami School of Law
Center for Continuing Legal Education
P.O. Box 248087
Coral Gables, FL 33124-8087
Telephone: 305-284-4762 / FAX: 305-284-6752
Web site: www.law.miami.edu/heckerling
E-mail: heckerling@law.miami.edu

Headquarters Hotel - Orlando World Center Marriott

8701 World Center Drive
Orlando, FL 32821
Telephone (407) 239-4200, FAX (407) 238-8777

NOTICE:

Although audio tapes of all of the substantive session at the Miami Institute currently are only made available to Institute registrants for purchase, the entire proceeding of the Institute are published annually by Lexis/Nexis. For further information, go to their Web site.

The text of these proceedings is also available on CD ROM from Authority On-Demand by LexisNexis Matthew Bender. For further information, contact your sales representative, or call (800) 833-9844, or fax (518) 487-3584, or go [here], or write to Matthew Bender & Co., Inc., Attn: Order Fulfillment Dept.,1275 Broadway, Albany, NY 12204.

In granting permission to reproduce this announcement, Joe Hodges made clear to me his role regarding the Institute:

That sounds fine to me as long as the ABA RPPT Section gets the credit.

I just work for them, for free. -- Joe

Updates:

After the Heckerling Institute concluded, the periodic reports summarizing the sessions -- all twenty-one, plus Joe's introduction & overviews -- were posted by the ABA's Real Property, Trust & Estate Law Section here, for viewing/downloading separately or collectively (PDF). I highly recommend a reading.

Paul T. Fabiano, Esq., of Cornerstone Advisors in Allentown, PA, attended the annual Heckerling Institute, held January 14-18, 2008, in Orlando, Florida. Afterwards, Paul volunteered to write his separate, individual impressions of highlights he noted at the Institute for posting on this Blog in multiple parts:

• Developments from Heckerling Institute, Pt. I (02/11/08)
  

• Developments from Heckerling Institute, Pt. II (02/18/08)

Developments from Heckerling Institute, Pt. I

Paul T. Fabiano, Esq., of Cornerstone Advisors in Allentown, PA, attended the annual Heckerling Institute, held January 14-18, 2008, in Orlando, Florida. For background about the Institute, see: PA EE&F Law Blog posting, "Heckerling Institute 2008 Revs Up" (01/11/08).

Afterwards, Paul volunteered to write his impressions of highlights he noted at the Institute for posting on this Blog in multiple parts. This is Paul's first installment, with more to come. I thank him and Cornerstone for this contribution. Contact information for Paul is found at the end of his article.

2008 Heckerling Highlights, Part I

by Paul T. Fabiano, JD, LLM, of Cornerstone Advisors

709 Fundamentals

1. Definition of Taxable Gifts: The Supreme Court in Dickman (1984) used a very broad definition of taxable gifts by analogy to the income tax definition of “all income from whatever source derived.”[1] This opens the door to bringing in obscure transfers as gifts. Although they may not ordinarily be reported as taxable gifts, consider whether such things as paying for a wedding or taking the family on vacation could be viewed as a taxable gift by the Service. It may be relevant if the payor is in attendance in determining if there was a gift transfer.

2. Community Property Gifts: Transfers of community property are automatically deemed one-half by each spouse even without a gift splitting election. Thus status as community property dictates, and titling or elections are otherwise irrelevant. Additionally, gifts made from community property may qualify for a valuation discount. When advising a client who moved from a community property state, be careful to consider these consequences before making any change.

3. Adequate Disclosure: In order to get the statute of limitations running on a gift transfer made after August 5, 1997, the return must adequately disclose it. Among other requirements for adequate disclosure, there must be a detailed description of the method used to determine the fair market value of the property transferred or a written appraisal.

Requirements. The description has detailed requirements, including financial data, restrictions considered and discounts used. [2] If an entity is gifted, the description must include the value of 100 percent of the underlying assets, without regard to the discounts. The requirement of the detailed description is very notable because it essentially requires a formal written appraisal or the return preparer to provide a substantive justification for the value used.

Income Tax Returns. Disclosure of a transfer on an income tax return can start the gift tax statute, but the disclosure must include an explanation why the transfer is not a gift. Transfers made in the ordinary course of business (e.g., salary to an employee-family member) do not need the explanation as long as otherwise reported properly.[3]

Incomplete Transfers. It seems to make sense to err in favor of reporting transfers as completed gifts. If a gift is reported as completed and the statute runs, the gift value used will be final even if later determined not to be a complete gift. In contrast, a gift reported as incomplete will not start the statute even if later found to be complete.[4]

Recent Developments

4. Priority Guidance Hit List: The following items appear among others on the Service’s Priority Guidance Plan

Swap Power. The application of IRC §2036 to a grantor’s retained power to substitute assets in a trust is on the Service’s most recent priority guidance. This power is often used to trigger grantor trust status under IRC §675(4)(c). It will be interesting to see their position. If the transaction is done at fair market value, it does not seem as if there is any retained enjoyment.

Restricted Management Accounts: It does not look like restricted management accounts are a good family limited partnership alternative after all. The IRS priority guidance provides that the application of IRC §2703 to such accounts will be addressed.

