Georgia Education Expense Tax Credits: Do Not Wait!

June is the new November The Georgia Dept. of Revenue is approving education expense tax credits at 3½ times the rate for 2011. As of Mar. 16, the DOR had approved $8.6 million in tax credits. In 2011, the tax credit cap was met in November. This year, the cap is likely to be met in June—if not sooner. In 2011, 2,700 Georgia taxpayers were denied participation in the education expense tax credit program. Don’t let this happen to you in 2012! Apply today for your tax credit approval.


Joe Nagel Website PictureFor most clients, planning to obtain Medicaid is a last resort; however, with the catastrophic cost of long-term care exceeding $200,000 in many metropolitan areas, they are left with no choice.  A careful review of a client’s assets, as well as their short-term goals and long-term objections, will determine whether transferring property to an Irrevocable Income Only Trust (“IIOT”) would be an appropriate part of an estate plan.  Such planning, when used properly, can avoid the difficult decision to sell family legacy assets to pay for nursing care coverage.  

Government rules and regulations attempt to ensure that Medicaid is in fact the payer of last resort.  There are strict income and asset eligibility requirements, combined with a look-back penalty period, with rules and enforcement varying by state. The Deficient Reduction Act of 2005 extended the look-back period to five years on all transfers, including transfers to IIOTs. That means that clients must wait 5 years after transfer before applying for Medicaid.   Since the IIOT must be in existence for five years, a critical question when funding the trust must be what assets the elder client can live without for a period of five years.

Moreover, since the Omnibus Reconciliation Act of 1993, unless certain exceptions apply (such as Special Needs Trusts), assets of a self-settled trust are considered available to the Settlor for Medicaid eligibility purposes regardless of whether trustee discretion is exercised or whether the trust was established for purposes of qualifying for Medicaid.  Any trust principal which could be distributed under any circumstances, is considered an available resource for Medicaid purposes.  Trust restrictions on when or whether a distribution may be made are disregarded.  The intent of the 1993 Act was to minimize “Medicaid Planning”. 

An IIOT is a trust set up to allow clients to meet the stringent Medicaid rules and requirements while preserving family legacy assets for future generations.  The terms of the IIOT must be carefully drafted.  Trust principal may not be distributed, under any circumstances, to the Settlor or the Settlor’s spouse.  A “rainy day provision” can be added to allow the Trustee to distribute principal to family members, so long as the trustee does not have discretion to distribute to Settlor or Settlor’s spouse. 

All income can be distributed to the Settlor. Trust assets are often invested in income producing securities while the Settlor is living autonomously. Once the Settlor goes into a nursing home, the Trustee may want to invest the trust assets in non-income producing securities. Note, the fact that the Settlor retains the right to IIOT in

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

H&A Successful in another Estate Tax Audit

H&A has again successfully settled an estate tax audit.   In this case, the IRS confronted the Estate with an additional assessment of nearly $2.4 million dollars in estate taxes.  The IRS assessment was based largely on three issues.  First, the IRS argued that an LLC created prior to death should be included in the estate under IRC Section 2036.  Second, the IRS argued that a vacation home  previously owned by a QPRT and rented back to the decedent should be included in the decedent’s taxable estate under IRC Section 2036.  Finally, the IRS disallowed an estate tax deduction for interest on a Graegin loan taken from the recently created LLC to pay estate taxes.

H&A was able to successfully defend the Estate on each and every issue on which the IRS based its assessment. Through proper planning, creative thinking, and hard work by H&A, the Estate recently received from the IRS a no-change closing letter.  This was a collaborative effort across all firm departments, and is a testament to the wide ranging skills and knowledge offered to our clients.   I’d like to thank everyone involved for their efforts in bringing this matter to a successful conclusion.

We cannot guaranty similar results, as success or failure of any audit defense depends on the facts and circumstances of the individual case.  If you need help dealing with the IRS, please do not hesitate to contact us at (404) 255-7400.

2011 Year End Tax Letter

December 7, 2011 

Dear Tax Clients:

 As the 2011 tax year comes to a close, now is the time to review your financial situation and determine what tax planning opportunities exist to decrease your 2011 taxes.  We are ready to help you plan efficiently and effectively for 2011 and future years.  

Individual Income Tax 

While the lower Bush era tax cuts are currently not scheduled to expire until the end of 2012, there are still year-end tax savings opportunities available.  The additional twist for year-end 2011 tax planning is the uncertain future for tax rates after 2012.  Many political observers forecast that higher income taxpayers will only be asked to pay more. 

Year End 2011 Action Items: 

Make your 2011 State Income Tax payments in December 2011, instead of waiting until January 2012, unless you are in an AMT situation. 

Sell any stock “losers” this month to offset your 2011 capital gains, plus $3,000.  Avoid “wash sale” rules by not buying the same stock within 30 days before or after the sale of the stock.  Otherwise, the losses will not count. 

Has your 2011 Federal Income Tax been under-withheld?  Or have you had other income and not made estimated tax payments?  Have more tax withheld from your December paychecks.  This will avoid underpayment penalties. 

