Florida Tax Planning: Memo on Foreign Tax Compliance

Recently, I wrote a memorandum to outline the tax compliance matters you will need to attend to regarding the estate planning or corporate work we have structured for our clients. (Click here to read the entire memo.)

Upon the creation of a foreign trust or other type of entity (including but not limited to a foreign corporation), or a domestic trust which contains provisions to become a foreign trust, and at other intervals during the existence of those trusts, there are various informational and tax return filing requirements imposed by the Internal Revenue Service (“IRS”) on the parties connected to the trust or other entity. This memorandum briefly explains the various potential filing requirements for a foreign trust, foreign corporation, or other type of foreign business entity, as well as for a settled trust that may in the future become a foreign trust. This memorandum is not intended to take the place of competent advice from an accountant, tax return preparer, or other tax professional experienced in the filing of tax and informational returns relating to international transactions, but only to put you on notice of filings that may be required. Failure to comply with these reporting requirements may subject the fiduciary, grantor, settlor, and/or the beneficiary(ies) to possible civil penalties, and in some cases, if the failure to file is intentional, criminal penalties. It is highly recommended that professional advice be sought and adhered to in complying with the IRS requirements regarding your activities.

Click here to read the memo.

--Stuart Morris, Esq.

Florida Estate Planning: Estate Planning Article in the New York Times

I recently came across a fascinating article on estate planning in the New York Times. It's a quick read and provides an interesting overview of what's happened in estate planning over the past year (and in the year to come) even for those of us Florida estate planning attorneys.

http://www.nytimes.com/2010/01/09/your-money/estate-planning/09wealth.html

If you have any questions about how this may impact your estate planning, please do not hesitate to contact me a info@law-morris.com for all of your Florida estate planning needs.

- Stuart Morris

Florida Estate Planning: Cartoons for the Estate Planning World

I know, I know, lawyers aren't supposed to have much of a sense of humor. But I came across a great site that has funny -- really funny -- cartoons about Estate Planning: http://stus.com/stus-category.php?cat=TOP&sub=WIL&name=estate+cartoons+will+trust

Of course, if you would like to consult with a qualified Florida estate planning attorney about asset protection, tax planning or estate planning regarding your particular set of circumstances, please call or contact us.

Florida Estate Planning: Senate About To Vote on Permant Estate Tax

Members of a House and Senate negotiating committee have worked out a compromise resulting in permanently keeping the estate tax at 2009 levels.

Specifically, individuals could exempt $3.5-million from taxes ($7-million for couples), with amounts above that taxed at a 45 percent rate.

This is essentially the House version of the legislation.

SENATE ACTION:

A budget recently passed by the Senate would have cut the estate tax by raising the exemption for individuals to $5-million ($10-million for couples) and would have lowered the tax rate to 35 percent.

Senators, Blanche Lincoln, D-Ark., and Jon Kyl, R-Ariz., proposed an amendment that would exempt estates up to $5 million per person and levy a maximum rate of 35 percent, as long as the tax cut didn't increase the deficit.

Every Republican and 10 Democrats voted for the amendment. It passed 51-48.

HR 2023:

Numerous bills have been introduced but just last week, Rep. Jim McDermott, D-Wash introduced a bill that would tax estates over $2 million per person at a maximum rate of 55 percent. (More on this below).

CONFERENCE COMMITTEE:

When the House-Senate conference committee met, it settled on the House version.

WHAT KICK STARTED CONSENSUS

Perhaps some of the impetus for that settlement came from The Combined Federal and State Marginal Estate Tax Rates Under H.R. 2023 Sensible Estate Tax Act of 2009.

H.R. 2023, introduced by Jim McDermott, a Washington Democrat, would amend the Internal Revenue Code of 1986 to reform the estate and gift tax.

The 2009 system uses a 45% marginal federal rate on all taxable estates in excess of the $3.5 million applicable exclusion amount. State death taxes may be deducted in arriving at the taxable estate.