5. GST Grandfathering: There is a split in circuits whether a beneficiary’s exercise, release or lapse of a general power of appointment at death ends the GST grandfathering of a trust (pre- September 25, 1985). The Eighth and Ninth Circuits maintained grandfathering, with only the Eighth Circuit being subsequent to contradictory Regulations.[5] A recent Tax Court case, which will go to the Sixth Circuit, held the Regulations were valid and the subject trust would lose its grandfathered status when a beneficiary exercised a general power of appointment at death. [6]

6. Tax Apportionment: A recent case highlights the importance of a well thought out tax apportionment clause. In Matter of Lee, a New Jersey court found a vague tax clause apportioned estate taxes to a residual charitable beneficiary despite state law which would exonerate it.[7] A circular calculation, therefore, ensued and caused additional estate taxes. Make sure the tax apportionment clauses specifies the tax payers and coordinates (or overrides) IRC §2207A properly, especially when there is a charitable beneficiary following a QTIP trust. Additionally, it is important to specify whether proportional residuary gifts are determined before estate taxes are calculated or after, as this will change the amount going to each beneficiary.

7. Estate Deductions: Proposed Regulations under IRC §2053 significantly change the way estate deductions are taken into account. In general, deductions are limited to amounts actually paid, and for future payments, the estate must take into account post-death events.[8] There is great concern that this does not coordinate with marital or charitable deductions which are determined as of the date of death. This could lead to an inadvertent estate tax and must be addressed by the IRS before the Regulations are final and effective. If these rules are not changed, most returns with contingent claims will likely be accompanied with a protective claim for a refund.

8. Investment Management Fees: This is a recurring discussion for the past few years at Heckerling, probably because of all the trust companies in attendance. The Supreme Court affirmed the Second Circuit’s holding that fees for investment management services paid by a trust were subject to the two-percent floor for miscellaneous itemized deductions.[9] This position is also provided for under the IRC 67(e) Regulations, which states that any cost that is not unique to an estate or non-grantor trust is subject to the two-percent floor. Although trustees must unbundle their fees for this purpose, there may be some flexibility available in allocating the amounts. [See also: PA EE&F Law Blog posting "IRS Wins Rudkin Case in U.S. Supreme Court" (01/17/08).]

9. Single Member LLC: A method used to avoid certain state’s estate taxes on out-of-state real estate is to put it in an LLC or partnership, thereby changing it’s character to an intangible. Recently, some states have ignored a single member LLC for this purpose, namely New York and Massachusetts.

10. Distribution Committees: Over recent years at Heckerling the use of multiple trustees with defined duties or working as committees has been touted. IRS New Release 2007-127 announced the IRS was reconsidering private letter rulings it has issued on the application of IRC §2514 (the gift tax general power of appointment) to such committees where trust beneficiaries serve and distribute with full discretion.[10]

11. Transfer for Value Ruling: Revenue Ruling 2007-13 helped clarify some uncertainty regarding whether certain non-gift transfers to grantor trusts are excepted from the transfer for value rule of IRC §101(a)(2). Specifically, a transfer between two grantor trusts is ignored for income purposes, so no transfer for value has occurred. If only the transferee trust is a grantor trust (not the transferor), the transfer will meet the transfer to insured exception of IRC §101(a)(2)(B) and the policy proceeds will maintain the exclusion from income tax. In this latter scenario, however, the parties still need to be careful about triggering a gain if the consideration exceeds the policy basis.

12. Charitable Lead Trust: A Private Letter Ruling on charitable lead annuity trusts provided that a trust instrument cannot alter the source ordering rules with regard to annuity payments.[11] In other words, income will always come out worst character first.

13. Built-In Gain Effect on Valuation: The 11th Circuit reversed a Tax Court case in regard to the methodology used to reduce the estate tax value of a closely-held C corporation with built-in gain.[12] The Tax Court had attempted to project a future sale date and discount the built-in gain liability. The 11th Circuit held the sale should be taken into account as if it occurred at the time of death, resulting in no discounting of the reduction. In a partnership situation using this logic, one would have to weigh the value of an IRC §754 election step-up on inside basis (which would eliminate the impact) versus taking an immediate estate tax reduction. [See also: PA EE&F Law Blog posting "Jelke Ruling re Company's Value for FET" (12/06/07.]

14. Form 706 Line for Disclosing Discount: Form 706 now asks on line 10a if the decedent owned any interest in a partnership, an unincorporated association, or limited liability company, or owned a fractional interest in real estate. Line 10b follows up by asking if the value of any interest owned under line 10a was discounted. This could be viewed as the IRS recognizing the existence of fractional interest discounts. Although this should produce additional caution regarding discounts generally, it could also inadvertently sanction the ability to take fractional interest discounts.

15. GRAT Inclusion: Proposed Regulations were released that provide the included estate tax value of an annuity, unitrust, or other payment retained by a grantor in a CRT or GRT is governed by IRC §2036 only and not IRC §2039. Instead of the entire value of the trust being included in the grantor’s estate, therefore, only the calculated amount needed to satisfy the remaining retained payments is included.[13] Drafters should address the resulting IRC § 2207B right of reimbursement from the GRAT for estate taxes under the grantor’s will, and specifically waive it if desired.

---

[1] Dickman v. Comm., 465 U.S. 330 (1984).

[2] Treas. Reg § 301.6501(c)-1(f).

[3] Treas. Reg §301.6501(c)-1(f)(4).

[4] Treas. Reg §301.6501(c)-1(f)(5).

[5] Simpson v. U.S., 183 F.3d 812 (8^th Cir. 1999); Bachler v. U.S., 281 F.3d 1078 (9^th Cir. 2002).

[6] Treas. Reg. §26.2601-1(b)(1)(i). Estate of Eleanor R. Gerson v. Comm., 127 T.C. 139 (2006).

[7] 389 N.J. Super. 22, 910 A.2d 634 (App. Div.).

