Crummy without notice?

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In the Estate of Turner v. Commissioner T.C. Memo 2011-209 (August 30, 2011), the Tax Court held that so long as the Grantor of an irrevocable life insurance trust grants a power of withdrawal to beneficiaries, the gift is an indirect present interest gift qualifying for the annual exclusion. The import of this ruling is that it extends the rule of Crummy to include gifts with a power of withdrawal where no written notice is given to the beneficiary.

So, let’s say Clyde and his wife Jewell creates an irrevocable life insurance trust. He buys a $3 Million policy and the annual premiums are $81,000 per year. He has three children who are beneficiaries of the trust upon his death. The trust grants the children the right to withdraw any gifts to the trust or for the benefit of the trust. Clyde decides to directly pay the life insurance premiums directly from the joint checking account with Jewell in lieu of paying some trustee to get the check and reissue a new check. No letters are sent to the beneficiaries informing them of their right to withdraw the premium monies from the trust. That should be a gift of a future interest, right? Wrong says the Turner decision. The court emphasized that the power to demand withdrawals after each direct and indirect transfer to the Trust was given to the beneficiaries in the Trust. The fact that some or even all of the beneficiaries may not have know of their right to withdraw is irrelevant. Thus, it is a present interest gift.

Why is that important? Each person has a right to give up to $13,500 per year per donee. This means that Clyde could give $13,500 to each of his children each year. It also means that Jewell could give $13,500 to each of her children each year (or any other individual that she wanted to give to). That means that Clyde and Jewell could give away $81,000 each year to their three children. This does not reduce the $5 Million each that they can give away when they die. In other words it’s a huge benefit to families trying to reduce estate taxes.

I’d still recommend giving the Crummy notices to the beneficiaries. This is but one Tax Court ruling and could be reversed, revised, distinguished or ignored. But at least if there is a mistake, you have at least one arrow to fire back when assessed a gift or estate tax.

Mitt Romney’s Tax Return

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I looked at Mitt Romney’s tax return which was published in the paper. Much was made of his low tax rate. The problem is the nuances that are missed by most media. First, he has millions of dollars of “qualified” dividend income. Qualified dividends are taxed at 15%. The rub is that they’ve already been taxed at corporate rates as high as 35% before they were issued as dividends. So, in reality this income has already had a 50% tax. Long term capital gains are taxed at 15%. However, many times such gains include inflation, yet the tax basis is not adjusted for inflation. Meaning that the recipient is being taxed on inflation in addition to real gains. This is one reason given as to why there is a lower capital gains rate so that they don’t have to get into adjusting basis to inflation (or deflation). Note he also paid a alternative minimum tax of several hundred thousand dollars. I also note that in a two year period he gave over $4 Million to charity. He also apparently gave a large percentage of it to the LDS Church. Anyway, as I said, its very nuanced and not something that is clear cut.

Payroll Tax Holiday Rant

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I’m all for putting money into the pockets of working class folks. And quite frankly I’m less than enthused about the ponzi scheme known as social security. The payroll tax holiday basically proves that social security is a ponzi scheme. For a year now, taxpayers have contributed less FICA tax to their social security accounts. Yet, current recipients continue to receive benefits at the same rate, and those taking advantage have not yet been told that this “holiday” means either that their social security checks will be smaller when they retire, or that social security as it is currently envisions will collapse under its own weight. The Machiavelli in me sees this “holiday” as an opportunity to speed up the social security collapse for those inclined to do away with it in its current form. The realist in me sees this as another blundering move without an eye on the long term effects of such a social security contribution holiday. Note also that the holiday suddenly is from a “tax” instead of a “contribution”. Are democrats adopting republican lingo? I would have preferred that Congress cut the income tax rate, but oops lower middle class people don’t pay income taxes. So, the only way to give them cash is to take it out of their retirement checks. Sooner or later, we’ll all have to pay the piper for this holiday. To put dollars on this. Let’s say a guy makes $40,000 per year and is 30 years old. This “holiday” means that about $2,000 is not contributed to his social security account. That means when he retires he will have $4,160 less in his social security trust fund when he reaches age 65 assuming a 3% interest rate. Thus, 35 years from now, theoretically his benefits will be cut by $23/month. But of course that won’t happen.

5 Common Mistakes by New Businesses- Part 1

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Joe starts Barco, a new dog food company. Someone tells him he should incorporate to avoid liability. So, he does that under the laws of his state in January. He makes a profit the first year of $100,000. At that point, he goes to his accountant and says, “gee, you should have been a subchapter S corporation. You could have saved $15,000 in taxes”. “How do I do that?” Joe asks. You had to file a Form 2553 within 75 days of when you started your business with the IRS. I can see if I can get relief for that, but, I’m not certain its going to work. Had he filed that one simple form he would have saved $15,000 that first year and been able to plan other things as well. This is Mistake Number 1 of start-up businesses.

IN HONOR OF LABOR DAY – JOBS

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How do you create jobs in America. Perhaps a start would be to look at the tax code. Since we have been legislating behavior for years in the Code, we can use it to stimulate the economy by targeting a specific problem, unemployment. So, how do we do that? First, our manufacturing sector is about down to scraps. Add in a targeted jobs tax credit for manufacturers. That gives companies an incentive to hire employees in the manufacturing arena and to potentially expand operations back in the states. Second, we need new products and we have an R&D credit, but lets put a real bounty on these green technology things. You get a bonus R&D credit for develop an automobile engine that does not run on carbons the fuel source is either renewable, perpetual or easily obtainable. Doing this would give the Fords, Chyslers and GMs a bonus incentive to develop engines which really will remove our dependence on oil and reduce carbon emissions. Stimulating the housing market is important. A quick way to do so is to ditch the passive loss rules. That way, if you buy a rental property and have a negative cash flow, you get to reduce your taxes even if you make a lot of money. This will increase available rental properties, effectively lower rental rates and will soak up the foreclosed homes and bank inventories. It will also give people incentive to develop real estate again and perhaps get the housing sector jump started. Will this work? It worked in 1981 when Reagan took office. He then reigned it in in 1989 causing a recession of sorts, but if there was a known sundown date on the benefits, people could choose what to do. Lastly, if you’re really serious about jobs, you cut the corporate tax rate to 5 percent and raise the dividend rate back to normal levels. If you do this, its revenue neutral and companies will have the incentive to repatriate dollars and perhaps jobs to the United States from tax advantaged places like Ireland. I doubt that our President will go that way. But this would be a recipe to increase jobs in America that has worked. The Great Depression ended pretty much only because World War II broke out and all industry was nationalized for the war effort. I don’t think that is an appropriate option at this time to help the economy. All the CCC projects did nothing to really stop the depression except to put a few dollars in a few pockets. Just to put an asterisk on this, consider that during the Great Depression, we also had the Dust Bowl phenomenon. Our midwest is not far from that these days. If our agricultural sector breaks down our economy could sink much further much faster. So, its time for some bold action.