A prelude to tax reform

ID-10013658Making many of the tax extenders permanent was a prelude to tax reform, because it will eliminate the annual tax debates in Congress that have plagued the institution in recent years.  That’s the view expressed by the new Ways and Means Committee Chair Kevin Brady (R-Texas), who took over the chairmanship in November when Paul Ryan became Speaker.

Corporate tax reform that is sensitive to international considerations is one area that may get consideration in 2016.  Republicans generally believe that reducing the corporate tax rate is the best way to head off corporate inversions, in which companies move their headquarters out of the U.S. largely for tax purposes.  Although earlier discussions have targeted a 25% corporate tax rate, “I am convinced that we have to be at 20% or below to keep us competitive for the longer run,” Brady told Tax Analysts in a December interview.

The difficult political question is whether tax reform should be revenue neutral, as Republicans have advocated, or whether it should raise new revenue, the Democratic position. “I don’t want tax reform to bail out Washington spending problems,” said Brady. “I want it to grow the economy.”

A more pessimistic view of the potential for tax reform in 2016 was expressed by George Callas, who is the senior tax counsel to Speaker Ryan. There just won’t be time to work through much significant tax legislation before everyone breaks for the November elections.  Tax reform ideas are likely to be grist in the presidential race, and may get a thorough airing through the campaign. However, Callas conceded that there is political pressure to “do something” about corporate inversions.

Should you need any further information, please do not hesitate to contact one of our experienced trust officers.


Image courtesy of Arvind Balaraman at Freedigitalphotos.net

Gift tax may be assessed 41 years after the gift

ID-100128578Sumner Redstone v. Comm’r, T.C. Memo. 2015-237 

 A conflict broke out in the Redstone family in 1971.  Patriarch Mickey Redstone and his two sons, Edward and Sumner, were co-owners of the family business, each owning 100 shares.

However, when the business was incorporated Mickey put up 48% of the capital, and the boys each contributed roughly 26%.  In 1971 Edward decided to leave the business, and demanded that his 100 shares be redeemed or he would sell them to outsiders.

In the squabble that ensued, Mickey claimed that a portion of Edward’s shares were subject to an oral trust in favor of Edward’s children, the amount in excess of Edward’s capital contribution.  The same conditions applied to Sumner’s share, in Mickey’s eyes.

A lawsuit was filed, and a settlement was reached in 1972.  Under the terms of the settlement, 33 1/3 of Edward’s shares were transferred to a trust for his children, and his remaining shares were redeemed by the company.  Three weeks later, Sumner transferred a third of his shares to an irrevocable trust for his children.  He was not required to do so by the terms of the settlement, but it seems likely that Mickey insisted upon the equal treatment.

Upon advice of counsel, neither brother filed a gift tax return reporting the transfers to the trusts.  Nearly 40 years later, the IRS became aware of the transfers as a result of publicity from other litigation.  Gift taxes were assessed against Edward’s estate and Sumner.

In Edward’s case, the Tax Court held because the transfers were the result of a bona fide settlement reached at arm’s length, there was no taxable gift [Estate of Edward S. Redstone v. Comm’r, 145 T.C. No. 11 (2015)].  Although Sumner was a party to the settlement, it imposed no similar duty upon him.  Accordingly, his transfer was not protected from gift tax.

Sumner’s attorneys argued that imposing a gift tax 41 years late, was an “unprecedented abuse” of the rule that the statute of limitations remains open if no gift tax return has been filed.  The Tax Court disagreed.  However, the Court negated the penalties that the IRS had assessed for failure to file, given Sumner’s reliance on counsel at the time.  Still, the gift tax deficiency was $737,625, plus 40 years worth of interest.

Should you need any further information, please do not hesitate to contact one of our experienced trust officers.


Image courtesy of nirots at Freedigitalphotos.net




Living Trusts



My parents are retired, living in another state.  They have a sizeable investment portfolio and are financially comfortable. However, as they are getting older, they are having trouble keeping up with their paperwork.  Last year they were late in making tax payments, very unlike them.  I would help them, but I just live too far away.  Is there a service that a bank offers retirees to help in managing their money? Does it cost a lot?



Your parents should look into establishing a living trust.

They would transfer their investment assets into the trust, which then would be managed by a trust department or trust division, such as us.  We would remit income to them as needed, file tax returns, and pay bills if they so desired. We could continue to provide this financial service even if one of your parents became incapacitated.  The trust could continue to operate through both of their lives, and it would avoid probate at their deaths.

