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Wednesday, September 15, 2021

Indirect Loans Between a Private Foundation and a Disqualified Person Are on the IRS' Radar

Code Section 4941(d)(1)(B) treats lending transactions between a private foundation and disqualified person as an act of self-dealing (although an interest-free loan by the disqualified person to the private foundation is not self-dealing) subject to an excise tax. What happens if the private foundation owns an interest in an entity, and that entity holds a promissory note of a disqualified person? Does this avoid self-dealing?

In Rev. Proc. 2021-40, the IRS advises that it will no longer issue private letter rulings regarding the applicability of the self-dealing rules under this fact pattern. Taxpayers should take this as a warning that the IRS may seek to treat such arrangements as self-dealing.

Rev Proc 2021-40, 2021-38 IRB


Sunday, August 15, 2021

Foreign Grantor Trust Making a Distribution to Owner/Beneficiary - One or Two Penalties for Nonreporting?

 A U.S. grantor of a foreign trust that is a grantor trust that receives a distribution from the trust as a beneficiary has two U.S. filing requirements attributable to the foreign trust status:

 

  1. Code Section 6048(b) requires U.S. owners of any portion of a foreign trust to ensure that the trust files a return for the tax year. A 5% penalty applies for noncompliance under Code Section 6677(b).
  2. Code section 6048(c) requires U.S. beneficiaries of a foreign trust that receive a distribution from the trust to report the distributions. A 35% penalty applies for noncompliance under Code Section 6677(a).

 

Forms 3520 and 3520-A are used for these reportings.

 

Before his death, Joseph A. Wilson received a $9.2 million distribution from a foreign grantor trust of which he was 100% owner. No filings were made under the above two provisions. The IRS imposed a 35% penalty of $3,221,183.

 

Wilson (and after his death) his estate claimed that when he was the owner of the trust, then only the 5% penalty should apply. The District Court ruled in favor of the estate.

 

On appeal, the 2nd Circuit Court of Appeals reversed and held that both penalties could apply (although technically the 5% penalty did not apply because that penalty is measured against the assets remaining in the trust at the end of the year and that amount was $0).

 

The taxpayer made numerous technical arguments based on various arguments that parsed the language of the various provisions. But in the end, the appellate court determined that the two reporting requirements were separate reporting requirements and the penalty provisions were also separate, with each applicable to its one particular reporting requirement to which it relates. No language in the statute supported an argument that only one of these penalties could be assessed when there are reporting failures under the two separate reporting requirements.

 

Estate of Wilson v. U.S., 2nd CA, Case No. 20-603 (July 28, 2021)

Thursday, August 05, 2021

New Homestead Laws in Florida

In its most recent legislative session, the Florida legislature enacted a number of additions and modifications to Florida statutory law relating to Florida's homestead exemption. These provisions can be summarized as enhancing or clarifying the exemption. The following is a summary of the new provisions, along with some excerpts.

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 736.0201(7): A proceeding to determine the homestead status of real property owned by a trust may be filed in the probate proceeding for the settlor’s estate if the settlor was treated as the owner of the interest held in the trust under s. 732.4015. The proceeding shall be governed by the Florida Probate Rules.

This provision provides jurisdiction to the probate court in a probate proceeding of a revocable trust settlor to determine the homestead status of real property owned by a trust. This should only apply to revocable trusts defined under Fla.Stats. § 733.707(3) and not other trusts, per the reference to Fla.Stats. § 732.4015. Fla.Stats. § 732.4015 references Fla.Stats. § 733.707(3). Generally, a revocable trust described in Fla.Stats. § 733.707(3) is one which the grantor has a right of revocation at death. Fla.Stats. § 733.707(3)(e) defines a “right of revocation” for this purpose as the power to amend or revoke the trust and revest the principal of the trust in the decedent, or withdraw or appoint the principal of the trust to or for the decedent’s benefit.

