HECKERLING REPORTS: 2008

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1 HECKERLING REPORTS: Heckerling Report Report No. 4 As we have done in January for the last eleven years, and again with the permission of the University of Miami School of Law Center for Continuing Legal Education, we will be posting daily Reports to this list containing highlights of the proceedings of the 42nd Annual Philip E. Heckerling Institute on Estate Planning that is being held January 14-18, 2008 at the Orlando World Center Marriott Resort and Convention Center in Orlando, Florida, a new venue for the Institute starting in A complete listing of the proceedings will be published here and is also available on the Institute's Web site at This Report covers the Transferring Wealth to Parents and Siblings session that was presented on Tuesday afternoon The next Reports will cover more of the Tuesday sessions and some more of Jason Havens' reports from the Exhibit Hall. Announcement: The Lackner Group has just announced the release of its newest program, Life Settlement NumberCruncher(tm). What is it? Life Settlement NumberCruncher (LSNC) is easy-to-learn and easy-to-use software designed to assist professionals and their clients in the difficult decision of whether to retain or sell an existing life insurance policy. This indispensable software is the first commercially available professional tool to run economic "hold" (retain) or "fold" (sell) numbers, an essential factor in the decision-making process. Who it's for: LSNC software was expressly designed for life settlement professionals, life insurance agents, life settlement brokers, attorneys, CPAs, financial planners, and trust officers. The Creators Steve Leimberg of Leimberg & LeClair and Mike Weinberg of The Weinberg Group created LSNC with the assistance of Ben Weinberg of The Weinberg Group and Vince Lackner of the Lackner Group. Can I Turn Right on Red? Yes, With Caution: Transferring Wealth to Parents and Siblings Tuesday, January 15, 2008 Presenter: Read Moore Reporter: Joanne Hindel Read Moore started off by saying that he would cover five basic strategies for transferring wealth to parents and siblings: annual exclusion gift Jump To 1 (Mon. 1/14) 2 (Mon. 1/14) (Tue. 1/15 and Wed. 1/16) 8 (Wed. 1/16) 9 (Wed. 1/16) 10 (Wed. 1/16) 11 (Wed. 1/16) 12 (Thu. 1/17) 13 (Wed. 1/16 and Thu. 1/17) 14 (Thu. 1/17 cont.) 15 (Thu. 1/17 cont.) 16 (Wed. add + Thu. 1/17 cont.) 17 (Wed.

2 strategies; nongift strategies; transactions with parents and siblings; taxable gift strategies and estate planning strategies. In the time allotted, he was able to cover four of the five strategies and made the following points: Annual Exclusion Gift Strategies The easiest and most tax-effective way for a client to make gifts to parents and siblings is to make annual exclusion gifts to them. Direct transfers of cash and property to parents and siblings qualify for the annual exclusion. In addition, a client's payment of a parent's or a sibling's expenses or obligations also are taxable gifts that qualify for the annual exclusion. A client's payments directly to persons providing "medical care" to a parent or sibling will qualify for the annual exclusion. Medical care includes a child's payment of a parent's or sibling's physician bills and hospital bills. A client's payments to a person who assists an elderly parent who requires in-home care will also qualify. The client can also pay for the costs of long-term care services as well as the expenses for an attendant, even if the services of the attendant do not satisfy the definition of qualified long-term care services. But only the portion of the services related to medical care will be excludable. 1/16 Q&A) 18 (Thur., Fri. 1/18 & Tech) 19 (Tue. 1/15 & Fri. 1/18) 20 (Thur. SS 3-D & Fri. 1/18 Wrap Up) 21 (Tech Summary - Final Report) A client can also pay a portion or all of medically necessary capital expenditures and these will be excludable. Capital expenditures that permanently improve property for the primary purpose of medical care are excludable only if they are an essential element of treatment. Payments by a client of the costs of the parent's alternative living arrangements if they can no longer reside at home are excludable. Paying for parents' and siblings' medical insurance premiums can provide another means to make annual exclusion gifts in excess of $12,000. Payments for qualified long-term care insurance contracts, within the meaning of IRC 7702B(b)(1), are also excluded, provided the annual cost limits provided in IRC 213(d)(10)(B) are not exceeded. In addition to directly paying a parent's or sibling's medical expenses, a client can also make certain tuition payments on a parent's or sibling's behalf without making a gift. In order to increase the amounts of gifts that a client can make and still qualify for the annual exclusion a good method is to create an irrevocable trust for the benefit of parents, siblings, spouses of siblings and descendants of siblings and give each beneficiary a Crummey power. The IRS has challenged these trusts particularly those where persons have no interest in the trust other than a Crummey withdrawal right. Court decisions in this area suggest that a trust of this kind will work, as long as all the beneficiaries who have Crummey powers are current beneficiaries.

