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Tax, Trusts & Estates Law Monitor

Updates and Commentary on Business and Individual Tax and Estate Planning

Family Limited Partnerships: Are Discounts Disappearing?

Posted in Estate Planning, Estate Tax, Gift Tax, Legislation

“Family limited partnerships” – that is, family investment entities usually structured as LLCs or limited partnerships – have been a popular estate planning technique for years. Generally speaking, a client can transfer non-voting, non-marketable interests in these types of entities to children or a trust, and claim a valuation discount due to the restrictions that apply to the interest transferred. It appears, however, that the IRS will soon release proposed regulations under Code §2704 that are expected to limit the use of valuation discounts in these situations.

Code §2704 governs certain “applicable restrictions” that may apply to ownership interests in family entities. The law provides that certain restrictions are disregarded for valuation purposes. The law also permits the IRS to issue regulations providing for other restrictions (as determined by the IRS) to be disregarded in determining the value of a transfer to a family member, if a restriction has the effect of reducing the value of the transferred interest but does not ultimately reduce the value of such interest to the transferee.

After including new Code §2704 regulations on its list of priority guidance for the past 11 years, it appears (based on comments made by an IRS spokesperson to the ABA Tax Section) that the IRS will soon issue these regulations. While the scope and specifics of the regulations are unknown, it is expected that the proposed regulations will restrict the use of discounting by defining new restrictions that are to be disregarded when valuing a transfer of an interest in a family entity. The effective date of the proposed regulations and possible “grandfathering” opportunities are also currently unknown.

Accordingly, if you have been considering this type of estate planning transaction, it would be prudent to contact us and discuss with one of the attorneys in our group.

Court Warns That Marriage Does Not Render A Spouse Automatically Entitled To Preexisting Life Insurance Policies

Posted in Estate Planning

In a recent unpublished decision, the New Jersey Appellate Division has again stressed the importance of complying with the beneficiary designation requirements contained in life insurance policies. See Fox v. Lincoln Financial Group, et al., A-3189-13T4 (2015).

In Fox, the decedent purchased a life insurance policy in 1992, at which time he designated his first wife as the primary beneficiary. Following their divorce, he executed a form making his sister the beneficiary of his life insurance. Years later, the decedent married the plaintiff and subsequently died without transferring the policy benefit to her. The plaintiff subsequently filed a declaratory judgment action and requested the court to create a “bright-line” rule holding that marriage presumptively revokes all prior life insurance beneficiary designations, leaving the spouse as sole beneficiary. The trial court declined to adopt that approach, and the Appellate Division affirmed.

On appeal, the court noted the general rule that the owner of a life insurance policy must comply—at least substantially—with the policy’s provisions to effect a change in beneficiary designation. “Substantial compliance” requires an insured to make every reasonable effort to change his or her beneficiary designation in accordance with the policy provisions. The court indicated that mere oral expressions of a desire to change a beneficiary designation are ineffective. See DeCeglia v. Estate of Colletti, 265 N.J. Super. 128 (App. Div. 1993). While noting that a different rule applies in the context of divorcing spouses, the court concluded that rule did not apply in a situation where a marriage is claimed to have resulted in a change of beneficiary. See Vasconi v. Guardian Life Ins. Co. of Am., 124 N.J. 338 (1991) (ex-spouse denied life insurance proceeds because all rights were waived to the insurance proceeds under the terms of a property settlement agreement); N.J.S.A. 3B:1-1 and 3B:3-14 (statutory provisions that revoke an ex-spouse’s right to receive, among other things, proceeds from life insurance policies owned by the other former spouse).

The court ultimately declined the invitation to create a new rule whereby marriage, in and of itself, operates to alter life insurance beneficiary designations. Accordingly, it denied plaintiff’s claim on the basis that the decedent failed to substantially comply with the insurance company’s “change of designation” policies.

This case once again illustrates the importance of keeping beneficiary designations up to date and complying with all policy requirements.

Defending Against a Motion to Dismiss New Jersey State Lottery Claims

Posted in Estate Planning, Income Tax

The Presiding Judge of the New Jersey Tax Court held in favor of Melvin and Kimberly-Lawton Milligan last week, ruling that they can proceed with their claims against the State of New Jersey, Division of Lottery challenging the retroactive taxation of their lottery winnings.

On June 9, 2000, Melvin Milligan won the top prize in the Big Game Drawing totaling approximately $46 million. When Mr. Milligan won and claimed his New Jersey Lottery prize, winnings from the New Jersey Lottery were specifically excluded by statute from taxable income under the New Jersey Gross Income Tax Act, N.J.S.A. § 54A:l-l, et seq. After consulting with counsel, and in reliance on the State tax laws in existence at that time, Mr. Milligan opted to receive his prize in 26 annual installments of approximately $1,769,000 each.

