The Strategist
4th Quarter 1995 - Volume 2 Issue 5
In the past, we may have discussed with you
or written to you about a way to eliminate the need to send out annual Crummey
notices. If you are the trustee of an irrevocable trust, the grantor of an
irrevocable trust, or a Crummey right recipient of an irrevocable trust, you
should read the following information carefully.
Because in the past it was felt as though
Crummey notices had to be signed with an election either to withdraw the gift
or not to withdraw the gift on an annual basis, many people were reluctant to
establish these types of trusts due to the administrative requirements of
sending the notices each year. Many times trustees forgot to send out these
notices.
A number of years ago in a private letter
ruling, the IRS accepted a situation that allowed the trustee of an irrevocable
trust to send a notice to all the Crummey right recipients that stated "a
gift would be forthcoming in the amount of "X" every year from this
point forward. The notice was to serve as a continuing notice of withdrawal
right". Furthermore, the beneficiary could elect not to have any
additional notices sent. This became known as a one-time renewing Crummey
notice. Many individuals have employed this strategy for a number of years.
Recently, the IRS, in TAM 9532001 (TAM is
the abbreviation for Technical Advice Memorandum), appears to have shot down
the one-time only renewing concept of a Crummey notice. In this particular
situation, the beneficiaries waived their rights to withdraw the gifts to the
trust and simultaneously waived their right to receive any further notices
regarding their rights of withdrawal to the future gifts that the trust may
receive. The IRS has now ruled that all transfers to that trust after the
initial transfer would not qualify as transfers of present interest and
therefore could not qualify for the $10,000 tax free annual gift exclusion.
Many attorneys feel that the IRS is wrong on
this position. However, if in the past you have employed a one-time renewing
Crummey notice in which the beneficiary waives future withdrawal rights, we
would strongly recommend that you now re-implement an annual Crummey notice to
each beneficiary that has withdrawal rights just to be safe.
Although this does create some
administrative work, there is good news. By issuing this TAM, the IRS has once
again confirmed that a gift in trust can qualify as a tax free annual exclusion
gift so long as there are individuals that have the immediate right to withdraw
the gift. The right to withdraw the gift can be waived annually and the gift
can be invested as the trustee sees fit including paying life insurance
premiums.
As of the writing of this newsletter,
Congress and the President have not agreed to a new budget and tax bill. It is
our opinion that the previous provisions included in the congressional budget
pact, which include retroactivity to January 1, 1995, will be eliminated from
any tax and budget bill that will be passed and signed. We believe that there
is a strong possibility that any tax legislation will not be passed until 1996
and the effective date of the legislation will be January 1, 1996.
Although virtually every item under the bill
is up for negotiation, in our opinion there are certain aspects of the proposed
tax bill that will survive the negotiation process. Therefore we our going to
take our crystal ball and make predictions on what the key estate and gift tax
issues will be included in the tax bill and how to take advantage of them.
Unified Credit - We believe that the Unified
Credit equivalent amount will increase by $25,000 per year for 6 years
beginning in 1996. This means that the current amount that can be passed tax
free by gift or by bequest will increase to $750,000 and then be adjusted for
inflation.
For those that have previously made Unified
Credit gifts, if this becomes law you will be able to make an additional $25,000
in gifts over and above annual exclusion gifts ($10,000 per year per donee)
without incurring any federal gift tax. A form 709 must be filed following the
gift and we encourage all of our clients to contact their accountant notifying
them of any gifts so that the they may complete the proper forms. There is no
certainty that this will be included in the tax bill, but we feel there is a
strong likelihood that the tax bill will be approved in the first quarter of
1996.
We do not believe that the bill will include
any inflation adjustments for gifting the annual exclusion amount. Although
there has been talk of increasing the $10,000 annual exclusion gift amounts by
the CPI, we do not believe that this will be passed. As always, we would like
to re-emphasize to our readers that it is important to make gifts early in the
year. Every annual exclusion gift, once completed, removes that amount from
your estate and potentially saves $5,500 in estate taxes if you are in the
maximum estate tax bracket.
The Senate provisions of the bill include an
elimination of the estate tax on the first $1,500,000 of family business and
only half the estate tax on up to $5,000,000 of family business value. Only
certain family businesses would be eligible for this election. In general, the
business must be at least 50% of the value of the estate and members of the
decedent's family must have materially participated in the business for 5 of
the previous 8 years before the decedent's death. If the family sells the
business or the qualifying family members cease to be active in the business
within 10 years, a recapture of the estate tax break will occur. We do not
believe that this will pass. This is very unfortunate since the family business
is the backbone of the American economy. We believe the reason it will not pass
is that this is deemed to be a tax break for the rich. This is unfortunate
since America's family businesses employ millions of people and contribute so
many dollars to the tax system in the form of payroll, social security,
medicare, and various other taxes.
One other provision of the proposed tax law
that we believe will pass is the elimination of the 3 year inclusion period for
gifts from a revocable trust. Currently, an individual can make tax free annual
exclusion gifts ($10,000 per year) to anyone from his or her funds. If the gift
is from individually titled property, the amount gifted is immediately outside
of the estate. However, if the gift comes directly from a revocable trust, the
property will be included in the estate for 3 years. If the law passes, gifts
from individually titled property or from an individual's revocable trust will
immediately be outside of the estate.
To avoid the 3 year inclusion rule for gifts
from a revocable trust until the law changes, you should transfer the asset you
wish to gift from your revocable trust to yourself (individually titled) and
then gift the asset. This two-step process should avoid the 3 year inclusion
rule. As soon as the new tax bill and budget are passed, we will review the
highlights for you in a supplemental edition of The Strategist.
For those of you that are Florida residents,
new laws went into effect October 1, 1995 affecting certain estate planning
documents. The most important one is that any revocable trust amended after
October 1, 1995 must now be amended with the same formalities and requirements
of a will. In other words, two witnesses and a notary are now required.
Previously, an individual could simply amend his or her revocable trust
agreement with a signature and date and attach the amendment to the original
trust document. This was changed to insure that the grantor and trustor were
still mentally competent and understood the consequences of their decisions.
A second change that has occurred in Florida
law is that any durable power of attorney executed after October 1, 1995 must
be honored by financial institutions or the financial institutions will face
financial retributions. Previously, many financial institutions, such as banks,
would simply ignore a valid durable power of attorney. Florida law now imposes
financial penalties and spells out a system of relief for those holders of a
durable power of attorney that are not honored by financial institutions.
As many of you know, our organization recently
spoke at the Kenan-Flagler Entrepreneurial Conference held in Orlando. The
conference was a great success with tremendous amounts of information being
passed along to all of the attendees. It is our understanding that the
Kenan-Flagler Business School intends to make this an annual conference. If you
would like to receive information on next year's conference, please write to us
and we will make sure that the conference organizers include you on their
mailing list for next year's conference.
Please note that our email address has
changed. After a long delay, we finally have our presence on the Internet. For
those of you interested in catching up on our past newsletters, please visit
our Home Page. Our email and Home Page addresses are available in the bottom
right-hand corner of this page.
Last but not least, as 1995 comes to a close
and many of us are winding down for the year, The Wealth Transfer Group, Inc.
would like to take this opportunity to wish all of our readers a safe and happy
holiday season as well as a successful and prosperous 1996.
The
Wealth Transfer Group, Inc. is not engaged in the practice of law or accounting
nor are any of its employees, representatives, or agents. Tax and legal advice
should be obtained from qualified personnel.
(c) 1995 The Wealth Transfer Group, Inc.
283 Cranes Roost Boulevard, Suite 145, Altamonte Springs, Florida, 32701 (407)
339-5787
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