If you are 70 ½ and older, you can make charitable contributions directly from your IRA to a bona fide charity. No charitable deduction is available for the donation, but income tax will not be due on what would otherwise be a taxable distribution form the IRA.  This tax break is especially advantageous for retired taxpayers who are no longer able to itemize their deductions.  The limit is $100,000 and it is scheduled to expire at the end of this year. 

Consider converting your traditional IRA to a Roth IRA.  You would owe tax on the IRA amount currently, to the extent it exceeds basis, but retirement distributions from the Roth IRA would potentially be tax free – especially advantageous since it is expected that tax rates will increase after 2012. 

Provisions currently scheduled to expire 12/31/2011:  

Payroll Tax – For the 2011 tax year, the employee share of Social Security Tax withholding was reduced from 6.2% to 4.2% of the taxable wage base of $106,800.  This reduction is scheduled to expire at the end of the year.  President Obama has proposed a measure that would continue the payroll tax deduction for 2012 at an even lower rate of 3.1% of the scheduled 2012 taxable wage base of $110,100.  This new measure has not yet become law and is currently under debate in Congress. 

Alternative Minimum Tax Exemption – In order to prevent many moderate income tax payers from being subject to the AMT, the exemption amounts for 2011 were increased to $48,450 for single taxpayers and $74,450 for married taxpayers filing jointly and surviving spouses.  Unless Congress acts to extend the higher exemption amounts, the exemption for 2012 and beyond will decrease to $33,750 for single taxpayers and $45,000 for jointly filing married taxpayers and surviving spouses. 

Provisions currently scheduled to expire 12/31/2012: 

Federal Income Tax Rate Brackets – The current tax rates of 10, 15, 25, 28, 33 and 35% are scheduled to expire 12/31/2012.  If they were allowed to expire, the rates for 2013 and future years would revert to the “pre- Bush tax cut” rates of 15, 28, 31, 36 and 39.6%.  

All indications at this time are that President Obama supports extending the tax rate cuts, except to the highest tax brackets starting at $250,000 for married filling jointly taxpayers and $200,000 for all other taxpayers. The Republicans continue to only support an extension of the lower Bush-era rates across-the-board to all taxpayers.  This will continue to be a hotly debated issue in Washington.  We will keep you informed as new developments continue to unfold. 

Capital Gains/Dividends – In 2011 and 2012, qualified capital gains and dividends are taxed at a maximum rate of 15%.  Unless this provision is extended, the maximum rate on net capital gains would increase to 20% in 2013.  All dividends would be taxed as regular income, and therefore, could be subject to the maximum rate of 39.6%. 

Limit on Itemized Deductions – Unless the Bush tax cuts are extended, higher-income taxpayers will revert to a limitation on itemized deductions in excess of a statutory threshold of adjusted gross income.  There would also be a similar limitation on personal exemptions for high-income taxpayers. 

Marriage Penalty Relief – The provisions currently in place to mitigate the “marriage penalty” for two income couples will expire at the end of 2012. 

Small Business Tax 

Bonus Depreciation  – The bonus depreciation percentage for the cost of new equipment, including computers and software, purchased and placed in service in 2011 will be 100%.  The bonus depreciation rate is scheduled to drop to 50% in 2012. 

Action Item: Accelerate planned equipment purchases to December and you will be able to deduct the entire cost of the equipment on your 2011 tax return. 

Hiring Incentives for Veterans – The Returning Heroes Tax Credit and the Wounded Warriors Tax Credit were recently enacted on November 21, 2011.  Under this new law, employers are eligible for a tax credit when hiring certain qualified military veterans.  This provision is currently scheduled to expire on 12/31/2012.

Action Item: A certification form must be filed with the state workforce agency within 28 days of the employment date to certify that the individual is eligible for the Work Opportunity Tax Credit. 

From 1099 Reporting – There are new questions on this year’s Schedule C (Profit or Loss from Business) and Schedule E (Supplemental Income and Loss) regarding the 1099 reporting of certain payments made to individuals in the course of your trade or business.  IRS is asking taxpayers if they had any payments that would require 1099 reporting and if yes, were all required forms filed.

Action Item:  Confirm that you are in compliance – Penalties can add up quickly. 

Federal Estate and Gift Tax 

The current estate tax for 2011 is set at a maximum 35% rate and a $5 million exclusion.  For 2012, the maximum rate remains the same at 35% and the inflation-adjusted exclusion is $5.120 million.  Absent future legislation, after 2012, the exclusion amount will be $1 million with a maximum 55% rate. However, many experts are predicting that Congress will lower the exclusion to $3.5 million and raise the maximum rate to 45% after 2012. 

Action Item:  Lifetime gift giving should continue to be part of your master estate plan.  Individuals can currently gift up to $13,000 per year and married couples can gift up to $26,000 per year, to each individual gift recipient free of any gift tax. 

Other Items 

IRS “Phishing” Scams – The IRS continues to be diligent in their efforts to protect taxpayer information and “shut down” scams as quickly as possible.  They stress that the IRS does not solicit taxpayer information via e-mail.  Any emails received from the “IRS” requesting personal information should be deleted. 

