Summary
2010
Estate Tax
Exclusion amount
$5,000,000
Maximum tax rate
35%
Carryover basis
Option to elect carryover basis instead of estate tax
Gift Tax
Exclusion amount
$1,000,000 (no change)
Maximum tax rate
35% (no change)
2011-2012
Estate Tax
Exclusion amount
$5,000,000
Maximum tax rate
35%
Gift Tax
Exclusion amount
$5,000,000
Maximum tax rate
35% (no change)
Saturday, December 18, 2010
Monday, August 2, 2010
Recent IRS Activity Affecting Nonprofit Organizations
Some IRS recent activity related to nonprofit organizations of interest...
ONLINE SYSTEM FOR EXEMPTION APPLICATIONS DELAYED
The IRS was targeting 2010 for the release of an online application process for organizations seeking tax-exempt status. This electronic application process is a welcome offering, as the filing fee, now $850 for most nonprofits, was to be reduced to $200. The IRS announced in June that the 2010 target deadline, has been pushed-back due to technical difficulties.
FILING RELIEF FOR SMALL NONPROFITS OFFERED THROUGH OCTOBER 15th.
The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007. First, it created a new tax return filing requirement - all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS. The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement. Second, the law also directed that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status. The IRS conducted an extensive outreach effort about this new legal requirement but many organizations have yet to file their required tax returns.
If an organization loses its exemption, it will have to reapply with the IRS to restore its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.
Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their tax-exempt status by filing returns by Oct. 15, 2010, under a one-time relief program, the Internal Revenue Service announced in July 2010.
The IRS has posted on a special page of IRS.gov the names and last-known addresses of the organizations with delinquent tax filings, along with guidance about how to comply with new filing requirements. The organizations on the list have tax return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required tax returns for the last three years.
Two forms of relief are available for small exempt organizations -- a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard), and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.
Small organizations required to file Form 990-N (e.g., gross receipts up to $25,000 annually) should go to the IRS website, provide the eight information items requested on the form, and electronically file it by Oct. 15.
Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by October 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.
The relief announced today is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.
The IRS will keep the list of at-risk organizations on IRS.gov until Oct. 15, 2010. Organizations that have not filed the required information returns by that date will have their tax-exempt status revoked, and the IRS will publish a list of these revoked organizations in early 2011. Donors who contribute to at-risk organizations are protected until the final revocation list is published.
ONLINE SYSTEM FOR EXEMPTION APPLICATIONS DELAYED
The IRS was targeting 2010 for the release of an online application process for organizations seeking tax-exempt status. This electronic application process is a welcome offering, as the filing fee, now $850 for most nonprofits, was to be reduced to $200. The IRS announced in June that the 2010 target deadline, has been pushed-back due to technical difficulties.
FILING RELIEF FOR SMALL NONPROFITS OFFERED THROUGH OCTOBER 15th.
The Pension Protection Act of 2006 made two important changes affecting tax-exempt organizations, effective the beginning of 2007. First, it created a new tax return filing requirement - all tax-exempt organizations, other than churches and church-related organizations, must file an annual return with the IRS. The Form 990-N was created for small tax-exempt organizations that had not previously had a filing requirement. Second, the law also directed that any tax-exempt organization that fails to file for three consecutive years automatically loses its federal tax-exempt status. The IRS conducted an extensive outreach effort about this new legal requirement but many organizations have yet to file their required tax returns.
If an organization loses its exemption, it will have to reapply with the IRS to restore its tax-exempt status. Any income received between the revocation date and renewed exemption may be taxable.
Small nonprofit organizations at risk of losing their tax-exempt status because they failed to file required returns for 2007, 2008 and 2009 can preserve their tax-exempt status by filing returns by Oct. 15, 2010, under a one-time relief program, the Internal Revenue Service announced in July 2010.
The IRS has posted on a special page of IRS.gov the names and last-known addresses of the organizations with delinquent tax filings, along with guidance about how to comply with new filing requirements. The organizations on the list have tax return due dates between May 17 and Oct. 15, 2010, but the IRS has no record that they filed the required tax returns for the last three years.
Two forms of relief are available for small exempt organizations -- a filing extension for the smallest organizations required to file Form 990-N, Electronic Notice (e-Postcard), and a voluntary compliance program (VCP) for small organizations eligible to file Form 990-EZ, Short Form Return of Organization Exempt From Income Tax.
Small organizations required to file Form 990-N (e.g., gross receipts up to $25,000 annually) should go to the IRS website, provide the eight information items requested on the form, and electronically file it by Oct. 15.
Under the VCP, tax-exempt organizations eligible to file Form 990-EZ must file their delinquent annual information returns by October 15 and pay a compliance fee. Details about the VCP are on the IRS website, along with frequently asked questions.
The relief announced today is not available to larger organizations required to file the Form 990 or to private foundations that file the Form 990-PF.