The annual fees for our trust service are determined as a percentage of the size of the trust.  We do not earn commissions on sales, and we are not paid for generating transactions.  Our fees grow only if the value of the trust grows.

Do you have a question concerning wealth management or trusts? Send your inquiry to contact@gstrustco.com.


(March 2016)

© 2016 M.A. Co. All rights reserved.

Taking the Fifth with the IRS

Filing an income tax return is not the act of being a witness against oneself within the meaning of the Fifth Amendment to the U.S. Constitution.  Those who file blank tax returns and attempt to invoke the Fifth Amendment as a defense have routinely been penalized for filing frivolous returns.

However, recently a taxpayer filed a numerically accurate return but redacted some information on the Schedule B.  He omitted the names of certain financial institutions, but he accurately reported (and paid the tax) on the income received from those institutions.  Apparently the taxpayer was concerned about running afoul of the requirements for reporting foreign bank accounts, which can involve severe criminal penalties for mistakes.

The IRS took the position that there is no Fifth Amendment privilege for any tax return questions, offered no rationale for requiring the omitted information, and imposed the penalty for frivolous returns.  The Tax Court refused to enforce the penalty, because the tax return was substantially accurate and because the taxpayer had a legitimate, narrow fear of self-incrimination.

(March 2016)

© 2016 M.A. Co. All rights reserved.

Choice of trust upon marriage

It’s a truism that every trust is unique, but a recent private letter ruling from the IRS shows just how creative some trust creators have been. Names are redacted from these rulings, so we’ll call the players Grandson and Fiancée.

Grandson is the beneficiary of an irrevocable trust, Trust 1, created by his grandfather.  Grandson receives all the net trust income each year.  However, if Grandson is married he gets just half the income, and his wife gets the other half.  If Grandson dies leaving a surviving spouse, she then receives all the net income from Trust 1 for life.  Grandson has adult children from an earlier marriage, and they are future beneficiaries of Trust 1 after Grandson dies.  Trust 1 principal eventually will pass to Foundation.

Grandson began cohabiting with Fiancée.  Unbeknownst to Fiancée, Grandson created Trust 2 for her benefit. She is entitled to a fixed dollar amount, paid monthly and subject to adjustments based upon an index, so long as the two remain cohabiting. After Grandson dies, the entire principal of Trust 2 will be distributed to Fiancée over a period geared to her age.

But there’s one important catch in Trust 2.  In the event that Fiancée and Grandson should marry, her interest in Trust 2 will terminate, unless she disclaims the interest that she receives in Trust 1 because of the marriage.  Thus, she is put to a choice: half of the income from Trust 1 for her life; all its income if she survives Grandson, and nothing more; or all of the assets of Trust 2 in time.

The couple has married, and Fiancée has agreed to disclaim her interest in Trust 1.  The dollar values of the trusts are not given, but evidently the prospect of eventually having 100% of Trust 2 is better than the lifetime income of Trust 1. Fiancée turned to the IRS to confirm the tax consequences.

Because Fiancée will make her disclaimer within nine months of the marriage, when her interests vest, the Service holds that the disclaimer will be timely, made within a reasonable time of the “knowledge of the existence of the transfer.”  The fact that she knew of the trust interest for some time before the marriage does not affect this result.  When she makes the disclaimer, the disclaimed interests will pass to other Trust 1 beneficiaries pursuant to the trust terms, not by her direction.  Importantly, she will not make a taxable gift with the disclaimer.

Because Fiancée was kept in the dark about Trust 2 and had no control over the conditions included in that trust, the IRS holds that her Trust 2 interest will not be consideration provided to induce her to make the disclaimer.  Therefore, there will be no adverse tax consequences to the disclaimer.

(March 2016)

© 2016 M.A. Co. All rights reserved.

Q & A on IRA rollovers

A recent report from the GAO suggests that IRAs are becoming an increasingly important element of retirement security.  An estimated 43 million taxpayers have IRAs, worth an estimated $5.2 trillion.  Some 42.3 million of these IRAs are worth less than $1 million each, and 800,000 are worth more.  314 taxpayers have IRAs worth $25 million or more.

One doesn’t accumulate IRA balances that large simply by making a maximum contribution each year and getting lucky with investments.  Larger IRAs are nearly always the result of a rollover from an employer’s qualified retirement plan, one that has long had much higher contribution caps than IRAs.

The IRA rollover is a critical tool for preserving retirement capital.  Here are some questions that we’ve heard regarding this area.

