Thursday, January 21, 2010

February AFRs Announnced

For the month of February 2010 the Applicable Federal Rates (AFRs) are as follows:


For this same period, the Section 7520 Rate will be 3.4%.To go directly to the IRS' publication, please visit the following website: http://www.irs.gov/pub/irs-drop/rr-10-06.pdf.

Wednesday, January 20, 2010

Estate Planning for Lesbian Gay Bisexual and Transgender Individuals and Families

Last night, attorney, Jeremy Cooper, attended a Las Vegas Chamber of Commerce seminar hosted by the Human Rights Campaign addressing Smart Financial and Estate Planning for LGBT individuals and families. Half of the presentation focused on the new Domestic Partnership law of Nevada and the current state of this evolving area of law. The other half focused on estate planning for LGBT indviduals and families. The following is a brief overview of the recently enacted Domestic Partnership legislation followed by some estate planning recommendations for those in the LGBT community:

Domestic Partnerships

During 2009, the Nevada legislature enacted legislation recognizing Domestic Partnerships between individuals who have properly registered with the state. A Domestic Partnership is a social contract between two persons that grants each partner different rights not available to non-married couples. To establish a legal Domestic Partnership, partners must furnish proof to the Secretary of State that both persons share a common residence, neither partner is married or part of another domestic partnership, the individuals are not related by blood, both individuals are at least 18 years of age, and both individuals are competent to consent to the domestic partnership.

Upon establishing a valid Domestic Partnership, domestic partners have the same rights, protections, and benefits granted to married spouses. Domestic partners are also subject to the same responsibilities, obligations, and duties under law as imposed upon married spouses. These rights and obligations include, but are not limited to, child support, alimony, community property rights, mutual responsibility for debts to third parties, etc. Deciding whether a couple should register as a Domestic Partnership is a very intimate and personal decision that should not be made without understanding the legal ramifications of doing so. Jeffrey Burr recommends consulting with a family law attorney who is experienced in dealing with the LGBT community.

Estate Planning Tips

Because of the unique legal challenges facing the LGBT community, it is vital that valid and comprehensive estate planning be put into place regardless of whether a committed LGBT couple decides to register as a Domestic Partnership in Nevada. First and foremost, proper estate planning by LGBT individuals should ensure that the right people are making the right decisions regarding one’s health care and asset management when the time comes, as well as distributing property to the intended beneficiaries at death. LGBT individuals and couples should strongly consider obtaining the following documents:

1. Powers of Attorney for Health Care and Financial Matters and Directives: These documents are extremely important for LGBT couples who decide not to register as Domestic Partners and for Domestic Partners when traveling outside of the state of Nevada or other states that do not recognize Domestic Partnerships. These are the documents that will allow your partner to make health care and asset management decisions for you if that is what is desired.

2. Wills and/or Trusts: These documents are also very important because they will determine to whom your property will be distributed at your death. Without a will or a trust, property will pass to ones heirs as determined by the state laws of intestacy which does not provide for property to pass to an LGBT partner unless the partnership has registered as a Domestic Partnership. These documents will also nominate guardians for one’s estate, person and minor children.

3. Partnership Alliance Agreement or Property Agreement: This document is essentially the same type of agreement as a Premarital, or Prenuptial, Agreement in that it establishes property brought into the partnership, how new property and income will be treated during the partnership, and how property will be distributed upon dissolution of the partnership. These documents can be prepared for LBGT couples whether or not they have registered as domestic partners.

-Attorney Jeremy Cooper

Wednesday, January 13, 2010

Hell Hath Frozen Over

As has been discussed here on the Jeffrey Burr blog recently, the Estate Tax and Generation Skipping Transfer (GST) Tax have unprecedentedly been repealed. Currently, nothing indicates that the state of the Estate Tax will be changing any time soon. And while the constitutionality of a retroactive estate and GST tax is definitely fun to talk about, it seems as though such an act would pass constitutional muster. Our gut instinct is that Congress will take action sometime this year and implement a retroactive tax. That being the case, we echo the sentiment of many an estate planner in saying “the death of the death tax has been exaggerated.” Still, until pen is put to paper, a new Estate Tax regime has reared its head which requires our attention. As such, the following outlines some highlights and issues to consider given current law:

1. The absence of the estate and GST tax will only last during 2010. The gift tax is still in full effect for 2010; however, the rate at which it is now being assessed is 35% (as opposed to the 45% rate in place last year).

2. The welcoming cheers of a world with two less taxes should be somewhat dampened by the jeering heard over the loss of stepped-up basis. Prior to 2010, the cost bases of a decedent’s assets passing to beneficiaries were stepped up to their fair market value at death. This step-up in basis had the favorable effect of reducing built-in capital gains and the resulting capital gains taxes which were incurred upon the sale of any such assets. Under the new regime, cost basis on a decedent’s assets will carry over to the beneficiaries for the most part (see below), thus subjecting built-in gains to the full fury of income tax rates.

3. As a consolation prize for the loss of step-up in basis, the new tax regime is allowing a decedent’s personal representative to allocate $1.3 million of basis to built-in gains on property in a taxpayer’s estate. Furthermore, the personal representative may allocate an additional $3 million of basis to built-in gain on qualified spousal property. Qualified spousal property is property passing directly to a surviving spouse or property passing to a QTIP type trust.

