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The Pivotal Law Blog

Protecting Portability Exclusion - Recent IRS Notice

Posted Tuesday, October 4, 2011 by Michael A. Larson

On September 29, 2011 the IRS issued Notice 2011-82 alerting executors of the estates of decedents dying after Dec. 31, 2010 to the requirement for filing a timely Form 706 (Estate Tax Return) to preserve a decedent spouse’s unused exclusion amount. A portability election can be made only on a Form 706 timely filed by the estate of a decedent dying after Dec. 31, 2010. Thus, a Form 706 must be timely filed (including valid extensions) even if the form is not otherwise required. Further, if the Form 706 is not timely filed, the ability to make a portability election is lost.

It should be noted that the filing of a timely return by itself will constitute the making of a portability election by the estate of a decedent dying after Dec. 31, 2010. Persons that do not wish make a portability election may do so by failing to file a timely Form 706 or by following the instructions for the Form 706 that will describe the necessary steps to avoid making the election.

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Independent Contractor v. Employee - IRS Program May Be Worth Considering

Posted Monday, September 26, 2011 by Michael A. Larson

alt text One of the most perplexing questions for many businesses is whether a worker is properly classifed as an employee or an indepndent contractor. Many businesses falsely believe that they have an option to treat workers as independent contrators or employees. Instead, there are rules that must be applied on a case by case basis. The rules for making this determination are difficult to apply and workers are often misclassified by businesses. Unfortunately, the cost of making the wrong call can be ruinous, with back employment taxes and penalties totalling up quickly to thousands of dollars.

The IRS is currently offering a new program, whereby business owners can reclassify independent contractors as employees and avoid significant liability for past payroll taxes. Per the IRS, businesses need only pay 10% of the past tax liability for payroll taxes without interest or penalties.

I have had experience making these critical distincitons between contractors and employees and I can help you to analyze the decisions that have been made to classify workers. Further, I can help you to navigate the process to avoid potentially significant past tax liabilities. Call me at 206-805-1490 if you are interested in discussing contractors, employees and avoiding past tax liabilities.

Here is a link to a Wall Street Jorrnal article that discusses the topic in more depth. WSJ Article

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State Tax Nexus Guide

Posted Thursday, September 8, 2011 by Michael A. Larson

alt text For those businesses engaged in multistate business activities, you might want to review a legal guide that I recently posted on Avvo. The title of the guide is “An Overview of Nexus for Businesses Engaging in Multistate Activities” and it can be found at http://www.avvo.com/legal-guides/ugc/an-overview-of-nexus-for-businesses-engaging-in-multistate-activities. This is an area in which I regularly advise multistate businesses. If you have a question regarding nexus or other tax issues, contact me at (206) 805-1490.

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IRS Issues Guidance for Estates of 2010 Decedents

Posted Monday, August 15, 2011 by Michael A. Larson

alt text On August 5, 2011, the IRS issued guidance to executors of estates for decedents who died in 2010. In Notice 2011-66, the IRS provides that executors of the estate of a decedent that died in 2010 may make an election on Form 8939 on or before November 15, 2011 to have the estate tax not apply and to have the Section 1022 carryover basis rules apply to property transferred as a result of the decedent’s death.

With the availability of a step up in basis of$1.3 million to assets passing to any person and an additional $3 million step up for assets passing to a surviving spouse, the decision to be taxed under the revised estate tax will depend heavily on individual facts and circumstances. However, for many estates the decision is fairly straightforward.

If the decedent’s estate is less than $5 million, the executor should generally not opt out, taking the basis step up to current fair market value and paying $-0- estate tax. For estates significantly greater than $5 million, the cost of the estate tax will generally exceed any benefit from a basis step up and the executor should opt out of the estate tax.

For estates in between, further analysis is necessary to balance the estate tax cost with the benefit from a step up in basis. Many factors are involved including the original cost basis, whether property will be held long term or sold quickly and the change in fair market value since date of death.

Executors should take note that if they choose not to opt out of the estate tax, the Form 706 for 2010 decedents is due by September 19, 2011.

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Maximize Estate Tax Savings with GRATs

Posted Monday, August 8, 2011 by Michael A. Larson and Michael A. Larson

alt text President Obama’s 2012 budget, while nowhere close to law, does indicate areas of estate tax planning that taxpayers should consider using before they are restricted. One of these techniques is grantor annuity trusts or GRATs. Obama would place restrictions on the use of GRATs beginning in 2012, including the requirement of a 10 year minimum term and a remainder value in excess of -0-.

The GRAT allows taxpayers to transfer assets while retaining an income annuity. The grantor receives a fixed annuity for a specified term and the beneficiaries receive the remaining principal at the end of the annuity term. The gift, determined at the time that the GRAT is established, is the theoretical remainder of the trust calculated using a statutory interest rate, which is at historically low interest rates in the current economy. As long as the trust assets increase in value at a rate in excess of the statutory rate, the excess is transferred to heirs with no gift tax.

alt textA popular form of the GRAT is a “zeroed out” GRAT. The GRAT is structured so that the remainder interest transferred to the beneficiaries is valued at -0-, incurring no gift tax. If the appreciation in value of the trust assets exceeds the statutory rate, which is currently set at 2.2% for August of 2011,the excess appreciation can be transferred to heirs free of gift tax. Given the recent downturn in the stock market, persons who expect a recovery in market prices in future years could transfer significant asset appreciation with no gift tax. Meanwhile, if the appreciation is not realized there is virtually no risk to the grantor, due to the lack of a gift tax at the establishment of the GRAT.

If you are interested in learning more about the use of GRATs in estate planning, contact Ron Bueing or Mike Larson for more information.

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