Practice Fundamentals Series: Gift Planning Basics: Taxable Gifts – Definitions, Opportunities and Potential Pitfalls

Program Date: Wednesday, January 6, 2016

Panelist: Annette K. Eaton, Esq., Nixon Peabody LLP

Program Chairs: Anne L. Warren of Brown Brothers Harriman & Co.,   Tamara Lauterbach Sturges of Egleson & Sturges, LLC, and Heidi Seely of Rackemann, Sawyer & Brewster, P.C.

Materials: Click HERE for panelist’s handout.

Program Topic: The speaker provided an overview of common gifting strategies every estate planning practitioner should have in his or her toolkit.  Through case studies, the speaker reviewed: (i) annual exclusion gifting; (ii) gifting to minors; (iii) gifting fractional interests; (iv) GRATs; and (v) charitable gifting strategies.

BBA Event Recap: When A.R.T. is the Issue: The Impact of Assisted Reproductive Technologies on Estates and Probate

Program Title: When A.R.T. is the Issue: The Impact of Assisted Reproductive Technologies on Estates and Probate

Program Date: Tuesday, November 20, 2015

Panelists: Lisa M. Cukier, Esq. and David Raymon, Esq., both of Burns & Levinson LLP

Program SponsorsFamily Law Section, Health Law Section, Estate Planning Committee

Materials:  To view the program materials, click here.

Summary of Program Topic: The panelists discussed assisted reproductive technologies and its impact on estate planning, family law and probate.  During their presentation, the panelists reviewed statutes and case laws that control ownership of genetic material, what constitutes parentage and how to dispose of embryos in estate plans.

Practice Fundamentals Series: Basic Estate Planning Documents I: Will, Introduction to the Revocable Trust, Power of Attorney and Health Care Proxy

Program Date: Wednesday, December 2, 2015

Panelist: Melissa E. Sydney, Esq., of Burns & Levinson LLP

Program Chairs: Anne L. Warren of Brown Brothers Harriman & Co.,   Tamara Lauterbach Sturges of Egleson & Sturges, LLC, and Heidi Seely of Rackemann, Sawyer & Brewster, P.C.

Materials: Click HERE  for panelist’s handout.

Program Topic:  The speaker provided an introduction to basic estate planning documents.  She reviewed the key components of wills, health care proxies, durable powers of attorney, and touched on the basics of revocable trusts.  The speaker also provided drafting suggestions and advice on avoiding certain pitfalls when advising clients about their estate plan.

BBA Event Recap: Discretionary Distributions from an Irrevocable Trust

Program Title: Discretionary Distributions from an Irrevocable Trust: How much discretion does the trustee have? It depends….

Program Date: Wednesday, December 16, 2015

Panelists: Peter M. Shapland of Day Pitney LLP and Stacy K. Mullaney of Fiduciary Trust,

Program Sponsor: Peter M. Shapland of Day Pitney LLP and Stacy K. Mullaney of Fiduciary Trust, co-Chairs of the Trust Administration Committee

Materials:  To view the program materials, click on each of the following links: Handout 001, Handout 002, Handout 003, and Handout 004

Summary of Program Topic:  The panelists discussed discretionary distribution standards and factors that trustees must consider in responding to beneficiary requests for distributions.  The conversation included: (I) what analysis is required under certain distribution standards; (ii) the purpose and intent of the settlor; (iii) when should a beneficiary’s financial resources be considered; and (iv) what duty does the trustee have to consider the future needs of the current beneficiary and/or the needs of successor and remainder beneficiaries.

Estate of Redstone v. Commissioner

By, Caitlin Glynn

Overview: Transfer made as part of settlement of family litigation is not a taxable gift

Summary: The Tax Court case, Estate of Redstone v. Commissioner, 145 T.C. No. 11, focuses on a family dispute that led to a transfer of 33 ⅓ shares of a family business to a trust for the shareholder’s two children.  The issue the Tax Court reviews is whether the shareholder’s transfer of stock in trust for his two children was a gift subject to the gift tax or whether it constituted a bona fide, arm’s-length transaction that was free from donative intent and that was “made in the ordinary course of business.”