The IRS will keep the list of at-risk organizations on IRS.gov until Oct. 15, 2010. Organizations that have not filed the required information returns by that date will have their tax-exempt status revoked, and the IRS will publish a list of these revoked organizations in early 2011. Donors who contribute to at-risk organizations are protected until the final revocation list is published.
Wednesday, June 16, 2010
NEW GRAT LEGISLATION PROPOSED
Yesterday, June 15th, in a 247-170 vote, the House the Small Business Jobs Tax Relief Act of 2010 (H.R. 5486) that is projected to raise more than $5 billion (a questionable statistic, given recent stock market and real estate, and business performance) by altering the requirements of grantor retained annuity trusts (GRATs).
This piece of legislation would change existing law regarding the structuring of GRATs as follows:
"(1) A required minimum 10 Year Term,
"(1) A required minimum 10 Year Term,
(2) Fixed amounts, when determined on an annual basis, can not decrease relative to any prior year during the first 10 years of the term,
(3) the remainder interest must have a value greater than zero determined as of the time of the transfer.
(4) The Effective Date would be for “transfers made after the date of the enactment of this Act.”
(3) the remainder interest must have a value greater than zero determined as of the time of the transfer.
(4) The Effective Date would be for “transfers made after the date of the enactment of this Act.”
This is NOT law today, but time is running out on a family’s ability to implement short-term, high pay-out GRATs designed to capture unexpected upside in the financial markets for a concentrated asset position.
Here’s the potential impact of the three proposed new requirements:
1. 10-YEAR MINIMUM.
A Grantor’s required retained annuity interest would have to last at least 10 years. This significantly increases the probability that – during the term of the trust – the client will die and thus expose the assets in the trust to federal estate tax. Obviously, this diminishes the appeal of a GRAT technique for older or sicker people. (Life insurance to “bullet-proof” the tax savings remains viable for younger and healthier people). But even for younger healthier people, the inability to use short-term rolling GRATs may diminish the ability to remove short-term upside volatility and will thus reduce the appeal of some GRATs. (We have always counseled that a longer term and an annuity based upon internal cashflow and valuation discounts is a safer, superior design.)
2. NO DECLINING PAYMENTS:
Because of the second proposed rule, it would not be possible to circumvent the 10 year minimum rule by front-loading all the GRAT payments, and thus effectively make 10 year GRATs work economically similar to two year GRATs.
3. REQUIREMENT OF PRESENT VALUE GREATER THAN ZERO:
Currently, a GRAT transfer can have an actuarial “zero value” for gift tax purposes. The proposed law would require “a value greater than zero.” How much greater we don’t know. It is rumored that the IRS would like to require that the value of the gift be at least 10% of the value of the assets transferred to the GRAT, similar to the rules for funding gifts to charitable remainder trusts (i.e., the charity has to have a present value interest at least equal to 10% of the value of the gift). With a 10% rule, wealthy people would be precluded from using GRATs for large transfers. A transfer of more than $10 million to a GRAT, if 10% or $1 million had to be a current taxable gift, would require that gift tax be paid.
Saturday, June 5, 2010
Grants to Nowhere
I just finished writing a pro bono grant for a favorite nonprofit of mine. The grant application process was managed by Cybergrants. At first blush, it appeared to be an efficient, electronic means of submitting grants applications. Nevertheless, it did take me three days to get everything exactly the way I wanted it...downloads, uploads, scans, instructions, paragraph-after-paragraph I wrote, and then re-wrote...
When everything was just right, I had to hit the cyber-button that warned that all submissions are final and non-editable. The grant that I'd spent three days writing, vanished into cyberspace, never to be seen again.
Tired, bored, and happy it was all over with, something compelled me to go back and review the excel spreadsheet that the "X" Foundation forced me to use to lay-out the program budget. I then realized that the "X" imposed excel spreadsheet automatically opened-up on the THIRD worksheet instead of the FIRST worksheet. I completely missed two whole "X" worksheets, of questionable importance.
I think at that point I cursed loud enough that the entire downtown area of Birmingham could hear me. My three-day pilgrimage was sunk. Over and done with before I (or my incredible nonprofit) even had a chance. I had just written a grant to nowhere.
I couldn't help but recall over-and-over the conversation that I just had with a professional grant application reviewer who told me that over 80% of all grant applications his various national committees review go right in the trash because the grant writer didn't follow an instruction, like "don't staple".
"It used to bother me" he said. "But, then I realized that if these people running these nonprofits can't follow simple instructions, how can they be trusted to administer grant monies?" I was sad when I heard that - thinking of all those poor, perfectly capable, slobs who wrote grants to nowhere. I saw his point, but it had nevertheless troubled me, as grant writing is not a life or death occupation...Can't a guy get a break for stapling something that should've been paperclipped? Even the IRS, who makes similar requests re: no stapling of checks to tax returns, will let that one slide...And, almost any other entity or organization I can think of will ship a document back to you for a required correction, as opposed to trashing it.