This provision was added due to a perceived lack of apparent authority for the probate court to otherwise make that homestead determination in these circumstances. Bill Analysis and Fiscal Impact Statement, to CS/CS/SB 1070 dated April 15, 2021, Page 5.

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 736.1109 (1): If a devise of homestead under a trust violates the limitations on the devise of homestead in s. 4(c), Art. X of the State Constitution, title shall pass as provided in s. 732.401 at the moment of death.

The constitutional restrictions on the devise of homestead are not defeated via ownership of the homestead of a decedent in a trust, subject to statutory carve-outs. This provision clarifies that if there is an improper testamentary devise in the trust, the property will pass to the same recipients who would receive it as if the decedent died owning the property directly and had attempted an invalid testamentary devise - that is Fla.Stats. § 732.401 of the Probate Code would apply, and the title passage occurs at the moment of death even though titled in the trust.

The provision applies only to revocable trusts and testamentary trusts. 

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 736.1109 (2) A power of sale or general direction to pay debts, expenses and claims within the trust instrument does not subject an interest in the protected homestead to the claims of decedent’s creditors, expenses of administration, and obligations of the decedent’s estate as provided in 736.05053.

If a trust holds an interest in a decedent’s protected homestead at death, this provision codifies a parallel probate result which applies to directly owned homesteads, such that a general power of sale or direction to pay debts, expenses, and claims of the decedent in the trust instrument does not in and of itself make the homestead subject to claims of the decedent’s creditors, expenses of administration, and obligations of the decedent’s estate.

The provision applies only to revocable trusts and testamentary trusts. 

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 736.1109(3) If a trust directs the sale of property that would otherwise qualify as protected homestead, and the property is not subject to the constitutional limitations on the devise of homestead under the State Constitution, title shall remain vested in the trustee and subject to the provisions of the trust.

Homestead property owned by a decedent that is protected homestead (i.e., it is directed to pass to an heir) and that is devisable, passes automatically at death to the recipient heir(s) and is not part of the probate estate. However, that is not the case if the decedent’s last will requires that property be sold and the proceeds to be divided among the heirs of the decedent or applied to estate obligations.

This provision extends this principle to when a trust owning the property has the direction for sale - in that circumstance, the trustee retains title to the property, and it does not pass automatically to the designated heir(s). 

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 736.151 Homestead property.—

(1) Property that is transferred to or acquired subject to a community property trust may continue to qualify or may initially qualify as the settlor spouses’ homestead within the meaning of s. 4(a)(1), Art. X of the State Constitution and for all purposes of general law, provided that the property would qualify as the settlor spouses’ homestead if title was held in one or both of the settlor spouses’ individual names.

(2) The settlor spouses shall be deemed to have beneficial title in equity to the homestead property held subject to a community property trust for all purposes, including for purposes of s. 196.031.

This provision is part of the new community property trust provisions of the Florida Trust Code. They seek to allow homestead protections to homestead property held in a community property trust. 

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 736.1104. Person Killer not entitled to receive property or other benefits by reason of victim's death --

(3) A beneficiary of a trust who was convicted in any state or foreign jurisdiction of abuse, neglect, exploitation, or aggravated manslaughter of an elderly person or a disabled adult, as those terms are defined in s. 825.101, for conduct against a settlor or another person on whose death such beneficiary's interest depends is not entitled to any trust interest, including a homestead dependent on the victim's death, and such interest shall devolve as though the abuser, neglector, exploiter, or killer had predeceased the victim.

This provision will void transfers of homestead interests in trusts where the recipient is convicted of neglect, exploitation, or aggravated manslaughter. What happens if the surviving spouse is the person so convicted? Does the spouse lose the interest if it was devised to the spouse under the trust? It would appear that the trust transfer is void, but would the Florida Constitution limits on devise when there is a surviving spouse restore the transfer to the trust? Interestingly, the Constitution does not directly provide that the spouse succeeds to the interest - this incurs under Florida statutory law. That being the case, does this mean that this provision can be interpreted as also overriding the statutorily required transfer to the surviving spouse in the event of a prohibited devise, and/or does the Florida Consitution nonetheless still require passage to the surviving spouse since it is the spouse that the constiutional interest seeks to protect (in addition to the protection of minor children)?