Audits of Tax Returns – There has been an increase in audit and notice activity related to clients’ Individual Income Tax Returns (Form 1040) over the past couple of years.  As the federal government continues to struggle financially, the audit/notice activity for Estate and Trust Tax Returns (Form 1041) is also starting to increase.  This includes the assessment of severe non-filing penalties in cases where tax returns have not been properly filed.  It should be noted that tax returns are required to be filed even if no tax is due.  We are ready to help if you have any issues in this area. 

Health Care Directives – Once a child turns 18, a parent/guardian’s access to medical records is terminated.  Therefore, if you have young adult children, it is advisable for them to execute and Advanced Health Care Directive naming you (or someone they trust) as their personal representative so that these records do not become blocked from access. 

Health Care Act

 Small Business Tax Credit – Currently a tax credit is available to qualified small employers to help offset the cost of employer provided health insurance coverage. 

Medicare Payroll Surtax – Effective 2013 the law currently contains provisions for imposing an additional Hospital Insurance tax of .9% on earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly.  An additional 3.8% Medicare contribution tax is imposed on unearned income for higher-income taxpayers. 

Estates and Trusts – The 3.8% tax is also imposed on certain estates and trusts. 

Medical Expense Deduction – The threshold for the itemized medical deduction will increase after 12/31/2012.  However, individuals who are 65 and older will be exempt from this increase through 2016. 

State of Georgia Changes

 Individual Income Tax Retirement Exclusion – The income tax exclusion on retirement income, for taxpayers who are 65 or older, increases from the current $35,000 of retirement income to the following:

 2012        $ 65,000

2013        $100,000

2014        $150,000

2015        $200,000

2016        Unlimited

No need to move to Florida – Georgia is increasingly becoming a retiree friendly State.

Individuals who are ages 62 through 64 are still entitled to the $35,000 individual tax exclusion on retirement income.

Happy Holidays!

Be Careful With Independent Contractors

We recently faced an issue with a Client who used independent contractors for a temporary job in another state and was assessed severe per-day penalties for misclassifying workers that the state considered employees.  The issue was settled to the Client’s satisfaction.

While that state has stricter independent contractor restrictions than Georgia, many states are looking to increase fines for mischaracterizing employees to help with revenue shortfalls.   Clients with operations outside of Georgia must be very careful of how they classify workers.  Further, at least 39 states have entered into agreements with the Internal Revenue Service to share data on employee misclassification.

The main test that Georgia uses to determine whether a worker is an independent contractor instead of an employee is the control test.  The more the employer controls many details over the worker’s work, the better the chance that worker will be considered an employee under state law.  Employees will be subject to tax and worker’s compensation ramifications while the regulations on independent contractors are significantly less stringent.

There are numerous other factors Georgia courts look to in determining whether a worker is an employee or an independent contractor, including the duration of the project, whether the employer supplies the tools and location for the project, and more.

If you would like us to review your current employment situation or have any questions about employees vs. independent contractors, do not hesitate to give us a call at Hoffman & Associates.


Deadline: Act Quickly to Take Advantage of Tax Savings

Direct your Georgia income tax dollars to private elementary and high schools (receive dollar for dollar tax credit for amounts contributed to charity) and still get a federal tax deduction to save more federal tax.  If you itemize, this is a “no brainer”!

Georgia Statute 48-7-29.16 establishes an income tax credit for taxpayer funds used to support a qualifying student scholarship organization.    Two examples are the Georgia GOAL Scholarship Program for 107 of Georgia’s private schools and the  GRACE Scholar program for Catholic Schools in Georgia.  A full listing of all student scholarship organizations can be found at the Georgia Department of Education’s website at 2, 2011 SSO List.pdf?p=6CC6799F8C1371F62F852EB6D75299360D76B6C7ABA0F68A8B177675F78FA12A&Type=D

Participants can give up to $1,000 per individual or $2,500 for married taxpayers filing a joint return.   For each dollar given, Participants will get a dollar of credit against their Georgia income taxes.  In addition, Participant’s, depending on their circumstances (whether they itemize or are subject to the AMT), may be entitled to take federal charitable deduction for the contribution.     For example, if a Participant contributes $1,000, she will get a $1,000 credit against her Georgia taxes and possibly a $1,000 charitable deduction for federal income tax purposes.

There is virtually no downside to taking this credit.  The Georgia credit allows you to simply redirect taxes you would otherwise pay to a scholarship program of your choice.  The federal charitable contribution deduction may reduce your federal taxes.  This is a no lose proposition.

To take advantage, Participants must fill out Georgia Department of Revenue Form IT-QEE-TP1 (see and submit it by November 1st (in order to assure that you will receive your confirmation back from the State of Georgia timely).    The participant should receive a confirmation that their contribution has been accepted.  Once received, the confirmation should be sent along with a check for the contribution amount to the scholarship program of the Participant’s choice.

The Georgia Department of Revenue is required to provide pre-approval within 30 days of submission of the form.  Therefore, to ensure you have sufficient time to make your contribution by year end, submit your application to the Georgia Department of Revenue in early November.

