Federal Law News Flash!

On June 15, 2012, Treasury issued temporary and proposed regulations which give clarity and guidance as to the application, use and limitations on the portability of the unused estate tax exemption of the first spouse to die. In particular, the IRS clarified how the portable amount of estate tax exemption is calculated, and how that amount can be used by the surviving spouse, both for lifetime gifts as well as at death. Treasury calculates the surviving spouse’s exemption in a way that is favorable to taxpayers: The first spouse’s unused exemption (calculated in the year of death and pursuant to a timely filed U.S. Estate Tax Return) is added to the surviving spouse’s exemption. This means that if the first spouse dies in 2012 with $5 million in unused exemption; his estate timely files a Form 706; and surviving spouse dies in 2013 with a $1 million exemption because of the change in federal law, the surviving spouse’s estate will have a $6 million total exemption. Earlier, commentators had interpreted the statute as limiting the surviving spouse’s total exemption to two times the exemption available at the survivor’s death (or a total of $2 million in the example described above). This favorable interpretation makes it even more important to consider filing a Form 706 at the first death.

Gifts to Trust Complete Even With Retained Power of Appointment

In Chief Counsel Advice 201208026, the IRS rejected two arguments for transfers to an irrevocable trust to avoid gift tax. First, the taxpayer argued the gifts were "incomplete" because the donor retained a testamentary limited power of appointment over the trust, but no power over discretionary distributions to the current beneficiaries. The IRS stated that the gift was complete as to the income interest of the current beneficiaries, and incomplete as to the remainder. In addition, the "crummey" withdrawal powers were defective because the beneficiaries could not enforce them, and would lose their interests as a discretionary beneficiary if the powers were exercised. For more information, see Federal Taxes Weekly Alert.

February Fraud Alert from Denver DA

The Denver DA’s office sends out a "Fraud Alert" each month. This month, they caution that "The most common tax fraud this time of year is committed by perpetrators who use stolen identities to file tax returns in the hopes of collecting tax refunds. However, not all identity thieves have financial motives in mind. Stolen Social Security numbers are also used by perpetrators or others with questionable backgrounds to get a job." They note that perpetrators will send e-mails or call saying they are from the IRS and asking for Social Security numbers and other information. The IRS never contacts taxpayers in this way. The alert also tells taxpayers to be sure to use a password to protect your tax return electronic file, and then save it to a disk and delete it from your hard drive. To see other Fraud Alerts, go to Fraud Alerts.

Favorable Tax Treatment of Contribution of IRA to Charity May End 12-31-2011

Unless Congress extends this benefit, the ability of taxpayers at least age 70-½ to contribute an IRA up to $100,000 in value directly to a public charity without having to report the IRA as taxable income followed by a charitable deduction (which does not offset the income 100%) will end as of December 31, 2011. Such a contribution will also satisfy the taxpayer’s Minimum Required Distribution for the year. If you are considering taking advantage of Code section 408(d)(8)(F), be sure to get the contribution started well before the end of the year.

IRS Extends Deadline for Form 8939 to January 17, 2012

The IRS issued Notice 2011-76 on September 13, 2011, extending the due date for Form 8939 from November 15, 2011 to January 17, 2012.  This form must be filed by Estates of 2010 decedents electing out of the estate tax system and into the carryover basis system.

The IRS also noted that estates of 2010 decedents may file Form 4768 to extend the due date for the Form 706 from September 19, 2011 to March 19, 2012, and that no penalties will be imposed for late payment of tax before that date.  Interest will still be assessed on late payments of tax, but the penalties will not apply.

See Notice 2011-76 for more details.