Note that a surviving spouse is entitled to the decedent’s homestead under the Florida Constitution (wholly, or in part, if there are surviving minor children), such that presumably this statutory provision does not void that spouse’s interest if they are the person so convicted. 

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 Changes to Fla.Stats. Section 196.075.

This statute is modified to avoid the need for representations of income beyond the first year of exemption in regard to the additional homestead ad valorem exemption to persons 65 or older at lower income levels. 

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 Changes to Ad Valorem Valuation of Homesteads. 

Chapter 2021-31 (H.B. No. 7061) made several changes to Florida Statutes regarding the ad valorem value of homestead interests, principally:

 1. Adding  new exceptions to the rule that ad valorem values are adjusted upon a change of ownership when the change or transfer is the removal from the title of a co-tenant holding title by joint tenancy with right of survivorship when the other co-tenants remain on the title. Such removal may be by instrument or the death of the co-tenant. 

2. Relating to adjustments in value of damaged property. 

3. Relating to adjustments in value of voluntarily elevated property. 

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 Change to Fla.Stats. Section 719.103(25).

A change to this statute provides that a unit in a co-op is an interest in real property. 

The effect of this change is that such units can now qualify as homestead property for all purposes under Article X, s.4 of the Florida Constitution. This resolves disparate results among courts and different provisions of Article X, s. 4 as to whether a co-op unit can qualify as homestead property.


Sunday, July 04, 2021

Maltese Pension Plan in the Sights of the IRS

The Maltese pension plan is a planning device for U.S. taxpayers to use the U.S. - Malta tax treaty to obtain tax deferral and tax avoidance benefits similar to a Roth IRA, but without many of the limitations of a Roth IRA. For more about it, search "Maltese pension plan" and you will find many sites touting its benefits.

For any of those involved with such plans or contemplating entering into one, they should take note that the IRS has added the arrangement to its 2021 "Dirty Dozen" scams list - at least as to transfers of appreciated property to the plan. Such planning generally treats the contribution of such appreciated property to the plan as a transfer to a "grantor trust," thus avoiding gain generation. However, gain from such disposition is purportedly then not taxed immediately to the participant.

This is what the IRS has to say:

"Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment."

This is not an outright determination that such arrangements are abusive, but are a warning that the IRS will be looking more closely at that them and has serious concerns about the claimed tax benefits.

IR-2021-144, July 1, 2021

Monday, May 17, 2021

Q&A on Florida's New Directed Trust Act

 Below is a copy of article to be published this evening on Leimberg Information Services:


Florida’s version of the Uniform Directed Trust Act (the “FUDTA”) has passed both houses of the Florida legislature and is expected to be signed into law by Governor DeSantis. Charles (Chuck) Rubin chaired the Florida Bar subcommittee that reviewed and adapted the Uniform Directed Trust Act, and Jenna Rubin also served on the subcommittee. They provide a review of the key provisions that practitioners should be aware of.

QUESTIONS AND ANSWERS

Who does the FUDTA principally affect? Trust directors (persons with authority under a trust instrument to give directions to be followed) and directed trustees (the trustees who are supposed to follow the directions).

Can I avoid the application of the FUDTA by not calling the person with the power to direct a protector or trust director? No. The label given is irrelevant. If a person has the power to direct, then they are a trust director.

Can a trustee be a trust director? No, only persons who have a power to direct but are not trustees are trust directors.

So, any non-trustee with a power to direct is a trust director? Mostly, but there are a few powers one can hold that alone will not make you a trust director, such as the power to remove or appoint a trustee, a power of appointment, and a power of a settlor over a revocable trust.

Why should I care whether a power holder is a trust director? Well, there are a lot of rules and benefits that apply under the FUDTA, but probably the biggest implication is that the trust director is subject to fiduciary duty in the exercise of the power of direction in the same manner as a trustee. Note that some states do not impose fiduciary duties on persons with roles similar to a trust director, or allow the trust instrument to remove such duties entirely.

