[Tax & Business Update] APRIL 25, 2010 UPDATE
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Gutter Chaves Josepher Rubin Forman Fleisher Law Firm
Apr 25, 2010, 11:02:16 AM4/25/10
to Tax & Business Update
April 25, 2010
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
******************************
CONTENTS OF THIS NEWSLETTER:
1. APPLICABLE FEDERAL RATES – MAY 2010
2. IS A DEVISE TO AN ATTORNEY-DRAFTSMAN VOID? [FLORIDA]
3. INCOME ON SURRENDER OF LIFE INSURANCE POLICY
4. ARE DOMESTIC ASSET PROTECTION TRUSTS READY FOR PRIME TIME?
5. ABOUT OUR FIRM
******************************
1. APPLICABLE FEDERAL RATES – MAY 2010
Go to http://tinyurl.com/2c4zzll to view the May 2010 applicable
federal rates.
******************************
2. IS A DEVISE TO AN ATTORNEY-DRAFTSMAN VOID? [FLORIDA]
The Florida Bar Rules provide that "[a] lawyer shall not solicit any
substantial gift, or prepare on behalf of a client an instrument
giving the lawyer or a person related to the lawyer any substantial
gift unless the lawyer or other recipient of the gift is related to
the client." Rule 4-1.8(c). This prohibition is nothing new - it dates
back to Roman law.
So what happens if a lawyer prepares a Last Will for client that
violates this rule and that leaves him or her a substantial gift? A
recent Florida case addresses this issue, when gifts were made both to
an attorney and his paralegal.
The trial court noted that such an ethics violation does not make the
gift void PER SE. However, it will be considered as evidence of undue
influence if the Will is challenged. In the subject case, the trial
court went on to find undue influence by the attorney and voided gifts
of over $7 million to the attorney and his paralegal.
What if the client really wants to make a gift to the attorney, of his
or her own volition? The Comments to the above ethics rule suggest
that the attorney advise the client to seek advice of independent
counsel on the gift. A further recommendation would be to have the
other attorney draft the Will.
Carey v. Rocke, 18 So3d 1266 (Fla. 2d DCA 2009)
******************************
3. INCOME ON SURRENDER OF LIFE INSURANCE POLICY
Taxpayers often borrow funds from their life insurance policies. If
the loans are not repaid, the insurance company may apply the cash
surrender value of the policy to the loan balance (including accrued
interest on the loans) when the total loan balance gets close to or
exceeds the cash surrender value. This is often done in conjunction
with a cancellation of the policy at that time. To the extent that the
policy loan exceeds the owner’s “investment in the contract,” the
owner will have to recognize income at that time.
This is what happened to Carolyn McGowen, and she had to recognize
over $565,000 in income when her loan balance of over $1.065 million
on a variable life policy exceeded the cash surrender value of the
policy, prompting the carrier to cancel the policy and apply the cash
surrender value to the loan balance.
Carolyn did not dispute that she had income from the surrender of the
policy. She instead claimed that the income was “income from discharge
of indebtedness,” and that she could then apply a special exclusion
for income from discharge of indebtedness that was otherwise available
to her under Code Section 108.
The Tax Court reviewed the situation and noted that the policy loan
was in fact a genuine loan (which is how Carolyn was able to receive
the loan advances without them being income to her at that time).
However, the Court noted that “income from discharge of indebtedness”
occurs when the “debtor is no longer legally required to satisfy his
debt either in part or in full.” This did not occur when the policy
was cancelled – instead, the loan was actually paid in full through
credit of the policy cash surrender value to the loan balance.
Carolyn’s income was not from discharge of indebtedness, but arose
directly under Code Section 72(e). Section 72(e) treats distributions
from insurance policies to owners as income to the extent that the
distributions exceed the investment in the contract. Thus, Code
Section 108 (and its exceptions to income from discharge of
indebtedness) could not be used by Mrs. McGowen.
Bill S. McGowen, et ux., TC Memo 2009-285
******************************
4. ARE DOMESTIC ASSET PROTECTION TRUSTS READY FOR PRIME TIME?
In theory, it should be possible to use a properly structured domestic
asset protection trust (DAPT) to receive assets from a settlor and
have the assets protected from the settlor’s creditors, while also
having completed gift treatment and no estate tax inclusion for the
settlor, even though the settlor remains a discretionary beneficiary
of the trust.