[8] Treas. Reg. §20.2051-1.

[9] Michael J. Knight, Trustee v. Commissioner, 552 U.S. ___ (No. 06-1286, Jan. 16, 2008).

[10] PLRs 200731019, 200715005, 200647001, 200647001, 200637025, 200612002 and 200502014.

[11] PLR 200648025.

[12] Estate of Frazier Jelke, III, 2007 U.S. App. Lexis 26477.

[13] REG-119097-05, IRB 2007-28.

You may contact Paul at Cornerstone Advisors, 1802 Hamilton Street, Allentown, PA 18104 (Ofc: 610-437-1375; Fax: 610-437-4575; Email: pfabiano@cornerstone-companies.com).

Update: 02/18/08:

For Part II of Paul's observations from the Heckerling Institute, see: PA EE&F Law Blog posting "Developments from Heckerling Institute, Pt. II" (02/18/08).

Update: 02/25/08:

For Part III of Paul's observations from the Heckerling Institute, see: PA EE&F Law Blog posting "Developments from Heckerling Institute, Pt. III" (02/25/08).

2007 Heckerling Institute Summaries Available

The 41st Annual Heckerling Institute on Estate Planning, offered by the University of Miami School of Law, was held January 8-12, 2007, in Orlando, Florida.

The Heckerling Institute on Estate Planning is the nation’s leading conference for estate planning professionals. The program is designed for sophisticated attorneys, trust officers, accountants, insurance advisors, and wealth management professionals who are familiar with the principles of estate planning. The Institute offers something of interest to every member of the estate planning team.

Summaries of presentations made during past Institutes traditionally were posted online by the Real Property, Probate & Trust Law Section, of the American Bar Association. For past years, see these links:

• 2006
  
• 2005
  
• 2004
  
• 2003
  
• 2002
  
• 2001
  
• 2000

The summaries for the 2007 Institute are available. See: New Reports from the 2007 Heckerling Institute. The index for the various reports is found here.

These "reports from the event" were already provided contemporaneously to ABA-RPPT Section members on its Probate-Trust Listserv (ABA-PTL List), and also to ACTEC members on its listserv. Each report can also be accessed at any time from the ABA-PTL Discussion List's Web-based Archive.

These summaries are not the same as the detailed materials distributed to registered participants; but all the concepts discussed during the sessions are mentioned.

So, if you seek general acquaintance with recent developments or overall trends in estate planning, these summaries deliver both. And you could always obtain specific detailed materials from the Institute as you might need.

Estate Planning & Drafting Software

On November 28, 2007, "Estate Planning & Drafting Software for the Professional" was the topic of a one-hour presentation at the 14th Annual "Estate Law Institute" conducted by the Pennsylvania Bar Institute, at the Pennsylvania Convention Center, in Philadelphia.

The session occurred at the end of the first day of the very successful & well-attended Institute, which I had anticipated previously in a posting, "PBI's "Estate Law Institute" Nov 28th-29th" (10/24/07).

The panelists included Daniel B. Evans, Esq., Nicole S. Splitter, and me (Neil E. Hendershot, Esq.).

As the moderator, I began the session by referring to materials in the Institute's three-volume set.

Donald H. Kelley, Esq., of Highlands Ranch, Colorado, had given me permission for PBI to reprint his 24-page outline, with live Internet links, entitled "Electronic Practice Leverage -- A Trusts and Estates Desktop". This is an expanded & updated treatment of technology resources & tips written by Don over the years. He mentioned the origin of the material.

The archived issues of the Trusts & Estates Technology Newsletter written by the author for Trusts & Estates magazine are available [here] (delivered free monthly to subscribers of Trusts & Estates magazine). For an electronic copy of this outline, with live links, in Word or PDF, please email the author at dhkelley@qwestoffice.net.

Don had posted many of the articles in the public area of the website of the American College of Trust & Estate Counsel in a section entitled "Technology Review". These articles include, among others:

• Internet Resources for Family Offices
  Jan 19, 2006 By Donald H. Kelley
• Web Based Calculators -- Part 1
  Feb 8, 2006 By Donald H. Kelley
• Web-Based Calculators -- Part 2
  Mar 22, 2006 By Donald H. Kelley
• Planned Giving Resources
  Oct 19, 2006 By Donald H. Kelley
• Forms on the Web for the T&E Practice
  Nov 27, 2006 By Donald H. Kelley
• Holiday Wish: a Trusts and Estates Desktop
  Dec 20, 2006 By Don H. Kelley
• Heckerling 2007: A View From the Booth
  Jan 18, 2007 By Donald H. Kelley
• Retirement Income Navigator
  Feb 21, 2007 By Donald H. Kelley
• Online Securities Valuation
  Mar 15, 2007 By Donald H. Kelley
• Brentmark Charitable Financial Planner
  Aug 15, 2007 By Donald H. Kelley
• Charitable Trusts Programs: Beyond Basics
  Sep 12, 2007 By Donald H. Kelley

Dan Evans then explained & demonstrated the software Estate Planning QuickView 2007, which he writes in conjunction with Stephen Leimberg, and which is marketed by Leimberg & LeClaire, Inc. of Havertown, PA.

Estate Planning QuickView is our state law sensitive flowchart and graph based Windows software to provide and help communicate instantaneous answers to two of the most important questions you - and your clients - need to answer:

• What dispositive strategy will reduce taxes at death to the lowest possible amount?
• What dispositive strategy at death will provide the highest amount of financial security (capital) for heirs? * * *
  

Dan demonstrated its interface, data entry, scenario capabilities, and output.

