High Net Worth Family Tax Report - April 2012, Vol. 7 No. 1


In This Issue:

- $5,120,000 Lifetime Gift Tax Exemption Expiring Soon

We recently circulated this article as a Special Client Alert. The resetting of the lifetime gift-tax exemption back to $1 million from $5,120,000 scheduled to take place on Jan. 1, 2013, is so important, however, that we are republishing our article to ensure that as many of our readers as possible have the opportunity to review it...

- Court Approves Defined Value Clause for Gift Where Excess Value Retained by Donor

The U.S. Tax Court has held for the first time in Wandry v. Commissioner (Tax Court, March 26, 2012), that a donor may make a non-cash gift of a stipulated dollar amount and retain any portion of the transferred property value in excess of the stated dollar amount the donor gave away. Gifts of property other than cash have been problematic because the donor cannot be sure how large a gift he has made until the Internal Revenue Service audits his gift tax return and either accepts the value claimed, or establishes a higher value (and resulting gift tax liability)...

- More Family Limited Partnerships in Court

Several recent cases have addressed tax issues related to family limited partnerships or limited liability companies. Using these popular forms of entities, if properly structured, assets can be transferred to a partnership or limited liability company and interests in the entity can be given away or sold to other family members at a significant discount from the underlying asset value because of the minority, illiquid, and noncontrolling nature of the interest transferred...

- Internal Revenue Service Releases Form 8938, Statement of Specified Foreign Financial Assets Just in Time for 2012 Filing Season

We previously circulated a Special Client Alert to make our readers aware of the possible need to file the new Form 8938 with their Federal income tax returns beginning with the 2011 tax year. You must file the form if you own certain “specified foreign financial assets” – a broader reporting requirement than the one requires the filing of Form TD F 90- 22.1 (FBAR) if you have foreign bank accounts...

- U.S. Tax Court Addresses Residence Interest Deduction for Unmarried Couples

In Sophy v. Commissioner (Tax Court, March 5, 2012), the U.S. Tax Court addressed the application of the $1 million limit for deducting interest expense on a home mortgage. Although personal interest is not generally deductible, interest on up to $1 million of debt can be deducted if the proceeds of the debt were used to purchase, construct, or substantially improve the taxpayer’s primary residence and one other dwelling used as a residence by the taxpayer. Interest on an additional $100,000 of debt can be deducted as “home equity” indebtedness if the loan is secured by the residence...

- IRS Moves Against Incomplete Gift Strategy

For a long time, a popular tax-planning strategy has involved the use of an “incomplete gift.” Treas. Reg. Section 25.2511-2(b) provides that a gift may be incomplete if the donor retains any power over its disposition. In order to take advantage of this regulation, a donor would transfer property to an irrevocable trust but retain a limited power of appointment exercisable in his will to name other beneficiaries of the trust. Properly structured, these trusts avoided treatment as grantor trusts and were instead treated as separate taxpayers...

- S Corporation Found to Have Underpaid Employment Taxes by Paying Too Little Wages

Many taxpayers have tried to limit their exposure to payroll taxes by creating an S corporation that pays them income attributable to their personal services. The taxpayer causes the corporation to pay him only a very small salary that is subject to payroll taxes. The balance of the earnings are passed through under Subchapter S as dividends, which are not subject to payroll or self-employment taxes. The S corporation does not depend on paying deductible compensation to reduce its own taxable income because it’s generally not subject to federal income tax...

- Failure of Donee to Include Required Information in Gift Acknowledgement Letter Results in Loss of Charitable Deduction

A recent U.S. Tax Court case serves as a reminder of the importance of obtaining a proper acknowledgement letter from any charity to which you make a gift. For any charitable gift of more than $250, the taxpayer must receive a contemporaneous written acknowledgement of the gift from the charity. Among other things, the acknowledgement must state whether any goods or services were provided to the taxpayer in connection with the gift, and if they were, the value of these goods or services...

- Ruling Reminds Us that Not All Litigation Recoveries Are Taxable

The IRS recently issued a private letter ruling that reminds us that not all amounts recovered in litigation are subject to income tax. In PLR 201152010 (December 30, 2011), the taxpayer had attempted to purchase assets from a unit investment trust. Another party interfered with the transaction and, as a result of that interference, the unit holders of the trust did not approve the sale. In order to purchase the assets, the taxpayer had to agree to pay a higher purchase price. After completing the purchase, the taxpayer sued the interfering party in the original transaction, and the court found in favor of the taxpayer, awarding damages in the amount of the additional price the taxpayer had to pay as a result of the interference...

- Power to Substitute Life Insurance Policy in Trust Does Not Cause Trust Assets to be Included in Trust Grantor’s Estate

The proceeds of life insurance may be included in the gross estate of the insured for estate tax purposes under IRC Section 2042 if the insured’s estate is the named beneficiary of the policy or the insured has any incidents of ownership with respect to the policy. In Rev. Rul. 2011-28 (December 1, 2011), a taxpayer set up a trust and the trust became the owner of a policy of insurance on the life of the taxpayer. The trust provided that the taxpayer could cause the trust to transfer the policy to the taxpayer, provided that the taxpayer transferred to the trust other assets of equivalent value. The IRS ruled that this power did not constitute a prohibited incident of ownership on the part of taxpayer....

Please see full report below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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