The form takes about ten minutes to fill out.  If you need help, call Joe Nagel in our office.  This is one of those tax items that is “too good to be true” but it works!

CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax information contained in this communication, including attachments, was not written to be used and cannot be used for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.  If you would like a written opinion

Estate Planning Awareness Week, October 17-23, 2011

Hoffman & Associates, Attorneys-at-Law, LLC joins its Colleagues in Promoting National Estate Planning Awareness Week, October 17-23, 2011

According to a 2010 industry trends survey of estate planners, nearly 70% of the respondents indicated that Americans fail to plan because they lack awareness as to why they should.  Hoffman & Associates is passionate about building awareness of the importance of thoughtful planning and is committed to educating the public about the negative consequences of what can happen to one’s loved ones when the proper documents are not in place.

Mike Hoffman of Hoffman & Associates noted that estate planning is one of the most overlooked areas of personal financial management.  More than 120 million Americans do not have proper estate plans to protect themselves or their families in the event of sickness, accidents, or untimely death.  This costs many families wasted dollars and unnecessary hardship that can be minimized with proper planning.

In 2008, the National Association of Estate Planners and Councils (NAEPC) worked with Congress to pass a resolution proclaiming the third week in October as National Estate Planning Awareness Week.  The resolution noted that “Many Americans are unaware that lack of estate planning and financial illiteracy may cause their assets to be disposed of to unintended parties by default through the complex process of probate.”

“Estate planning is a thoughtful process and not merely a single legal transaction.  It should be reviewed every 3 to 4 years,” said Mike Hoffman.  “As a member of many estate planning organizations, our firm has access to a state-of-the-art document drafting system, a network of experienced colleagues throughout the country with whom we can collaborate, and superior educational resources to help us stay on the leading edge of knowledge,” said Mike Hoffman.

Another startling statistic from the 2010 Industry Trends Survey of estate planners found that 62% believed that many American do not plan because they have the erroneous assumption that estate planning is only for the wealthy.

Estate planning is important for adults of all ages. Read the September 27, 2011 article in U. S. News & World Report entitled “What You Need to Know About Estate Planning” which highlights the importance of single 20-somethings having an estate plan that includes a medical directive in the event of unexpected injury or illness.

For young families, estate planning is particularly important, as those who stand to lose the most are their young children. In the event of the death of both parents, who will care for the children? Who will handle the affairs of the estate and ensure that property will be transferred according to the wishes of the deceased parents? If there is no estate plan or will, the courts will appoint a guardian for the children, and the guardian may be an individual who does not share the values and religious beliefs of the deceased parents.

Or in the event of divorce and remarriage, how will property pass from the former spouse to the children living in a household with a stepparent?  In the event of the death of the primary breadwinner, is there sufficient life insurance coverage for purposes of income replacement to support the surviving spouse and children who were dependent upon the primary breadwinner for their daily maintenance and support.

Advanced age and substantial wealth are not the primary indicators of the need for an estate plan. Young families, especially those with children who have special medical or educational needs, should seek the advice of an estate planning attorney who can guide them in providing for the current and future needs of their young children.

For more information or to set up an appointment to review your estate planning documents, please call 404-255-7400.

Beneficiary Designation Forms

This is a reminder to clients of the importance of executing designated beneficiary forms for your retirement plan accounts.    If no designated beneficiary form is executed, the plan administrator will determine who receives the death benefit based on the plan document, which often names the spouse, or, if none, then the estate of the participant as the beneficiary.     Often these are not the best choices for the individual participant.  

Once executed, beneficiary designations should be reviewed every couple of years, particularly after life changing events such as marriage, divorce, or the birth or death of a family member.  Failure to do so can be catastrophic.  For example, in Kennedy v. Dupont, a 2009 U.S. Supreme Court case, a participant selected his wife as the sole designated beneficiary of his retirement plan account.   The couple divorced and the spouse waived her right to the retirement benefits under the divorce decree.  The participant later passed away, but never changed the designated beneficiary form.  The Supreme Court found that the ex-spouse had the right to receive the death benefit from the participant’s account despite her waiver.    

If you would like help regarding the tax and other consequences of choosing a designated beneficiary, please contact Joe Nagel at (404) 255-7400 ext. 16.

Planificación Patrimonial Una Necesidad para los Pequeños Negocios

A lo contrario de muchos aspectos de sus empresas, los propietarios de pequeñas compañías tienden a pasar por alto la planificación de patrimonio a pesar de las recomendaciones de expertos.

“[La planificación] no es tan común como debería ser”, dijo Michael Hoffman, fundador del Hoffman & Associates, Attorney-at-Law, LLC. Hoffman le pregunta a clientes dueños de empresas que empiezan la planificación de bienes personales si han pensado en los planes para sus entidades. “Alrededor del 70 por ciento dice, ‘no'”, dijo Hoffman. “No sé si no han piensan en ello o no creen que es importante, pero definitivamente deberían tener un plan puesto.”