In non-DAPT jurisdictions, creditors of a settlor can typically reach
the assets of a trust the settlor funds even if the settlor’s interest
is wholly discretionary. This results in an incomplete gift. In a DAPT
jurisdiction such as Nevada or Alaska, however, the assets are
protected from the settlor’s creditors (subject to exceptions that
vary from state to state). Thus, it has been argued that at the
settlor’s death the assets of the trust are not included in the
settlor’s estate and thus avoid estate tax. The settlor gets the best
of many worlds – the assets grow outside of his taxable estate, the
assets are protected from his creditors, and in a pinch the trustee
can still apply trust assets for his or her benefit.
In Private Letter Ruling 200944002, the IRS gave much welcome
recognition to this result. Based on this recognition, tax advisors
are more likely now to proceed with this type of planning.
The lynchpin of this planning is that the local DAPT law of the state
provides substantial limits on creditors of the settlor reaching the
trust assets. This creditor protection is fairly likely to be
respected by courts when the settlor is a resident of the state with
DAPT law, and the trust is settled in that state with assets situated
in that state. That is all well and good for settlors who reside in
such states, but what if the settlor resides outside of such a state?
Can the settlor establish a trust in a DAPT jurisdiction and still
obtain these tax results?
The private letter ruling does not answer this question, since it
involved a settlor who resides in the applicable DAPT jurisdiction.
Presently, the law is unsettled as to the effectiveness of the
creditor protection as to settlors residing outside of the DAPT state,
including possible challenges to the application of such protection
due to the Constitution’s Full Faith & Credit Clause. Therefore, while
the private letter ruling does provide more authority for a favorable
result, there is still a great deal of uncertainty in regard to the
results for settlors residing outside the DAPT jurisdiction.
******************************
5. ABOUT OUR FIRM
Our firm seeks to preserve and enhance the individual, family and
business wealth of our clients in the following principal practice
areas: Planning to Minimize Taxes (U.S. & International) • Probate &
Trust Litigation • Estate Planning, Charitable, Marital & Succession
Planning • Business Structuring & Transactions • Trusts & Estates
Administration • Tax Controversies • Creditor Protection.
Please visit our website at http://www.floridatax.com for information
about the firm, our attorneys, articles from recent monthly
newsletters, interesting articles and tax guides, and federal and
Florida tax rates and information. The firm and its attorneys have
been recognized in numerous peer rating guides, such as Best Lawyers,
Martindale-Hubbell, Chambers, Who's Who in American Law, Florida
Trend's Legal Elite, Superlawyers, and South Florida Legal Guide Top
Lawyers.
DAILY TAX AND BUSINESS UPDATES AVAILABLE. View updates that we didn't
have room for in this newsletter or prior articles, or easily stay up-
to-date with twice a week postings on breaking tax and business
developments. Visit http://www.rubinontax.blogspot.com.
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Having problems receiving this newsletter? Make sure that the E-mail
address "cru...@floridatax.com" is marked as a friend or otherwise set
to clear your spam filters! Subscribe and unsubscribe instructions
should be located at the end of this message - if not, send subscribe
and unsubscribe instructions to cru...@floridatax.com. To be properly
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email address or send instructions to cru...@floridatax.com with the
specific address being unsubscribed.
Feel free to forward this newsletter on to anyone who you think may be
interested.
-----------------------------------------------
The Usual Disclaimer: This newsletter summarizes for informational
purposes only information of interest to the clients and friends of
Gutter Chaves Josepher Rubin Forman Fleisher P.A. The information is
condensed from, and a general summary of, legislation, court
decisions, administrative rulings and other information, and should
not be construed as legal advice or opinion, and is not a substitute
for the advice of counsel.
Gutter Chaves Josepher Rubin Forman Fleisher P.A.
Boca Corporate Center
2101 Corporate Blvd., Suite 107
Boca Raton, Florida 33431
561.998.7847
www.floridatax.com
--
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Comments: Send comments to cru...@floridatax.com
An Electronic Newsletter of Gutter Chaves Josepher Rubin Forman
Fleisher P.A.