And, now I was one of those poor, perfectly capable, slobs who just did the cyber-equivalent of stapling a should've-been-paperclipped document. That was (presumably) it! Three days of my life wasted, and desperately needed dollars for an incredible start-up nonprofit sunk - all because "X" Foundation can't properly deliver a spreadsheet to open up on the FIRST page, not the last, and because at that point on day THREE, I was too tired to notice. A grant to nowhere.
It got me thinking, is there a better mouse trap? Isn't a simple one-page elevator pitch enough for the mighty grant application reviewers to size-up a grant request, with access to so much technology? At the touch of a button, a grant reviewer can pull-up tax return information, check a non-profit's status, view a website or a blog, google-it...What more do they really need, aside from a one-page summary grant request?
When a nonprofit approaches an individual or corporation for a donation, doesn't it usually amount to a quick one-minute elevator pitch? And, boom - the check is written. No oversight, no follow-up, no strings generally attached. Nothing. Sometimes these same people are giving tens of thousands, if not millions of dollars...
But a grant request - now that's another story...It begins with intensive research to figure out what foundations even fund causes like yours. From there, you have to figure out how each foundation wants you to present your request - in what format, and under what time frame. It takes several days to put the information together. Sometimes a preliminary "meet-and-greet" is required. It's a crap-shoot at best that the funding will come-in. It usually results in a restriction on the use of any funds that do come in. And then the grants administration reporting kicks-in - like progress and final reporting on the actual use of the funds...
Most nonprofits that are truly deserving of funding simply can't fathom the process or handle the burden. And, most grant writers are pro bono human beings, who, yes, in the midnight hour, may staple something that should be paperclipped, or miss a worksheet or two.
I can't help but think of how many incredible causes are simply not on the radar of all the big foundations because of their grants application processes.
One of my favorite shows of the year was SHARK TANK. The business owners had a matter of minutes to present details on their funding request to a panel of investors, and on-the-spot, they either got funding or they didn't.
Isn't that really all a foundation needs to make a decision on whether a cause is worthy of funding? I think so.
The funny thing about all this is I think "X" Foundation realizes this as well. At the very end of its Cybergrant application process, the last thing you MUST do is upload a one-page summary of your organization. Say no more!!!
When everything was just right, I had to hit the cyber-button that warned that all submissions are final and non-editable. The grant that I'd spent three days writing, vanished into cyberspace, never to be seen again.
Tired, bored, and happy it was all over with, something compelled me to go back and review the excel spreadsheet that the "X" Foundation forced me to use to lay-out the program budget. I then realized that the "X" imposed excel spreadsheet automatically opened-up on the THIRD worksheet instead of the FIRST worksheet. I completely missed two whole "X" worksheets, of questionable importance.
I think at that point I cursed loud enough that the entire downtown area of Birmingham could hear me. My three-day pilgrimage was sunk. Over and done with before I (or my incredible nonprofit) even had a chance. I had just written a grant to nowhere.
I couldn't help but recall over-and-over the conversation that I just had with a professional grant application reviewer who told me that over 80% of all grant applications his various national committees review go right in the trash because the grant writer didn't follow an instruction, like "don't staple".
"It used to bother me" he said. "But, then I realized that if these people running these nonprofits can't follow simple instructions, how can they be trusted to administer grant monies?" I was sad when I heard that - thinking of all those poor, perfectly capable, slobs who wrote grants to nowhere. I saw his point, but it had nevertheless troubled me, as grant writing is not a life or death occupation...Can't a guy get a break for stapling something that should've been paperclipped? Even the IRS, who makes similar requests re: no stapling of checks to tax returns, will let that one slide...And, almost any other entity or organization I can think of will ship a document back to you for a required correction, as opposed to trashing it.
And, now I was one of those poor, perfectly capable, slobs who just did the cyber-equivalent of stapling a should've-been-paperclipped document. That was (presumably) it! Three days of my life wasted, and desperately needed dollars for an incredible start-up nonprofit sunk - all because "X" Foundation can't properly deliver a spreadsheet to open up on the FIRST page, not the last, and because at that point on day THREE, I was too tired to notice. A grant to nowhere.
It got me thinking, is there a better mouse trap? Isn't a simple one-page elevator pitch enough for the mighty grant application reviewers to size-up a grant request, with access to so much technology? At the touch of a button, a grant reviewer can pull-up tax return information, check a non-profit's status, view a website or a blog, google-it...What more do they really need, aside from a one-page summary grant request?
When a nonprofit approaches an individual or corporation for a donation, doesn't it usually amount to a quick one-minute elevator pitch? And, boom - the check is written. No oversight, no follow-up, no strings generally attached. Nothing. Sometimes these same people are giving tens of thousands, if not millions of dollars...