Dan then demonstrated a companion software program offered by the same vendor, used both in estate planning & fiduciary administrations: NumberCruncher 2007.

NumberCruncher is Steve Leimberg's authoritative estate planning decision-maker and "electronic survival tool". It is the essential "instant answers" solution for estate, business, and financial planners.

This intuitively easy-to-use tool requires practically no learning curve. New users will be astounded by how quickly NumberCruncher can be mastered, how many creative tasks it performs, and how amazingly fast you have your answers. * * *

I then introduced the professional-level estate planning software written by Donald H. Kelley & Konrad Schmidt, III, and published by Thompson-West: Intuitive Estate Planner.

This software application allows you to easily perform estate planning calculations and prepare presentations for clients. It analyzes estate plan development options and saves time in collecting and organizing client information.

The Intuitive Estate Planner allows you to handle estate calculations in three easy steps: enter client data; make planning choices; and view calculations and generate planning reports and client handouts.

• Graphically display the effect of the federal and state estate taxes on inheritance
• Calculate the effect of possible changes in the federal estate tax
• Plan and demonstrate solutions to tax attrition of the client's estate
• Show flow of property through the estates, including numerical results of the plan
• Compose a slide show of planning and property concepts for a client or group
• View and/or print the results of all calculations in flowchart, comparative bar graph, or table format * * *
  

I noted the ease-of-use, educational aspects, Internet linkages, and breath & depth of this estate planning tool in my enthusiastic, though brief, review of its capabilities.

Other estate & financial planning tools for the computer were described in a Technology Review, published by Jason E. Havens, in the American Bar Association's Probate & Trust Journal (Mar/Apr, 2006).

As a transition into the topic of estate drafting software, I mentioned consumer-oriented will & trust preparation software, and then introduced a professional-level product.

Nicole S. Splitter, a Senior Account Executive with Interactive Systems, Inc., demonstrated one sophisticated assembly system for estate planning, trust, & related personal planning documents, written by prolific authors & highly-respected practitioners Jonathan J. Blattmachr, Esq. and Michael L. Graham: Wealth Transfer Planning.

This "lifetime estate planning and drafting system" is available for different user levels:

* Professional Version — for the Trusts & Estates specialist with higher net worth clients requiring tax planning; includes customization tools, unlimited support and other specialized training & services
* Standard Version — for the T&E lawyer with taxable and non-taxable clients; includes customization tools
* Essentials Version — for the T&E or general practice lawyer with clients of modest wealth and non-taxable estates; no customization tools * * *

Nicole demonstrated the modules, data input, customization, references, support, assembly, and output of this impressive, powerful product.

All these tools contribute greatly to a practitioner's maintenance of excellence in rendering estate planning services to clients.

Update: 12/14/07:

On November 29, 2007, "Fiduciary Administration Software for the Professional" was the topic of a one-hour presentation during the second day of the 14th Annual "Estate Law Institute" conducted by the Pennsylvania Bar Institute, at the Pennsylvania Convention Center, in Philadelphia.

See: PA EE&F Law Blog posting "Fiduciary Administration Software" (12/14/07).

Update: 06/11/08:

Software that drafts estate & personal planning documents was a subject of discussion on the American Bar Association's Estate Planner's Listserv this day.

One contributor recommended an article comparing such products for the professional, as published in the July/August, 2004 issue of the ABA's "Probate & Property" periodical, by Joseph G. Hodges, Jr., Esq., and Jason E. Havens, Esq., entitled "Deftly Drafting Estate Planning Documents" (7 pages, PDF).

Then Joe Hodges, as Chief Moderator of the ABA-PTL Listserv, added a comment:

Chiming in a little late on this one, in addition to the article Jason and I wrote, Roger Shumaker and I included an updated matrix chart of available T&E software in our materials for our Technology Update that was presented at Heckerling 2008.

That matrix is now posted on the RPTE Section Web site as part of the Heckerling Reports for 2008 as Appendix C in Report 21 (Final Report) near the top.

That web page contains a link to download 42nd Heckerling Estate Planning Institute 2008 - Appendix C from Special Sessions on Technology (43KB) for the comparison table entitled "Summary of Trusts and Estates Law Practice Software" (6 pages, PDF), prepared 11-14-07 for 2008 Heckerling Estate Planning Institute - Copyright 2008 by Joseph G. Hodges Jr., Roger L. Shumaker, and D.W. Craig Dreyer.

Developments from Heckerling Institute, Pt. II

I now post Part II of Paul T. Fabiano's observations from the annual Heckerling Institute held January 14-18, 2008, in Orlando, Florida. Paul works with Cornerstone Advisors in Allentown, PA.

For the first of three installments of his observations, see: PA EE&F Law Blog posting, "Developments from Heckerling Institute, Pt. I" (02/11/08). I thank him for this additional contribution. The final segment, Part III, will appear next week.

2008 Heckerling Highlights, Part II

Paul T. Fabiano, JD, LLM

Cornerstone Advisors

FLP Valuation Issues

1. Gift on Formation: To avoid making a gift on formation of a family limited partnership, the transferor should first fund the partnership and properly credit capital accounts. Thereafter, preferably the next tax year, he or she can transfer partnership interests. Although not reflecting reality, planning must avoid an argument that the subsequent transfer was contemplated at the time of the capital contribution.[1] This applies equally after formation to indirect gifts resulting from additional contributions. Traditionally, indirect transfers do not receive a discount because they are valued, instead, based on the amount given up by the transferor.

