As estate planning attorneys, we receive calls from clients concerning the use of revocable living trusts in estate planning. The general public is invited to seminars on the subject, they receive literature in the mail, and, in some cases, receive in-home visits from parties, who are usually not attorneys, who advocate the use of the revocable living trust. Over the years, we have responded to clients to answer their questions concerning what the living trust will do and what it will not do. What follows is a discussion of what we call the “Six Myths” of the revocable living trust.

Myth No. 1: A living trust saves taxes.

A blanket statement that a living trust saves taxes is subject to examination. First of all, what types of taxes are being discussed? One should know that the Louisiana inheritance taxes disappeared in 2004. Accordingly, State of Louisiana inheritance taxes do not come into play with respect to a trust or a will. The Federal Estate Tax may be applicable whether there is a will or a trust. Some parties advocating the revocable living trust indicate that the trust is necessary in order to obtain the benefit of the $5 million Federal Estate Tax exemption. This is not true. The $5 million Federal Estate Tax exemption can be obtained without the use of a will or a trust. The exemption is not utilized when bequests are made through a trust or a will to a surviving spouse; however, federal law for the years 2011 and 2012 provides for “portability” of the exemption of the spouse whose Federal Estate Tax exemption has not been used. This portability applies to the estate of that deceased spouse’s surviving spouse, at least for 2011 and 2012.

Many assets in an estate are referred to as “non-probate assets,” such as annuities, IRAs, and 401k plans. In the event that a trust is made the beneficiary of such accounts, there could be potentially higher federal income taxes. This is clearly a trap for the unwary. Income tax consequences will turn on the design of the trust and, in particular, the design for distribution of income from the trust assets.Continue Reading Six Myths of the Revocable Living Trust

The federal First Circuit Court of Appeals recently rejected a taxpayer’s claim for a refund based on recharacterization of a payment for a non-competition agreement. Muskat v. United States, 2009 WL 211067 (1st Cir. 2009).

In connection with the sale of a business structured as an asset sale, the Buyer and the CEO (who was also the largest shareholder of the Seller) agreed in definitive documents that $1.0 million of the retained CEO’s new compensation package would be allocated to his non-compete covenants. Although the CEO initially recorded that payout as ordinary income for his 1998 taxes, in 2002 he filed an amended return for 1998, recharacterizing the $1 million payment as consideration of his personal goodwill, which he argued entitled him to capital gain treatment (which would have entitled him to a refund of over $200,000). The IRS denied Muskat’s request so he brought an enforcement action against the IRS. The district court, too, denied his request, finding that Muskat lacked “strong proof” that the non-competition payment was intended as payment for personal “goodwill” rather than as a covenant not to compete.Continue Reading A Taxpayer’s Post-Closing Remorse Relating to Tax Allocations

On December 23, 2008, President Bush signed the Worker, Retiree, and Employer Recovery Act of 2008 (the Act) into law.  Section 201 of the Act waives any required minimum distributions (RMDs) for 2009 from retirement plans that hold each participant’s benefit in an individual account, such as § 401(k) plans and § 403(b) plans, and certain § 457(b) plans.  The Act also waives any RMD for 2009 from an Individual Retirement Arrangement (IRA).
Continue Reading New Law Suspends Required Minimum Distributions for 2009

Historically, the IRS has said that a disregarded entity could (and maybe should) use the owner’s taxpayer identification number for income and other tax purposes. For employment tax reporting, the IRS issued Notice 99-6, 1999-1 CB 321 , which said that employment taxes for employees of a disregarded entity could be reported by a disregarded entity in one of two ways:

(1) Calculation, reporting, and payment of all employment tax obligations with respect to employees of a disregarded entity by its owner (as though the employees of the disregarded entity are employed directly by the owner) and under the owner’s name and taxpayer identification number; or

(2) Separate calculation, reporting, and payment of all employment tax obligations by each state law entity with respect to its employees under its own name and taxpayer identification number.Continue Reading IRS Requires Employer Identification Numbers for Disregarded Entities Beginning in 2009