Wow, that’s pretty harsh for a player with a small role. How are settlors supposed to get someone to take on the role if they have such a duty and the liability that comes along with it? Helpfully, like most provisions in the Trust Code, the trust provisions can be drafted to reduce (or increase) the level of duty.

So I can relieve the trust director of all duty and liability? No, the FUDTA will not let you go that far. Just like a trust instrument cannot entirely relieve a trustee of fiduciary duty (the duty to act in good faith and in accordance with the terms of the trust must always remain), a trust director is also subject to the good faith minimum duty no matter what the trust instrument says.

A trust director can only exercise the powers granted to it in the trust instrument, correct? Mostly, but in addition to the express powers, the trust director also has further powers appropriate to the the exercise or nonexercise of the expressly granted power of direction. Draftpersons can breathe easier knowing they do not have to think of and include every explicit power that a trust director may need in order to exercise the desired power of direction.

How can a trust director protect itself from liability? Not serve! But short of that, the Trust Code provisions that shorten the applicable limitations period for breach of trust to six months via the delivery of a trust disclosure document applies equally to trustees and trust directors.

Does the directed trustee have to follow the directions of the trust director, even if the directed trustee disagrees with the appropriateness of the directions? Yes. The only exceptions are if the trust director is acting outside the scope of the power of direction, or if following the directions would result in willful misconduct by the directed trustee.

What if the direction is a breach of trust by the trust director – does that make it outside the scope of the power of direction and thus the directed trustee does not have to follow it? No, that is not the case. The policy is that if the trust director commits a breach of trust in making the direction, that trust director is liable. This encourages the directed trustee to act in accordance with directions, and since the beneficiaries can sue the trust director they have a remedy and do not have to also be able to sue the trustee.

How can the directed trustee protect itself as to questionable instructions? The trustee can go to court and seek instructions as to its obligations to follow the directions, and can charge the trust for fees and costs incurred in doing so.

Can a trust director demand relevant information from the directed trustee? Yes as to information needed to do its job, and the directed trustee can similarly demand needed information from the trust director.

Does the trust director have to keep an eye on the trustee or give advice or notifications to beneficiaries or other interested persons? No, in the absence of trust provisions requiring it. And the same applies to the directed trustee in regard to monitoring the trust director.

A trust director situation seems similar to a trust that gives power to one trustee to direct a co-trustee. Are the duties and obligations of the affected fiduciaries similar under the Florida Trust Code? Yes, the FUDTA coordinates the duties and liabilities in those two situations so that they are pretty much the same.

Are the rules for suing a trust director for breach of trust similar to suing a trustee? Yes. Such actions are subject to the same statute of limitations and defenses.

A trustee and a trust director both exercise powers over a trust. Do all the Florida Trust Code provisions applicable to trustees apply to trust directors? No, they do not. However, there is an extensive list of Florida Trust Code provisions included in the FUDTA that were determined to be appropriate to apply to trust directors, and those listed provisions do apply.

Does the FUDTA apply only to trusts created after the July 1, 2021 effective date? No, it applies also to trusts created before then, but only as to decisions or actions occurring after that date.

How closely does the FUDTA track the Uniform Directed Trust Act (the “UDTA”)? The FUDTA closely follows the UDTA so decisions from UDTA states will likely be useful in interpreting the FUDTA (and vice-vers_, but care should be exercised since the FUDTA does have some modifications and additions.

Sunday, March 21, 2021

No "All Going to Charity" Exception for Chenoweth/Ahmanson Funding Issue

Taxpayers and planners love to use valuation reductions for partial interests in entities as a method for reducing transfer taxes. Such reductions and discounts can be a two-edged sword, however.