Mixed distribution

Q. I’ve made both pre-tax and after-tax contributions to my employer’s retirement plan. Are there special considerations for my IRA rollover?

A. The IRS has provided helpful guidance for taxpayers who have both pre-tax and after-tax balances in their employer-provided retirement plans (Notice 2014-54). In most cases the taxpayer will have the flexibility to achieve an optimum tax result.

The IRS provided the following fact pattern. Taxpayer’s 401(k) account consists of $200,000 of pre-tax money and $50,000 of after-tax contributions.  Upon a separation from service, Taxpayer has requested a distribution of $100,000. Those funds must come proportionately from each pot, so that the distribution will be $80,000 pre-tax, $20,000 after-tax.

From this setup, the IRS explores several scenarios for the Taxpayer.  First, Taxpayer may order that the money be paid directly to IRAs, the pre-tax money to a traditional IRA and the balance to a Roth IRA.  That approach preserves all the favorable tax attributes of the distribution for the future.

Next, the Service posits that Taxpayer wants to roll $70,000 of his distribution into a successor employer plan.  Because that amount is less than the pre-tax portion of the distribution, the entire amount will be assumed to be of pre-tax money.  If the new employer plan allows for separate accounting of after-tax contributions, Taxpayer has the option of so designating a portion of the rollover.  However, Taxpayer does not have that choice if the new plan does not provide the separate accounting, the IRS warned.

 Missed deadline

Q. I received a big retirement plan distribution which I meant to roll over to an IRA, but I didn’t get to it within 60 days. What can I do now?

A. The best way to handle a rollover is a trustee-to-trustee transfer. Are you certain that you received a distribution? That is, if the distribution check is made out to the recipient plan, instead of to you, this may still be a trustee-to-trustee transfer.  Such a check may be delivered to the payee plan after the 60-day deadline has passed, even after the death of the participant.

If that solution is not available, the next question is whether an exception to the 60-day rule might apply.  These exceptions are:

First-time homebuyer. Let’s say that your withdrawal was a “first-time homebuyer” distribution.  If there is a delay or cancellation of the purchase or construction of the home, the amount withdrawn may be recontributed back into the IRA without penalty.  The time limit on this is 120 days, instead of 60 days.

Disaster-based extensions. If a federal disaster has been declared in your area, the IRS may issue a pronouncement on the availability of automatic extensions for various filings, which may include your rollover.

Financial institution errors. If you took action within 60 days, but the deposit to the IRA happened after 60 days solely due to an error by your financial institution, you can get an automatic waiver of the 60-day rule. This works, provided the funds are deposited in the eligible plan within a year of the original distribution.

Frozen deposits. If a bank becomes insolvent, so that a participant can’t get the money out in time to meet the 60-day rule, the rule is suspended.  The time during which the money has been frozen doesn’t count toward the 60 days, and the participant has 10 days after the assets are unfrozen to complete the rollover.

Do you have a question?

We specialize in two areas of personal financial management:

  • Helping clients to achieve financial independence, using tax-sensitive techniques as appropriate.
  • Helping clients to maintain financial independence by providing unbiased investment advice and trusteeship.

For specifics on how we might help you, contact our asset-management specialists.



(March 2016)

© 2016 M.A. Co. All rights reserved.

Changes in Social Security benefits

Social Security benefits in 2016 will be affected by actions and decisions made in Congress and the U.S. Supreme Court in 2015. In Obergefell v. Hodges the Court held that same-sex couples have a constitutional right to marry in all states. That also means that, if such couples do marry, they have the right to be treated as spouses for tax and Social Security benefit purposes. Accordingly, spousal and survivorship benefits will become available to same-sex married couples.

As of this writing, the Social Security Web site acknowledges this development, but offers no further guidance on when these benefits will begin to be paid. Those who believe they are eligible are encouraged to file immediately, as there may be retroactive payments made once the administration has worked out the new rules.

The budget deal

First, some background. The “Senior Citizens Freedom to Work Act” was signed by President Clinton in 2000. The most important change was the elimination of the earnings test for receiving Social Security benefits upon reaching full retirement age. Retirees who reach age 66 this year may collect benefits in full, no matter how high their income may be. Of course, with a higher income the amount of benefits subject to income tax goes up as well.

Another option created with that legislation was the opportunity to suspend benefits after they started, to allow for earning delayed retirement credits. However, sharp-eyed financial planners soon developed additional legal claiming strategies that may have gone beyond what Congress intended.

