East Brunswick New Jersey Estate Planning, Probate and Living Trusts Attorneys Levine, Furman & Smeltzer, LLC

Educational Alerts
Educational Alerts are written on topics that effect various aspects of estate planning and the laws that govern it. They are usually published and posted to this site at the end of each month. Occasionally newsworthy events will initiate the release of additional alerts at the time the news breaks. The purpose of an Estate Planning Update is to bring important information to the financial advisors in the community. Our hope is that this information better equips you to assist your clients.

Levine, Furman & Smeltzer, LLC releases important estate planning and related articles on a regular basis. Please take a moment to register to receive full access to our Educational Alerts and FYIs.

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Potential Changes to Medicaid Laws May Warrant Taking Action Now
This article addresses many of the proposals being set forth by the Department of Health and Human Services Commission and the National Governor's Association for Medicaid Reform. Many of these proposals will change the manner in which Medicaid planning will be done in the future and how your clients may want to accelerate their planning before any changes are made.

Fifth Circuit Releases Long Awaited Strangi Opinion
This month's alert highlights the findings of the Strangi 4 FLP case. This is the second appeal to the 5th Circuit. The opinion is a partial victory for the IRS, but the key points of the case are the issues regarding implied agreements (and use of FLP assets to pay estate administration expenses, debts of the decedent and estate taxes) and what is business and non-business purposes are sufficient to meet the "bona fide transfer for fair value" exceptio under IRC 2036.

2036 Is Not Just for Family Limited Partnerships
In past alerts we have informed you how the IRS has had successes in using IRC § 2036 to pull back transferred partnership assets into the estate of a decedent, thwarting the taxpayer's plans to obtain a discount. These victories have emboldened the IRS to apply the requirements of IRC § 2036 against other types of intra-family transfers.

Taxpayers Using FLPs Continue to Trip Over Section 2036
The article examines three new FLP cases in which the Service was victorious. It stresses the need for clients to have their FLP agreements and practices reviewed.

Chances for Repeal of the Estate Tax Lessen -- Congress May Settle for Permanent Increase in Exemption Amount
The article examines pending legislation concerning potential repeal of the estate tax. It discusses the more likely outcome of an increase of the applicable exclusion amount. It concludes that the need for estate planning will remain greater than ever for non-tax reasons.

Taxpayers Fight and Win State Estate Tax Battles
In 2001, the federal government passed the Economic Growth and Tax Reform Reconciliation Act of 2001 (“EGTRRA”). One of the provisions of EGTRRA was the gradual reduction and then elimination (in 2004) of the state death tax credit on the federal estate tax return. About three-quarters of the states limited the amount of the death taxes they received to the amount of the state death credit. With the reduction in the credit, these “pick-up” states started to see their tax revenues decline and as a result about one-third of them “decoupled” from the federal system. The decoupling states implemented their own estate tax regime based on federal law that was in existence prior to EGTRRA. In some circumstances this resulted in taxpayers paying a higher combined federal and state estate tax than they would have paid under the law before the enactment of EGTRRA, even though EGTRRA was heavily promoted as a tax reduction.

Joint Committee on Taxation Proposes Tax Law Changes Effecting Estate Planning
On January 27, 2005, the Congressional Joint Committee on Taxation (JCT) released a 435 page report entitled "JCS-02-05 Options to Improve Tax Compliance and Reform Tax Expenditures." Assuming that the estate tax is not repealed, the following proposals contained in the JCT report may be enacted in order to tighten up several estate planning strategies the IRS has viewed as abusive.

Court Upholds Trust Nominee Clause and Finds No Revocation Where the Formalities of Revocation and Amendment Were Not Followed by the Surviving Trustor
During the course of a long marriage, George and Barbara Heaps executed a joint revocable living trust with both spouses acting as co-trustees. It provided that the trust would split into two trusts, a “family trust” and a “marital trust,” after the death of the first of them. The surviving spouse would act as co-trustee over the “family trust” with George and Barbara’s son and son-in-law. The surviving spouse would serve as the sole trustee over the “marital trust.”

Disclaimer Proves Fatal to Estate Plan
Mr. Katz executed a will in 1991 that called for the creation of a "pecuniary credit shelter trust" equal to the amount of the "aggregate federal estate tax exemption equivalent." The will language further provided that the credit shelter trust "shall not be reduced on account of any disclaimer by my wife." Finally, another provision in the will stated conflicting provision in this will, "if my wife disclaims any interest in any portion of the property otherwise passing outright to her under this Article of my will, such portion shall be added to the [credit shelter] trust." The purpose of the credit shelter trust created under Mr. Katz's will was to place an amount equal to the amount that can pass free of estate tax into trust so that it would eventually pass to his children without being subject to estate taxes in his wife's estate.

President Signs the Working Families Tax Relief Act and the American Jobs Creation Act
President Bush signed into law the Working Families Tax Relief Act of 2004. It provides for approximately $146 billion in tax breaks aimed primarily at middle-income taxpayers and businesses of all sizes.