3 Nongift strategies One way a client can effectively make a tax-free gift to his or her parents or siblings is by providing services to the parent or sibling without charge. A child who is an investment adviser, for example, can advise his parents or siblings on their asset allocation and investment selection, thereby providing for free what the parent or sibling would otherwise pay for. Making a "gift" in this way can be especially powerful in the case of a child who is a hedge fund or venture capital manager. A client who is a professional, such as a physician, lawyer, or architect, can also provide some services to a parent or sibling, but there will be some practical limits to what the client can provide, particularly in the case of health care professionals. The principle that the gift tax applies only to gifts of property and not to gifts of services is so fundamental that it is difficult to find court decisions or IRS rulings that even address the issue. If a child has an obligation to support a parent under state law, then the child's payments in discharge of that obligation would not be subject to gift tax. At common law children did not have an obligation to support their parents. Some states, however, have enacted civil statutes that require children to support their parents. The statutes tend to require parents to be destitute. If a parent truly is destitute, the child really has a moral obligation to support the parent, backed up by a statute, and the IRS is unlikely to cause trouble in this area. Beyond the obvious cases involving destitute parents, there are no clear legal guidelines on what a child can pay without causing a gift tax. A wealthy client may wish to take a parent or a sibling on a vacation, perhaps using the client's private plane, or throw a big party for the parent or sibling. More simply, a child could ask a parent to come to the child's vacation home with the client for a few days. Is the child's provision of benefits for a parent or a sibling in this situation a gift that is subject to the gift tax? The gift tax applies only to gifts of property. In the vacation or party situation, the parent is not making a direct transfer of property to a parent or a sibling. The gift tax, however, applies to indirect transfers of property as well as to direct transfers of property: Any transaction in which an interest in property is gratuitously passed or conferred upon another, regardless of the means or device employed, constitutes a gift subject to tax. Can a client allow a parent or sibling to occupy real estate owned by the client on a rent-free basis without gift tax consequences? In general, the answer appears to be no under the United States Supreme Court's decision in Dickman v. Commissioner, 465 U.S. 330 (1984).

4 Although Dickman involved interest-free loans, the Court's view of the gift tax and the use of property quoted above is broad enough to support the notion that if a client allows a family member to live in a residence on a rent-free basis, the taxpayer will likely have made a gift of the foregone rent. One way that clients can approach the rent-free use problem is to jointly own property with a parent or sibling and allow the parent or sibling to live rent-free on the property. As long as the parties split the ownership expenses of the property, the fact that the child does not receive rent from the parent should not result in the child being deemed to have made a gift. If, however, one co-tenant excludes or "ousts" the other co-tenants from using the property, then the occupying co-tenant will be liable to the other tenants for rent. While joint ownership is more promising than merely allowing a parent or sibling to use property on a rent-free basis, perhaps the best way to allow a parent or sibling to use property on a rent-free basis is for a trust for the benefit of the parent or sibling to allow the parent or sibling to use the property without rent. Transactions with Parents and Siblings Intrafamily transactions may qualify for the "ordinary course of business" exception if there is sufficient evidence of a genuine business arrangement (arm's length negotiation and lack of donative intent). Transfers to family members, however, are subject to special scrutiny and are presumed to be gifts despite any business relationship between the parties. If a client does not own a family company in which he or she can employ a parent or sibling, can the client contract with the parent to provide personal services to the client in exchange for compensation? For example, could a child pay a parent or sibling for babysitting or gardening? How about for fixing things around the house or setting up the client's home theatre or wireless computer network? Cooking? Security? As a legal matter the answer is yes, but as with all intrafamily transactions the transaction will be scrutinized to determine whether it is a gift. If a client and his or her parents or siblings cannot come up with a way in which the parent or sibling can provide services to the client in exchange for compensation, could the client agree to pay a parent or sibling for not doing something? Under contract law, an individual's agreement to not do an act, such as smoking, is consideration that supports an enforceable contract. The limited gift tax-related authority in this area suggests that the answer is no even though contract law would recognize the contract. One simple way a wealth client can assist a parent or sibling is by lending the parent or sibling money, which the parent or sibling could either spend or invest to produce income.