Para crear un plan de sucesión para su negocio, comience por escribir su visión para su empresa después de su muerte. ¿A dónde quiere que vaya y ¿cómo quiere que se vea? Hoffman sugiere ponerse en contacto con un abogado especializado en bienes de planificación que pueda ayudar facilitar la documentación necesaria una vez que comience el proceso. A base de sus objetivos, el abogado también lo puede ayudar al hacer recomendaciones a lo largo del camino.

Además de un abogado, Hoffman sugiere ponerse en contacto con su contador, su cónyuge, socios de negocio y cualquier otra persona que se verá afectada por su plan de sucesión de empresas.

“Todos los grupos afectados deben participar desde el principio”, dijo Hoffman.

A partir de ahí, tiene que ver cómo valorar su negocio y cómo un cambio de propiedad se llevará a cabo una vez que se haya ido. Este es el momento de decidir quién se hará cargo del negocio. Si usted tiene socios, decidir si van a comprar su porción del negocio o si el heredero azumara su parte.

Un acuerdo de compra-venta que establece un precio de venta de la empresa y su porción del negocio es crucial, dijo Hoffman. Un compra-venta proporciona documentación que establece si quiere que sus socios compren su parte, si desea bloquear a ciertas personas de su negocio, y si desea que sus herederos vendan su parte.

Este es también un tiempo para ver cómo los grupos afectados compraran su parte y, si es necesario, cómo los impuestos de bienes afectarán el negocio después de su muerte.

“Ese es el objetivo principal del plan de sucesión de empresas”, dijo Hoffman.

Impuestos sobre la propiedad pueden variar de 35 a 50 por ciento del valor del negocio y se deben dentro de nueve meses de su muerte. Muchas veces, el pago de los impuestos de bienes requiere la venta del negocio, lo que puede significar que las pequeñas empresas se venden por menos de su valor de mercado real. Con una planificación adecuada, es posible que los herederos aprovechen de las exenciones fiscales del Internal Revenue Service que pueden ayudar a proteger el negocio de un pago de impuestos grande después de su muerte.

“Vamos a conseguir algo por escrito, ahora para su beneficio en el futuro”, dijo Hoffman.

Establecer un seguro de vida sólido que le ayude a pagar una compra de negocios puede ayudar a las empresas seguir funcionando después de la muerte de un propietario.

“Para la mayoría de la gente, tener su propio negocio es su sueño y han trabajado toda su vida por conseguirlo”, dijo Hoffman. “El seguro de vida es una gran herramienta para estas situaciones”, dijo Hoffman.

Los empresarios individuales deberán establecer un plan de sucesión para asegurar que su negocio no se inmovilice. En esta situación, los bienes personales pueden ser utilizados para cubrir las deudas del negocio.

“La legalización de un testamento puede durar desde un par de meses hasta seis meses”, dijo Hoffman, “pero he visto casos que han durado muchos años.”

Para las empresas familiares, es importante decidir quién va a obtener qué porcentaje del negocio a su muerte. La creación de un plan de sucesión de negocios ayuda a aliviar la tensión antes de una muerte, a fin de proteger el futuro de su negocio.

“Si la gente no tiene un plan, tienen que hablar acerca de cómo establecer uno”, dijo Hoffman. “Para la mayoría de la gente, su negocio es su mayor activo.”

Summer 2011 Status Wealth Transfer Taxes


The 2010 Compromise Act changes everything in the estate planning area.  The $5,000,000 exclusion level was adopted for 2011 and 2012.  The last time Congress reduced an exclusion was in 1936, and only once before that, in 1932.  It is estimated that the estate tax will now only apply to 1.4 decedents in a 1000 (1/7 of 1%).*

How important was the November 2010 election?  Huge.

The Obama Administration had campaigned for a $3,500,000 exemption and a 45% tax rate.  The November 2010 elections had a huge and immediate impact.  On December 6, 2010, President Obama announced that he and Congressional leaders had agreed on the “framework of a deal” to permit the so-called “Bush tax cuts” to be extended for 2 years, a 1-year 2% payroll tax reduction, a 13-month extension of employment benefits, and an extension of the estate tax for 2 years with a $5,000,000 exemption and a 35% tax rate.  On December 9, 2010 the Senate released the text of its version of the agreement announced by President Obama as an amendment to other unrelated legislation.  It also included the opportunity for executors to elect out of the estate tax and into the carryover basis rules for 2010, increase of the GST exemption to $5,000,000 beginning January 1, 2010, a GST tax rate of 0% for 2010 and 35% beginning in 2011, indexing the $5,000,000 exemption and basic exclusion amounts for inflation beginning in 2012 and portability.  There was no mention of GRATS, consistent basis, relief for farm or timber real estate, valuation discounts, and permanent removal of the shadows of “sunset” from all of these areas.  On December 15th the Senate approved the Reid-McConnell Amendment.  On December 16th and 17th the House approved the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  Obama signed the Act on December 17th.

The Basics

Now the estate tax basic exclusion amount (“BEA”), the gift tax basic exclusion amount and the generation-skipping transfer tax exemption are reunified at $5,000,000.  The tax rate has likewise been unified at 35%.

