Friday, November 26, 2010

Don't Sell the Farm!

Over Thanksgiving Break, I was talking with a family of farm descendants. Their father died and his estate consists mostly of farm acreage. The appraised value of the land was considerably high and would subject the estate to a large amount of estate tax liability. Of course, there is little liquidity to pay any estate tax.

They need to consider whether the real property qualifies to use a special use valuation. The advantage is that the real property is valued at its farm use value rather than its fair market value. If the farm is located in Ohio and passes from the decedent to a qualified heir, such as a surviving spouse or children, it may qualify. The farm property must be devoted exclusively to an agricultural use. Also, the adjusted fair market value of the farm real estate must be at least 25% of the value of the decedent's adjusted gross estate.

Tuesday, November 23, 2010

Recommended Website:

Another website that you might want to be aware of is, which is the United States Government's official web portal. There is a section on vital documents and what to do if they are lost or destroyed. This covers everything from your passport to damaged U.S. currency. Other topics are benefits (with a benefit calculator included), government jobs and government auctions.

Sunday, November 21, 2010

The Qualified Domestic Trust

As stated in our previous post, the unlimited marital deduction is disallowed for distributions to non-citizen spouses. There is an exception to this disallowance however. A Qualified Domestic Trust (QDOT) can be created whereby property can pass to the non-citizen surviving spouse and qualify for the marital deduction. The QDOT can be created post-death provided that the property is transferred to the trust or is irrevocably assigned prior to the estate tax return due date.

Tuesday, November 16, 2010

The Unlimited Marital Deduction

There is no estate tax liability for assets passing from a deceased spouse to the surviving spouse. Both Ohio and federal provide for an unlimited marital deduction for the transfer of property between spouses. This is based upon the view that the husband and wife are one economic unit.

The marital deduction applies to transfers during lifetime and at death. The deduction is only for U.S. citizens regarding property passing from one spouse to the other (the citizenship requirement is to ensure that the government can ultimately collect the estate tax from the surviving spouse's estate). This is one reason that estate planning attorneys want to confirm that husband and wife are both U.S. citizens (especially with Ohio's close proximity to Canada).

Technically, the marital deduction simply defers the estate tax and does not avoid it. While an outright bequest of decedent’s entire estate to a spouse will eliminate estate tax at the decedent’s death, the surviving spouse’s estate will be taxed on all of the assets transferred from decedent (that is unless the surviving spouse consumes or gifts away the assets). As a consequence, the marital deduction simply defers the tax to the second estate.

Sunday, November 14, 2010

What Happens to the Exemption for Generation-Skipping Transfer Tax in 2011?

We are already Mid-November and nothing has happened legislatively regarding the federal estate tax exemption. Although the Generation-Skipping Transfer (GST) Tax is independent of the federal estate tax, legislative changes to the exemption amounts would likely occur at the same time. Since 2004, the GST exemption equaled the estate tax applicable exclusion amount. In 2009, the GST exemption was $3,500,000. In 2010, the GST was repealed, and in 2011 the tax will be back with an exemption amount of $1,060,000,indexed for inflation.

The GST tax is imposed on asset transfers to "skip persons". "Skip persons" are generally grandchildren and later descendants of the donor, if the donor's child, who is the parent of the donee is living.

The government's concern of generation-skipping transfers is best shown by example.

Rich Guy-àGuy's son-àGuy's grandson-àGuy's great grandson


First Estate Second Estate Third Estate

In the normal case, you would have 3 separate estates from which the government could tax. However, where Rich Guy's estate is placed in trust with son and grandson having right to income with principal going to great grandson, Rich Guy gets similar result and 2 generations of estate tax skipped.

Will the federal government act in the short term to change the GST exemption amount or will it go back to its 2001 level?