2. Bad Facts: The best advice for planning with FLPs is to avoid bad facts on formation and operation. In essence, you do not want your client to be the one that gets caught by the bear. This is still where the Service has found its traction on estate inclusion under various arguments.

• Disproportionate Distributions. The partnership should not make disproportionate distributions to the senior family member.[2] Even proportionate distributions that cover the senior family member’s expenses are risky.

• Power of Attorney. The partnership should not be set up by an agent acting under a power of attorney for the senior family member.[3]

• Payment of Taxes. An estate’s post-death use of partnership funds to pay estate taxes demonstrates that the decedent did not retain sufficient liquid interests during life.[4] This rationale applies equally to a redemption of the decedent’s interests. Consider using life insurance instead or borrowing from the partnership under commercially reasonable terms, if needed.

3. Control of General Partner's Interest: Although there is little authority specifically isolating the retention of general partner interests, it is best if the senior family members hold no control at death given the retained control arguments. Even better, they should relinquish any controlling interest at least three years before death to avoid an inclusion look-back under IRC §2035. If senior family members must serve as general partners, check the partnership boilerplate to remove “sole and absolute” authority and overly protective exculpatory clauses.

4. Attorney-Client Privilege: Legitimate non-tax business purposes can help prove a bona fide sale for adequate consideration in the creation of FLPs, avoiding some inclusion arguments.[5] Showing these, however, would likely involve testimony by the drafting attorney and waiver of the attorney-client privilege. In other words, client files should focus on the non-tax reasons rather than discounting opportunities. Keep this in mind in creating FLPs.

5. Risk of Marital Underfunding: If the undiscounted value of an FLP is included in the senior family member’s estate, there is a significant risk of causing estate tax on the first death when a marital deduction is involved. Any partnership interests left to a marital trust for the benefit of the surviving spouse probably won’t get the same undiscounted treatment, causing a disconnect between the inclusion value and the marital deduction. If involved in a risky FLP, be sure to recognize this potential problem.

S Corporations

6. 100 Shareholder Rule: The rules governing the allowable number of shareholders in an "S" corporation expand well beyond the 100 indicated.[6] There is a very broad definition for “all members of a family” that greatly reduces the number of shareholders actually counted, particularly in a family owned business. All members of a family include lineal descendants of a common ancestor (up to six generations) and the current and former spouses of the lineal descendants or the common ancestor.[7]

7. Non-Approved Shareholders: If the owners of a business venture wish to elect "S" corporation status with non-approved shareholders (e.g., nonresident aliens), a structure using a subsidiary LLC may solve the problem. In this structure, an "S" corporation would proportionately own an LLC that holds the assets of the business.

• The non-approved persons would own a proportionate interest in the LLC. For example, the non-approved shareholders can hold their 10 percent directly of the LLC, and the "S" corporation (owned by the approved shareholders) would hold 90 percent of the LLC.

• Be careful to consider any problems when a non-approved person (e.g., nonresident alien) is the spouse of an "S" corporation shareholder and resides in a community property state. The non-approved spouse could have an interest in shares that were acquired by the shareholder as compensation due to community property status.

8. Single Class of Stock: To meet the single class of stock requirement, all shares must have equal rights to distributions and liquidation proceeds.[8]

• Disproportionate Distributions. Despite the single class requirements, shareholders often take disproportionate distributions. In these situations, they should follow with equalizing distributions for the year.

• Buy-Sell Installments. When a corporation redeems a shareholder’s stock, the buy-sell agreement often allows installment payments. The installment terms should meet a debt safe-harbor to avoided being deemed an equity interest.[10]

• Split-Dollar Arrangements. To avoid a second class of stock when a corporation enters a split-dollar arrangement with a shareholder, the employee should reimburse the corporation for the economic benefit.[11] For arrangements entered after September 17, 2003, this would cause adverse income tax consequences. In that case, be sure the corporation’s obligation to pay is not binding (give it a right to terminate).[12] The second class of stock rules only take into account binding corporate agreements.

Business Succession Planning

There was a good discussion of the considerations, players involved, options and legal implications of business succession planning. In general, the following are keys to good planning:

• Keep outsiders out of the business, including non-active children.
• Give up on the idea of equalization, as it cannot be practically achieved.
  
• Use life insurance to its advantage to solve planning challenges.
  
• Use trusts liberally to protect the business from creditors and spouses, and to foster, design, and implement the succession plan.

9. QTIP Holding Stock: When a QTIP trust holds closely-held stock, there is a chance it will not be income-producing unless there are regular dividends. When combined with a restrictive buy-sell agreement, there is a risk that the surviving spouse’s right to convert unproductive property will be illusory, and the estate will lose the marital deduction. A suggested resolution is to give the trustee of the QTIP the additional power, in addition to distributing income, to distribute principal to the surviving spouse to the extent necessary to obtain the marital deduction.

10. Fiduciary Duty in Holding Stock: If the intent is for a trust to own closely-held stock or interests, the trustee should be alleviated of liability concerns for retaining it. Be sure to specify that trustee can retain the stock in contravention of all trustee’s duties to diversify (per the Prudent Investors Act), and trustee is indemnified and held harmless. This should include specific language regarding the ability to retain the stock during periods of a loss in value.[13]

11. Estate Tax Value Stipulation: In addition to the main valuation mechanism under a buy-sell agreement, some use the estate tax value as finally determined as a floor price for transfers at a shareholder’s death. The IRS could view this as evidence that the decedent did not think the value used otherwise would meet the requirements for fixing the estate tax value under IRC §2703. If this is a strong concern, a better alternative may be to simply provide for an appraisal price for the purchase.

