Tax-Free IRA Charitable Rollovers Reinstated by American Taxpayer Relief Act (“ATRA”)

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From 2006 through 2011, individuals age 70-1/2 or older were eligible to make donations of up to $100,000 directly from their individual retirement accounts (IRAs) to benefit public charities.

Although they received no charitable deduction for such transfers, they didn’t have to report the distribution as taxable income, either. Result: zero tax. And, such a distribution counted toward fulfilling their required minimum distributions (MRDs) for those years.

But Congress didn’t act during 2011 to extend them, so they disappeared during 2012. However, Congress, in its wisdom (and perhaps because nonprofit institutions deluged Congress with lobbyists) reinstated IRA charitable rollovers in the American Taxpayer Relief Act of 2012 (signed into law on January 2, 2013), both for tax year 2013 and retroactively for tax year 2012. And since most taxpayers eligible to make IRA charitable rollovers didn’t make them in 2012 (since there was no guarantee they would get zero-tax treatment), Congress extended the period to make 2012 contributions through January 31, 2013.

If you decide to make an IRA charitable rollover during January, be sure to discuss with your tax advisor whether you should characterize it as a 2012 rollover or a 2013 rollover.

Consider “Front-Loading” Your Life Insurance Trust Contributions

A proposal that first appeared in the Obama administration’s failed 2012 budget proposal sought to override existing state laws and limit the terms of cascading or “dynasty” trusts to 90 years. This proposal didn’t make it into law, but might resurface again in a future Democratic administration or congress.

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Frontload your irrecovable life insurance trustAlthough there 

can be no guarantees, any new federal law along those lines probably would treat existing dynasty trusts as grandfathered, and so exempt from this term limitation. However, if gifts were made to such trusts after the effective date of a trust term limitation law, a result might be that the trust would lose its grandfathered status. This already happens with certain grandfathered trusts (those settled before September 25, 1985) with respect to the generation-skipping transfer (GST) tax.

Or, a contribution after the effective date might cause the trust to be divided into a “dynasty share” and a “limited-term share.”

Many of my clients (and many, many people who aren’t my clients yet) with potentially taxable estates have already-existing irrevocable life insurance trusts (ILITs) to which they contribute annually. Many of these trusts are 100% exempt from the generation-skipping transfer tax. Those folks, to the extent possible and practicable, should consider using some of their lifetime exemption to “front-loading” their gifts to such GST exempt ILITs. Just in case.

Virginia Trust & Estate Law Recodification Charts (For Attorneys and Advisors)

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Effective October 1, 2012, Virginia has reorganized and renumbered its statutes relating to wills, estates, trusts, fiduciary powers, fiduciary responsibilities, and related topics in an attempt to put everything (more or less) in one Article of the Code, so that attorneys and advisors will not need to skip so often between different Articles, Chapters, and Sections when drafting or interpreting documents.

Virginia estate planning listservs and forums have been flooded with questions about which “old” sections have been replaced by which “new” sections, and vice versa. The tables that show the renumberings are buried deep in the Virginia Code Commission website and are kind of hard to find, so I’ve put them here:

 

(Note: Clients and casual browsers might find these a bit dry.)

Why Copyrights and Trusts Don’t Always Mix Well

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Here’s a recent article of mine about the estate planning aspects of transferring copyrights to literary and artistic works. I wrote it for a readership of trusts & estates lawyers, CPAs, and financial planners who get questions about copyrights, making gifts of them during life and at death, and how the heirs of authors and artists can often terminate and reclaim a grant of rights that was made during an author’s lifetime.

You can read the whole thing, but the nugget of wisdom is this: if you intend to make a gift of literary rights when you die, do it in your will (which can be a pour-over will), and not by transferring them to your living trust while you’re alive.

How Estate Taxes Hurt the Poor

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Over the years, many clients have walked into my office with the goal (usually among several others) of eliminating, or at least minimizing, their family’s exposure to estate taxes.

And I’ve been pleased to help them do that (and to charge reasonable fees for my help). But although minimizing estate taxes is important, it’s not the only reason you should do comprehensive estate planning, and for most of my clients, it’s not the most important reason they do it. (See more on some of the other reasons here and here.)

So, although my view on the matter places me in a distinct minority of trusts and estates lawyers, I wouldn’t be the least bit disappointed if we were to eliminate death taxes entirely. Besides the general “micro” unfairness to American families of re-taxing, at each generation, family wealth that has already been taxed when it was earned, federal and state death taxes are harmful on the “macro” level as well.

In a Wall Street Journal op-ed from October 2011, professor and author Steven Landsburg explains How the Death Tax Hurts The Poor by encouraging near-term spending rather than long-term investment:

We’re all living on other people’s inheritances and investments in our economy. Just five generations ago, the average American worked 60 hours a week, took no vacations, and earned less than the modern-day equivalent of $6,000 a year. He or she rarely traveled more than a few miles from home, had no central heat or running water, and died at age 50.

Today we earn more and work less because of better factories, more powerful machinery, and far more advanced technology. We work less around the house because of self-cleaning ovens and frost-free refrigerators and automatic washing machines. We travel far from home in our trains, planes and cars, or we access the world virtually without ever leaving our climate-controlled living rooms. We live longer because of better hospitals, better medicines, better research institutions, and better trained doctors.

Where did all that stuff—all those factories and computers and research towers—come from? It was constructed from resources and capital that became available to investors because somebody—perhaps some “rich” person—was being frugal. Often, that frugality was motivated by the desire to leave a bequest. Absent the death tax, we’d have had even more frugality and more resources available for the kind of investments that benefit all of us….

Check out the whole article, and keep in in mind as the next election approaches and the candidates start discussing their plans to reform the tax system. (If you like the article, you might also like Professor Landsburg’s book.)

How Low Interest Rates Can Cut Your Tax Bill

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I often point out tax-saving opportunities created by our current low interest rates, and an October 1, 2011 Wall Street Journal article does a nice job of making the point again. In How Low Rates Can Cut Your Tax Bill, Tax Report columnist Laura Saunders points out that our current low interest rates (a Section 7520 rate of only 1.6% in December 2011) add to the attractiveness of several mainstream planning opportunities:

  • Loans to family members – the applicable federal rate for long-term loans (more than 9 years) is only 2.80% in December 2011. The author gives an example of a $100,000 loan from parents to a child and his spouse to buy a home: the parents could either collect annual interest of $2,950 or they could forgive the loan (up to $52,000 of debt forgiveness per year with no gift tax liability) in whole or in part.
  • Installment Sales — with interest rates low, more of a sale counts as capital gain than as ordinary interest income.
  • Grantor-Retained Annuity Trusts — noting that we have seen proposals from money-hungry Congressmen to eliminate short-term GRATs, the author urges consideration of a strategy “sanctioned by the tax code” while rates remain low;
  • Charitable Lead Trusts — Charitable lead trusts (in which a charity uses trust assets for a term of years to create income, and then returns them to your children or grandchildren) are likely to pass more tax-free assets to beneficiaries when interest rates and asset values are low. Given historically low interest rates and low asset values, lifetime CLTs, which can create income tax deductions now and save estate taxes later, are worth considering if you are charitably inclined.

 

Check out the article, and then contact me if you’d like to talk about any of these strategies in more detail. Remember, nobody knows how long interest rates will stay this low. They could rise tomorrow, so if you’ve been thinking along these lines, it’s time to get moving.

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