Summary of Facts:  Edward Redstone (“Edward”), along with his brother, Sumner, and father, Mickey, incorporated a closely-held family company National Amusements, Inc. (“NAI”).  Upon NAI’s incorporation, Mickey contributed a disproportionate amount of capital.  Nevertheless, Edward, Sumner and Mickey each were listed as the registered owners of an equal ⅓ of NAI’s shares, equal to 100 shares each.

Edward was eventually forced out of the business after numerous family disputes within the Redstone family, originally stemming from the institutionalization of Edward’s son, Michael, by Edward, for psychiatric problems.  Edward felt marginalized, not only with his family, but also within the family business.  Eventually, Edward quit the business.  Upon leaving, Edward demanded possession of the 100 shares of common stock registered in his name.

Mickey refused to give Edward the stock certificates.  Mickey argued that a portion of the shareholder’s stock, though registered in Edward’s name had actually been held since NAI’s inception in an “oral trust” for the benefit of Edward’s children, because of Mickey’s disproportionate contribution of capital.  Mickey contended that he had gratuitously accorded Edward more stock than he was entitled to, and the “extra” shares should be regarded as being held in trust for Edward’s children.

The parties negotiated for six months in search of a resolution.  Edward sued NAI to recover the 100 shares of stock that were registered in his name.  A settlement was ultimately reached.  The parties agreed in a Settlement Agreement that Edward was the owner of 66 ⅔ shares of the stock, and the remaining 33 ⅓ shares of stock would be transferred into irrevocable trusts for the benefit of Edward’s two children.  The Settlement Agreement further provided that Edward would transfer the 66 ⅔ shares to NAI for $5 million.

The IRS determined that Edward’s transfer of stock to the irrevocable trusts for the benefit of his children was a taxable gift.  The IRS further determined that in addition to gift tax owed, there were further penalties for fraud, negligence and failing to file a gift tax return.

Applicable Legal Principles and Analysis:  Where property is transferred for less than adequate and full consideration in money or money’s worth, the amount by which the value of the property exceeds the value of the consideration is deemed a gift.  A transfer of property within a family group normally receives close scrutiny as to whether it is a gift.  However, on numerous occasions, the Tax Court has held that a transfer of property between family members in settlement of bona fide unliquidated claims was made for “full and adequate consideration” because it was a transaction in the “ordinary course of business.”  A transfer of property will be regarded as made for “a full and adequate consideration” in the “ordinary course of business” only if it satisfies the three elements specified in Treas. Reg. Sect. 25.2512-8.  The three elements are that the transfer is bona fide, transacted at arm’s length and free of donative intent.

The Tax Court held that the transfer was not a gift as it satisfied all three elements.  The settlement was “bona fide” because the parties “were settling a genuine dispute as opposed to engaging in a collusive attempt to make the transaction appear to be something it was not.”  See 145 T.C. No. 11, at 21.  The transfer was at “arm’s length” as Edward acted “as one would act in the settlement of differences with a stranger.”  See id. at 22.  The Tax Court found that Edward was genuinely estranged from his father.  There were legitimate business grievances against one another that led to the parties being represented by counsel and engaged in adversarial negotiations for many months prior to settlement that was incorporated into a judicial decree.  The transfer was free of donative intent as Edward transferred stock to his children not because he wished to, but because his father demanded it.  See id. at 25.  At the time of the settlement, Edward had no desire to transfer stock to his children but was forced to accept this transfer in order to placate his father, settle the family dispute, and obtain a $5 million payment for his 66 2/3 shares.