In calculating the credit for gift tax paid on transfers during life, the rate of a tax that applies at the taxpayer’s death is used, rather than the rate that was actually paid. This language diminishes most “clawback” concerns that have arisen in light of the 2-year existence of the $5,000,000 BEA.  Planners are always concerned with who pays the estate tax attributable to any lifetime gifts, and that is what is known as a tax apportionment issue, like it is for any other phantom asset that increases the estate tax liability at death.  The credit is granted as if any gift had been taxable and the tax was paid inter vivos.  Remember, it’s not that the transfer was tax free, rather the unified credit is tantamount to having a tax bill that is paid by using the credit available.  Since it is not an exemption or deduction, it does not actually make any transfer “tax free.”  So, if a $5,000,000 lifetime gift is made, with no tax actually paid, and a $1,000,000 BEA is applicable at death, there is no clawback because the tax on the $5,000,000 gift is a credit against the tax at death.  The fact that no gift tax was actually paid is irrelevant, so the benefit provided by the unified credit during life is not retracted at death.

The 2010 Act also adopts portability for transfers made after 2010 and a new term: “Deceased Spousal Unused Exclusion Amount” or “DSUEA.”


Portability does not apply for generation-skipping transfer tax purposes, just for estate tax purposes.

An election is required and the predeceased spouse’s estate must file an estate tax return to capture the portability option.

Estates for decedents who died in 2010 can elect to apply either the estate tax with a $5,000,000 BEA and 35% rate or carryover basis with no estate tax.  Carryover basis will be preferable for many large estates because the current capital gain tax rate is significantly lower than the 35% federal estate tax rate and   the taxes are deferred until a recognition event that may never be realized.

The estate of any decedent dying before December 17, 2010 (date of enactment) has a nine month period for filing any returns (including carryover basis Form 8939 for estates electing the alternative), paying any tax, and making disclaimers.

The 2010 Act clarifies that the generation-skipping transfer tax was applicable in 2010, but the rate was zero.  Note that if one elects carryover basis for a 2010 estate, a direct skip is not possible because there was no estate tax, which impacts where GST exemption is allocated as well as other matters such as splitting trusts and calculating inclusion ratios.

Estate planning is relevant, alive and well!

In 2009, there were 234,000 gift tax returns filed.  The Internal Revenue Service has announced their intention to review significantly more of these filings than they have in the past.  In an ex parte petition filed December 27, 2010, the IRS requested California property records to pursue gift tax evaders. The IRS has received voluntary disclosure of property transfer information from authorities in Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin.  This will become a pattern across the United States.

In 2001, there were 125,000 Estate Tax Return Form 706’s filed.  This number had dropped to 33,000 by 2009.  It is estimated that of this 33,000 filed in 2009, 6,000 were estates of less than $5,000,000 and 5,000 were estates of between $5,000,000 and $10,000,000. Query – what will this number be in 2011 with the basic exclusion amount being $5,000,000?  In Georgia, for 2007, there were 803 estate tax returns filed.  This number dropped to approximately 600 in 2009 and approximately 400 in 2010.  It is anticipated that this number will be closer to 200 for the year 2011.

During the last three years, we have been in a “perfect storm” for estate planning purposes.  We have remained under a cloud of uncertain legislation and rules.  The estate planning environment has been supported by four strong “legs to the stool.”  We have witnessed the largest, deepest recession in our lifetime and valuations will never be lower.  We are experiencing a historically low interest rate environment, which improves most of the estate planning techniques that we are able to implement.  We are in an environment where the budget crisis begs for increased revenue and therefore taxes in the future, coupled with a “tax the rich” mentality a significant number of our legislatures and our President.  Finally, we are in an era where valuation discounts are still acceptable when done properly and under the right circumstances.

For those with large estates, it is tantamount to irresponsibility to not be implementing favored estate planning techniques which include things like intra-family loans, annual gifting, family limited partnerships and family limited liability companies, preferred partnership freezes, installment sales to defective grantor trusts, and the like.  Planning techniques are extremely complicated and expensive to implement, but the tax savings and asset protection consequences alone are compelling.

In low interest rate environments, qualified personal residents trusts (“QPRT’s”), grantor retained annuity trusts (“GRAT’s”), and charitable lead trusts (“CLT’s”) may not be as popular as in times of higher interest rates.  This is because the IRS tables assume that the retained benefit is worth less because of the low interest rate environment, therefore, the remainder interest is worth more.  Therefore, the value of the gift is not reduced as much when current interest rates are low as compared to when interest rates are higher.  However, there are alternate techniques that can be used to transfer, discount or freeze the valuation of personal residences.  There are techniques to minimize or zero-out the value of GRAT remainder interest.  The charitable lead trust area has evolved using a technique referred to as the “Shark Fin CLT” which back loads a significant portion of the payment to charities, allowing growth and ultimately more property in the CLT to pass to remainder beneficiaries.

The estate planning environment is ripe and exciting.  For those who do not embrace the objectives, concepts, and techniques that are currently being implemented by taxpayers, opportunities squandered will be opportunities lost.