Mr. Milligan received the agreed-upon installments without issue until 2009, when the State of New Jersey amended the law to subject New Jersey Lottery winnings over $10,000 to the New Jersey Gross Income Tax. This amendment was enacted on June 29, 2009, but made effective retroactively as of January 1, 2009. As a result, beginning tax period 2009, and every year thereafter, Mr. Milligan and his wife, Kimberly-Lawton Milligan, began reporting the New Jersey Lottery winnings as income and paying the applicable tax in excess of $133,000 each year. The Milligans dispute New Jersey’s right to collect income tax on their prize money – a prize won over nine years before the change in the law – and have filed a lawsuit against the State of New Jersey, Division of Taxation and State of New Jersey, Division of Lottery. The Milligans allege breach of contract, violations of both the United States Constitution and New Jersey State Constitution, as well violations of the common-law “manifest injustice” doctrine based on the retroactive application of the tax.

On February 24, 2015, the Honorable Patrick DeAlmeida, Presiding Judge of the Tax Court in Trenton, New Jersey, ruled that the Milligans can proceed with their lawsuit against the Division of Lottery who sought to dismiss the Millgans’ action for failure to state a claim. In his opinion, Judge DeAlmeida held that “[a]n inference can be drawn” that the Milligans were induced to play the lottery and that “the Division of State Lottery breach[ed] the resulting contract when in 2009 it paid [the Milligans] less than the contractually agreed upon sum certain.” Rejecting the Division of Lottery’s arguments, the Court further held that “[t]he Complaint without question suggests a contract claim against the Division of State Lottery … based on legal precedents recognizing a contractual relationship between the bearer of a winning lottery ticket for the June 9, 2000 drawing and the Division of State Lottery.” A copy of the full opinion can be found 

Cole Schotz represents the Milligans as well as over two dozen other plaintiffs who are similarly challenging the State’s retroactive taxation on their lottery winnings. The Court’s ruling in Milligan applies across the board. For more information, please contact Steven Klein, Lauren Manduke, Jeffrey Schechter, or Geoffrey Weinstein at (201) 489-3000.

Florida Becomes the 36th State to Allow Same-Sex Marriage

Posted in Estate Planning

On August 21st, 2014, U.S. District Court Judge, Robert L. Hinkle, in the case of Brenner v. Scott, ruled that Florida’s constitutional and statutory bans on same-sex marriage were unconstitutional.  Same-sex couples were able to marry across the State of Florida beginning yesterday, the day that Judge Hinkle’s stay was lifted.  The case is now on appeal with the 11th Circuit Court of Appeals, which presides over Alabama, Florida, and Georgia.  To the extent the 11th Circuit hears this case and rules in favor of Judge Hinkle’s holding, same-sex marriage could become legal in both Alabama and Georgia, two of the 14 states that still do not recognize same-sex marriage.  The 4th, 7th, 9th, and 10th Circuits have already ruled that any bans on same-sex marriage are unconstitutional, thereby legalizing same-sex marriage in the states that each of these Circuit Courts preside over.

This case is a huge win for same-sex couples, especially for the many same-sex spouses that live in New York and wish to relocate to Florida.  Prior to this ruling, these couples faced many legal challenges, including, but not limited to, legal issues with intestacy, parenting, and adoption.  These couples can now have peace of mind as they move forward to become “snowbirds.”

ABLE Accounts for Disabled Individuals – Senate is now ABLE to Act

Posted in Estate Tax, Legislation

On December 3, 2014, the House of Representatives passed legislation that would allow qualifying disabled persons to establish tax-free savings accounts similar to 529 plans to pay for a host of expenses, including, but not limited to, housing, transportation, and medical expenses.  The Achieving a Better Life Experience (ABLE) Act of 2014 is expected to be approved by the Senate, and would be effective for tax years beginning after December 31, 2014.

Similar to 529 Plans, each state could elect to establish an “ABLE” program.  Contributions to the ABLE account could be made by any person.  Such contributions would not be tax deductible and would be limited to $14,000 annually.  Income earned by the account that is either reinvested or distributed to an eligible disabled individual would not be subject to income tax.  The account could hold a balance of up to $100,000 without being considered an asset for eligibility under means-based benefits programs, such as Social Security Income (SSI) and Medicaid.

