Jul 1, 2005 12:00 PM, Rorie M. Sherman Editor in Chief

By: Rorie M. Sherman Editor in Chief

From David A. Handler, partner with Kirkland & Ellis LLP in Chicago, we have this report:

• Disclaimers in favor of donor-advised funds do qualify. In Private Letter Ruling 200518012 (Dec.17, 2004, released May 6, 2005), the decedent left property to her grandchildren under a trust agreement. The trust provides that if a grandchild disclaims any portion of his or her bequest, the disclaimed portion will be distributed to a donor-advised fund set up in the disclaimant's name. During his lifetime, the disclaimant will serve as the advisor to the fund, and will be able to recommend disbursements to charity. A disclaiming grandchild cannot control the disposition of the property passing to his fund and the final decision regarding the use of the disclaimed property rests with the administration of the foundation. Therefore, because the grandchildren are not employees of the fund or foundation, the disclaimed property will be considered to pass without any direction on the part of the disclaimant, within the meaning of Internal Revenue Code Section 2518(b)(4) and the proposed disclaimers will constitute qualified disclaimers under IRC Section 2518.

• Discount for built-in capital gains tax liability is reduced. In Estate of Jelke, T.C. Memo. 2005-131 (May 31), the Tax Court held that the estate tax value of a decedent's interest in a closely held corporation would be subject to valuation discounts for lack of control (10 percent discount) and marketability (15 percent discount), as well as a discount to reflect the built-in capital gains tax liability. However, the discount for the tax liability was itself discounted to reflect when the corporation would reasonably incur the tax. The corporation's primary investment objective was long-term capital growth, resulting in low asset turnover and significant, unrealized capital gains. Thus, at the time of the decedent's death, an assumption of complete liquidation was inappropriate and the reduction for the built-in capital gains tax liability was determined by computing the corporation's average annual turnover, which would cause the capital gains tax to be incurred over a period of 16.8 years. A 13.2 percent discount rate was applied to that tax liability (based on the average annual rate of return for large-cap stocks) to determine the present value of the capital gains tax liability.

• Section 2036 case: condominium is included in an estate. In Estate of Tehan, T.C. Memo 2005-128 (May 31), the Tax Court held that a decedent's gross estate included the value of a condominium that the decedent had transferred to his eight children in a series of fractional interest gifts, during the three years preceding his death. After making the transfers, the decedent continued to live in the condo free of rent, paid all the unit's monthly expenses and did not seek his children's permission to invite guests or redecorate the place. The court held that the decedent retained the right to possess and enjoy the residence during his life, causing it to be included in his estate under IRC Section 2036.

• Appeals court issues decision on Section 2036's “bona fide sales for adequate and full consideration.” In Estate of Abraham, 1st Cir., No. 04-1886 (May 25), the U.S. Court of Appeals for the First Circuit affirmed a Tax Court decision that found an estate included property purportedly transferred to the decedent's children by gift and purchase because the purchases were not “bona fide sales for adequate and full consideration” and the decedent retained rights in the income from the property. The decedent, Ida Abraham, had transferred real estate into three family limited partnerships (FLPs), and transferred interests in the partnerships to her children and their families.

T&E Premium Content

To read the rest of this article, please login to our Premium Content section:

Registered Web Site Users
User Name:
Password:
Remember Me