Recent history

The current estate tax was established by the Revenue Act on September 8, 1916, as the U.S. was on the brink of entering WWI.  Rates were 1% to 10% on taxable estates over $50,000.  In 1917, the rates were increased 50%, from 1.5% to 15%, and the Finance Committee acknowledged that such a tax was a “temporary emergency measure” in an area that is generally reserved to the States.  The Revenue Act of 1926 made a significant move towards repeal providing a state death tax credit of 80% of the basic tax.  The Senate version would have repealed the estate tax in its entirety.

Then came the Depression, WWII, post-war recovery, the Korean War, Viet Nam, the civil rights movement, Social Security, Medicare, Medicaid, welfare, food stamps, and unemployment benefits.

There was significant legislation in 1976, including carryover basis (which was repealed in 1980), reduction of the maximum rate from 77% to 70%, unification of the gift and estate tax rates, making both estate and gift taxes tax-inclusive for gifts made within 3 years of death, a single lifetime exemption, the abolition of “gifts in contemplation of death” rule, more explicit rules in governing disclaimers, liberalized extended payment of estate tax rules under §6166 and tax on generation-skipping transfers (repealed and replaced in 1986).

The Reagan Administration had a low interest in total repeal of the estate tax and produced only a reduction of the top rate from 70% to 50% in a phased reduction that ultimately leveled off at 55% with a 60% rate applicable on amounts over $10,000,000, to eliminate the benefit of the lower brackets for larger estates.

The “Death Tax Elimination Act of 2000” was passed in 2000 by large majorities in Congress (including 59 Senators), but was vetoed by Clinton.  This legislation would have reduced rates, converted the unified credit to an exemption, eliminated the 5% surtax “bubble” on taxable estates larger than $10,000,000, repealed the estate, gift and generation-skipping transfer taxes for years beginning in 2010, and implemented a carryover basis regime.

The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) was subject to the Byrd Rule ten year sunset provisions.  The Byrd Rule makes “extraneous” provisions in a budget reconciliation subject to a point of order in the Senate.  “Extraneous’ is defined to include the reduction of net revenues in years beyond the period provided for in the budget resolution.  The 2001 budget resolution generally covered ten years and also a net reduction of taxes beyond ten years would have been ruled out of order.  This rule was added to The Congressional Budget Act of 1974 in 1985 and amended in 1990 in sponsorship of the late Senator Robert Byrd (D-WV).  A point of order under the Byrd Rule can be waived by a vote of 60 senators.  EGTRRA passed by a vote of 62-38, with a “sunset” provision in it.  Presumably the votes were not there to make permanent the estate tax repeal.

Efforts began in earnest in 2002 and continued in 2003 to repeal or reform the estate tax, but Republicans failed to achieve the 60 votes necessary to override the Byrd Rule.  The 2004 election brought four more Republican seats in the Senate, which now totaled fifty-five, and many were confident of total repeal, a centerpiece of President Bush’s domestic agenda.

Permanent repeal of the federal estate tax was passed in the House on April 13, 2005 and placed before the Senate.  At the end of July 2005, just before August recess, Senate Majority Leader Bill Frist (R-TN) filed a motion of “cloture”, basically a form of “calling the question”, when the Senate reconvened on September 6, 2005.  It was believed that full repeal lacked 60 votes, and compromise efforts needed to continue until Labor Day.  However, when Congress reconvened, the pressures of dealing with Hurricane Katrina became overwhelming and the estate tax vote was postponed, as it turned out, indefinitely.

In May of 2006, consensus started to build towards provisions that became identified with Senator Kyle (R-AZ), a compromise of a 15% rate and a $5,000,000 exemption (indexed for inflation), and a continued stepped-up basis for appreciated assets.  When the Senate took up the cloture motion on June 8, 2006, Senator Kyle had suggested that he would agree to a second rate of 30% imposed on taxable estates of over $30,000,000.  The Senate vote ended up 57-41 in favor of cloture, 3 votes short of the necessary 60.

During 2006, the House proposed two new estate tax compromise bills in an attempt to attract the support of 60 senators.  The “Permanent Estate Tax Relief Act of 2006” (“PETRA”) and the “Estate Tax and Extension of Tax Relief Act of 2006”  (“ETETRA”) were both submitted to the Senate, and on August 3, 2006, a cloture motion failed to attract the required 60 votes (56-42).

What would have happened just after Labor Day 2005 if Katrina had not intervened?  Republicans lost control of Congress to the Democrats in the 2006 election, and support for total repeal became more and more diluted by years of frustrating political maneuvering and the realization that carryover basis would be an unwelcome and messy substitute.  Our large budget deficits and the “tax the rich” mantra has taken estate tax repeal off the table.

Interim Changes and Adjustments

The annual exclusion remained at $13,000; the special use valuation reduction is increased for 2011 to $1,020,000; the non-citizen spouse annual exclusion is increased to $136,000; and an inflation index is applicable to the applicable exclusion amounts for estate and gift tax purposes and the GST exemption amounts (all $5,000,000) after 2011.

What can we look forward to?  Change.