Similar to 529 Plans, the law would contain provisions dealing with distributions for non-qualified expenses and provisions dealing with what happens to the ABLE account funds on the disabled individual’s death.

This legislation presents an invaluable planning opportunity for families with disabled children, as parents would be able to establish a tax-exempt ABLE account for their disabled child without such an account being considered for SSI and Medicaid.  Under current law, people with disabilities are generally disqualified from eligibility for SSI and Medicaid if they have more than $2,000 in assets.

Extension of 2014 Qualified Charitable Distributions

Posted in Estate Planning, Income Tax, Legislation

On December 3, 2014, the House of Representatives passed legislation that would extend a number of tax breaks for the 2014 tax year.  Senate approval of the bill is likely.  Please click here to view a summary of the Bill (H.R. 5771).

Among the tax break extensions is the tax break for charitable contributions made directly from an IRA, also known as Qualified Charitable Distributions (“QCDs”).  This option provides individuals with a nice alternative to donating to a charity.

The tax break allows an IRA owner to transfer $100,000 annually to a charitable organization without incurring any income tax.  The IRA owner must be age 70 ½ or older and the funds must be distributed directly to the charity.  The QCD also may be used to satisfy the required minimum distribution for the year.

QCDs may not be made to donor advised funds or to supporting organizations and may not be made from employer-sponsored retirement plans.  Although QCDs may be distributed to a charity tax free, they generally do not provide the donor with a charitable deduction.

The planning window for this opportunity is currently limited since the extension only applies for the 2014 tax year and the Senate has not yet approved the Bill.


2015 Estate And Gift Tax Update

Posted in Estate Planning, Estate Tax

On October 30, 2014, the IRS released Revenue Procedure 2014-61, which announced inflation adjustments to the applicable exclusion amount beginning in 2015. For an estate of any decedent dying during calendar year 2015, the applicable exclusion is increased from $5.34 million to $5.43 million.  This change increases not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $10.86 million estate, gift and GST tax free to their children and grandchildren in 2015.

The estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.

While the New Jersey state exclusion amount remains unchanged at $675,000, the New York exclusion amount was changed as of April 1, 2014.  Beginning April 1, 2014, the exclusion is as follows:

  • $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;
  • $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;
  • $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;
  • $5.25 million for decedents dying between April 1, 2017 through December 31, 2018.  Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

The gift tax annual exclusion to a non-citizen spouse has been increased from $145,000 to $147,000.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

Other items of note that also are subject to inflationary adjustment in 2015 include the social security wage base, which increases from $117,000 in 2014 to $118,500 in 2015, and the maximum amount that can be deferred into a 401(k) from $17,500 to $18,000.

Significant Revisions to the IRS Offshore Voluntary Disclosure Program

Posted in Income Tax, International Tax

On June 18, 2014, the IRS announced a revamped Offshore Voluntary Disclosure Program.

The existing OVDP has been in place since March 2009.  The program allows a taxpayer to voluntarily come into compliance with US tax reporting obligations and pay a reduced civil penalty rather than facing either greater civil penalty exposure or criminal exposure.  The updated program makes significant changes to the penalty structure, as well as changes to streamline the administration of the program.

Penalty Structure

The penalty structure has been changed significantly.  As part of the voluntary disclosure, the taxpayer must agree to pay a penalty in place of any FBAR penalties that would otherwise apply and in place of any penalties that would apply for the non-filing of various information returns that are also required for international tax compliance.  For the first time, the IRS has implemented a two-tier structure that prescribes a different penalty for those whose violations were willful and those whose violations were not willful.

The OVDP penalty percentage of 27.5% will continue.  The new program introduces a 50% penalty in place of the 27.5% penalty for those taxpayers who had banked with institutions or promoters that the US government has investigated for facilitating evasion activities for its clients, banks or promoters that are cooperating with the US, or banks or promoters who have been publicly identified as having been issued a summons for US taxpayer activity.  The IRS has published a list of such banks.  The higher penalty will be applicable only after August 4, 2014.  It serves as a further incentive for noncompliant taxpayers to come into compliance immediately through the use of the OVDP.

Streamlined Process

The second significant change is the expansion of the streamlined process, which had been in place since 2012, to U.S. residents and to all taxpayers who certify that their non-compliance was not due to willfulness.  The streamlined process allows for taxpayers to submit three years of tax returns and six years of FBARs.  There is no preclearance procedure for the streamlined process and no documentation other than the required returns and certification.  In addition, there is no longer any maximum tax threshold (previously $1,500) and no risk assessment, which in the 2012 program had limited the streamlined program to those considered low risk because of the nature of the offshore account and the amount in the account.  Once the streamlined process is used, the taxpayer can no longer avail himself of the OVDP.