Thursday, November 11, 2010

A Lunch with the Ladies of the Grandview Civic Welfare Club

I have waited months and months for the motivation to return from my blog hiatus. As it turns out, my inspiration is a 90 year old club in Grandview, Ohio. Yesterday, I had the privilege to speak to the members of the Grandview Civic Welfare Club. A perk of being a male speaker for an all-ladies club is gaining admission to one of their meetings. (They meet the second Wednesday of each month at the Grandview Heights Public Library). What did I observe? A concise and relevant meeting of a group that prides itself on helping the communities of Grandview and Marble Cliff. The club was recognized last month by Mayor Ray DeGraw when he presented the group with a proclamation, declaring October 13 as "Grandview Civic Welfare Day" in the city. While a proclamation is nice and well-deserved, these members appear to be motivated by serving their community. There is also the fun aspect. If you are ever at the Grandview Heights Public Library's lower level and hear laughter, chances are it’s the Grandview Civic Welfare Association.

Monday, May 17, 2010

Capitalizing on Low Home Values – Meet the Qualified Personal Residence Trust (QPRT)

Most of us have witnessed the highs and lows of investing and understand that timing is everything. This is also evident in the real estate market where the US housing prices continue to struggle. In some circumstances, the stagnant housing market may present an opportunity for one to plan for the purpose of lowering their ultimate estate tax liability. Through the use of a Qualified Personal Residence Trust (QPRT) the grantor can transfer the title of the real estate to the trust and retain the right to continue to use the residence for a term of years with the remainder transferring to children or other beneficiaries. Assuming that the grantor survives the term, the residence will not be included in the donor’s estate for estate tax purposes. At the end of the term, the residence will be distributed to the beneficiaries, or may remain in further trust for the benefit of those beneficiaries. If the grantor outlives the term, the grantor may agree with the beneficiaries or with the trustee to continue to use the residence, so long as the grantor pays fair market rent for this use. The payment of fair market rent avoids a challenge by the IRS that the grantor’s continued enjoyment of the residence draws the residence back into the donor’s estate for tax purposes.

The transfer of the residence to the QPRT is considered a gift by the grantor for gift tax purposes; however, the gift is of a future interest in the property and thus reduces the value of the gift significantly. The grantor uses some of his lifetime federal gift tax exclusion amount or may even incur some gift tax liability now, to save more on estate tax later. If the grantor survives the term of the QPRT, the value of the house, plus any appreciation from the date it was transferred, passes to the children with no additional estate tax.


John transfers a $1 million residence to his QPRT, retaining the right to live in the residence for a eight-year term. The value of the present gift to the remainder beneficiaries might be only 50%, or $500,000. If John survives the eight-year term, the residence will not be included in his estate for tax purposes, nor will any of the appreciation in value of the residence occurring after the initial transfer. If, after eight years, the residence has appreciated in value to $1.5 million, John has succeeded in transferring this amount to his beneficiaries at the same tax cost as a transfer of only $500,000.

To read more about this topic see an article titled, Low home values shine favorable light on personal residence trusts by Robert Celaschi, appearing in Business First's Estate Planning Section, March 19, 2010.

Friday, May 14, 2010

Nonprofits Under the Gun

This morning, the Columbus Dispatch perhaps provided a valuable service to people involved in nonprofits. The article Charities up against IRS deadline also likely caused some hand wringing among these same people who probably finished their cup of coffee and dashed off to their computer to see if their nonprofit was on the list of charities in danger of losing their tax-exempt status with the IRS. The statistics from the article came from the National Center for Charitable Statistic website. The website is a very good source and is now marked as one of my "favorites". I imagine the website might be running a little slow today due to a large amount of traffic. The Dispatch article indicates that approximately 8,900 charities have a filing requirement with most of those having a filing deadline of Monday, May 17.

The good news is that gives most charities enough time to become compliant. If the charity's gross receipts are less than $25,000, all it needs to do is file a Form 990-N (e-postcard) that consists of eight easy questions. If the charity's gross receipts are over $25,000, a Form 990 return is required to be filed. It is possible to get an extension on filing the Form 990.

Friday, April 02, 2010

Recommended Website: GuideStar

We regularly come across websites or web-based products that we find highly useful. One particular website that we have used for years is GuideStar. This website covers nonprofit organizations like no other. The site permits you to search for nonprofits by name and/or location. The information that you can access depends on whether you pay for a premium subscription. With a premium subscription, you can access the organization's IRS form 990, find out about executive compensation, and much more. Even without a premium subscription, it is a valuable tool. We receive the GuideStar Newsletter via email and it frequently contains useful information.