The Ahmanson and Chenoweth cases point out that when a majority interest in an entity is included in a taxpayer's gross estate, the valuation discounts will typically be substantially less than will apply to a noncontrolling or minority interest, and that this can have undesirable consequences when a portion of the entity is transferred to a charity or a marital deduction trust. For example, assume that a 100% interest owned by a decedent as his sole asset in an operating corporation is valued at $10 million, with little or no discounts taken.

Then assume that 60% of the corporation will pass to a bypass trust, with the remaining 40% passing to a charity. One might think that there should be no estate tax, because the 60% is covered by the decedent's unified credit exemption, and the 40% is covered by the charitable deduction. However, the case law advises that the value passing to the charity for which the charitable deduction is allowed is not 40% of the company's reported value. Instead, the 40% interest must be valued on its own, and as a minority interest, larger valuation discounts will apply. Thus, if we assume a 25% combined marketability and lack of control discount on the 40% interest, if it has a gross value of $4 million, the charitable deduction is limited to $3 million in the example. This leaves $1 million exposed to estate tax.

In a recent Tax Court memorandum decision, controlling interests in several real estate holding LLCs owned by a decedent were given 75% to one charity and 25% to a different charity. The IRS argued that the 25% piece going to one charity would need to be heavily discounted (citing Ahmanson), thus reducing the charitable deduction for that piece and having the same issue as noted in the previous paragraph.

The taxpayer tried to rebuff the discount's application by claiming that since 100% of the business interests were going to charity (albeit two separate charities), then no discount should be taken for purposes of the charitable deduction. The Tax Court rejected the argument, noting that there were two separate transfers to two separate charities, and standard valuation principles should apply to each gift on its own.

Note that while this decision involved the charitable deduction, the concept similarly applies to the marital deduction. In planning where marital deduction gifts or charitable gifts are likely and closely held business interests are involved, efforts should always be undertaken to anticipate these issues in the planning stage to avoid the division of a majority interest in a business into minority interests that are used to fund these deductible transfers.

Estate of Warne v. Comm., T.C. Memo 2021-17

Tuesday, March 16, 2021

Cryptocurrency and the IRS - Some Important Updates

 Cryptocurrency is treated like any other investment asset for federal income tax purposes and not "money." Therefore, taxpayers that sell cryptocurrency for a gain incur taxable capital gains for income tax purposes.

It is likely that a fair amount of cryptocurrency has been sold for gain by U.S. taxpayers without that being reported - either out of ignorance or intentional tax avoidance. Importantly, cryptocurrency transactions are not invisible but are available for review on the blockchain. Some sleuthing may be required to tie a particular transaction to a taxpayer, but this is often not that difficult. Further, cryptocurrency exchanges may be able to identify crypto transactions and tie them to specific persons.

Taxpayers with gains in the past or present years should note Operation Hidden Treasure, which was recently revealed by IRS personnel. This is an IRS program focused on taxpayers who omit cryptocurrency income from their tax returns, and is comprised of agents trained in crypto and virtual currency tracking. Civil and criminal enforcement elements of the IRS are involved.

The IRS also updated its Frequently Asked Questions on Virtual Currency Transactions on March 2.  This can be accessed at https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions

One interesting change in the FAQ relates to whether the mere purchase of virtual currency must be reported on a taxpayer's Form 1040 pursuant to the new question that asked whether the taxpayer was involved in any virtual currency transaction during the year. The question itself strongly suggests that the answer is 'yes.' However, the FAQ says 'no.' Here is the question and answer:


I don't know about you, but buying virtual currency sure seems like "acquir[ing an] interest in any virtual currency." A FAQ issues by the IRS does not have the force or effect of law. While one is probably okay with relying on a FAQ to answer 'no' to the question, the more conservative answer would be to answer 'yes' to this question.

Sunday, March 14, 2021

Applicable Federal Rates - March 2021

 For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here!  

