Business Law Estate Planning Legal Topics New Legal Developments Tax Law

Tell It to the Judge: No Right to Jury Trial in State Income Tax Refund Action

In the bad old days, taxes were assessed by individual tax collectors with the power to seize property. The only good part was that jury trials were available at common law in actions against tax collectors to recover illegally collected taxes. But once federal tax collectors started transferring tax receipts to the U.S. treasury, and the common law action was replaced by a statutory action, the right to a jury trial disappeared for federal tax refund actions. The California Supreme Court has just decided to follow the federal lead and has held that there is no constitutional right to a jury trial in state tax refund actions.

Elder Law Estate Planning Legal Topics New Legal Developments Tax Law

Estate and Gift Tax System Reunified in 2011: A Trap for the Unwary?

Beginning in 2011, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (.pdf) (Pub L 111–312, 124 Stat 3296) eliminates the separate $1 million lifetime gift exemption. Donors can now make taxable gifts up to the estate tax applicable exclusion amount of $5 million with no gift tax. 

Annual exclusion gifts don’t count. Donors can still give up to $13,000 per year per donee ($26,000 for married couples) free of estate and gift tax.

Beware! The estate tax law “sunsets” on December 31, 2012. Unless the law is further amended in the meantime, the exclusion reverts to $1 million in 2013. Lifetime gifts in excess of that amount would then be subject to estate tax in the donor’s estate, even if there was no gift tax when the gift was made.

Of course, that may not happen. But for now—until the law is made permanent—donors may be well advised to limit taxable gifts to $1 million. In other words, the more things change, the more they stay the same.

The Act is briefly summarized in the December 2010 issue of the CEB Estate Planning and California Probate Reporter, and will be discussed in greater detail in the forthcoming February issue and at the Estate Planning and Administration: 26th Annual Recent Developments program to be presented at five locations around the state January 21 through January 28, available soon as On Demand.

 Tax elections and reporting requirements for estates of decedents dying in 2010 and 2011 are discussed in the March 2011 update of California Trust Administration, chaps 12–14. Planning implications of the Act will be discussed in the April 2011 update of California Estate Planning.

© The Regents of the University of California, 2011. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

Estate Planning Legal Topics Tax Law

The (Incomplete) Gift That Keeps on Giving

The estate tax is repealed for estates of decedents dying in 2010, but the gift tax remains in effect for lifetime gifts in excess of $1 million. Under current law, any transfer in trust is treated as a transfer of property by gift, unless the trust is a grantor trust for income tax purposes—including transfers that are incomplete gifts for gift tax purposes. See IRC §2511(c). 

Some practitioners fear that §2511(c) could be construed as treating an entire transfer to a charitable remainder trust as a gift—including the annuity or unitrust interest retained by the donor. This is an absurd result from a tax perspective, and practitioners expect the issue to be resolved soon. But until it’s resolved, steer clear of charitable remainder trusts in which the donor retains the annuity or unitrust interest.

For more on charitable remainder trusts, see Drafting California Irrevocable Trusts, chap 18 (3d ed Cal CEB 1997).

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© The Regents of the University of California, 2010. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

Estate Planning Legal Topics Tax Law

Once and Future Estate Tax Still Not Restored

Five months into the new year there has been no Congressional action to restore the estate tax. Under current law, there is no estate tax or generation-skipping transfer (GST) tax for decedents dying in 2010, but the taxes come roaring back in 2011 with a maximum rate of 55 percent and an estate tax applicable exclusion amount of $1 million. The income tax basis of the decedent’s property is not stepped up to date-of-death value for decedents dying in 2010. Instead, the executor may allocate $1.3 million in basis increase to the property (plus $3 million for property passing to a surviving spouse). The gift tax continues to apply at a reduced rate of 35 percent to lifetime taxable gifts in excess of $1 million, but there is no GST tax on taxable gifts in 2010. As noted in The Estate Tax Repeal Mess: Are We Having Fun Yet? in the February issue of the Estate Planning & California Probate Reporter,

There is, of course, a possibility that Congress will act to change the laws applicable in 2010, and most (but not all) experts believe it is constitutional for Congress to do this retroactively to the beginning of the year. But there is little indication that Congress is in any hurry to do so.

Confronted by such a mess and the difficulty of explaining it to clients, it becomes tempting to simply ignore the situation until the law becomes more certain. Nevertheless, a review of client plans will reveal that there are situations in which relatively modest plan amendments can at least avoid making a bad situation worse.

Estate Planning Legal Topics Tax Law

Health Care Reform Includes Surprise Tax Increase for High Earners

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (Pub L 111–148, 124 Stat 119). As expected, the health care reform legislation, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (Pub L 111–152, 124 Stat 1029), includes an additional Medicare tax beginning in 2013 on individuals making over $200,000 per year ($250,000 for joint filers), bringing the Medicare tax rate to 3.8 percent for those individuals. In a surprising development, for the first time in the history of the Medicare program, the new 3.8 percent Medicare tax will apply to the net investment income of those individuals.