Charles (Chuck) Rubin, Editor/Author (except as otherwise noted) ©
******************************
CONTENTS OF THIS NEWSLETTER:
1. APPLICABLE FEDERAL RATES – MAY 2010
2. IS A DEVISE TO AN ATTORNEY-DRAFTSMAN VOID? [FLORIDA]
3. INCOME ON SURRENDER OF LIFE INSURANCE POLICY
4. ARE DOMESTIC ASSET PROTECTION TRUSTS READY FOR PRIME TIME?
5. ABOUT OUR FIRM
******************************
1. APPLICABLE FEDERAL RATES – MAY 2010
Go to http://tinyurl.com/2c4zzll to view the May 2010 applicable
federal rates.
******************************
2. IS A DEVISE TO AN ATTORNEY-DRAFTSMAN VOID? [FLORIDA]
The Florida Bar Rules provide that "[a] lawyer shall not solicit any
substantial gift, or prepare on behalf of a client an instrument
giving the lawyer or a person related to the lawyer any substantial
gift unless the lawyer or other recipient of the gift is related to
the client." Rule 4-1.8(c). This prohibition is nothing new - it dates
back to Roman law.
So what happens if a lawyer prepares a Last Will for client that
violates this rule and that leaves him or her a substantial gift? A
recent Florida case addresses this issue, when gifts were made both to
an attorney and his paralegal.
The trial court noted that such an ethics violation does not make the
gift void PER SE. However, it will be considered as evidence of undue
influence if the Will is challenged. In the subject case, the trial
court went on to find undue influence by the attorney and voided gifts
of over $7 million to the attorney and his paralegal.
What if the client really wants to make a gift to the attorney, of his
or her own volition? The Comments to the above ethics rule suggest
that the attorney advise the client to seek advice of independent
counsel on the gift. A further recommendation would be to have the
other attorney draft the Will.
Carey v. Rocke, 18 So3d 1266 (Fla. 2d DCA 2009)
******************************
3. INCOME ON SURRENDER OF LIFE INSURANCE POLICY
Taxpayers often borrow funds from their life insurance policies. If
the loans are not repaid, the insurance company may apply the cash
surrender value of the policy to the loan balance (including accrued
interest on the loans) when the total loan balance gets close to or
exceeds the cash surrender value. This is often done in conjunction
with a cancellation of the policy at that time. To the extent that the
policy loan exceeds the owner’s “investment in the contract,” the
owner will have to recognize income at that time.
This is what happened to Carolyn McGowen, and she had to recognize
over $565,000 in income when her loan balance of over $1.065 million
on a variable life policy exceeded the cash surrender value of the
policy, prompting the carrier to cancel the policy and apply the cash
surrender value to the loan balance.
Carolyn did not dispute that she had income from the surrender of the
policy. She instead claimed that the income was “income from discharge
of indebtedness,” and that she could then apply a special exclusion
for income from discharge of indebtedness that was otherwise available
to her under Code Section 108.
The Tax Court reviewed the situation and noted that the policy loan
was in fact a genuine loan (which is how Carolyn was able to receive
the loan advances without them being income to her at that time).
However, the Court noted that “income from discharge of indebtedness”
occurs when the “debtor is no longer legally required to satisfy his
debt either in part or in full.” This did not occur when the policy
was cancelled – instead, the loan was actually paid in full through
credit of the policy cash surrender value to the loan balance.
Carolyn’s income was not from discharge of indebtedness, but arose
directly under Code Section 72(e). Section 72(e) treats distributions
from insurance policies to owners as income to the extent that the
distributions exceed the investment in the contract. Thus, Code
Section 108 (and its exceptions to income from discharge of
indebtedness) could not be used by Mrs. McGowen.
Bill S. McGowen, et ux., TC Memo 2009-285
******************************
4. ARE DOMESTIC ASSET PROTECTION TRUSTS READY FOR PRIME TIME?
In theory, it should be possible to use a properly structured domestic
asset protection trust (DAPT) to receive assets from a settlor and
have the assets protected from the settlor’s creditors, while also
having completed gift treatment and no estate tax inclusion for the
settlor, even though the settlor remains a discretionary beneficiary
of the trust.