Take Away Considerations:  In the settlement of litigation in a family related context, concerns are often raised by planners as to whether any parties are making taxable gifts as a result of the settlement.  Although transfers in compromise and settlement of genuine trust and estate disputes will typically be treated as transfers for full and adequate consideration in the ordinary course of business, this Tax Court case summarizes certain factors to consider in this context, which include: whether a genuine controversy existed between the parties; whether the parties were represented by and acted upon the advice of counsel; whether the parties engaged in adversarial negotiations; whether the value of the property involved was substantial; whether the settlement was motivated by the parties’ desire to avoid the uncertainty and expense of litigation; and whether the settlement was finalized under judicial supervision and incorporated in a judicial decree.  See 145 T.C. No. 11, at 20. These factors offer helpful guidelines for practitioners to consider when advising clients whether a transfer of property in the context of a family settlement should be reported as a taxable gift.

Volunteer T&E Attorneys Needed for Veterans Legal Services

Claire Carrabba and Nikki Marie Oliveira, co-chairs of the Public Service Committee, have been working with Lynn Girton, the Pro Bono Director of Veterans Legal Services (“VLS”), in order to establish a volunteer project to assist homeless and low-income veterans with basic estate planning needs.  In order to qualify for services, the veteran must generally have an income below 200% of the federal poverty level.  Many of the veterans require assistance in obtaining a Will and other estate planning documents, such as Durable Powers of Attorney and Health Care Proxies.  No specialized knowledge of veterans’ law or benefits is needed to help VLS clients.  VLS is able to offer malpractice insurance to those attorneys who provide pro bono assistance to VLS clients.

Lynn Girton is looking for 15 volunteers to get the pro bono project started and she anticipates having a few cases available in the next month.  If you have any questions or are interested in volunteering, please fill out the sign-up sheet (click here) and return it to Nikki Marie Oliveira at [email protected]







BBA Event Recap: Serving as Trustee of a Special Needs Trust

Program Title: Serving as Trustee of a Special Needs Trust – What Lawyers Need to Know to Act as Trustee or Advise Clients Who Serve as Trustees

Program Date: Tuesday, November 17, 2015

Panelist: Ken W. Shulman of Day Pitney LLP

Program Sponsors: Rebecca J. Benson of Margolis & Bloom LLP and  Gary Zalkin of Zalkin Law Firm PC, co-Chairs of the Elder and Disability Law Committee; Peter M. Shapland of Day Pitney LLP and Stacy K. Mullaney of Fiduciary Trust, co-Chairs of the Trust Administration Committee

Materials:  To view the program materials, click here.

Summary of Program Topic:  The panelist discussed the duties and responsibilities of managing a Special Needs Trust, including managing assets, dealing with beneficiaries (and their family members), preserving eligibility for public benefit programs, making distributions and staying out of trouble. The program also addressed the ethical issues that arise when drafting attorneys name themselves as trustees.

IRS Releases Proposed Regulations on Taxing Expatriates’ Gifts and Bequests to U.S. Citizens and Residents

By, Caitlin Glynn of Rackemann, Sawyer & Brewster

Recent guidance has been issued to implement Internal Revenue Code Section 2801 (“Section 2801”) which imposes a succession tax on U.S. citizens and residents who receive gifts or bequests from individuals who relinquished U.S. citizenship or ceased to be lawful permanent residents of the United States on or after June 17, 2008 and were “covered expatriates” as defined by the Statute.

IRC Section 2801 Explained

Section 2801 was added to the Internal Revenue Code by The Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART Act”).  In passing the HEART Act Congress determined that it was appropriate and in the interests of tax equity to impose a tax on U.S. citizens and lawful residents who receive from an expatriate a gift or bequest that would otherwise not be subject to U.S. estate and gift tax.  Under Section 2801 the receipt of covered gifts or covered bequests by U.S. citizens or residents from covered expatriates is subject to tax.  For purposes of calculation of the tax on the gift or bequest, the amount of the gift is its fair market value as of the date of receipt and the tax imposed is the highest applicable gift and estate tax rate (currently 40 percent).