4. As a reminder, even if the current tax regime remains in effect, these changes are to be short-lived (2010 only). Assuming no changes to the current or future Estate Tax laws are made, a previous tax regime, not seen since 2001, returns in full force in 2011 (i.e., $1 million of Estate Tax exemption, $1.3 million GST tax exemption, 55% max rate for estate, gift and GST tax, etc.).

5. Because most trusts were drafted with the expectation that hell would freeze over before the Estate Tax was repealed, many of these same trusts are now facing the serious potential of unintended disinheritances of spouses or children. This unintended consequence is the result of formulas within trust agreements that divide assets upon a spouse’s death based on the Estate Tax laws in place at the time of death. Where there is no Estate Tax, the formula referencing such is likely to be misapplied and achieve something entirely different than what the decedent intended. This issue becomes especially problematic when there are second marriages and step-children.

In closing, we would just like to say that all hope is not lost. As mentioned above, a retroactive tax seems sensible; however, the longer we go without a hint of congressional action, the more likely it is that 2010 will pass devoid of estate and GST tax. Either way, many will likely need to give some attention to the estate plan they currently have in place to determine what, if any, changes need to be made to address this unexpected occurrence. These changes could range from a complete overhaul of one's estate plan to simply putting a "band-aid" in place to get you through the year.

-Attorney Jeremy Cooper

Tuesday, January 12, 2010

Thursday, January 7, 2010

IRS Proposes New Regs to Regulate Tax Preparers

Last June, the IRS Commissioner initiated a comprehensive review of the paid tax return preparer industry (the IRS estimates the number of paid tax return preparers in the US to be between 900,000 and 1.2 million).

On January 4, 2010, the IRS proposed new regulations as part of the findings of this study focusing on the testing and continuing education of tax return preparers. The new regulations are intended to “enhance the protections and services for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term.” http://www.irs.gov/newsroom/article/0,,id=217781,00.html

In rolling out the IRS’s new initiative, expect the following actions and regulatory requirements:

1. 10,000 Letters and Visits. Starting this week the IRS is sending letters to 10,000 paid tax return preparers throughout the country. The letters are targeting large volume preparers who frequently make errors on their returns. The letters are meant to encourage and remind such preparers to be more careful in preparing returns. Many of the preparers receiving these letters can also expect to receive a visit from Revenue Agents before the end of tax season.

2. Registration Requirements. Mandatory registration requirements for all paid tax return preparers signing tax returns. Such individuals will be required to register with the IRS, receive a Preparer Tax Identification Number (PTIN), and pay a user fee. Current PTIN holders will have to re-register with the IRS so that the IRS can reissue their PTINs.

3. Competency and Continuing Education Requirements. All paid tax return preparers who are not attorneys, certified public accountants or enrolled agents will now have to take a competency test and be subject to continuing education requirements (15 hours annually). Attorneys, certified public accountants and enrolled agents are exempt from this requirement because of the already existing licensing exams and continuing education requirements required of them (however, the IRS notes that it will examine the accuracy of future return preparation by attorneys, certified public accountants and enrolled agents to determine whether they can remain exempt).

4. Other Noteworthy Items. The IRS will compile a searchable public database of tax return preparers that have registered with the IRS and are meeting the competency test and continuing education requirements to inform taxpayers as to whether their preparer is found therein. Treasury Department Circular 230 will extend to all signing and non-signing tax return preparers (this would make these individuals subject to discipline for unethical and unprofessional conduct). Compliance checks will be conducted by the IRS.

Because these are proposed regulations, many of the items noted above are not immediately effective for the current filing season. However, the IRS has stated that it will “immediately increase its education and enforcement presence in the return preparer community.”

Monday, January 4, 2010

QUESTIONS ABOUND REGARDING EXPIRATION OF ESTATE TAX

The time has come to scrape your jaw off the sidewalk. It’s hard to believe, but true—Congress failed to extend the estate and generation skipping transfer (GST) taxes into 2010. In addition, the gift tax rate dropped on January 1st from 45% to 35% and the tax free step-up in basis on estate assets also ended, requiring heirs to plan for post-death capital gains taxes.

The first estate and GST tax returns for 2010 decedents will be due next October (or in April 2011 if an estate takes the automatic six-month extension). This means that Congress could possibly bring these taxes back retroactively by passing legislation any time before then. Another option would be for Congress to avoid the ex post facto constitutional issue by simply restoring the tax prospectively, even though this might allow a relatively few transfers to avoid the tax all together.

It is also possible that Congress will simply do nothing in this year 2010 and wait for the 2011 roll-back of rates and exemption amounts to 2001 levels. At this point, nobody knows what Congress will do; they might even surprise us and take up responsible tax reform this year to permanently fix the situation with long-term guidance. However, we don’t plan on letting our hopes rise that high.

One thing is for sure, if individuals are using a traditional AB or ABC revocable trust, they should definitely have it reviewed with their estate advisor soon. With some revocable trusts, the amounts passing at death to different groups of beneficiaries may be entirely derived by a formula which hinges on the existence of an estate tax. If no estate tax exists, this could lead to disastrous outcomes, even the unintended disinheritance of entire groups of beneficiaries (some trust shares are created only to the extent needed to reduce estate taxes to zero). Even if questions regarding the tax are ultimately worked out, the potential for litigation among and between beneficiaries is huge.

-Attorney David M. Grant