Taxpayers often own a vacation home or other residential property that they desire to exchange in a tax-deferred like kind exchange under Section 1031 of the Internal Revenue Code. Under Section 1031, no gain or loss is recognized on the exchange of property held for use in a trade or business or for investment if the property is exchanged solely for property of like kind that is to be used in either a trade or business or for investment. Personal residences and similar personal-use property generally do not qualify as property held for investment or used in a trade or business within the meaning of Section 1031. When it comes to vacation homes and similar property that a taxpayer uses occasionally for personal use, there has generally been uncertainty as to whether or not that property would qualify for a Section 1031 exchange.
Continue Reading IRS Provides Safe Harbor For Like Kind Exchange

The IRS issued Notice 2008-25 explaining how the recapture rules for the 50% bonus depreciation under the GO Zone legislation applies to GO Zone property involved in either a like kind exchange under Section 1031 of the Internal Revenue Code (the “Code”) or an involuntary conversion under Section 1033 of the Code.

In general, for qualified GO Zone property, taxpayers can claim a 50% bonus depreciation deduction for the qualified Go Zone property. However, this depreciation deduction is subject to recapture if the property ceases to be substantially used in the GO Zone or in the active conduct of a trade or business by the taxpayer. If GO Zone property is no longer GO Zone property in the hands of the same taxpayer at any time before the end of the GO Zone property’s recovery period under the normal depreciation rules, then the taxpayer must generally recapture in the taxable year in which the GO Zone property is no longer GO Zone property (the recapture year) the benefit derived from claiming the GO Zone bonus depreciation deduction. The benefit derived from claiming this bonus depreciation deduction is equal to the excess of the total depreciation claimed, including the bonus depreciation, for the property for the taxable years before the recapture year over the total depreciation that would have been allowable for the taxable years prior to the recapture year under the normal depreciation rules. The recapture amount will be treated as ordinary income in the recapture year.Continue Reading IRS Issues Notice Explaining Go Zone Recapture Rules For Like Kind Exchanges of Go Zone Property

In IRS News Release 2007-134 issued on July 31, 2007, the Internal Revenue Service has granted an additional year to the time limit for victims of Hurricanes Katrina, Rita and Wilma to sell the vacant land upon which their home had sat and was destroyed as a result of the hurricanes.
Continue Reading Victims of 2005 Hurricanes Get Additional Year to Sell Vacant Land

The purpose of due diligence in the acquisition of licensing of intellectual property assets (namely patents and copyrights) is to give a buyer an opportunity to investigate and evaluate the asset concerned in some detail. More particularly, due diligence involving patens and copyrights can present ownership issues if the author/inventor is or was married and resides in a community property state. Whatever level of diligence is required for the particular transaction, the buyer should consider inquiring as to the current and past marital status of the inventor/author of the intellectual property if the inventor/author is either the seller; a direct owner of the seller; or in some cases, even a past owner of the intellectual property.
Continue Reading Intellectual Property Due Diligence In a Community Property State

On February 16, 2007, the IRS issued a formal ruling approving a sale of a life insurance policy to a grantor trust. This ruling is a rare formal ruling by the IRS in the grantor trust area. Grantor trusts, or intentionally defective grantor trusts, are used often in a variety of estate planning situations. Grantor trusts are typically used in estate planning situations where the parties want the income of the trust to be taxed to the grantor of the trust (the person who set up the trust) or where they want the grantor to be deemed to be the owner of the trust property for income tax purposes.
Continue Reading IRS Issues New Grantor Trust Ruling

The need for “estate planning” is often dismissed by individuals as being a luxury which can only be utilized by the wealthy. However, anyone who owns any property has need for at least some knowledge of estate planning in order to determine who will receive his or her property at the time of death. The term “estate planning” is not restricted to planning or drafting of wills for individuals who will have a federal estate tax consequence at death. “Estate planning”, when used in its broadest sense, is necessary for the husband and wife who want to leave as much as they can to their surviving spouse for that surviving spouse’s economic well-being and protection. It is also necessary for the young husband and wife who have several children, a house with a large mortgage, a small savings, and life insurance. Estate planning is also necessary for the single individual with no children who desires to distribute his or her property in a manner different from the statutory course. Do not let the term “estate planning” fool you. It applies to each of us in some form or fashion.
Continue Reading Louisiana Estate Planning – Some Information You Should Know