Section 2801 is distinctive in that it imposes the tax on the recipient of the gift or bequest, rather than the donor or estate of the decedent.  The tax will be imposed whether the donor or decedent acquired the property transferred before or after expatriation.  The tax will not apply to those gifts that do not exceed the gift tax annual exclusion amount for the year.   The tax is also reduced by the amount of any gift or estate tax paid to a foreign country with respect to a covered gift or bequest.

Previous Guidance from the IRS

On July 20, 2009 the Treasury Department and the IRS issued Announcement 2009-57.  This Announcement states that the IRS intends to issue guidance under Section 2801.  The Announcement further provides that tax payments and filing requirements of the statute are deferred pending the issuance of final regulations.

The Proposed Regulations

The Proposed Regulations amend Title 26 by adding Part 28, “Imposition of Tax on Gifts and Bequests from Covered Expatriates.”  The proposed Regulations are divided into seven sections and include Sections 28.2801-1 to 28.2801-7.  See Internal Revenue Bulletin 2015-39.

Section 28.2801-1 sets forth the general rule of liability for the tax, that the tax is imposed on U.S. citizens or residents who receive covered gifts or covered bequests from a covered expatriate.  Domestic trusts and foreign trusts electing to be treated as domestic trusts are treated in the same manner as U.S. citizens.  Section 28.2801-2 provides definitions for Section 2801, including important terms such as “covered expatriate,” “covered bequest,” “domestic trust,” “foreign trust” and “power of appointment.”  “Covered expatriate” is defined by reference to Section 877A(g)(1).  Section 877A(g)(1) generally defines a “covered expatriate” as an individual who expatriates on or after June 17, 2008, and whose average annual net income for the period five taxable years before expatriation exceeds $124,000 (subject to a cost of living adjustment), or whose net worth as of expatriation is $2 million, or who cannot certify that they have complied with filing requirements for the five taxable years before expatriation, subject to certain exceptions.

Section 28.2801-3 addresses rules and exceptions applicable to the definitions of covered gift and covered bequest.  In general, the following transfers are excluded from such definitions: qualified disclaimers of property made by the covered expatriate; taxable gifts reported on a covered expatriate’s timely filed gift tax return and property included in the covered expatriate’s gross estate and reported on such expatriate’s timely filed estate tax return, provided that the gift and estate tax due is timely paid; donations to a charitable organization that would be deductible for gift or estate tax purposes; or transfers to a U.S. citizen spouse if such transfer would otherwise qualify for the gift or estate tax marital deduction.

Section 28.2801-4 provides specific rules regarding who is liable for the payment of the Section 2801 tax as well as how to compute the tax. As outlined above, a U.S. citizen or resident who receives a covered gift or a covered bequest is liable for the tax.  A domestic trust that receives a covered gift or covered bequest is treated as a U.S. citizen and is thus liable for the tax.  Of note, a non-electing foreign trust is not liable for the Section 2801 tax.  Thus, a U.S. citizen or resident who receives a distribution from a non-electing foreign trust is liable for the Section 2801 tax to the extent the distribution is attributable to covered gifts or covered bequests.  This Section also provides rules for contributions to charitable remainder trusts (CRTs) made by covered expatriates for the benefit of one or more charitable organizations and the benefit of a U.S. citizen or resident other than the charitable organization. The value of the charitable organization’s remainder interest in a CRT is excluded from the definition of a covered gift or covered bequest.  The value of the interest of the non-charitable U.S. citizen or resident in such contributions to the CRT is a covered gift or bequest and thus taxable, unless otherwise excluded.

Section 28.2801-5 provides guidance on the treatment of foreign trusts.  If a covered gift or covered bequest is made to a foreign trust, the tax applies to any distribution from that trust to a recipient who is a U.S. citizen or resident. The section also discusses how a foreign trust can elect to be a U.S. trust for purposes of Section 2801.

Section 28.2801-6 addresses how the basis rules under Sections 1014, 1015(a) and 1022 impact the determination of the U.S. recipient’s basis in the covered gift or the covered bequest.  This Section also clarifies the applicability of the GST tax to some Section 2801 transfers, among other special rules and cross-references.  Of note, unlike Section 1015(d), which generally allows gift tax paid on the gift to be added to the donee’s basis, Section 2801 does not provide for a similar basis adjustment.