But a grant request - now that's another story...It begins with intensive research to figure out what foundations even fund causes like yours. From there, you have to figure out how each foundation wants you to present your request - in what format, and under what time frame. It takes several days to put the information together. Sometimes a preliminary "meet-and-greet" is required. It's a crap-shoot at best that the funding will come-in. It usually results in a restriction on the use of any funds that do come in. And then the grants administration reporting kicks-in - like progress and final reporting on the actual use of the funds...
Most nonprofits that are truly deserving of funding simply can't fathom the process or handle the burden. And, most grant writers are pro bono human beings, who, yes, in the midnight hour, may staple something that should be paperclipped, or miss a worksheet or two.
I can't help but think of how many incredible causes are simply not on the radar of all the big foundations because of their grants application processes.
One of my favorite shows of the year was SHARK TANK. The business owners had a matter of minutes to present details on their funding request to a panel of investors, and on-the-spot, they either got funding or they didn't.
Isn't that really all a foundation needs to make a decision on whether a cause is worthy of funding? I think so.
The funny thing about all this is I think "X" Foundation realizes this as well. At the very end of its Cybergrant application process, the last thing you MUST do is upload a one-page summary of your organization. Say no more!!!
Monday, March 8, 2010
New Michigan Trust Code Alert
On April 1, 2010, the Michigan Trust Code becomes effective. This new Code modernizes existing Michigan trust law on many fronts. This new Code applies to all trusts. Some rules are mandatory, others can be overridden through contrary language in the trust document. Law firms and clients alike are eager to make changes to existing and future trust documents to adapt to the new rules and terminology.
Suffice it to say that if you have an existing trust and have not paid a visit to your attorney, you are wise to do so immediately. If you are presently serving as Trustee or have any powers over an existing trust, you also should consult with an estate planning attorney to understand how your capacity, duties and powers may have changed.
Suffice it to say that if you have an existing trust and have not paid a visit to your attorney, you are wise to do so immediately. If you are presently serving as Trustee or have any powers over an existing trust, you also should consult with an estate planning attorney to understand how your capacity, duties and powers may have changed.
Friday, February 19, 2010
The Estate Tax Mess - A Sample Client Letter With the Gory Details
This is a sample client letter I got indirectly from the National Association of Estate Planners and Councils. It sets-forth the seriousness of the present situation. Have you heard from your personal estate planning attorney yet regarding this mess? If not, make contact immediately to review your estate planning documents; or, call us for a review.
"Dear ___________:
As you may have heard, the federal estate tax rules changed radically in 2010, and could change radically again in 2011 unless Congress passes new legislation. This letter is intended to advise you of what has happened and encourage you to reevaluate your estate plan as soon as possible.
2001 Tax Act. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) which provided for significant phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions and lower tax rates. EGTRRA provisions included:
What Happened in 2009? Estate planning practitioners almost universally expected Congress to carry the 2009 estate tax rules across 2010 (both Representative Rangel as Chair of the House Ways and Means and Senator Baucus as Chair of the Senate Finance Committee said it would happen earlier last fall). However, unexpectedly in December the House failed to act on a one year extension and instead sent the Senate a bill to make the 2009 rules permanent. Because the Senate was focused on health care and there was broad disagreement in the Senate on what to do with estate taxes, Congress enacted no changes to EGTRRA's 2010 rules. Thus, effective as of January 1, 2010, there is no federal estate or GST tax.
Planning in Chaos. Congress's failure to adopt estate tax legislation in 2009 and the possibility that changes will not be adopted during 2010, radically change the estate planning considerations of many clients. For example, Congress has indicated that in 2010 about 6,000 decedents will benefit from the elimination of estate taxes, but over 70,000 heirs will pay higher income taxes because of the change in the income tax basis rules for assets received from decedents.
2010 Changes. The U.S. has an unpredictable planning environment in which any number of radically different changes may occur in 2010:
Congress may do nothing in 2010, in which case there is an adjusted carryover basis, and no federal estate or GST tax for people who die in 2010. While you probably will not die in 2010, you still need to consider planning for that possibility, because not planning for these changes, if death occurs, can be disastrous. For example:
· If Congress acts in 2010 to address the estate tax issues, it could:
2011 Changes. Unless Congress enacts new legislation in 2010, then on January 1, 2011, a number of automatic changes occur to the federal tax code, including:
Higher Taxes. No matter what happens to the estate tax, substantial tax increases are looming. A $12 trillion deficit is projected for the next decade. The Congressional Budget Office indicates that the social security trust fund will pay out more then it receives starting in 2011 or 2012. Taxes will have to increase across a broad range of Americans. Both the Washington Post and the New York Times have stated that the President will have to abandon his pledge to only increase taxes on taxpayers earning over $250,000. Given slow economic recovery and the fact that we are in a mid-term election year, the federal government will probably not increase taxes until sometime in 2011. While substantial tax increases are likely, we just don't know any details.
