OCTOBER 2018 OCTOBER 2018
CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
VA Issues Final Rule On Pension Benefits. Previous issues of this newsletter have explained the proposed changes in the VA pension rules which were initially published in 2015. Other issues of this newsletter have reported that various delays had occurred resulting in no final rule having been published. The VA final regulations governing entitlement to VA pension benefits were officially published on September 18, 2018, to go into effect on October 30, 2018. Later issues of this newsletter will explain some of the changes in the VA pension rules as a result of the issuance of the final regulations. For explanatory information regarding the proposed rules, please refer to the “Articles and Links” section of my website, www.rkcraiglaw.com, to review the articles and commentaries listed, particularly under the headings 2015 Elder Law Developments, 2016 Elder Law Developments, and 2017 Elder Law Developments. In addition, the article titled Special Needs Trusts for Asset Protection (Planning, Implementation, Recent Developments, and a Comparison of ABLE Accounts), and the article titled ABLE Accounts Under the Achieving a Better Life Experience Act of 2015, also address the VA pension rules.
Insurance Mistakes – Continued. These comments will continue previous suggestions made pertaining to some of the common mistakes that people make when planning with life insurance. Mistakes frequently occur in the case of irrevocable life insurance trusts (“ILITs”) when so-called Crummey powers are used to qualify gifts into the trust for the annual gift tax exclusion. The use of Crummey withdrawal powers was authorized by an old tax case, Crummey et al. v. Commissioner of Internal Revenue, 397 F. 2d 82 (9th Cir. 1968). The existence of a Crummey power when properly structured will allow a person to make a “gift” into an ILIT, and because certain beneficiaries have the right to withdraw what was gifted into the trust, the transfer to the trust will qualify for the gift tax exclusion (currently $15,000 per year per donee). To qualify, however, the ILIT must have adequate assets in the trust to satisfy the withdrawal power if it is exercised. There would be a problem if the life insurance policy has a value less than the withdrawal power at any time before the withdrawal power lapses. Typically what is done is the donor will funnel the premium payment through the trust, and the trustee will give notice to the beneficiaries and then hold the funds until the Crummey power lapses and then pay the policy premium. The donor should not pay the premium directly to the insurance carrier. For a group term policy, the employer pays the premium, and in such a case, the creator of the trust would have to make a transfer to the ILIT of a sufficient amount (sometime called a “side fund”) to cover future Crummey withdrawal powers. The IRS has held that the power holder must be able to withdraw the term policy without reference to a side fund, but it would still be necessary to have a sufficient side fund if the group policy does not have a value at least equal to the Crummey withdrawal power at all times before the lapse of the power. Crummey powers must be drafted and utilized very carefully and there are special problems that must be given consideration when a group term policy is used to fund an ILIT.
Charitable Gifts With Reservation Of Rights. Suppose that you wish to give property to a charity, but you wish to include a reversion clause in the gift agreement if some condition occurs, such as when the gift is to a government entity and the property would come back to the donor if the property was no longer used for a specific charitable purpose. Treas. Reg. 1.170A-1 provides that an income tax deduction will be disallowed if a charitable gift could be defeated by a subsequent act unless the likelihood of that event occurring is “so remote as to be negligible.” Agreements containing a reservation of rights must be drafted very carefully to address issues relating to the charitable deduction. Assuming that the deduction was allowed, but the charity is later required to repay the contribution, then it would be necessary to include the amount of the previous deduction in the taxpayer’s income in the year when the charity repays the contribution.
Business Opportunity Transfers. One way of transferring a business interest to a younger generation from an older generation is to create a business opportunity and allow the younger generation to benefit from that opportunity. For example, a different business or line of business could be established, a new business entity created, and the younger generation could own the enterprise. When properly structured, there will be no income tax or other tax consequences to such a transaction. In such a case, it would be very important to be able to establish that any “good will” associated with the new business was not the corporate “good will” with the original company. If the younger generation taxpayer does not have an employment agreement or non-compete agreement with the original company and is free to leave the original enterprise, then there should not be deemed to be any existing corporate good will that would be deemed to have been transferred by the original company. It would also help to be able to show that the younger generation taxpayer is actively involved in the management of the new company. An arrangement such as this would probably work the best when the younger generation members are actively involved in the original business and have enough connections of their own to justify forming a new business. The success of this type of arrangement will be very fact-sensitive.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.