In non-DAPT jurisdictions, creditors of a settlor can typically reach
the assets of a trust the settlor funds even if the settlor’s interest
is wholly discretionary. This results in an incomplete gift. In a DAPT
jurisdiction such as Nevada or Alaska, however, the assets are
protected from the settlor’s creditors (subject to exceptions that
vary from state to state). Thus, it has been argued that at the
settlor’s death the assets of the trust are not included in the
settlor’s estate and thus avoid estate tax. The settlor gets the best
of many worlds – the assets grow outside of his taxable estate, the
assets are protected from his creditors, and in a pinch the trustee
can still apply trust assets for his or her benefit.
In Private Letter Ruling 200944002, the IRS gave much welcome
recognition to this result. Based on this recognition, tax advisors
are more likely now to proceed with this type of planning.
The lynchpin of this planning is that the local DAPT law of the state
provides substantial limits on creditors of the settlor reaching the
trust assets. This creditor protection is fairly likely to be
respected by courts when the settlor is a resident of the state with
DAPT law, and the trust is settled in that state with assets situated
in that state. That is all well and good for settlors who reside in
such states, but what if the settlor resides outside of such a state?
Can the settlor establish a trust in a DAPT jurisdiction and still
obtain these tax results?
The private letter ruling does not answer this question, since it
involved a settlor who resides in the applicable DAPT jurisdiction.
Presently, the law is unsettled as to the effectiveness of the
creditor protection as to settlors residing outside of the DAPT state,
including possible challenges to the application of such protection
due to the Constitution’s Full Faith & Credit Clause. Therefore, while
the private letter ruling does provide more authority for a favorable
result, there is still a great deal of uncertainty in regard to the
results for settlors residing outside the DAPT jurisdiction.
******************************
5. ABOUT OUR FIRM
Our firm seeks to preserve and enhance the individual, family and
business wealth of our clients in the following principal practice
areas: Planning to Minimize Taxes (U.S. & International) • Probate &
Trust Litigation • Estate Planning, Charitable, Marital & Succession
Planning • Business Structuring & Transactions • Trusts & Estates
Administration • Tax Controversies • Creditor Protection.
Please visit our website at http://www.floridatax.com for information
about the firm, our attorneys, articles from recent monthly
newsletters, interesting articles and tax guides, and federal and
Florida tax rates and information. The firm and its attorneys have
been recognized in numerous peer rating guides, such as Best Lawyers,
Martindale-Hubbell, Chambers, Who's Who in American Law, Florida
Trend's Legal Elite, Superlawyers, and South Florida Legal Guide Top
Lawyers.
DAILY TAX AND BUSINESS UPDATES AVAILABLE. View updates that we didn't
have room for in this newsletter or prior articles, or easily stay up-
to-date with twice a week postings on breaking tax and business
developments. Visit http://www.rubinontax.blogspot.com.
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Having problems receiving this newsletter? Make sure that the E-mail
address "cru...@floridatax.com" is marked as a friend or otherwise set
to clear your spam filters! Subscribe and unsubscribe instructions
should be located at the end of this message - if not, send subscribe
and unsubscribe instructions to cru...@floridatax.com. To be properly
processed, unsubscribe instructions need to come from the applicable
email address or send instructions to cru...@floridatax.com with the
specific address being unsubscribed.
Feel free to forward this newsletter on to anyone who you think may be
interested.
-----------------------------------------------
The Usual Disclaimer: This newsletter summarizes for informational
purposes only information of interest to the clients and friends of
Gutter Chaves Josepher Rubin Forman Fleisher P.A. The information is
condensed from, and a general summary of, legislation, court
decisions, administrative rulings and other information, and should
not be construed as legal advice or opinion, and is not a substitute
for the advice of counsel.
Gutter Chaves Josepher Rubin Forman Fleisher P.A.
Boca Corporate Center
2101 Corporate Blvd., Suite 107
Boca Raton, Florida 33431
561.998.7847
www.floridatax.com
--
You received this message because you are subscribed to the Google Groups "Tax & Business Update" group, the firm newsletter of Gutter Chaves Josepher Rubin Forman Fleisher P.A.
To unsubscribe from this group, send email to Tax-Business-Up...@googlegroups.com.
To subscribe to this group, send an email to cru...@floridatax.com with the words "Subscribe Newsletter" in the subject line (and optionally, let us know your name and location in the body of the email), OR go to http://groups.google.com/group/Tax-Business-Update and click "Join this Group" and follow the instructions to sign up for the group. Your name and email address will remain confidential.
Comments: Send comments to cru...@floridatax.com
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