Section 28.2801-7 provides guidance on the responsibility of a U.S. recipient to determine if a tax under Section 2801 is due.  The Treasury Department and IRS recognize that because the tax imposed by Section 2801 is on the recipient, rather than the donor or the estate of the decedent (that has access to the information related to whether the donor or decedent is a covered expatriate), U.S. taxpayers may have difficulty determining whether a tax is due. To aid the taxpayer, the IRS may disclose returns and return information upon request.

December 9, 2015 is the deadline for written or electronic comments to the above regulations.

BBA Event @ 11/20/15 – Assisted Reproductive Technologies, Estate Planning, Family Law and Probate

Topic: When A.R.T. is the Issue: The Impact of Assisted Reproductive Technologies on Estates and Probate

When: Friday, November 20, 2015 12:30 PM to 1:30 PM

Where: Boston Bar Association16 Beacon Street, Boston, MA

Description:  Learn about assisted reproductive technologies and its impact on estate planning, family law and probate.  After this seminar, attendees will know statutes and case laws that control ownership of genetic material, what constitutes parentage and how to dispose of embryos in estate plans.

Event Co-Sponsors: Family Law Section, Health Law Section, Estate Planning Committee

Details: For more information about this event, click here.

IRS Announces Inflation Adjustments for 2016

By, Kerry Reilly, Esq.

Income Tax:

  • Highest Tax Bracket for Estates and Trusts. An estate or trust will be subject to the highest income tax bracket and Medicare surtax if taxable income exceeds $12,400 (increased from $12,300 in 2015).
  • Foreign Earned Income Exclusion. For taxable years beginning in 2016, the foreign earned income exclusion amount under §911(b)(2)(D)(i) is $101,300 (increased from $100,800 in 2015).
  • Expatriation to Avoid Tax. For calendar year 2016, under §877A(g)(1)(A), unless an exception under §877A(g)(1)(B) applies, an individual is a covered expatriate if the individual’s “average annual net income tax” under §877(a)(2)(A) for the five taxable years ending before the expatriation date is more than $161,000 (increased from $160,000 in 2015).
  • Tax Responsibilities of Expatriation. For taxable years beginning in 2016, the amount that would be includible in the gross income of a covered expatriate by reason of §877A(a)(1) is reduced (but not below zero) by $693,000 (increased from $690,000 in 2015).

Gift Tax:

  • Annual Exclusion for Gifts. The annual exclusion for gifts remains at $14,000 for 2016.
  • Annual Exclusion for Gifts to Non-Citizen Spouse. The first $148,000 of gifts to a spouse who is not a citizen of the United States shall not be considered a taxable gift by the donor (increased from $147,000 in 2015).
  • Large Gifts Received from Foreign Persons. Gifts from foreign persons in excess of $15,671 in aggregate must be reported to the IRS (increased from $15,601 in 2015).

Estate Tax

  • Unified Credit Against Estate Tax. The basic exclusion amount for an estate of any decedent dying during calendar year 2016 is $5,450,000 (increased from $5,430,000 in 2015).
  • Valuation of Qualified Real Property in Decedent’s Gross Estate. For an estate of a decedent dying in calendar year 2016, if the executor elects to use the special use valuation method under §2032A for qualified real property, the aggregate decrease in the value of qualified real property resulting from electing to use §2032A for purposes of the estate tax cannot exceed $1,110,000 (increased from $1,100,000 in 2015).
  • Interest on Certain Portions of Estate Tax Payable in Installments. For an estate of a decedent dying in calendar year 2016, the dollar amount used to determine the “2-percent portion” (for purposes of calculating interest under §6601(j)) of the estate tax extended as provided in §6166 is $1,480,000 (increased from $1,470,000 in 2015).

See Rev. Proc. 2015-53 for more details.