Deferred Compensation

This session covered the recent changes to IRC §409A and taxation of deferred compensation arrangements. This includes plan mechanics and the expansion of the constructive receipt doctrine, including the prohibition now of a haircut provision to accelerate distributions and employer health triggers.

12. Vesting and Funding: It is important to recognize that as long as a plan participant is not vested in the deferral or the plan is not funded, the employee does not recognize income. Unvested means the employee’s right to receive future payments is not transferable and is subject to a substantial risk of forfeiture. Unfunded means the deferred compensation is only an unsecured promise of employer to pay employee in the future (employee would be in line with other general unsecured creditors).

13. Deferrals for Senior Family Members: A deferred compensation plan may be used to ensure continued salary to the senior family members after they transfer ownership. If the payments are to be respected as salary for purposes of the plan, it must be compensating them for earlier services to the company. Be careful, however, to avoid establishing that the owners were underpaid in prior years because that could trigger unpaid payroll tax obligations if successfully challenged.

Art Collectibles

There are a number of difficult tax considerations for active art collectors. Namely, it is not easy to obtain dealer status and therefore acquire the business characteristics necessary to take into account related expenses, losses and tax-free exchanges (for income tax purposes). The charitable deduction benefits were also significantly impacted by the Pension Protection Act of 2006.

14. Fractional Interest Gifts: After August 17, 2006, it is more difficult to make fractional interest gifts of art or collectibles to charities for income tax deduction purposes. The remaining interest must be transferred within 10 years and the charity must have a substantial physical possession during the donor’s interest period.[14] Donors no longer get the benefit of the increase in value when later gifting the remaining interest. Instead, the income tax deduction is limited to the proportional value of the donated items based on the date of the initial gift.[15]

• Split-Purchase Alternative. A good alternative to avoid the deduction limitation and 10-year requirements is to enter a split-purchase arrangement with the charity when acquiring an item.

• Technical Correction. A 2007 technical correction removed similar estate and gift tax deduction limitations, in order to prevent a mismatch with estate tax values at death.[16] However, fractional gifts must still be completed within 10 years.

15. Fractional Interest Discount: A fractional interest discount for gift tax or estate tax purposes appears to be a losing argument. Unlike other fractionally held property (e.g., real estate) co-owners in the art world are not likely to litigate and make the co-ownership difficult, as this is known in the art world to taint the item. A nominal discount of 5 percent is more likely.[17]

---

[1] See Senda, T.C. Memo 2004-160 (July 12, 2004).

[2] Estate of Harper v. Comm’r, 83 T.C.M. (CCH) 1641 (2002).

[3] Erikson v. Comm’r, T.C. Memo 2007-107 (April 30, 2007).

[4] Rector v. Comm’r, T.C. Memo 2007-367(12/13/07).

[5] See Cohen v. Comm’r, 79 T.C. 1015 (1982) (which dealt with decedent’s control over a business trust).

[6] The Americans Jobs Creation Act of 2004.

[7] IRC §1361(c)(1)(B).

[8] Treas. Reg. §1.1361-1(1)(1).

[9] See, e.g., PLRs 200730009, 200524020 and 9519048.

[10] Treas. Reg. §1.1361-1(1)(4)(ii).

[11] PLR 9709027.

[12] This post Final Regulations consideration was not discussed at the Institute.

[13] See Fifth Third Bank v. Firstar Bank, No. C-050518, 2006 WL 2520329 (Ohio App., 1st Dist., Sept 1, 2006).

[14] IRC §170(o)(3)(A)(i).

[15] IRC §2055(g), IRC §2522(e).

[16] Technical Corrections Act 2007, Section 3(d).

[17] Robert G. Stone v. United States, 2007 U.S. Dist. LEXIS 58611 (N.D. Cal., August 10, 2007).

You may contact Paul at Cornerstone Advisors, 1802 Hamilton Street, Allentown, PA 18104 (Ofc: 610-437-1375; Fax: 610-437-4575; Email: pfabiano@cornerstone-companies.com).

Update: 02/25/08:

For Part III of Paul's observations from the Heckerling Institute, see: PA EE&F Law Blog posting "Developments from Heckerling Institute, Pt. III" (02/25/08).

Estate Planning Attorneys Surveyed

On January 15, 2008, the Sun Herald (Biloxi, Mississippi) posted an article entitled "WealthCounsel Announces the Results of Groundbreaking Survey of the Estate Planning Industry at Heckerling Conference in Orlando".

The referenced survey, conducted by WealthCounsel, LLC, compiled responses from experienced estate planning attorneys about their practices, the industry, and their clients.

WealthCounsel, LLC announced today from the exhibit hall of the 42nd Annual Heckerling Institute on Estate Planning the results of its 2007 WealthCounsel(R) Industry Trends Survey in a report entitled "A Look Inside the Estate Planning Industry."

The survey was designed to identify the challenges confronting today's estate planning professionals and to obtain a sense for the estate planning needs of American consumers. Approximately 5,000 estate planning attorneys were invited to participate in the survey during November 2007. * * *

The survey sought feedback not from consumers or institutions about their needs or expectations, but from estate planning attorneys about their practices, the broader estate planning industry, and their clients' overall motivations in seeking advice:

The results of the groundbreaking initiative captured feedback from nearly 500 estate planning attorneys throughout the country on topics ranging from future trends that they anticipate in the industry, to client net worth and psychographics, to the trade publications they read.