H.R. 2023 would have sent estate tax rates to the moon by disallowing the deduction for state death taxes, lowering the applicable exclusion amount to $2 million (although the AEA is portable between spouses) and adopting the following tax rate schedule:

Taxable Estates Over	Federal Rate
$2,000,000	45%
$5,000,000	50%
$10,000,000	55%

Assuming state estate tax rates are the "old" state death tax credit rates, formerly known as the "pick up tax," here are the combined marginal rates under H.R. 2023:

Taxable Estates Over	State	Federal	Combined
$2,040,000	8.0%	45%	53.0%
$2,540,000	8.8%	45%	53.8%
$3,040,000	9.6%	45%	54.6%
$3,540,000	10.4%	45%	55.4%
$4,040,000	11.2%	45%	56.2%
$5,000,000	11.2%	50%	61.2%
$5,040,000	12.0%	50%	62.0%
$6,040,000	12.8%	50%	62.8%
$7,040,000	13.6%	50%	63.6%
$8,040,000	14.4%	50%	64.4%
$9,040,000	15.2%	50%	65.2%
$1,000,000	15.2%	55%	70.2%
$10,040,000	16.0%	55%	71.0%

Here's how that compares to what we have in 2009:

Taxable Estates Over	Old Combined Rate (45% federal, deduction state death tax allowed)	Rate Increase	Percentage Increase In Combined Marginal Tax Rate
$2,040,000	49.4%	3.6%	7.3%
$2,540,000	49.8%	4.0%	7.9%
$3,040,000	50.3%	4.3%	8.6%
$3,540,000	50.7%	4.7%	9.2%
$4,040,000	51.2%	5.0%	9.9%
$5,000,000	51.2%	10.0%	19.6%
$5,040,000	51.6%	10.4%	20.2%
$6,040,000	52.0%	10.8%	20.7%
$7,040,000	52.5%	11.1%	21.2%
$8,040,000	52.9%	11.5%	21.7%
$9,040,000	53.4%	11.8%	22.2%
$1,000,000	53.4%	16.8%	31.6%
$10,040,000	53.8%	17.2%	32.0%

So, a $4 million estate gets a 9.2% tax hike, and an $11 million estate would have been hit with a whopping 32% tax hike.

WHAT'S COMING? WHERE'S IT GOING? (IT AIN'T OVER TILL IT'S OVER!)

Ronald Aucutt, a partner at McGuireWoods, said that "people interested in the estate tax should focus on what happens as the House and Senate try to work out their differences in the budget reconciliation process."

The most likely outcome, he says, is that the 2009 estate tax is made permanent, with the $3.5 million exemption indexed to inflation.

Florida Tax Planning: IRS Alert - Top Tax Scams

Tax schemes are illegal, and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution. (For these reasons, and many others, it's always important to consult with a qualified Florida Tax Planning Attorney for advice on tax plannig strategies.)

The IRS urged taxpayers to avoid twelve common schemes:

Phishing

Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information.

The criminals use the information to steal the victim's identity, access bank accounts, run up credit card charges or apply for loans in the victim's name.

Phishing scams often take the form of an e-mail that appears to come from a legitimate source.

Supposed "refunds" from the IRS are among common phishing tricks.

Note: The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Warn clients who receive unsolicited e-mails that purport to be from the IRS about this scam and tell them to forward the message to phishing@irs.gov.

Hiding Income Offshore

Offshore transactions are now being tracked and aggressively pursued. The Service will target both taxpayers and any promoters involved.

Specifically, the IRS is looking for and prosecuting taxpayers who try to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. The IRS is training its auditors to seek out and deal with those hiding income offshore in undisclosed accounts.

NOTE: A major distinction in treatment is drawn between taxpayers with offshore accounts who voluntarily come forward and those who fail to report offshore accounts.

Other tax evasion tricks the IRS is focusing on include abusive use of offshore:

· debit cards,

· credit cards,

· wire transfers,

· foreign trusts,

· employee-leasing schemes,

· private annuities,

· life insurance plans.

· electronic funds transfer and payment systems,

· offshore business merchant accounts, and

· private banking relationships.

Filing False or Misleading Forms

Scam artists file false or misleading returns to claim refunds that they are not entitled to.

Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits, are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a "straw man" bank account has been created for each citizen.

Under this scheme, taxpayers fabricate an information return, arguing they used their "straw man" account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.

Abuse of Charitable Organizations and Deductions

Tax-exempt organizations are playgrounds for scam artists. The Service is targeting:

· arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property,

· schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property,

· highly overvalued donations,

· arrangements in which the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets.

NOTE: Increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions are now in effect.

Return Preparer Fraud

Dishonest return preparers attract new clients by promising large refunds and then charge inflated fees for return preparation services and skim a portion of their clients' refunds.

NOTE: No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy.

Frivolous Arguments

Over the years, dozens of arguments have been made by promoters of "kits" "books" and "plans" involving frivolous schemes to encourage individuals to make unreasonable and unfounded claims to avoid paying taxes.

NOTE: Taxpayers who file a tax return or make a submission based on one of the positions on the government's list of frivolous arguments (See IRS.gov) are subject to a $5,000 penalty.

False Claims for Refund and Requests for Abatement

This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement.

Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program.

The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

Abusive Retirement Plans

The IRS continues to uncover abuses in retirement plan arrangements (see for instance Dave Hildebrandt v. Indianapolis Life), including Roth Individual Retirement Arrangements (IRAs).

The Service is also looking for:

· transactions that taxpayers are using to avoid the limitations on contributions to IRAs,

· transactions that are not properly reported as early distributions,

· advisers who encourage taxpayers to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits,

· the use of limited liability companies to engage in activity which is considered prohibited.

Disguised Corporate Ownership

Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. This is done to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing.

NOTE: The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

Zero Wages

As an illegal method to lower the amount of taxes owed, some individuals have been:

· filing a phony wage/income-related information return to replace a legitimate information return has been used. Typically, a Form 4852 (Substitute Form W-2) or a "corrected" Form 1099 is used as a way to improperly reduce taxable income to zero.

· submitting a statement rebutting wages and taxes reported by a payer to the IRS.

· Giving an explanation on Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation.

Misuse of Trusts

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. The use of domestic trusts to accomplish similar tax trickery is also common.

Fuel Tax Credit Scams

Although some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit, others are making unreasonable claims for the fuel tax credit. For instance, some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable.

NOTE: Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

HOW TO REPORT SUSPICIOUS ACTIVITY

To report suspected tax Fraud Activity, use IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888.

Include specific information about:

· who is being reported,

· the activity being reported,

· how the activity became known,

· when the alleged violation took place,

· the amount of money involved and

· any other information that might be helpful in an investigation.

The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

Whistleblowers also may provide allegations of fraud to the IRS and may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.

Florida Estate Planning: Reviewing Wills and Trusts for Compliance with Florida Law

While Florida generally recognizes wills created in another state that were valid at the time they were created, it is often a good idea to have your will reviewed by a Florida Estate Planning Attorney when you move to Florida.

One problem one often runs into is that guardians for minor children who reside in Florida must be a close relative or a resident of the state of Florida. Often people designate non-relatives that do not reside in Florida and these are not effective.

While it is possible to create a trust or other legal instrument to allow a non-resident to manage the property of a minor, this should not be done in a will as it may be ineffective.

There are many other issues that arise with a move across state lines. Some states are community property and Florida is not. It is best to have your documents reviewed to make sure that your desires are carried out. There are some wills like holographic wills (a will that is handwritten by the testator) that may be valid in states like California that Florida will not recognize unless they comply with the Florida Statute of Wills.

Contact a Florida Estate Planning Attorney for more information and a review of your documents.

MLG's Top Eleven Year-End Planning Tips

1. Use It or Lose It -- Use Your Annual Exclusion
The annual gift tax exclusion amount is the amount each person can gift to any number of recipients without a gift tax consequence. This amount is $12,000 ($24,000 for gifts from husband and wife; i.e., split gifts) for 2008. The annual exclusion amount will increases to $13,000 ($26,000 for split gifts) in 2009.

When determining how much annual exclusion you have available to give to a specific person, count the beneficiary's share of insurance premiums contributed by you to any Insurance/Irrevocable Trust or by other gift but don't count any gifts for education tuition or medical expenses that you paid directly to a school or medical provider.

