According to congressional aides, the House of Representatives is likely to propose a temporary, one-year extension of the 2009 estate tax rates ($3,500,000 exemption and a 45% tax rate). While many in Congress would prefer a permanent solution, time is running short for a bipartisan group of senators to agree on a permanent tax bill.

Some insiders in Washington believe there is still a chance for the Senate to strike a deal for a permanent rate structure. Last April, a majority of the Senate, including 11 Democrats, voted for an amendment that would have exempted estates under $5,000,000 and set a 35% tax rate.

Stay tuned.

For more information regarding this topic, please e-mail your requests to Julius H. Giarmarco, or call Julius at (248) 457-7200.

Since our March E-Update, where we first reported the poor track record of non-spouse IRA inheritors in bankruptcy court, another unfavorable decision has come to light, now making IRA inheritors "1 for 8" in this regard. How have the Chapter 7 bankruptcy trustees been so successful? By demonstrating the differences between inherited IRAs and "regular" IRAs, the bankruptcy trustees have been able to persuade judges that the statutory protection afforded regular IRAs should not extend to inherited IRAs.

What differences? Here are a few: (1) No contributions can be made to inherited IRAs at any time; contributions can be made to regular IRAs until the year the IRA owner attains age 70½; (2) no additional 10% tax under IRC Section 72(t) applies to distributions to IRA inheritors who are under age 59½; though there are exceptions, the same tax generally applies to all distributions to regular IRA owners who are under age 59½; and (3) mandatory withdrawals must be taken from inherited IRAs; no mandatory withdrawals must be taken from regular IRAs prior to the year the IRA owner attains age 70½. These, and other differences, led one court to declare that "fundamental changes in the nature of the IRA occurred upon the death of [the owner]".

It should be noted that these cases do not represent a breach in creditor protection for regular IRA owners. In fact, most of the cases are careful to point out that, had the original IRA owner filed for bankruptcy, the IRA in question would certainly have been protected. The same should be true for spouses who have rolled over their deceased spouse's IRAs to their own.

On the other hand, since most 401(k)s and 403(b)s ultimately wind up as non-spouse inherited IRAs, these bankruptcy court decisions can be fairly said to have implications for those types of accounts as well.

The planning solution? Name a spendthrift trust as the IRA beneficiary. The bankruptcy code specifically excludes assets held by the same from the bankruptcy estate. Of course, if a "stretch-out" is desired, be sure that the spendthrift trust qualifies as a "see-through" trust (either "conduit" or "accumulation") so that the life expectancy of the trust beneficiary can still be used to calculate RMDs from the now better protected retirement plan account.

For more information regarding this topic, please e-mail your requests to Salvatore J. LaMendola, or call Sal at (248) 457-7204.

A district court has held that assets gifted under a durable power of attorney that lacked language authorizing the attorney-in-fact to make gifts were includible in the deceased principal's gross estate.

The then-applicable Pennsylvania statute provided that, when a principal intends to authorize the agent to make a gift under a power of attorney, the authorization must be specifically stated in the power of attorney. Despite the absence of the required language, the decedent's estate argued that the attorney-in-fact could nevertheless issue the gift checks because the attorney-in-fact and the decedent had discussed the making of gifts, and the decedent had agreed to do so (i.e., the decedent had ratified the gifts). A district court found this ratification theory unconvincing, given the stated purpose of the Pennsylvania statute - to address the proper manner in which a principal may authorize an agent to make a gift under a power of attorney - and the fact that the Pennsylvania Superior Court has construed the statute narrowly.

Regardless of the state of residence, it is prudent to give gift giving authority (within limits) to an attorney-in- fact. This will confirm the intent of the client and prevent a disruption in an ongoing gift-giving program.

Finally, keep in mind that, when drafting a durable power of attorney, the attorney-in-fact should not have such broad authority (gift giving or otherwise) as to have a general power of appointment over the principal's assets, for this will cause inclusion of the assets over which the attorney-in-fact can act in the attorney-in-fact's estate.

For more information regarding this topic, please e-mail your requests to Randall A. Denha, or call Randy at (248) 457-7205.

If a life insurance policy is gifted shortly after it is purchased, its gift tax value is the gross premium paid by the donor.

If a person makes a gift of an existing policy, and the policy is a single-premium or paid up, its gift tax value is the single premium the insurer would charge currently for a comparable policy of equal face value on the life of a person who is the insured's age at the time of the gift. Treas. Reg. Sec. 25.2512-6(a), Example 3.

If the gift is of a policy where further premiums are due, then the gift tax value is the policy's "interpolated terminal reserve" plus the unearned premium. Treas. Reg. Sec. 25.2512-6(a), Example 4. This figure is provided by the carrier on Form 712.

The FMV of a life insurance policy distributed from a qualified retirement plan is the greater of: (1) the policy's interpolated terminal reserve, any unearned premium, plus a pro rata portion of the estimated dividends to be paid for that policy in the year of the gift, or (2) the PERC value (PERC stands for premiums, earnings, and reasonable charges). Revenue Procedure 2005-25.

But, what if the insured is in poor health or uninsurable at the time of the gift? Can we still value the policy in the manner described above? There is no clear answer and there are no cases directly on point. In such event, it might be prudent to obtain a life settlement quote from a settlement broker.

For more information regarding this topic, please e-mail your requests to Julius H. Giarmarco, or call Julius at (248) 457-7200.