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We are into
the second quarter of 2010 and still no federal estate tax. Will Congress pass
new legislation? And if so, will it be retroactive? Congress has given no
indication it will do anything, so we are likely to be dealing with this
uncertainty for most of 2010. The possibility also is increasing that the
arrival of 2011 may bring with it the return of a federal estate tax with a $1
million exemption and a 55 percent maximum tax rate. As we noted in our
December 2009 Estate Planning Update (http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1672),
this may be a good time to review your estate plan to ensure that neither too
much nor too little will pass to your intended beneficiaries.
executors and beneficiaries of estates of decedents dying in 2010 are coping
with "carry-over" basis, the need to determine the decedent's basis
in estate assets (do you know what you
paid for everything you own?) and how to allocate the $1.3 million basis
increase among heirs (there is an additional $3 million increase for assets
passing to or for the benefit of a surviving spouse).
difficult times to plan, but plan you must, or your heirs may find themselves
in very difficult and uncharted waters.
Still Some Good News But It May Be
discussed in our April 2008 Estate
Planning Update (http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1146),
current depressed asset values combined with historically low interest rates
offer many opportunities to transfer wealth efficiently.
those opportunities is the use of a grantor retained annuity trust (GRAT). A
GRAT captures a portion of an asset's appreciation and removes it from the
donor's estate, allowing it to pass to the next generation free of estate and
gift taxes. Essentially, a GRAT pays the donor an annuity for a set number of
years (known as the annuity period) based on an interest rate set monthly by
the IRS. If the assets held in the GRAT appreciate at a rate in excess of the
IRS interest rate at the time the GRAT is established, that appreciation will
pass to the next generation without gift or estate tax. The lower the IRS
interest rate, the lower the annuity payments will be and the greater the
portion of the appreciation that can be captured.
A downside to
creating a GRAT is that if the grantor does not survive the annuity period, the
value of the property in the GRAT will be included in the grantor's taxable
estate. Accordingly, GRATs often are created with short annuity periods (such
as two to five years) to increase the chance of surviving the annuity period.
presently offered by these short-term GRATs may be fleeting. On March 24, 2010,
the House of Representatives approved H.R. 4849, the "Small Business and
Infrastructure Jobs Tax Act of 2010." The bill, which is now in the
Senate, includes a provision that has a direct impact on GRATs by requiring
that all GRATs must have a minimum annuity period of 10 years. Obviously, this
provision increases the risk that the grantor will die during the annuity
period and limits the attractiveness of a GRAT. As the legislation is currently
drafted, this new GRAT limitation will apply to transactions entered into after
the effective date of the new law, i.e., the date an act is signed by the
President; however, the effective date may change in the Senate version or in
any compromise legislation produced by a House-Senate conference committee.
H.R. 436 also is pending in the House; if enacted, it would eliminate valuation
discounts in connection with certain transfers of property (discussed in our
April 2009 Estate Planning Update, http://www.pepperlaw.com/publications_update.aspx?ArticleKey=1465).
pending legislation, combined with the present low interest rates and low asset
valuation environment, make now an attractive time to consider a GRAT as well
as other wealth transfer techniques.
Demutualized Stock May Have a Basis
and trusts that own life insurance policies issued by a mutual insurance
company own an interest in the company itself in addition to a life insurance
policy. When that company "demutualizes," policy owners receive
shares of stock representing the value of the ownership interest in the
company. The IRS has always taken the position that the recipient's basis in
the stock is zero, meaning that when the stock is sold, the entire proceeds of
sale had to be recognized as gain. However, in early 2009, the Federal Court of
Claims held that the stock basis was not zero and, instead, that the stock had
value when issued such that some basis had to be allocated to it. That decision
was recently upheld by the Court of Appeals for the Federal Circuit.
this mean? While the IRS has not indicated that it will acquiesce in the
conclusion of these courts, when you sell stock received as part of a
demutualization of an insurance company, you may wish to consult with your tax
counsel about treating the value of the stock assigned by the insurance company
when distributed as your basis in computing any capital gain. If you have filed
a return reporting the entire proceeds of sale as gain and the return is still
open, you may wish to consider filing an amended return claiming a refund.
The material in this
publication is based on laws, court decisions, administrative rulings,
congressional materials, and should not be construed as legal advice or
opinions on specific facts. The information in this publication is not
to create, and the transmission and receipt of it does not constitute, a
lawyer-client relationship. Internal Revenue Service rules require that
advise you that the tax advice, if any, contained in this publication
intended or written to be used by you, and cannot be used by you, for
purposes of (i) avoiding penalties under the Internal Revenue Code or
promoting, marketing or recommending to another party any transaction or
This article is
republished with permission of Pepper Hamilton, LLP. Further duplication
without the permission of Pepper Hamilton, LLP is prohibited. All rights