ROTH IRAs. In 2010, taxpayers can convert traditional IRAs to ROTH IRAs and can pay the income taxes due on such conversion in 2010 or equally in 2011 and 2012. There are significant benefits and traps for the unwary in making these decisions.
Effectively, unless Congress adopts new legislation, in 2010 the estate tax rules rotate 180 degrees from where they were in 2009, and then rotate 180 degrees again in 2011 – only the estate tax and income tax rules could be even worse than what we had in 2009. Uncertainty makes it difficult to plan, but waiting to see what happens next is not a good idea. The earlier you can implement flexible tax and estate planning to respond to these changes the better. "
"Dear ___________:
As you may have heard, the federal estate tax rules changed radically in 2010, and could change radically again in 2011 unless Congress passes new legislation. This letter is intended to advise you of what has happened and encourage you to reevaluate your estate plan as soon as possible.
2001 Tax Act. In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) which provided for significant phased-in increases in the federal estate, gift and generation skipping tax (GST) exemptions and lower tax rates. EGTRRA provisions included:
- In 2009, the estate and GST exemptions increased to $3.5 million per decedent, with a flat 45% estate and GST tax rate on any excess. The gift tax exemption was $1.0 million, with tax rates from 41% to 45%.
- In 2010, the federal estate and GST taxes were repealed for one year. The gift tax $1.0 million exemption remained, with a lower flat tax rate of 35%. Thus, you have to die or pay gift tax to get the benefit of the change. The step-up in basis rules (which gave a "fresh-start" fair market basis for most assets of a decedent) was replaced with an adjusted carry-over basis. These new basis rules permit a step-up in basis of up to $1.3 million, plus an additional $3.0 million for certain spousal transfers at death.
- On January 1, 2011, EGTRRA was automatically repealed, resulting in an odd situation: A $3.5 million estate and GST exemption and flat 45% estate tax rate in 2009, no estate or GST tax in 2010, and a $1.0 million estate exemption and tax rate of up to 60% in 2011.
What Happened in 2009? Estate planning practitioners almost universally expected Congress to carry the 2009 estate tax rules across 2010 (both Representative Rangel as Chair of the House Ways and Means and Senator Baucus as Chair of the Senate Finance Committee said it would happen earlier last fall). However, unexpectedly in December the House failed to act on a one year extension and instead sent the Senate a bill to make the 2009 rules permanent. Because the Senate was focused on health care and there was broad disagreement in the Senate on what to do with estate taxes, Congress enacted no changes to EGTRRA's 2010 rules. Thus, effective as of January 1, 2010, there is no federal estate or GST tax.
Planning in Chaos. Congress's failure to adopt estate tax legislation in 2009 and the possibility that changes will not be adopted during 2010, radically change the estate planning considerations of many clients. For example, Congress has indicated that in 2010 about 6,000 decedents will benefit from the elimination of estate taxes, but over 70,000 heirs will pay higher income taxes because of the change in the income tax basis rules for assets received from decedents.
2010 Changes. The U.S. has an unpredictable planning environment in which any number of radically different changes may occur in 2010:
Congress may do nothing in 2010, in which case there is an adjusted carryover basis, and no federal estate or GST tax for people who die in 2010. While you probably will not die in 2010, you still need to consider planning for that possibility, because not planning for these changes, if death occurs, can be disastrous. For example:
- Formula clauses (e.g. terms that allocated your estate exemption to a "by-pass trust") in your planning documents could inadvertently disinherit some heirs and/or your surviving spouse and/or create conflicts among family members on how your documents should be properly interpreted.
- Conflicts could arise among your heirs and fiduciaries on asset basis issues.
- Inadvertent GST taxes could be incurred after 2010.
- Passing assets directly to your surviving spouse may result in higher estate taxes after 2010.
- Inadvertent state taxes could be incurred from out of date terms in your documents.
- Congress may adopt legislation to carry the 2009 rules over 2010, retroactive to January 1, 2010. There is broad disagreement on whether a retroactive tax bill would be constitutional. If a retroactive law it adopted, it will be challenged as unconstitutional and it could take years for the Supreme Court to rule on the issue. Until such a ruling, uncertainty will prevail. Those dying after any enactment should not have that uncertainty. In any event, your estate plan should contemplate dying both before or after a potential retroactive enactment, which may or may not be constitutional.
· If Congress acts in 2010 to address the estate tax issues, it could:
- Adopt permanent estate tax exemption, beginning in 2010 or 2011. If so, most commentators anticipate estate tax exemptions to fall between $2-5.0 million and tax rates 35% to 45%.
- Adopt a temporary higher estate exemption.
- Adopt rules to limit or eliminate valuation discounts.
2011 Changes. Unless Congress enacts new legislation in 2010, then on January 1, 2011, a number of automatic changes occur to the federal tax code, including:
- The estate tax exemption drops to $1.0 million per decedent.
- The estate tax rate increases (e.g., 55% above $3.0 million and 60% above $10 million).
