10/ Tax Law Update
David A. Handler, partner, and James Thibodeau, associate, in the Chicago office of Kirkland & Ellis LLP, report on:
• Estate of Murphy v. United States—Arkansas district court examines valuation, estate inclusion and administrative expense deduction issues and rules in favor of a decedent’s estate, refunding about $41 million, Case No. 07-CV-1013 (W.D. Ark. 2009).
• Chief Counsel Advice 200941016 (released Oct. 9, 2009)—The office of Chief Counsel notes in an email that a valuation discount in a restricted management account might exist for a potential breach of contract action.
Estate Planning & Taxation
16/ Don’t Give Directly To Special Needs Relatives
By Michael Gilfix
It’s a blessing when an extended family member or friend wants to financially help your disabled client. But you don’t want to turn that blessing into a curse: You want to ensure that your client doesn’t lose any public benefits he’s already receiving. So, you draft a special needs trust (SNT)—but even that may be fraught with complications. Here’s an overview of what you should consider when you create an SNT, like whether you should include provisions allowing for the establishment of separate accounts for multiple donors and sample language if you decide to go that route.
Michael Gilfix is a partner in Palo Alto, Calif.’s Gilfix & La Poll Associates LLP.
The International Practice
20/ Do Your Clients Still Have Hidden Foreign Accounts?
By Amy Walsh
If your client’s been hiding assets in an offshore account, tell him to come clean—now. Yes, the Oct. 15, 2009 deadline for voluntary disclosure of foreign bank accounts has passed. But the longer he waits, the more likely it will be that he’ll face jail time and draconian penalties. Not to mention the mess he’ll leave for his heirs and executors.
Amy Walsh is a partner in the New York firm of Kostelanetz & Fink, LLP.
24/ FBAR Problems And Proposed Solutions
By Elyse G. Kirschner
We get it: The IRS wants to step up its enforcement of reporting foreign bank accounts. Not only has the Service expanded the type of information taxpayers are required to file regarding foreign investments, but the IRS also has expanded the type of connections with foreign accounts that will be treated as financial interests. And all this info has to go on a Report of Foreign Bank and Financial Accounts (FBAR) form. Still, taxpayers and practitioners sorely need the IRS to clarify reporting obligations for trusts that hold foreign accounts, beneficiaries that have interests in such trusts, and investors with interests in foreign hedge funds and private equity funds. The IRS keeps changing the FBAR filing deadlines to help taxpayers out, but clearly, information and clarity also are needed.
Elyse G. Kirschner is a partner at Weil Gotshal & Manges in New York.
30/ Gift Tax Cost Depends On Form and Substance
By N. Todd Angkatavanich
& Edward A. Vergara
How should you structure an international gift to ensure it’s not taxed? Some say the stakes are even higher than with U.S. transfers: Rules that merely evaporate a discount in the domestic context actually can turn a non-taxable gift into a taxable gift in the international arena. For example, you need to be acutely attuned to the dates of a client’s initial funding and subsequent transfer of interests in a corporation or limited liability company—otherwise, the indirect gift doctrine or step transaction doctrine may rear their ugly heads to negate important tax benefits. So, if your global client wants to transfer U.S.-situs property, make sure you cross the “t’s” and dot the “i’s.” N.
Todd Angkatavanich is a partner in the New York, Green-wich and New Haven, Conn. offices of Withers Bergman LLC.
Edward A. Vergara is an associate in the New York, Green-wich and New Haven, Conn. offices of Withers Bergman LLC.
36/ Calling for Clarity On NRAs’ Partnership Situs
By Dina Kapur Sanna
How do you determine the situs of partnership interests for U.S. federal estate tax purposes, if your client is a non-resident alien (NRA) and the partnership is a domestic partnership or holds U.S.-situs assets or conducts business in the United States? The answer isn’t easy, and neither the Internal Revenue Code nor the Treasury regulations offer any guidance. Even the IRS isn’t much help: The Service says a partnership interest is a U.S.-situs asset if the partnership is engaged in business in the United States. But the Service’s position comes from an old revenue ruling with little reasoning.
Author Dina Kapur Sanna suggests that the IRS should make the estate tax situs rules consistent with the income tax residency rules. By unifying these rules, there would be a consistent regime for NRAs investing in the United States.
Dina Kapur Sanna is an attorney with Day Pitney LLP in New York.
42/ Soften the HEART’s Blow
By Paula M. Jones
Last summer, Congress passed the Heroes Earning Assistance and Relief Tax Act (HEART), which makes it much harder for a U.S. citizen or U.S. resident to leave the United States without incurring an exit tax. But not only do expats get hit—HEART creates a new category of taxation never before seen in the federal transfer-tax system. Under HEART, individuals who receive gifts from “covered expatriates” and those beneficiaries of the estate of a covered expatriate now owe a tax on the gift or bequest. There are ways, however, to structure transfers of gifts and bequests so as to avoid HEART’s imposition of the highest flat tax rate on donees or beneficiaries.
Paula M. Jones is an associate at Reed Smith LLP in Philadelphia.
47/ Should Your Client Have A Non-charitable Foundation?
By Alexander A. Bove, Jr.
You probably know the nuts and bolts of creating a trust for your client. But have you ever considered a private non-charitable foundation as an estate-planning vehicle? Odds are, the answer is “no.” Perhaps because you know that even if your client wanted a private non-charitable foundation, such a structure isn’t a legal entity in the United States. But that doesn’t mean you shouldn’t consider establishing a foundation in a foreign jurisdiction. And there are practical advantages a foundation offers, such as the ability to exist without beneficiaries and have a non-charitable purpose. Compare the legal characteristics, tax treatments and overall pros and cons of a trust versus a private non-charitable foundation.
Alexander A. Bove, Jr. is a principal in the Boston firm of Bove & Langa, P.C.