Wandry Appealed to 10th Circuit
On March 26, 2012, the Tax Court issued what has been heralded as a ground breaking decision in Wandry v. Commissioner, T.C. Memo 2012-88. The Court upheld a stated dollar value defined value clause of gifts of LLC interests, in which no charity was involved in the formula allocation.
A Notice of Appeal to the 10th Circuit was filed on August 28.
Illinois Attorney General Adopts New Rule Regarding Estate Tax Treatment of Civil Unions
Pursuant to the Illinois Religious Freedom Protection and Civil Union Act, effective June 1, 2011, parties to a civil union are subject to the same obligations and afforded the same benefits that apply to spouses. Accordingly, the recently adopted rule provides that an Illinois marital deduction, including a qualified terminal interest property (Q-TIP) election, is allowable between civil union partners. Because civil unions are not recognized for federal estate tax purposes, the following returns must be filed with the Illinois Attorney General:
1) A Form 700 Illinois Estate and Generation-Skipping Transfer Tax Return;
2) A pro forma Form 706 completed as if the marital deduction was allowed for federal purposes; and
3) If there is a federal filing requirement, a copy of the Form 706 actually filed.
The new rule is effective August 9, 2012.
Oregon Proposal to Phase Out Death Taxes
Pursuant to legislation signed in June last year, Oregon replaced its pick-up tax with a stand-alone estate tax that has a $1 million dollar exemption amount and separate rate schedule for individuals dying after December 31, 2011. Taxes are payable only on the amount that exceeds $1 million at graduated rates, which start at 10% and increase to 16%.
On July 27, a citizen's initiative to enact the "Death Tax Phase-Out Act" was approved as a November 6, 2012 ballot measure. Pursuant this proposal, taxes would be reduced to a descending percentage of the tax collectible just before the passage of the Act. The reduced percentage would apply to individuals dying in the listed years as follows:
- 2013: 75% of prior tax collectible
- 2014: 50% of prior tax collectible
- 2015: 25% of prior tax collectible
- 2015: 0% of prior tax collectible
If approved at the November ballot, the Act would be effective January 1, 2013.
Reimbursement of Income Taxes to Grantors of Intentionally Defective Grantor Trust:
The intentionally defective grantor trust is a popular estate planning technique whereby the grantor is treated as the owner of the trust property for income tax purposes, but the trust property is typically excluded from the grantor's estate for estate tax purposes. Payment of the income taxes by the grantor is, in effect, a further gift to the trust, which can grow without depletion for the tax liability. Revenue Ruling 2004-64 provides that a trustee's discretionary authority (whether or not exercised) to reimburse the grantor for the grantor's income tax liability attributable to trust assets will not, by itself, cause the value of the trust's assets to be includible in the grantor's gross estate. The IRS cautioned, however, that estate tax inclusion may occur if applicable local law subjects the trust's assets to the claims of the grantor's creditors.
Movement in New Jersey
Identical bills introduced in the New Jersey Assembly and Senate on January 10 provide, in effect, that the trustee's discretion to reimburse the trust creator for income taxes paid is not to be considered a right that would subject the trust assets to the claims of the creator's creditors. According to the bill summary, the amendment is in response to Revenue Ruling 2004-64, after which many states modified their laws, and is modeled after New York's Estates, Powers & Trusts Law s.7-3.1(d).
The Senate bill passed on August 20, 2012 and was sent to the Assembly.
Ohio Pending, Virginia Enacted
Ohio has recently introduced and Virginia has recently enacted legislation to provide that a trustee's discretionary authority to pay directly or reimburse the settlor amounts for income taxes payable on trust income will not subject those amounts to the claims of the settlor's creditors. The Ohio proposal has passed the House and been sent to the Senate. The Virginia law took effect on July 1, 2012.
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