- States which remain "coupled" to the federal estate tax will have their state death taxes restored. Thus, if you own property in one of these coupled states, you could have new exposure to a state estate tax.
- The fair market value step up in basis returns for assets passing from a decedent.
- The top income tax rates go up by at least 4.6%, capital gain tax rates go up by up to 5% and dividend tax rates go up by up to 24.6%.
Higher Taxes. No matter what happens to the estate tax, substantial tax increases are looming. A $12 trillion deficit is projected for the next decade. The Congressional Budget Office indicates that the social security trust fund will pay out more then it receives starting in 2011 or 2012. Taxes will have to increase across a broad range of Americans. Both the Washington Post and the New York Times have stated that the President will have to abandon his pledge to only increase taxes on taxpayers earning over $250,000. Given slow economic recovery and the fact that we are in a mid-term election year, the federal government will probably not increase taxes until sometime in 2011. While substantial tax increases are likely, we just don't know any details.
ROTH IRAs. In 2010, taxpayers can convert traditional IRAs to ROTH IRAs and can pay the income taxes due on such conversion in 2010 or equally in 2011 and 2012. There are significant benefits and traps for the unwary in making these decisions.
Effectively, unless Congress adopts new legislation, in 2010 the estate tax rules rotate 180 degrees from where they were in 2009, and then rotate 180 degrees again in 2011 – only the estate tax and income tax rules could be even worse than what we had in 2009. Uncertainty makes it difficult to plan, but waiting to see what happens next is not a good idea. The earlier you can implement flexible tax and estate planning to respond to these changes the better. "
Saturday, February 6, 2010
Hybrid Philanthropy - The New Era of Charitable Giving
The line between for-profit and nonprofit entities is blurred by the "low-profit limited liability company", or L3C.
This new structure, about a year old as of this month in Michigan, is an intriguing proposition. Nonprofits, private foundations, government, pension funds, private investors all collaborating and investing funds in a limited liability company designed specifically for potentially profit-making projects that have a philanthropic purpose. The "low-profit" name is misleading - the L3C venture can produce unlimited profit, but can't have profit as it's primary purpose. The creators designed it for patient capital, hence the "low-profit" choice of words.
The L3C model is designed to appeal to private foundations ("PF") - capital contributions qualify as Program Related Investments.
A Program Related Investment is counted as part of the 5% each PF is required to distribute each year. It is also excluded from asset values that go into the computation of the annual 5% dollar amount. A PRI has three statutory requirements: alignment with PF mission; profit is not the primary purpose; and, no lobbying. The three statutory requirements are included in the L3C formation documents, thereby providing assurance to PFs that their investment should qualify as a PRI without feeling the need to seek an expensive private letter ruling or legal opinion.
Along with the L3C, other examples of PRI are: (most common) loans to nonprofits that are in alignment with a PF's mission, loan guarantees to nonprofits that are in alignment with a PF's mission, and (much less common) direct investment in traditional for-profit entities that are in alignment with a PFs mission.
Contributions by private foundations could in theory absorb most of the risk of a project, thereby attracting private capital and pension dollars in higher tranches with higher required rates of return.
We love this idea - bringing collaboration, profit metrics and financing to philanthropic causes opens the door to real problem solving and real capital resources.
Contributions to an L3C are not deductible as charitable contributions. Founders who are looking for investment dollars versus grants, and profit-sharing potential may choose the flexibility of the L3C over the rigidity of a 501(c)(3) for social purpose initiatives.
The following Michigan L3Cs have been formed since January 2010. Our firm is presently working on a prototype document for mixed use development in areas like the Eastern Market.
administrative services (Divine Help Services, Unique Support Specialists); athletics (Liga del Futvol); environmental (Beyond Profit Venture Partners, EcoZoic, Tri-Green Development); education (Top Urban School Facilities, TEF Franklin, Signature Hope); technology (Ardent Cause, BroadMap, Cool School Technologies, SEEDR, V02 Funding); fundraising (The Giving App); disabled services (KI Medical Device Manufacturing); business ventures(Ingenuity US); job training (Ingenuity, New Center Career Center, Signature Hope); spiritualism (SBNR); community relations (EcoZoic, Peace Meals); promote philanthropy (Mission Throttle); collection and preservation (Michigan History Magazine); music programming and recording (Community Records); lending and financial counseling ( Southwest Lending Solutions).
A closer look at some of these organizations leads us to conclude they are private business people using the L3C vehicle as a nonprofit marketing "brand" versus a platform for attracting investment. But, the branding aspect of the L3C is another one of its touted benefits - similar to the "B" Corporation "brand".
This new structure, about a year old as of this month in Michigan, is an intriguing proposition. Nonprofits, private foundations, government, pension funds, private investors all collaborating and investing funds in a limited liability company designed specifically for potentially profit-making projects that have a philanthropic purpose. The "low-profit" name is misleading - the L3C venture can produce unlimited profit, but can't have profit as it's primary purpose. The creators designed it for patient capital, hence the "low-profit" choice of words.