None of the potential changes revealed in Obama’s 2010 budget proposals were enacted.  Areas to keep an eye on are (1) a minimum ten year term for GRATS and requiring a remainder interest greater than zero, which by definition creates a future interest in GRAT transactions and requires the filing of a gift tax return on creation because the annual exclusion cannot apply; (2) the elimination of valuation discounts; (3) making portability permanent; (4) special interest provisions for farmers and small business owners; (5) amending the GST tax provisions to preclude perpetual tax free dynasty trusts; (6) preclude lapsing Crummey withdrawal rights; and (7) restoring the estate death tax credit.

Valuation discounts

It was during the Reagan years that the attacks on valuation discounts began to arise in earnest, appearing in a report by Treasury entitled “Tax Reformed for Fairness, Simplicity, Economic Growth” published on November 27, 1984.  Specifically, Treasury proposed that fractional interests of an asset be valued at their pro rata share of the value of the total asset owned or previously transferred by the transferor or the transferor’s spouse. By 1987, a rule valuing interests in family-entities at their pro rata share was proposed in the House but dropped by the time the Ominous Budget Reconciliation Act of 1987 became law.

The Clinton Administration’s budget proposals for 1999 would eliminate valuation discounts except as they apply to active businesses.  The budget proposals for 2000 and 2001 repeated this particular proposal, with slight modifications. Representative Charles Rangle (D-NY) proposed legislation in March of 2000 and in March of 2001 to eliminate valuation discounts on the valuation of non-business assets.  Representative Earl Pomeroy (D-SD) has introduced similar legislation in 2002, 2005, 2007 and 2009.

On January 27, 2005, the Staff of the Joint Committee on Taxation published a 430 page report entitled OPTIONS TO IMPROVE TAX COMPLIANCE AND REFORM TAX EXPENDITURES which presented 5 proposals estimated to raise between 4 and 5 billion dollars over 10 years…

First, perpetual dynasty trust would be eliminated.  Second, valuation discounts would be curved by applying aggregation rules and a look-through rule.  Third, lapsing Crummey powers would be curtailed by limiting Crummey withdrawal powers to those who are direct, non-contingent beneficiaries of a trust (to repudiate Cristofan 1991), limit Crummey powers to powers that never lapse, or limiting Crummey powers to cases where the exercise of which are not only possible but are a meaningful possibility that they will be exercised.  Fourth, providing consistent basis between the estate tax valuation and the basis in the hands of an heir, which would require the executor to report the tax basis of property to each recipient and to the IRS.  Finally, a fifth proposal would subject 529 Plans to transfer tax rules.


Having a predeceased spouse’s unused estate tax exemption (BEA) to carryover to the surviving spouse can simplify estate planning for some married couples.  However, our clients should not rely on portability.  A credit shelter trust still offers advantages, and other estate planning techniques will continue in importance, including equalization of ownership inter vivos, using an inter vivos or testamentary QTIP, considering a joint settlor revocable trust, and not relying on portability or post-mortem planning because of uncertainty, ignorance or disregard.

Trusts (whether inter vivos or testamentary) can introduce professional management.  Trusts should create asset protection during the beneficiary’s/surviving spouse’s life.  Assets in a trust can protect expectancies of children from diversion by the surviving spouse, especially in the cases of second marriages, blended families or remarriage by the surviving spouse.  The intervening appreciation and accumulated income of a credit shelter trust avoiding estate taxes is extremely valuable, particularly given the number of years a surviving spouse may outlive the testator/testatrix.  Preservation of the predeceased spouse’s exemption also survives conventional planning if the surviving spouse remarries and the exemption (BEA) is legislatively reduced or portability sunsets.

Portability does not apply to generation-skipping transfer tax.  Therefore, the use of the predeceased spouse’s GST exemption is a significant consideration.

Portability must be elected, so an estate tax return must be filed.  Avoiding the filing of an estate tax return for the predeceased spouse’s estate, if the estate is not so large as to otherwise require a return, will save significant administration and probate costs.

On the other hand, a second step-up in basis for appreciated assets and the avoidance of state estate tax on the first estate may be counterbalancing considerations.

Remember that the DSUEA is not indexed for inflation.  Also recognize that relying on portability eliminates the “bracket run” on the first $500,000 that is included in the predeceased spouse’s estate.  Portability planning may affect percentage ownership requirements under provisions such as Sections 303, 2032, 2032A, and 6166.

Portability is a non-starter if either the predeceased spouse or the surviving spouse is a non-resident non-citizen of the United States.  Portability may be “lost” if the surviving spouse remarries since it applies only for the unused exclusion amount of the decedent’s last post-2010 predeceased spouse.

Finally, portability was adopted in 2010 for just two years and may not be extended to transfers after 2012.

Mr.  Hoffman would like to acknowledge his use and reliance on outline materials ESTATE PLANNING UNDER THE NEW TAX LAW FOR 2011, 2012 AND BEYOND, presented by Dennis I. Belcher, as prepared by Ronald D. Aucutt, as well as Jeffrey N. Pennell’s RECENT WEALTH TRANSFER DEVELOPMENTS, both presented at the Georgia Federal Tax Conference, June 9-10, 2011, Atlanta, Georgia.



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