Direction of rates: moving up



Saturday, February 06, 2021

Beware the Last Minute Signing of a Prenuptial Agreement [Florida]

 

Marital attorneys know that upon divorce, spouses who signed a prenuptial agreement will often raise arguments of coercion and duress to void the agreement. Factually, such allegations and arguments may or may not be true, and in either case may be hard to prove or disprove many years after the fact. A good story and sympathetic court can spell doom for the agreement. Therefore, practitioners seeking to enhance the likelihood of an enforceable agreement should manage the objective and verifiable facts that mitigate against coercion and duress so as build defenses against future attack. One of those objective facts that can usually be managed is when the prenuptial agreement is signed – signings the day before or the day of the wedding should be avoided.

A recent Florida case presented various facts that both supported and weakened the agreement. The end result was the voiding of the prenuptial agreement. One of the facts was that the agreement was signed the day before the agreement. We can wonder whether if the agreement had been signed well before that whether the court would have voided the result.

The case also provides a lengthy analysis of the meaning of the terms coercion and duress in context of voiding a prenuptial agreement. It also has an interesting set of facts.

The key facts of the case were:

  • Husband was a divorced 41 year old. Wife turned 18 three days prior to meeting Husband. She had never married and was a virgin when she met him. She was living in Columbia, and was looking for a wealthy American man to marry and to bring her to the U.S. They met on May 29, 2001 through a matchmaking website.
  • The Husband did not speak Spanish and the Wife spoke little English.
  • In June 2001, the parties had sex and became engaged on the same day.
  • The Wife became pregnant and there was an abortion in mid-August.
  • According to Wife, Husband told her the prenuptial agreement was a requirement for her to immigrate to the U.S. However, Wife admitted she would have signed anything because she loved and wanted to marry Husband and because she wanted to immigrate to the U.S.
  • Husband obtained a form prenuptial agreement and modified it to his satisfaction. The parties did not discuss the agreement or negotiate its terms.
  • Wife took the agreement to a Colombian attorney. The attorney provided Wife with a Spanish translation on August 29, 2001. The attorney signed a certification that she was knowledgeable in Florida law and had advised Wife about her rights. She now admits she did not know Florida law and did nothing more than translate the agreement. The Wife claimed that she was in severe pain and distress relating to the abortion on August 29 and August 30. Wife also feared exposure of the premarital sex and abortion to her strict Catholic family.
  • On August 30, 2001, the parties executed English and Spanish versions of the agreement before a notary public. Wife did not read it.
  • The parties married on August 31, 2001.
  • Several days later, the parties went to a previously scheduled appointment at the Colombian embassy to start the Wife's immigration process.
  • Several months later the parties moved to Florida, where Husband resided and owned businesses. They had five children together.
  • In May 2017, Wife filed for divorce.

The trial court invalidated the agreement since it "was the product of duress and coercion."

The court found "duress" relating to the unequal bargaining positions, the pregnancy and abortion, and the risk of exposure of those things to her family.

The court found that Husband's threat of no wedding and no immigration on the day before the signing was "coercion." The court concluded that the Husband exploited the time pressure aspects of the courtship and Wife's "vulnerable  emotional position" to his pecuniary advantage.

The appellate court noted two grounds for invalidating a prenup. The first is where the defending spouse has engaged in "fraud, deceit, duress, coercion, misrepresentation, or overreaching."

The second is when the agreement makes an unfair or unreasonable provision for the challenging spouse, given the parties' relative circumstances. The second ground was inapplicable since this was not what the trial court relied on.

As an aside, this second ground will not apply if there is full and fair disclosure of assets, so it is not an automatic circumstance of voiding a prenuptial agreement. Disclosure is generally not relevant to the first ground – thus, the presence of duress or coercion can void the agreement even with disclosure of financial information. Disclosure was not an issue in the case.

The appellate court noted that duress exists if the signing was effected involuntarily and was thus not an exercise of free will, AND this condition of mind was caused by some improper and coercive conduct of the other side – i.e., the other spouse must bring external pressure bring to bear.