The L3C model is designed to appeal to private foundations ("PF") - capital contributions qualify as Program Related Investments.
A Program Related Investment is counted as part of the 5% each PF is required to distribute each year. It is also excluded from asset values that go into the computation of the annual 5% dollar amount. A PRI has three statutory requirements: alignment with PF mission; profit is not the primary purpose; and, no lobbying. The three statutory requirements are included in the L3C formation documents, thereby providing assurance to PFs that their investment should qualify as a PRI without feeling the need to seek an expensive private letter ruling or legal opinion.
Along with the L3C, other examples of PRI are: (most common) loans to nonprofits that are in alignment with a PF's mission, loan guarantees to nonprofits that are in alignment with a PF's mission, and (much less common) direct investment in traditional for-profit entities that are in alignment with a PFs mission.
Contributions by private foundations could in theory absorb most of the risk of a project, thereby attracting private capital and pension dollars in higher tranches with higher required rates of return.
We love this idea - bringing collaboration, profit metrics and financing to philanthropic causes opens the door to real problem solving and real capital resources.
Contributions to an L3C are not deductible as charitable contributions. Founders who are looking for investment dollars versus grants, and profit-sharing potential may choose the flexibility of the L3C over the rigidity of a 501(c)(3) for social purpose initiatives.
The following Michigan L3Cs have been formed since January 2010. Our firm is presently working on a prototype document for mixed use development in areas like the Eastern Market.
administrative services (Divine Help Services, Unique Support Specialists); athletics (Liga del Futvol); environmental (Beyond Profit Venture Partners, EcoZoic, Tri-Green Development); education (Top Urban School Facilities, TEF Franklin, Signature Hope); technology (Ardent Cause, BroadMap, Cool School Technologies, SEEDR, V02 Funding); fundraising (The Giving App); disabled services (KI Medical Device Manufacturing); business ventures(Ingenuity US); job training (Ingenuity, New Center Career Center, Signature Hope); spiritualism (SBNR); community relations (EcoZoic, Peace Meals); promote philanthropy (Mission Throttle); collection and preservation (Michigan History Magazine); music programming and recording (Community Records); lending and financial counseling ( Southwest Lending Solutions).
A closer look at some of these organizations leads us to conclude they are private business people using the L3C vehicle as a nonprofit marketing "brand" versus a platform for attracting investment. But, the branding aspect of the L3C is another one of its touted benefits - similar to the "B" Corporation "brand".
Obama's Estate Tax Related Proposals. Act Fast or Lose Out
The Obama Administration's Revenue Proposals
We do not yet have answers on the estate and gift tax system, (as of today, the estate tax is repealed for just 2010, and the gift tax applies at a reduced rate to gifts in excess of $1,000,000).
The Obama administration made some revenue proposals for 2010 that were released by the Treasury Department in its "Greenbook." The Greenbook contained several proposals that are of interest in the estate planning arena:
Require Consistency in Value for Transfer and Income Tax Purposes
Modify Rules on Valuation Discounts
Require Minimum 10-year Term for Grantor Retained Annuity Trusts (GRATs)
Because none of the revenue proposals have yet become law, particularly if you are considering wealth transfer planning with a family entity or short-term GRAT, it is advisable to proceed immediately.
We do not yet have answers on the estate and gift tax system, (as of today, the estate tax is repealed for just 2010, and the gift tax applies at a reduced rate to gifts in excess of $1,000,000).
The Obama administration made some revenue proposals for 2010 that were released by the Treasury Department in its "Greenbook." The Greenbook contained several proposals that are of interest in the estate planning arena:
Require Consistency in Value for Transfer and Income Tax Purposes
- This proposal would require that the income tax basis of property received from a decedent or donor must be equal to the estate tax value or the donor's basis.
- The executor or donor would be required to report the necessary information to both the recipient and to the Internal Revenue Service. This reporting requirement could apply to annual exclusion gifts and to estates for which no estate tax return is required.
- The proposal would be effective as of the date of enactment.
Modify Rules on Valuation Discounts
- The Greenbook proposal would significantly limit many valuation discounts that are used to leverage transfers when planning with family limited partnerships and family limited liability companies.
- The IRS has stipulated to discounts in the 35% range for family entities holding portfolio assets in recent Tax Court cases - these discounts could be lost in the future under the Greenbook proposal.
- The proposal would apply to lifetime transfers and transfers at death after the date of enactment.
Require Minimum 10-year Term for Grantor Retained Annuity Trusts (GRATs)
- The Greenbook proposes to require at least a 10-year term for all GRATs. This would eliminate the use of short-term rolling GRATs.
- The proposal would apply to GRATs created after the date of enactment.