The annual exclusion does not carry over to future years so use it or lose it.

2. Utilize Your Gift Tax Exemption
Each person has a lifetime gift tax exclusion of $1,000,000 (this amount is not slated to increase like the estate tax exemption). Thus, an individual can make gifts in excess of the annual gift tax exclusion amounts (discussed above) of up to $1,000,000 during his or her lifetime, before having to pay any gift tax. Gifts between spouses are not subject to gift tax as long as the receiving spouse is a U.S. citizen.

Gifts to a non-citizen spouse are not eligible for a marital deduction or the gift tax exemption but are eligible for a special annual exclusion amount. This non-citizen spouse annual gift exclusion is $133,000 for 2009 and will continue to be indexed for inflation in future years.

Gifts can be made outright, to UTMA accounts or to irrevocable trusts.

3. Pay Tuition and Medical Expenses
Payments for tuition and medical expenses are not considered taxable gifts and are not included in annual exclusion limits or in the $1,000,000 lifetime exclusion. A donor, for example, can pay the tuition expenses for a donee at any educational level without any gift tax consequence. In order to be exempt from the gift tax, payments must be made directly to the educational institution or medical professional.

4. Preserve Your Estate Tax Exemption
The estate tax exclusion is currently $2,000,000. In 2009, however, the combined estate tax exclusion for each individual will increase from $2,000,000 to $3,500,000 (the "exclusion amount"). In light of the increase in the exclusion amount, a husband and wife will be able to protect up to $7,000,000 (in 2009) from the federal estate tax with proper estate planning.

A proper estate plan, at a minimum, requires the first spouse to die to title assets valued at $3,500,000 in his or her own name (or in their revocable trust) for which the surviving spouse is not the designated beneficiary, and a will or revocable trust that carves out the exclusion amount into a trust for the surviving spouse.

It is important to note, while the estate tax exemption is scheduled to increase to $3,500,000 in 2009, followed by the repeal of the estate tax for one year in 2010, in 2011 and thereafter, the estate tax applicable exclusion amount will decrease to $1,000,000 (adjusted for inflation). Additionally, the top current federal estate and generation-skipping tax rate is 45% and, unless the law is changed, will stay at that rate through 2009. In 2010, the federal estate and generation-skipping tax rate is scheduled to fall to 0%, and then revert to a top rate of 55% in 2011.

The top gift tax rate is also currently 45%. However, even after the scheduled repeal of the estate tax in 2010, certain gifts will remain subject to tax at the top individual income tax rate, which is currently 35%.

5. Fund a 529 Plan
Section 529 of the Internal Revenue Code affords a taxpayer with an opportunity to establish a special account for the purpose of paying higher education expenses. Investments in a 529 Plan accumulate income tax free and distributions used for qualified education expenses are not subject to federal income tax. One common technique is "frontloading" gifts to a 529 education savings plan. You can make five years' worth of annual exclusion gifts, or $60,000, to a 529 plan in 2008 for the benefit of any one person, but annual exclusion gifting to that person over the next four years will be reduced by $12,000 per year. This is especially effective when markets are depressed.

6. Create and Fund a Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust ("GRAT") is an irrevocable trust into which you transfer assets into the trust and retain the right to receive annual payments of a fixed dollar amount for a specified term of years. At the end of the trust term, the remaining trust assets pass to family members.

The IRS assumes that a GRAT will grow at a rate equal to the 7520 rate at the time the trust is established (3.4% for December). Growth which exceeds the assumed rate passes to trust beneficiaries free of gift and estate tax. The lower the hurdle or interest rate, the larger the potential gift. GRATs are a preferred wealth transfer option in a low interest rate environment because it is relatively easier to outperform the hurdle rate than in a high interest rate environment.

GRATs are also "grantor trusts" which means that the grantor (creator of the trust) is taxed on all of the income. Payment of these income taxes is effectively a tax-free gift to the trust beneficiaries since the trust assets can grow without reduction for income tax payments.