The appellate court noted that coercion is not the same as duress, but there is no Florida case law providing a definition for coercion for these purposes. To distinguish the two and provide a definition, the court borrowed from an Ohio Supreme Court case that held that duress means actual physical force or the threat of same to one's person, property or reputation, with coercion being more broadly defined to include undue influence and other lesser forms of compulsion such as moral or economic force sufficient to overcome the recipient's free will.

The appellate court overruled the trial court and found there was no duress. This was because there was no evidence that the Husband threatened to tell the Wife's family about their circumstances if she did not sign the prenuptial agreement.

The court did sustain the finding of coercion, however. The mere threat of not proceeding with the marriage is not enough for coercion, based on case law cited by the court. Indeed, if that was the case, many more prenuptial agreements would be subject to successful challenge. However, additional acts did raise the level of compulsion into the realm of coercion. These acts included Husband’s representations that the prenuptial agreement was a prerequisite to immigration into the U.S. This, combined with the time pressure aspects and the Wife's vulnerable condition was enough to support a finding of coercion. The court's citation of problematic prenups in the case law where presentation and/or signing occurred shortly before the wedding indicates that this was a key component in its holdings.

Husband does not appear to have had the assistance of counsel in the preparation or signing of the agreement. Knowledgeable counsel can go a long way towards minimizing both actual and the appearance of coercion and duress. As noted, objective actions such as not signing the agreement on the eve of the wedding, and the representation of the other spouse by a Florida attorney with the proper expertise would have gone a long way to defuse the allegations of duress and coercion.

Bates v. Bates, 46 Fla. L. Weekly D287c (3rd DCA, February 3, 2021)

Tuesday, February 02, 2021

New Rules Coming on Brokers and Other Financial Representatives Being Named as a Fiduciary or a Beneficiary

 Securities brokers and other registered representatives often develop close relationships with their clients. Those clients may make provision for them to become a fiduciary or beneficiary in trusts and wills due to these relationships.

For those representatives who are subject to FINRA, new FINRA Rule 3241 becomes effective on February 15, 2021 that generally requires review and approval of such circumstances by member firms so as to avoid conflicts of interest. The new rules can be reviewed here.

Exceptions apply to representatives that are family members of the appointing client. In addition to direct appointments, the rules treat similarly circumstances where the representative directs the appointment of other persons in these roles such as family members of the representative.

Draftspersons should be familiar with these limitations, to assist their clients where they desire to make such appointments.

FINRA Rule 3241. Registered Person Being Named a Customer’s Beneficiary or Holding a Position of Trust for a Customer

Thursday, January 28, 2021

FBAR Reporting to Be Expanded to Include Foreign Accounts Holding Virtual Currency

Presently, for U.S. persons a foreign account holding virtual currency is not a reportable account for purposes of having to file an FBAR.

In a recent announcement FinCEN has advised that it intends to amend the FBAR regulations to include those accounts.

In today's environment, this is about as surprising as the sun coming up this morning.

FinCEN Notice 2020-2


Tuesday, January 26, 2021

Applicable Federal Rates - February 2021

For the applicable federal rates for the above month, preceding months, and a data table that visually shows trends, click here!  

Direction of rates: moving up 

Wednesday, January 20, 2021

Antideferral Tax Legislation on the Horizon? What is Antideferral Tax Legislation?

President Biden has made no secret of his plans to raise taxes. One possible avenue is through the adoption of antideferral rules, along the lines recently outlined in a report by Senator Ron Wyden, the ranking member of the Senate Finance Committee.

Presently, taxpayers who own appreciating assets are not taxed on the appreciation until the sale of those assets. Further, the gains may be subject to preferential rates of tax.

Both of these concepts would go out the window in an antideferral regime. First, the report recommends the elimination of favorable capital gains rates. Second, as to publicly traded securities, taxpayers would be required to "mark-to-market" the value of their accounts each year for income tax purposes. To the extent those assets went up in value during the year, taxes would be due on that appreciation (or a deduction would be allowed for any loss) even though the asset was not sold. The taxpayer could no longer defer tax on gains until sale. Third, as to nonpublicly traded property, in lieu of a mark-to-market arrangement, a penalty would be imposed on the taxpayer which would grow for the longer the property is held, so as to deny the benefits of tax deferral to the taxpayer. The penalty might be an interest charge or a tax surcharge.