Because none of the revenue proposals have yet become law, particularly if you are considering wealth transfer planning with a family entity or short-term GRAT, it is advisable to proceed immediately.
Tuesday, January 26, 2010
Value Adjustment Clauses. Don't Leave Your Gift or Estate Tax Return Without One.
An important valuation dispute between taxpayers and the IRS came to a head with the Eighth Circuit’s decision in Estate of Christiansen v. Commissioner. Helen Christiansen’s will left her entire estate to her daughter Christine, but a disclaimer provision permitted a gift over to a charitable foundation and a charitable lead trust in the event Christine disclaimed any portion of the estate (in order to reduce estate tax due). Because the estate owned hard-to-value family limited partnership interests, Christine disclaimed "that portion of the estate that exceeded $6.35 million, as finally determined for federal estate tax purposes" (as opposed to disclaiming specific estate property).
The IRS examined the estate tax return and the estate agreed to a higher value for the partnership interests. But, due to the formula disclaimer, the increase in estate tax value passed entirely to the charitable entities, resulting in an increased charitable deduction, and no increase in estate tax.
The IRS challenged the increased charitable deduction. First, it successfully argued that the disclaimer was unqualified with respect to the 75% that passed to the charitable lead trust, because Christine was a remainder beneficiary of the trust. Second, the IRS unsuccessfully argued that the allowance of any increased charitable deduction was contrary to public policy because the formula disclaimer, coupled with the gift over to charity, was a disincentive to examine the return. The Tax Court allowed the increase in charitable deduction for the 25% passing to the foundation, but not for the 75% passing to the charitable lead trust.
The IRS appealed its loss on the grounds of public policy to the Eighth Circuit. As noted by the court, “the Commissioner argues that we should disallow fractional disclaimers that have a practical effect of disclaiming all amounts above a fixed-dollar amount. According to the Commissioner, such disclaimers fail to preserve a financial incentive for the Commissioner to audit an estate's return.”
The court showed little sympathy for the IRS and affirmed the Tax Court decision. The court said that “we note that the Commissioner's role is not merely to maximize tax receipts and conduct litigation based on a calculus as to which cases will result in the greatest collection. Rather, the Commissioner's role is to enforce the tax laws.”
Had the charitable lead trust provisions been properly drafted, the net effect would have been to quash the entire IRS valuation challenge. Taxpayers should be aware of the potential benefits of a value-adjustment provision when making any taxable transfer of hard-to-value assets. While pitfalls abound, they can and do work if properly structured.
Until now, the leading defined-value decision has been McCord v. Commissioner, a taxpayer-favorable decision from the Fifth Circuit. The defined value clause in McCord had also provided that any increase in the value of transferred partnership interests was to pass to charity, effectively eliminating any increase in tax and discouraging IRS audits. Notably, the IRS did not raise the public policy argument in the McCord appeal, so Christiansen may be an indication of how other circuits will respond.
The IRS examined the estate tax return and the estate agreed to a higher value for the partnership interests. But, due to the formula disclaimer, the increase in estate tax value passed entirely to the charitable entities, resulting in an increased charitable deduction, and no increase in estate tax.
The IRS challenged the increased charitable deduction. First, it successfully argued that the disclaimer was unqualified with respect to the 75% that passed to the charitable lead trust, because Christine was a remainder beneficiary of the trust. Second, the IRS unsuccessfully argued that the allowance of any increased charitable deduction was contrary to public policy because the formula disclaimer, coupled with the gift over to charity, was a disincentive to examine the return. The Tax Court allowed the increase in charitable deduction for the 25% passing to the foundation, but not for the 75% passing to the charitable lead trust.
The IRS appealed its loss on the grounds of public policy to the Eighth Circuit. As noted by the court, “the Commissioner argues that we should disallow fractional disclaimers that have a practical effect of disclaiming all amounts above a fixed-dollar amount. According to the Commissioner, such disclaimers fail to preserve a financial incentive for the Commissioner to audit an estate's return.”
The court showed little sympathy for the IRS and affirmed the Tax Court decision. The court said that “we note that the Commissioner's role is not merely to maximize tax receipts and conduct litigation based on a calculus as to which cases will result in the greatest collection. Rather, the Commissioner's role is to enforce the tax laws.”
Had the charitable lead trust provisions been properly drafted, the net effect would have been to quash the entire IRS valuation challenge. Taxpayers should be aware of the potential benefits of a value-adjustment provision when making any taxable transfer of hard-to-value assets. While pitfalls abound, they can and do work if properly structured.
Until now, the leading defined-value decision has been McCord v. Commissioner, a taxpayer-favorable decision from the Fifth Circuit. The defined value clause in McCord had also provided that any increase in the value of transferred partnership interests was to pass to charity, effectively eliminating any increase in tax and discouraging IRS audits. Notably, the IRS did not raise the public policy argument in the McCord appeal, so Christiansen may be an indication of how other circuits will respond.
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