Respondents for the most part were seasoned practitioners with substantial estate planning and legal expertise. Seventy-five percent of respondents indicated they have practiced law for more than 11 years, and fifty-five percent have specialized in the estate planning field for more than 11 years. * * *

The article summarized key results:

• 94% of practitioners believe that estate planning is an interdisciplinary function requiring collaboration among the attorney, CPA, and financial professional;
• 93% believe that baby boomers will create a greater demand for services;
  
• 73% volunteer with non-profits or civic organizations;
  
• 60% said their clients engage in estate planning to avoid probate;
• 40% said clients want to keep their children from mismanaging their inherited assets.
  

The article was derived from a commercial press release, which was reported identically by Forbes and PR Newswire.

An electronic copy of the report may be downloaded from the website of its issuer, WealthCounsel (PDF, 16 pages). The press release noted that a copy also can be obtained by sending an email to: marlene.frith@wealthcounsel.com.

The survey report remains a semi-promotional offering by a vendor. Still, it provides rare insight into attorneys' collective experience nationally, by compiling the views of one group of estate planning lawyers.

Its results may not accurately reflect our experience in Pennsylvania, however. Nearly 20% of the respondents practiced in California, and nearly 8% practiced in Florida, while only about 2% practiced in Pennsylvania -- that is, just ten PA attorneys.

The survey report notes the intention to conduct such a survey annually for release at the Heckerling Institute.

Developments from Heckerling Institute, Pt. III

I now post Part III -- the final installment -- of Paul T. Fabiano's observations from the annual Heckerling Institute held January 14-18, 2008, in Orlando, Florida. Paul works with Cornerstone Advisors in Allentown, PA.

For the first two installments of his observations from the Institute, see: PA EE&F Law Blog posting, "Developments from Heckerling Institute, Pt. I" (02/11/08), and "Developments from Heckerling Institute, Pt. II" (02/18/08).

I thank him for his contributions, which have been noted by other bloggers and appear widely read.

2008 Heckerling Highlights
Part III

Paul T. Fabiano, JD, LLB
Cornerstone Advisors

Planning for Retirement Plans

This presentation gave a detailed economic analysis of IRA stretching versus planning alternatives, such as withdrawing the benefits before death or rolling into a Roth IRA. The stretch IRA proved best in most scenarios along with a Roth conversion that had the highest return under Monte Carlo simulations.

There was also a scenario where paying estate tax and going down a generation, avoiding a spouse’s required minimum distributions, provided more to the heirs in the long run. The materials contain excellent forms for beneficiary designations and trust provisions.

1. Nonspouse Rollover: Although the Pension Protection Act of 2006 allows nonspouse beneficiaries to roll an inherited qualified plan into an IRA account (using the deceased’s life expectancy for required minimum distributions), the IRS is not going to require employers to accommodate this in their plans.[1]

2. Wash Sale Rules: Revenue Ruling 2008-5 confirmed that wash sale rules, which disallow recognition of losses when taxpayers repurchase the same security, extends to repurchases made in an IRA.

3. Other Resources: If a trustee’s discretion to make distributions to a surviving spouse require trustee to consider other resources first, consider adding language directing trustee not to consider resources beyond minimum distributions from retirement plan assets.

Transfers to Parents and Siblings

This presentation discussed how wealthy family members can efficiently make gifts to, or provide for, parents and siblings. In general, the primary means to benefit these family members are annual exclusion gifts, gifts to trusts with multiple Crummey powers, payment for medical expenses (including the portion of long-term care that is medically necessary) and education expenses, and payment in the ordinary course of business.

4. Use of Property: Again, considering Dickman, the scope of gift tax law for transfers of property is broad and could extend to rent-free use of real estate.[2] To reduce the possibility of the free use being deemed a gift, alternatives are joint ownership or trust ownership of the property.

• Co-Tenants. Generally under property law, a co-tenant does not have an obligation to pay a co-tenant rent unless he or she “ousts” the co-tenant. Possibly, under this reasoning, the beneficiary co-tenant could be a mere one percent owner.

• Trust Ownership. A trust could also work because it cannot make a gift to a beneficiary, but there is a challenge with funding it initially with the property.

Section 529 Plans

This presentation gave a unique look at considerations that planners should address in implementing and changing 529 plans. The laws governing these plans and rules by institutions offering these plans are still evolving. Be alert of potential consequences when changing ownership, naming new beneficiaries or moving the plan to another state.

5. Successor Owner: An often overlooked consideration is the successor owner of a 529 plan account. There are at least two issues to be aware of: (1) the account owner has no fiduciary duty to the account beneficiary (e.g., he or she could take the funds personally) and (2) the exemption from estate tax inclusion can be lost if the account is subject to transfer taxes or debts of the owner.[3]

• Trust as Owner. By making a trust the account owner, the account management then falls into a fiduciary role and can survive incapacity or death; however, be aware of the potential estate inclusion and exclude the account from payment of taxes and debts.[4]

• Additionally, note that an Advance Notice indicates that trusts may no longer be permitted account owners.[5]

6. 5-Year Election: It appears the five-year election for contributions to a 529 plan pro-rates the gift automatically and the annual gift over the period cannot be varied. Additionally, be careful to make the election on a timely return or the first late return. The election cannot be made once a return has been filed for the year of the contribution.[6]

7. Beneficiary Changes: There are no tax problems with changing the beneficiary of a 529 plan account as long as the change is to “a member of the family” of the prior beneficiary and in the same generation. If the new beneficiary does not meet these criteria, the old beneficiary is deemed to make a taxable gift and may have to recognize income on the account earnings. It is interesting to note, however, the old beneficiary could then file a five-year election on the resulting gift.[7]

Section 2053

As introduced in Part 1 of these highlights, the Treasury released proposed regulations to IRC §2053 significantly changing the way estate tax deductions are taken into account.[8] There are currently differences among Circuits in considering post death events and these regulations are intended to end the uncertainty.