In short, using a GRAT, a client can transfer assets to a trust on a gift-tax-free basis, receive the assets back over a period of years with a rate of return and any excess growth is outside the client's estate.

7. Create and Fund a QPRT
Real estate values are presently low and many clients are considering transferring their vacation properties or personal homes to their descendants. Under current conditions, individuals have an opportunity to make a discounted gift using a Qualified Personal Residence Trust ("QPRT").

If structured properly, the QPRT will freeze the value of the taxpayer's residence at the time they create the trust and transfer the residence thereby resulting in significant estate tax savings. QPRTs are often considered most effective when interest rates are high; however, while rates are currently low, this may be offset by current low housing prices.

After the gift, the donor can continue to live in the residence for the term of the trust, and potentially longer by renting the residence.

8. Gift FLP Interests
The Family Limited Partnership (FLP) is a well established estate planning tool. The family wealth can be transferred into the FLP by the original partners. Creditor protection is afforded as in other limited partnerships. The entity could be controlled by the general partner who can be funded with as little as 1% of the total assets. Annual exempt gifts of partnership interests can be made at a discount to beneficiaries.

For example, an individual with three children can utilize the annual exclusion and gift $36,000 per year in value without making a "taxable gift." Assuming no other gifting and a 28% or more valuation discount, if this individual gifts a 5% interest in a $1,000,000 family limited partnership, then there would be no reportable gift, although they will have removed $50,000 in value from their taxable estates.

The amount of discount to be taken will vary based upon the circumstances of the partnership arrangement. For most gifts of this nature, we recommend appraisal reports to determine the discount amount to be taken.

Clients with family limited partnerships who have not engaged in annual gifting may wish to begin doing so based upon the current political and market environment.

9. Intra-family Lending
Low interest rate environments are an excellent time for a legally documented intra-family loan. One means of wealth shifting to the next generation is through the use of loans. Clients can set up an irrevocable trust for the benefit of their beneficiaries and loan the trust money to make investments. Using the Internal Revenue Service (IRS) published rates, which are required to be used to avoid income and gift taxes, the client can lend money to the trust with extremely low interest rates. This creates fantastic opportunities to shift growth investments outside the taxable estate and into a trust for the beneficiaries of the client at no cost. So long as the investments beat the interest rate charged, the beneficiaries win and the client has reduced estate taxes. Also, since it is not a gift, there is no need to allocate any estate tax exemption or generation skipping tax exemption. The assets in the trust can avoid estate taxes for 360 years!!! Many clients already have loans outstanding to their children or to trusts. In this low interest environment, these notes may be renegotiated at a lower rate to reduce the debt service cost and to provide greater growth outside the estate. The notes can be set up with varying due dates and principal amounts and increase the estate's tax free growth.

10. Freeze Transaction
An effective wealth transfer technique involves a freeze transaction whereby future growth in investments are sold to trusts which benefit a spouse and/or descendants. An example would be a sale of an ownership interest in a family limited partnership to a trust for children in exchange for a long-term low interest promissory note.

If a client owns a 50% limited partner interest in a limited partnership owning $2,000,000 in assets, then the 50% limited partnership interest, representing $1,000,000 in assets, might be sold to the trust for a $700,000 promissory note, taking into account a 30% valuation discount. Under this transaction, the growth on $1,000,000 worth of assets inures to the trust, which owes back only $700,000 plus interest to the client. Consequently, this immediately moves $300,000 worth of wealth from the client's taxable estate, and if the $1,000,000 worth of assets increases, the difference between the asset growth and $700,000 plus interest has been shifted to the trust for the children.

11. IRA Charitable Rollover
Renewed federal legislation permits individuals 70 1/2 and over to again make a tax-neutral distribution of up to $100,000 from their Individual Retirement Account (IRA) in 2008 and 2009. The charitable transfer may be earmarked for a specific use within a charity but it may not be designated for a donor advised philanthropic fund, supporting foundation, charitable remainder trust or charitable gift annuity. A transfer from an IRA, under this law, is excluded from federal income tax, and qualifies toward the mandatory required minimum distribution but does not qualify for a charitable deduction.