Bank and Trust Officer Held Liable for Estate Tax
Learn the facts as well as lessons that should be learned from the case of Hatleberg v. Norwest Bank Wisconsin, 678 N.W.2d 302 (Wis. App. 2/24/2004)

Internal Revenue Service - 1, Taxpayers - 1, Third Set Remains to be Played!!!
On September 1, 2004, the long awaited decision of the Third Circuit on the Thompson FLP case was released (Turner v. Comm’r., 94 AFTR.2d 2004-5764 (3rd Cir. 2004), aff’g Thompson v. Comm’r., TC Memo 2002-246 (The case was appealed by Mr. Thompson’s executor, Betsy Turner, and thus the name change). Encouraged by the Fifth Circuit’s favorable decision in the Kimbell case (reported in our May 2004 Fax Alert), many estate planning attorneys were hoping for another taxpayer victory. But that was not to be with Thompson, as the Third Circuit upheld the Tax Court’s decision in favor of the Internal Revenue Service. The score is now tied while estate planners wait for the decision in the appeal of another important FLP case, Strangi v. Comm’r., to emerge from the Fifth Circuit.

IRS Blesses Planning With Grantor Trusts In Revenue Ruling 2004-64
The IRS, with its release of Revenue Ruling 2004-64, has given its approval to the use of grantor trusts as an income and estate planning strategy and it has removed any confusion as to whether the trust must contain a provision for the reimbursement of income taxes paid by the grantor.

Mistake in Preparing Estate Tax Return Costs Taxpayer:IRS Provides No Relief
The facts in PLR 200422050 are as follows: a decedent’s will left her estate in trust for the benefit of her husband. The trust provided that the husband was to receive all income from the trust and he could compel the trustee to make trust assets productive. As a result of these provisions, the trust would qualify for the federal estate tax marital deduction under IRC § 2056 as a qualified terminable interest property (“QTIP”) trust if the executor made an election under IRC § 2056(b)(7).

IRS Suffers Big Blow in Fifth Circuit Reversal of the District Court Holding on Kimbell FLP Case
On May 20, 2004, the Fifth Circuit Court of Appeals reversed the grant of summary judgment for the government in the U.S. District Court case of Kimbell v. United States, 244 F. Supp.2d 700, 91 AFTR.2d 2003-585 (N.D. TX 5/14/2003).

Failure to Qualify for Marital Deduction Can Cost Hundreds of Thousands
The amount that can be given at death free of estate taxes in 2004 is $1.5 million. With proper planning, a married couple can double that amount to $3 million. Where an estate is greater than $3 million, the estate tax on the excess can be deferred until the death of the surviving spouse, but only if proper planning is put in place. This is because of the unlimited federal estate tax marital deduction. Where the first spouse to die wants to control where the excess assets go after the death of the surviving spouse (by giving the surviving spouse only a life estate in the excess assets), a special kind of trust, known as a Qualified Terminable Interest Property Trust (or QTIP Trust) must be used.

Ninth Circuit Court Affirms Asset Protection for Trust Beneficiary
One of the advantages of establishing trusts for beneficiaries as opposed to outright distributions is asset protection. In the case In re John and Holly Coumbe, Debtors, a Bankruptcy Trustee sought to include the assets of a testamentary trust created by the debtor’s mother in his Chapter 7 bankruptcy estate. The Court held the trust assets were unavailable to the debtors’ creditors.

FDIC Simplifies Trust Rules: Expanded Coverage Could Benefit Many Consumers
In 2003, the Federal Deposit Insurance Corporation ("FDIC") solicited comments to its two proposed alternatives for simplifying the rules for insuring bank accounts owned by trusts. After reviewing the comments it received, on January 13, 2004 the FDIC announced a new regulation for trust bank accounts.

Important Estate Planning Numbers for 2004
Starting in 2004, the estate tax and gift tax systems are no longer in pari materia. How will this affect your clients giving?

Circumstances Surrounding Drafting, Execution, and Administration of a Prenuptial Agreement Determine Its Effectiveness
The planning done before marriage is often as important as planning after marriage in assuring that a client’s estate planning wishes are carried out. Laws governing prenuptial agreements vary somewhat from state to state, but often the circumstances surrounding the drafting, execution, and administration of a prenuptial agreement are crucial to the effectiveness of the agreement.

JGTRRA Brings Tax Relief for Businesses
In this e-alert, we summarize how JGTRRA brings tax relief to small businesses and corporations.

HIPAA Protected Health Information Provisions Become Effective – Clients Need to Take Action Now
On April 14, 2003, the privacy provisions of the Health Insurance Portability and Accountability Act of 1996, Pub. L. 104-191, 45 CFR §§ 160–164, affectionately dubbed HIPAA, went into effect. The new regulations have caused much turmoil among "covered entities" (e.g., doctors, hospitals, nursing home facilities, and insurance companies), as they will now, for the first time, be subject to federally imposed sanctions and monetary fines for unauthorized disclosure of "private health information." The new law has caused many health care providers to clamp down on the release of medical records and other health care information to anyone other than the patient.