5 If the purpose of the loan is to provide spending money to a parent or sibling, one obvious issue that will come up is how the parent or sibling will repay the loan. The parties could structure the loan as a line of credit, which will allow the borrower to borrow only what he or she needs from time to time. If, however, the client could make the loan to a grantor trust for the benefit of the parent or the sibling, many of the income tax inefficiencies may disappear. Taxable Gift Strategies Clients often want to make bequests to their parents and siblings in their estate plans. From a tax perspective, however, the client would be better off making a taxable gift to the parent or sibling than making a taxable bequest. One obvious reason is that the annual exclusion is available for the first $12,000 of a gift of a present interest. In addition to the annual exclusion, however, is the fact that the government taxes gifts at a lower rate than transfers at death and most states do not impose a gift tax. Gift tax law allows a donor to make a gift to a donee on the condition that the donee pays the gift tax - a "net gift." A net gift is best made in January of a given year, which permits a tax-free gift of 15 months of interest or dividends. If the client is interested in making a gift of income-producing property, several factors suggest that an irrevocable trust is a much better way to make the gift. Trusts provide creditor protection, which may be important in the case of a spendthrift parent or sibling, who could squander the income (and principal, through a sale) if the client made an outright gift of an income-producing property. Another benefit of using an irrevocable trust as a vehicle for a gift of income-producing property is the fact that the client can make the trust a grantor trust and pay the income on the trust's income that is distributed to the parent or sibling. Read Moore's presentation was thorough and thought-provoking and his outline provides additional details on this strategies for transferring wealth to parents and siblings. THE REPORTERS Our on-site local reporters who are present in Orlando this year are Gene Zuspann Esq. of Zuspann & Zuspann in Denver, Colorado; Joanne Hindel Esq. of Fifth Third Bank in Cleveland, Ohio; Jason Havens Esq. of Howard, Mobley & Havens PLLC in Florida and Tennessee; Kimon Karas Esq. of McCarthy, Lebit, Crystal and Liffman Co., LPA in Cleveland, Ohio; Bruce Stone Esq. of Goldman, Felcoski & Stone, PA in Coral Gables, Florida; Craig Dreyer Esq. of McDonald Hopkins LLC in Cleveland, Ohio; Carol Sobczak Esq. of The Law Offices of Carol A. Sobczak in St. Helena, California; Ronda Martinez Esq.

6 of Fifth Third Bank in Southfield, Michigan; and Mike Stiff Esq. of Hutchins & Stiff LLC in Denver, Colorado. The editor again this year will be Joseph G. Hodges Jr. Esq, a solo practitioner in Denver, Colorado, who also is the Chief Moderator of the ABA-PTL List. GENERAL INFORMATION ABOUT INSTITUTE: Inquiries/Registration: Philip E. Heckerling Institute on Estate Planning University of Miami School of Law Center for Continuing Legal Education P.O. Box Coral Gables, FL Telephone: / FAX: Web site: heckerling@law.miami.edu =========================================== Headquarters Hotel - Orlando World Center Marriott 8701 World Center Drive Orlando, FL Telephone (407) , FAX (407) ==================================================