Special rules could apply to residences, retirement assets, and other special classes of assets. The report suggests the rules should apply only to high income or high asset households.

Such a plan would radically transform the taxation of capital in the U.S. While purportedly applicable only to wealthier taxpayers, history shows that such taxable classes tend to expand to less wealthy taxpayers over time. The plan would also result in increased tax return complexity and bookkeeping, and costs of compliance. 

Most importantly, the plan does not discuss the impacts on capital formation. It is capital investment and formation that drives economies and is the policy behind reduced capital gains rates. This new arrangement would eliminate the tax incentives to capital investment that currently exist, and may punish long-term capital investments. Treating capital badly has two principal effects. First, it takes productive capital out of circulation, where it otherwise would be producing goods, services, jobs, and innovation through research and development. Second, it would drive capital out of the U.S. to other jurisdictions that treat capital investment more favorably under the principle that capital goes to where it is treated best. None of this will improve the economy and indeed could adversely affect it in a material manner.

President Biden promised to undo the tax cuts made by President Trump. The antideferral rules, if adopted, would go far beyond undoing those cuts and instead would install a tax regime that never existed in the U.S. and a new drag on the economy that would likely have both unforseen and unfavorable consequences. Keep an eye out to see where this is going.

Below is a link to the report.

Treat Wealth Like Wages Report




high taxpayers - how long

tax compliance and compolexity

capital

Saturday, January 02, 2021

IRS Is Proposing a User Fee for Estate Tax Closing Letter

Executors and personal representatives of estates of decedents can be held personally liable for distributing or applying estate assets when there are unpaid estate taxes due, if the IRS does not get paid. When an estate tax return is filed, the final amount of estate taxes due is not known until either the statute of limitations expire, or there is an audit (possibly followed by ongoing dispute, resolution through Appeals, and/or litigation). The estate fiduciaries are thus in the dark about whether or when an adjustment to the estate taxes will be forthcoming, or if the IRS has accepted an estate tax return as filed. This is unfair to the fiduciaries, and the beneficiaries, since a prudent fiduciary will need to hold back on distributions until the tax amount is more certainly known.

So as to assist the fiduciaries in determining if tax is or will be due, when an estate tax return is filed the IRS has traditionally issued an estate tax closing letter when an estate tax return has been filed. This is generally issued after the IRS' review of the return and determination not to audit or after completion of post-audit procedures or litigation.

Several years ago, the IRS stopped automatically issuing them. This was done in part as a cost-saving measure, and because the IRS believed that fiduciaries could obtain the same information as a closing letter by determining if the transaction code and explanation of "421 - Closed examination of tax return" was entered on the estate's tax transcript.

However, since fiduciaries, local probate courts, State tax departments, and others had come to rely on the convenience of estate tax closing letters and the explanations they contained, estates could still request a closing letter if they wanted one. This request could be made by telephone or fax  - but presently only by fax due to COVID-19 operational restrictions.

Noting the continuing burden of responding to these requests, and the continuing volume of estate tax returns (in part due to the portability rules and the need to file estate tax returns to obtain the benefits of portability), the IRS is now proposing, via proposed regulations, a $67 user fee to request a closing letter to help it defray costs.

While the fee amount is not outrageously high, it is always irksome when the government charges members of the public before the government will discharge its duty. In this case, that is particularly so since it is the liability that the government imposes on fiduciaries (both in their fiduciary capacity and their individual capacity) that necessitates a closing letter.

A secondary concern is fee creep. We have all seen modest government fees increase over time to unreasonable amounts. Look no further than the fees charged for private letter rulings - these at one time had no fee, then a small fee, and now bear fees in the many thousands of dollars.

As of now, the fee is only proposed. Stay tuned.

Proposed Regulation Section 300.13