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SUMMER 2006 UPDATE
The following are items of importance for our readers. We hope this information is helpful to you in your personal planning. See list at left for articles on tax-planning topics.
A. Increase in Estate Tax Exemption.
Effective January 1, 2006, the federal estate tax exemption will increase from $1,500,000 to $2,000,000 for every US citizen or resident. Thus, for a married couple with proper planning (a typical "A/B" trust), up to $4,000,000 of asset value can pass to beneficiaries free of estate tax. Equally important, if the decedent's interest in the estate is under $2,000,000, no federal estate tax return will be required and the expense of that tax return will be eliminated. It will be important, however, to maintain records of the fair market value of assets at a decedent's death for adjusted income tax basis purposes. Historically, this information was reflected on the federal estate tax return.
B. Increase in Gift Tax Annual Exclusion.
Effective January 1, 2006, the annual exclusion available for all gifts of present interests (most outright gifts) will be increased to Twelve Thousand Dollars ($12,000). As a result, each individual may give each and every other individual property of $12,000. This will include cash, stock, interests in real estate, limited partnerships and the like. A husband and wife will be able to collectively give Twenty-Four Thousand Dollars ($24,000). Generally, as has been true in the past, one spouse can give separate property valued at $24,000 to each individual provided the donor's spouse consents to the gift for tax purposes. This consent is reflected on a gift tax return filed by the donor spouse.
C. Circular 230.
The Internal Revenue Service has announced new guidelines to practice before the Internal Revenue Service. This Circular has been in effect since 1921 but has recently been updated to try to discourage taxpayers from using "tax advisors advice" as a reason to avoid penalties assessed by the Internal Revenue Service on positions taken that are not meritorious. This is an outgrowth of the tax shelter industry and aggressive positions taken by certain tax advisors.
This new Circular requires formal written legal opinions to support specific kinds of written advice. This will be quite costly for clients.
Under normal circumstances, formal opinion will not be given (nor requested by the client). However, if written advice (including emails) is provided, it must be accompanied by a statement (shown below) indicating that the client may not rely on the written advice of the tax practitioner to avoid penalties assessed by the Internal Revenue Service.
It is unfortunate the IRS has gone to this great length to establish a further basis for assessing penalties. Many estate planning activities are tax structured in compliance with the intent of the law, such as establishing the "Bypass" Trust for estate planning (currently "A/B" Trust), the QTIP Trust and similar standard planning techniques. It also applies to qualified Personal Residence Trusts, Grantor Retained Annuity Trusts and similar tax planning opportunities clearly established by the law. Nevertheless, the warnings must be given by the practitioner under these new rules.
Equally suspect are the discounts claimed for Family Limited Partnerships and fractional interest ownerships in real estate, minority interests in corporations and the like. Discounts are legitimate, but must be supported by proper valuation opinions. Clients can anticipate seeing the Circular 230 disclaimer on many transactions.
The disclaimer language which will normally appear is as follows:
Circular 230 Notification:
The Internal Revenue Service issued a notice ("Circular 230") in June 2005 requiring advisors to give notice to clients of any projects associated with tax advice. The nature of this circular requires that clients be notified they may not rely on the advisor's advice as a means of avoiding penalties on tax deficiencies resulting from positions taken by a client that are contrary to the findings of the Internal Revenue Service. The following constitutes compliance of this notice:
"The advice given by this office for tax planning matters is not intended or written by Roskoph Associates Professional Corporation to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that my be imposed on the taxpayer by the Internal Revenue Service. No advice is written to support the promotion or marketing of any transaction."
D. 2005 Year-end Charitable Gifts.
Congress has passed a tax relief package to aid victims of Hurricane Katrina. Included in the tax relief is a provision that allows a donor who makes cash gifts to a 501(c)(3) charity to deduct an amount equal to 100% of their adjusted gross income. This is twice the normal limitation of 50% on adjusted gross income. This opportunity for significant deductions is not limited to Hurricane Katrina causes. One taxpayer said "How many sales does the government have? This is a big sale, and you bet I'm going to go." (C. Kemmons Wilson, Jr.).
Despite this comment, many wealthy taxpayers do not use cash for contributions, but use appreciated securities or real estate that do not qualify for this enhanced deduction. It will be interesting to see the impact this provisions truly has. In the meantime, be aware of this "sale" opportunity.
E. Partnership Update.
The IRS has continued to challenge Family Limited Partnerships for estate planning purposes. After years of losses in the tax court, the IRS is now successful in causing the entire partnership to be included in a decedent's estate when that decedent transferred the limited partnership interest during lifetime, but continued to maintain control over the management of the Partnership and the timing of distributions. This is a very simple statement of a complex area, but partnerships are still viable entities both for gift planning and estate planning. Individuals should consult with their tax advisors to determine whether limited partnerships are appropriate for their personal planning.
F. Panel on Tax Reform.
The President's Advisory Panel on Federal Tax Reform has announced proposed tax revisions to the Internal Revenue Code. These proposals include a limitation on deductible interest on home mortgages (varying by the section of the country of the taxpayer's property), eliminates those deductions for vacation homes and proposes to abolish the alternative minimum tax that has now affected millions of taxpayers not originally intended to be included in the "tax shelter haven" category. This is a long way from enactment, but it shows the intent of the administration. The Panel made no recommendations regarding the federal estate tax.
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