Ninth Circuit Includes Gift Tax Paid by Wife in Husband's Estate
The opinion in Brown v. United States, 91 AFTR.2d 2003-2085 (9th Cir. May 1, 2003) opens with the following truism: "The estate tax combines into one sad transaction the only two certainties in life." Brown is very important because it applies the step transaction doctrine to defeat an estate tax planning strategy between husband and wife.

Reformation of Trust Saves Estate Taxes
Joint trusts for married couples have been used in community property states for over a decade. There had been speculation by some attorneys regarding the effectiveness of joint trusts in common law states. However, concerns over recognition of joint trusts by the IRS have largely been put to rest by PLRs 200101021 and 200210051 (see our previous FaxAlert dated April 30, 2001 titled "Joint Trusts in Common Law States" for more on this subject).

Tricks and Traps Concerning Annuities
Because there are many tax traps concerning annuities, it is important for the financial advisor to know the treatment of annuities when advising clients.

IRS Scores Another Victory in Family Limited Partnership Case
On January 14, 2003, Judge Buchmeyer of the United States District Court for the Northern District of Texas decided in favor of the Internal Revenue Service in Kimbell v. United States of America, Civil Action No. 7:01-CV-0218-R, 2003 U.S. Dist. Lexis 523.

IRS Issues Final Regs On Section 645
A living trust becomes irrevocable upon death and, as a separate legal entity, it requires a tax identification number to report income during its period of administration. If the decedent had assets subject to probate outside his or her trust, then the decedent’s estate may also need a tax identification number and an additional fiduciary income tax return (Form 1041) may be required.

Care Must Be Taken When Disinheriting an Heir
It is not uncommon for a person to place provisions in his or her will or trust to exclude an heir from receiving an inheritance. Such was the desire of Mary Bartels, who wished to disinherit her daughter, Deborah Smith, and whose will was the subject of dispute in the case In the Matter of the Estate of Mary Alberta Bartels, Deceased, 184 Or. App. 448, 56 P.3d 501 (October 23, 2002).

NUA: A Tax Advantaged Way of Removing Employer’s Stock from a Retirement Plan
Internal Revenue Code ("IRC") § 402(e)(4) provides a special income tax benefit for distributions of employer stock from qualified retirement plans. Any appreciation in value in the stock which has occurred between the date the stock was credited to the employee's account and the date of distribution is characterized as "Net Unrealized Appreciation" or NUA. If properly planned for, the NUA is not taxed on the date of distribution - it is taxed when the stock is subsequently sold. Only the retirement plan's cost basis in the stock is taxed on the date of distribution. This special treatment is only available if the employer stock is distributed as a part of a lump sum distribution, in which case all the NUA is non-taxable at the date of distribution. If the distribution of employer stock is not a part of a lump sum distribution then only NUA attributable to the employee's contributions to the plan is excludable.

IRS Scores Two Victories in Recent FLP Cases!
In recent years it has become rather common place for the attacks on Family Limited Partnerships ("FLPs") by the IRS in Tax Court and District Court to result in losses for the IRS. So it was rather unusual to see the IRS score a win, much less two wins, in recent months.

IRS Releases Final Regs for IRAs and Retirement Plans
The Internal Revenue Service recently released, in T.D. 8987 (April 16, 2002), the long awaited Final Treasury Regulations for Internal Revenue Code ("IRC") § 401. These regulations replace Proposed Regulations dating back to 1987, with modifications. The Final Regulations are effective starting January 1, 2003, but can be used in calculating Minimum Required Distributions ("MRDs") for calendar year 2002, as described below. Some of the key provisions of the Final Regulations are as follows:

So You Thought Estate Taxes Were Going Down?
The Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") provides for a gradual decrease in the highest marginal federal estate tax rate between 2002 and 2007. EGTRRA also provides for a periodic increase in the Applicable Exclusion Amount, or the size of an estate that can escape the federal estate tax, between 2002 and 2009. For instance, in 2002, the highest marginal estate tax rate is scheduled to drop from 55% to 50%, and the AEA is scheduled to increase from $675,000 to $1 million. With these changes one would expect that estate taxes paid by all taxpayers will decrease in 2002. Unfortunately, that isn't true.

Joint Trusts in Common Law States
The use of a joint revocable living trust for the estate planning needs of married couples has been quite common in community property states for almost two decades now. In common law states the use of joint trusts for planning for married couples has become increasingly prevalent, but some pundits continue to proclaim that a joint trust cannot be effectively used for estate planning in common law states.

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Levine, Furman & Smeltzer, LLC Office Locations Estate Planning Attorneys for East Brunswick, NJ
Main Office EAST BRUNSWICK F-3 Brier Hill Ct. East Brunswick, NJ 08816 Phone: (732) 238-6000 Fax: (732) 238-6055 CONTACT US See a map to this office!	Satellite Office LAKEWOOD 1072 Madison Avenue Route 9 Lakewood, NJ 08701 Phone: (732) 238-6000 Fax: (732) 238-6055 CONTACT US See a map to this office!