In November 2015, as part of the budget agreement, Congress enacted significant reforms curtailing some of these strategies. No hearings were held, no legislation was proposed, the changes simply showed up in the budget. Anyone who already has implemented one of these strategies may continue it, but the ability for everyone else to use them is being phased out.

File and suspend

Married couples have been able to have their Social Security cake and eat it, too, in a sense. Husband files for benefits at age 66, and wife immediately claims her 50% spousal benefit. Husband then suspends his benefit, waiting until age 70 to begin collecting. By doing so, his benefit will be boosted by 8% for each year of delay, up to a maximum of 32%. This approach maximizes Social Security income for the couple in their 70s and beyond.

File and suspend has not been eliminated, but during the suspension period the spousal benefit will no longer be available (nor will a child’s benefit). The new rule goes into effect May 1, 2016. Only those who are age 66 or older before that date may file and suspend their benefits under the old rules until that date.

Spousal benefit only

Couples with two incomes have paid Social Security taxes to earn two primary benefits and two spousal benefits. A person may claim only one benefit at a time, so something will be going to waste. However, the deferred retirement credit could be used to reduce the loss, especially if the husband and wife are close in age.

When Wife claimed her benefit at age 66, Husband (also age 66) claimed his 50% spousal benefit based upon her work record. That allowed his own benefit to grow until he reached age 70. At that point he would claim a benefit based upon his own work record, now increased by 32%.

This option has now been limited to those who reach age 62 by December 31, 2015. In other words, no one born in 1954 or later will have this choice. This phase-in lasts much longer, as those born in 1953 will not turn 66 until 2019.

(February 2016)
© 2016 M.A. Co. All rights reserved.

Little Known Social Security Benefits Change Coming Soon

By now the reality of the Social Security Administration’s decision to not increase   monthly benefits for 2016 is being felt by those seniors receiving benefits.  Accompanying this “freeze” of the monthly benefit came an increase of 2.3% in Medicare Part B coverage resulting effectively in a net decrease of one’s Social Security benefit.  Unfortunately for those receiving retirement benefits there was little opportunity to plan ahead.

However, there are more changes coming as of May 1, 2016, which allows seniors to plan appropriately. As part of the budget negotiations, Congress enacted (without hearings and not introducing legislation) significant reforms to the “Senior Citizens Freedom to Work Act” of 2000 which allowed for retirees to suspend benefits after they began while earning delayed retirement credits.

The file and suspend strategy allowed a spouse to file for his or her Social Security and then immediately suspend receiving the benefit. Why would one do this?  A working spouse could apply for Social Security so that the other spouse can receive the maximum spousal benefit.  Then the applying spouse suspends his or her benefit locking in the other spouses benefit.  All the while the suspended benefit is growing at 8% per year up to a maximum of 32% until age 70, when benefits must be taken. Ira J. Brower, President and CEO of Garden State Trust Company said, “that file and suspend has not been eliminated, but during the suspension period the spousal benefit will no longer be available.” He continued, “a new rule goes into effect May 1, 2016.  Only those who are age 66 or older before that date may file and suspend their benefits under the old rules.”

David Bowie: Tax Exile

David_Bowie_-_TopPop_1974_08Rock star David Bowie died of cancer in January at age 69. According to a recent account in TaxNotes, Bowie became a tax exile in 1972. At that time he had accumulated U.S. and California tax debts of some $300,000. As England then had a top marginal income tax rate of 83%, that also was not very inviting. Bowie’s wife at that time, Angela, had been educated in private schools in Switzerland, so she suggested that they explore relocating there.

The couple flew to Switzerland, hired a local lawyer, and negotiated Swiss legal residency in Blonay, a village near Lake Geneva. Bowie was required to spend significant amounts of time in Switzerland to maintain that status, but in exchange his income was taxed at only 10%.

Reportedly Bowie later changed his legal residency to Ireland by purchasing a 640-acre estate near Dublin. This could have been an even better tax deal than that offered by Switzerland. After 1969 the Irish tax code exempted royalty earnings of musicians, writers and other artists from income tax. The exemption was capped in 2007, leading some artists to relocate to The Netherlands.

Another savvy move by Bowie in the financial realm was the creation of Bowie Bonds in 1997. $55 million worth of bonds were sold, secured by Bowie’s back catalog. The interest and principal payments for the bonds came from the royalties from some 300 songs that he wrote and still owned. When the bonds were fully paid off, the intellectual property rights reverted back to Bowie. This model for securitization of royalty rights has since been emulated by other artists.

Press reports pegged Bowie’s estate at about $230 million. No word yet on which nation or nations expect to impose an estate tax on it.