The streamlined process differs slightly between US residents and non-US residents.

  • Non-residents may submit both delinquent original tax returns and amended tax returns.  Residents are only able to submit amended returns and are not eligible if they have not filed returns.
  • There is no FBAR penalty for a non-resident.  A resident must submit a 5% penalty for the FBAR violations.  The 5% penalty only applies to bank accounts that need to be reported on an FBAR and is narrower than the penalty base in the OVDP, which includes other assets that were vehicles for offshore tax evasion.

Transitional Guidance

Because of the reduced penalty available for non-willful taxpayers, the IRS has provided guidance for the transition of OVDP participants to the streamlined process.  Taxpayers who have opted out of the OVDP can also request to be transitioned to the streamlined program.  The important distinction between those who use the streamlined process initially from those who transition in from the OVDP is the requirement for OVDP participants to submit all required OVDP paperwork.  This element of the transition must be considered carefully in situations where the documentation shows possible willfulness.   The new guidance also notes that the streamlined process is available for those who filed amended returns and FBARs as a “quiet disclosure.”

Where no tax is due

In situations where there is no tax due and only FBARs or other information returns were not filed, the IRS has separately issued revised guidance for filing the information returns and FBAR forms without any penalty.

Open Issues

The question of whether an individual was willful is a legal determination that will depend on the facts and circumstances of each case.  The Supreme Court’s definition of willfulness is the “intentional violation of a known legal duty.”  How this standard is applied in the context of FBAR violations is the subject of controversy in several recent court cases and is by no means settled law.  This legal determination should be made by an attorney.

Immediate Action Items

  • For those who have accounts at banks under investigation, apply to the OVDP by August 4, 2014 to avoid the 50% penalty.

If you have any questions regarding the foregoing, please contact Jeffrey Schechter 201-525-6315, Geoffrey Weinstein 201-525-6282, Steven Saraisky 201-525-6259 or Reuben Muller 201-525-6238.

Important Changes to New York Estate and Gift Tax Laws

Posted in Estate Tax, Gift Tax

The New York State Legislature passed the Executive Budget for 2014-2015 on March 31, 2014, which brings about important changes to New York estate and gift tax laws.  These include:

Estate tax exemption increase.  Effective April 1, 2014, the New York State estate tax exemption increased to $2,062,500 for New York residents dying between April 1, 2014 and April 1, 2015 and will increase to $3,125,000 on April 1, 2015, $4,187,500 on April 1, 2016 and $5,250,000 for taxpayers dying between April 1, 2017 and January 1, 2019.  Beginning on January 1, 2019, the exclusion will be indexed for inflation taking into consideration cost-of-living adjustments.  In 2019, the New York exemption is scheduled to equal the federal estate tax exemption.

The top tax rate will remain at 16% rather than a reduction to 10% as proposed by Governor Cuomo.

New York has not adopted the concept of “portability,” which would permit a surviving spouse to utilize any estate tax exemption unused by the decedent spouse.  For this reason, estate planning tools such as qualified disclaimers should continue to be used to capture the decedent’s exemption absent portability.

Estate tax cliff.  The New York estate tax exclusion increase will benefit those estates equal to or below the estate tax applicable exclusion amount at the time of a decedent’s death while those estates that are between 100% and 105% of the exclusion amount will rapidly lose the benefit of the exclusion due to a phase-out computation.  However, no credit is allowed for New York taxable estates exceeding 105% of the basic exclusion amount.  Instead, these estates will be taxable in their entirety.

For example, assume an applicable estate tax exclusion amount of $2,062,500 at the time of a decedent’s death.  Under the new laws, if the decedent’s estate is valued at $2,062,500, the entire estate escapes New York estate tax.  However, if the estate is instead valued at $2.2 million, which represents more than 105% of the basic exclusion amount of $2,062,500, then the entire estate is subject to taxation, resulting in a tax of $114,800.

Pursuant to the new brackets, an estate exceeding 105% of the New York exclusion amount that is fully subject to New York estate tax will effectively owe the same amount that was owed under prior law.

Lifetime gifts added back to estate.  The new law also provides that all taxable gifts not otherwise included in the Federal gross estate and that were made during the three years ending on the decedent’s date of death will be included as part of the New York gross estate for purposes of calculating the New York estate tax.  This significant change in law does not apply to gifts made while the decedent was not a resident of New York State nor to gifts made prior to April 1, 2014 or on or after January 1, 2019.