CLAWBACK DISCUSSIONS WITH PROF. PENNELL

I have written on the unified credit clawback issue previously, both here and here. I have had some email discussions with Professor Pennell, and wanted to share with you some of the salient points since they will be of interest to those who are involved with this issue.

If you read my larger analysis here, you will note that the key issue in this area is whether the computations for estate tax purposes that involve prior gifts require the use of the unified credit amount as it existed in the year of the applicable gift or the year of death. While it is my belief that there ultimately will be no clawback asserted, and the unified credit amount will be used in the above computation based on the date of death credit to effect that, I cannot completely eliminate the possibility of clawback being applied under the existing statute and regulations.

One aspect that some use to support the possibility of clawback are the current Form 706 instructions which if applied in their current form could allow for it. Professor Pennell is vehemently against giving any consideration to the current instructions. He wrote to me:

The instructions . . . do not and could not say anything about the problem at hand . . . because we have never been in an environment in which the exclusion amount has declined. . . . And . . . an instruction to a form is not in any sense the law.

His points are valid and should be considered in handicapping the likelihood of clawback being applied by Treasury in the future.

He also places a lot of emphasis on the Code and regulation provisions that require the use of tax rates as they exist in the year of death to support year of death applicable credit amounts as well.

…the unified credit is defined in the Code by two factors, the exclusion amount and the tax rate. And the regulations DO address those two factors . . .  by telling us which tax rate and which exclusion amount to use.

There is merit to this, too, since the tax rates do inform the unified credit computation, but as of now at least, the provisions are still too ambiguous to me to unequivocally resolve the issue.

My thanks to Prof. Pennell for taking the time to discuss these issues with me, and to allow me to share the above excerpts with our readers.

FBAR SCAM

A recent article warns of a current email scam that attempts to trick recipients into sending bank account to the scammers. The email comes with “Report of Foreign Bank and Financial Accounts (FBAR)” in the heading, and advises the recipients that there is a problem with their tax return and that they need to provide bank account information to the IRS. Of course, it is not the IRS making the request but scammers seeking to obtain bank account information.

Read more about the scam here.

RECENT CHANGES IN PRINCIPAL AND INCOME ACT ACCOUNTING [FLORIDA]

The following are some highlights of recent legislative changes, effective in 2013:

Carrying Value Definition. In fiduciary accountings, “carrying value” is the value of an asset when acquired by the fiduciary. Beneficiaries will often use the value to determine how the fiduciary has performed over time by comparing the current value of an asset to its carrying value. Fla.Stats. §738.102 clarifies that for estates and revocable trusts, this value is set at the value on the date of death. It also allows that if there is a change of fiduciaries, the fiduciaries can adjust the carrying value to fair market value at the time of change if done on the next accounting. This avoids fiduciaries being judged on values that were attributable to the period prior to when they became fiduciaries.

Unitrusts. Fla.Stats. §738.104 now allows a conversion of a trust to a unitrust without required a release of the power to adjust by the trustee. Fla.Stats. §738.1041 now employs a three year averaging rule in computing unitrust payouts unless a trust explicitly provides otherwise – this will provide smoothing in payouts in years with high volatility in values of assets.

Distributions to Beneficiaries. In the past, distributable income that was allocable among multiple beneficiaries was allocated based on their fractional interest in estate or trust assets based on date of distribution values. Fla.Stats. § 738.202(1) simplifies these computations by now using carrying values for this computation. Fla.Stats. §738.202(2)(a) now says to exclude unpaid liabilities from the assets in these computations.

Large Distributions from Publicly Traded Entities. New Fla.Stats. §738.401(3)(e) directs that distributions from publicly traded entities that exceed 10% or more of the value of the ownership interest will not be fully allocated to income, but will be allocated in part to income and in part to principal based on a 3% rate of return computation.  Correspondingly, publicly traded interests are removed from the partial liquidation reallocation rules that apply under Fla.Stats. §738.401(3)(c) per revised (5)(b) of the statute.

Distributions from Pass-Through Entities. Fla.Stats. §738.401(7) has been substantially revised and somewhat simplified. The general rule for distributions from entities is that distributions are income, not principal. Fla.Stats. §738.401(7) will instead disregard the entity and look to the assets generating the income in making the income vs. principal characterization when there is an individual trustee, the distributing entity is a pass-through entity and an investment entity, and the  trustee has the power to adjust.

Distributions from Deferred Compensation Plans, Annuities, and Retirement Plans Fla.Stats. §738.602 is simplified in its approach to using unitrust computations to allocate between income and principal.

Life Estates (or term for years tenancies) and Remainders. Fla.Stats. § 738.801 has been added to provide statutory rules for allocating expenses between the holder of the current tenancy and the remaindermen for nontrust interests.

Florida Laws, Chapter 2012-49