8. Contingent Claims: Under the proposed regulations, any contingent claims or deductions cannot be reported until actually paid.[9] Additionally, only bona fide claims can be deducted even if already paid. Accordingly, such claims must be paid and enforceable under state law.

• Family Presumption. Family claims carry a rebuttable presumption that they are not legitimate and bona fide.

• Recurring Noncontigent Payment. For recurring payments due in the future, which are not contingent (e.g., installment payments under a buy-sell agreement), the estate may deduct an amount equal to the present value of the future payments.

9. Estimated Amounts: An exception to the actually paid rule applies for claims that are “ascertainable with reasonable certainty, and will be paid.” Under the proposed regulations, this exception could apply to executor’s or attorney’s fees if reasonable and within accepted amounts in the jurisdiction.[10] If later not paid, the executor must notify the Commissioner and pay the resulting tax with interest.

Defined Value Transfers

With the new penalties for undervaluation of gifts, it is a good idea to use a defined value gift to reduce any risk.

10. Formula Gifts: Although the Service dislikes all types of formula gifts, a defined value gift has a base of authority and is superior to a gift adjustment clause.

• Adjustment. An adjustment clause, which the 4th Circuit held to be void as against public policy, is where the amount of the gift is retroactively adjusted if the value is later found to be different than assumed.[11]

• Defined Value. The defined value clause, which is sanctioned by tax law in other contexts (such as GRATs, allocation of GST exemption and marital deduction formulas), instead, defines the amount transferred with reference to the final valuation. Such a clause was upheld for a gift in the 5th Circuit.[12]

• Pour-Over. A variation of the defined value clause, is to have the excess value, as finally determined, flow into another place such as to a charity. This removes the incentive for the Service to challenge the gift value and involves an interested third party to substantiate the value used.

• Incomplete Gift. The defined value and pour-over could be taken a step further by having a trust purchase an asset from the client then divide into a sale share and an uncompleted gift share. The uncompleted gift share of the trust, as defined by formula based on the asset’s finally determined value, would grant back to the client a power of appointment.

11. GRAT with Trust: While the ability to adjust the annuity in a GRAT eliminates the gift tax risk of gifting hard to value assets (e.g., business interests), the return of a higher annuity through principal distributions may frustrate the client’s intent. If the client established another trust and gifts cash to it, the trust could loan the cash to the GRAT to make the annuity payments to client with no valuation risk. At the GRAT term end, the GRAT could repay the loan with its principal.

Trust Decanting

States statutes are beginning to allow the decanting of trust assets into another trust.[13] This can provide a great deal of flexibility to address many issues, such as solving trust liquidity needs, reducing administration costs, modifying administrative provisions, changing state law or correcting drafting errors. These powers are different from modification statutes because the trustee is acting without the consent of beneficiaries.

• Common Law: If not specifically authorized by client’s state statute, it is possible to apply ordinary common law principals to establish a new trust when the trustee has the discretion to apply principal “for the benefit of” the beneficiary.[14]

• GST Impact. Be careful to consider any impact on GST exemption. The regulations provide guidance on the extension of an otherwise GST exempt trust.[15]
  

• Income Tax Effect. Another tax consideration is triggering a gain if the beneficial interests of the new trust differ from the old trust. There may be more leeway on this issue under a decanting statute then if done by modification.

• Beneficial Interests. There are varying state provisions in the decanting statutes requiring similar beneficial interests or standards of distribution. Also, consider whether a taxable gift can occur if a beneficiary who is giving up some portion of interest does not object to a decanting.

Trust Distributive Provisions

This presentation provided good insight into the selection of trustees, the terms of trust distribution and tax implications of different arrangements.

• Incentive Trusts. In particular, there is great coverage and language addressing incentive trusts, such as for education or employment incentives.

• Mission Statement. Although most planners do not spend a great deal of time on the standards of distribution, there is a very broad range of interpretations and applications in such language. Consider spending more time on what the standards mean to the client and possibly develop a mission statement for them to that effect.

---

[1] Notice 2007-94.

[2] Dickman v. Comm., 465 U.S. 330 (1984).

[3] IRC §529(c)(4)(A) .

[4] Id.

[5] Advance Notice of Proposed Rulemaking, released on January 17, 2008.

[6] Id.

[7] Id.

[8] Prop Reg. §20.2053-1.

[9] Prop Reg. §20.2053-4.

[10] Prop Reg. §20.2053-3.

[11] Comm. v. Procter, 142 F.2d 824 (4th Cir. 1944).

[12] McCord v. Comm., 120 T.C. No. 13, 120 T.C. 358, 2003 WL 21089049 (2003).

[13] New York, Alaska, Delaware, Tennessee, Florida, and South Dakota.

[14] See, PLR 200530012, Phipps v. Palm Beach Trust Co., 196 So. 299 (Fla. 1940); but see Third Restatement on Property (which seems to disallow this by providing a distribution power is not the same as a power of appointment).

[15] Reg. §26.2601-1(4)(i)(A).

You may contact Paul at Cornerstone Advisors, 1802 Hamilton Street, Allentown, PA 18104 (Ofc: 610-437-1375; Fax: 610-437-4575; Email: pfabiano@cornerstone-companies.com).