The Year In Review

he year 2002 was a "transitional year." We began the year awaiting the possibility of a permanent estate tax repeal, more definitive limits for arrangements such as family limited partnerships and split dollar insurance, and a clearer direction for the economy and stock market in general.

But instead of resolution and clarity, 2002 brought us distressing news and uncertainty-threatened warfare with Iraq, a serial sniper, white collar scandals, kidnappings, floods in Europe, earthquakes in Italy, tornados in the U.S., West Nile Virus, shoplifting, human cloning, total annihilation by a giant asteroid (it missed us), and even a sighting of the Bubonic Plague. Even death and taxes, our most reliable of certainties, appear to be up for grabs; we are about to have a "permanent" repeal of the estate tax (at least until Congress changes its mind) and now mortality itself is challenged by cryogenics. You just never know.

Proposed Legislation

And so after all of this "transition" we end the year much as it began. We are heading into 2003 with the exemption from estate tax holding steady at $1 million and the annual gift tax exclusion remains at $11,000. The top estate and gift tax rate drops from 50% to 49%. And we remain focused on the future for answers about the permanence of the estate tax repeal…and everything else.

Permanent Repeal: The House voted to make the estate tax repeal permanent when it passed the Permanent Death Tax Repeal Bill of 2002 (H.R. 2143) on June 6, 2002, by a vote of 256-171. A Sense-of-the-House resolution to make the repeal permanent was supported by a 242 to 158 margin on September 19, 2002. President Bush has also favored making the repeal permanent. Although the vote fell six votes short in the Senate on June 12, it stands a better chance of passage in 2003 because the Republicans regained a voting majority during the mid-term election, but 60 votes are needed for passage under Senate budget rules.

Pension Reform Legislation: A pension reform package was presented by President Bush in February 2002. The House of Representatives passed a version of this legislation in April. In July, the Senate Finance committee approved the National Employee Savings and Trust Equity Guarantee Bill (S1971). This legislative initiative is intended to provide protection of pension plan participants in the wake of the Enron scandal. Provisions address the diversification of plan assets, worker protection during plan blackout periods, information assistance to plan participants, expanded disclosure of insider trading and executive compensation. There is also a moratorium on the collection of employment taxes on the exercise of incentive stock options or under employee stock purchase plans.

Charitable Giving Legislation: Prospects may be improving for a bill that would expand tax incentives for charitable giving. Senate Majority Leader Thomas Daschle (D-S.D.) indicated in mid-September that he hoped to reach an agreement to limit debate on the bill. The Senate's version of the bill would provide about $8 billion of charitable giving incentives. One potential change that will get a great deal of attention involves a two-year deduction for charitable donations by individuals who do not itemize their deductions.

Other key provisions would permit individual retirement account rollovers for charitable purposes with no tax penalty and individual development accounts that allow for the establishment of tax-deferred savings accounts for charitable purposes. Additional provisions limit certain corporate tax shelters. A variety of amendments are being considered. One would increase the limit on a private foundation's direct holdings in a corporation from 2% to 5%. Duplicate reporting requirements were also addressed. The House of Representatives has previously passed their own version of the bill, the Charity Aid, Recovery, and Empowerment (CARE) Bill of 2002 (HR 7).

Reforms Ahead: Vice President Cheney said that President Bush was considering a tax reform package for next year as a means of strengthening the economy. Among the potential areas are a capital gains tax cut and the elimination of the double taxation of dividends.

The Split Dollar Loophole

The Treasury may have established a new speed record for responding to an abusive tax practice. Less than three weeks after an article in The New York Times reported on how split dollar insurance techniques were being used, the Treasury rolled out Notice 2002-59 and a rather sophisticated loophole was put out of business. The technique exploits a discrepancy between a life insurance company's lowest and highest published premiums for a life insurance policy. A payment of premiums is a taxable gift, but if that gift is reduced from $550,000 to a P.S. 58 rate" of $50,000, the tax liability is reduced by $250,000. And what works on a small scale can work even better on a large scale. As an interesting byproduct of the wave of split dollar arrangements, $50-million insurance premiums being paid up front resulted in a few very fortunate insurance agents seeing once-in-a lifetime commissions.

The IRS could no longer ignore the fact that thousands of such wealthy individuals were paying little or no transfer tax on such insurance maneuvers, and a huge stream of tax revenue was being diverted. As split dollar arrangements began to crop up and press the envelope, the IRS was forced to break its 35-year silence on the subject. In 2001 the IRS issued Notice 2001-10 to prevent the use of P.S. 58 rates because taxpayers were using those rates to understate the economic benefits provided under split-dollar arrangements. A new table was provided on an interim basis. In July, 2002, the Treasury returned to the split-dollar topic with Notice 2002-8 and proposed regulations on the valuation of split-dollar insurance interests. If you believe the IRS, the bottom line is that the most abusive of the split dollar arrangements were never valid in the first place. From attorney Jonathan Blattmachr's perspective, the IRS had paved the way for the use of split dollar with a 1996 ruling. For the moment, Notice 2002-59 is the last word.

A Second Bite at Strangi

In, Estate of Strangi, 115 TC 478, $10 million of assets was exchanged for a 99% interest in an FLP just two months prior to the taxpayer's death, yet the FLP was upheld for having enough economic substance. Section 2703 was found to be inapplicable, the formation of the FLP did not constitute a taxable gift, and the FLP qualified for a 31% valuation discount-effectively transforming $10 million into $6.9 million for estate tax purposes. Case closed.

Case reopened. The United States Court of Appeals for the Fifth Circuit has permitted the IRS to amend its claim and argue that assets transferred to the FLP were includible in the decedent's gross estate under Section 2036. Procedurally, it is a minor issue-a motion to amend the claim was made 52 days prior to trial, there was no indication by the Tax Court that such an amendment would unduly burden the parties or delay the proceedings, so it was an abuse of discretion not to permit the claim to be amended.

The appeal is a sign of the Service's continued interest in policing exploitation of FLPs. Estate of Strangi, Court of Appeals, 5th Cir., USTC 2002-2, No. 01-60538 (June, 2002). Thus, note that FLP discounts also failed to receive free passage in other venues. In, Estate of Godley v. Comm'r., 2002-1 USTC, 4th Cir. Ct. of App. (2002), it was concluded that no minority discount applied where options to purchase the decedent's partnership interests did not affect the contractual stream of income or the decedent's control.

In, Shepherd, 115 TC 376, affirmed 11th Cir. 2002-1 (2002), the donor signed the deed transferring land to the partnership and executed the partnership agreement simultaneously but his sons failed to sign the partnership agreement until the following day, causing the transfer of land to be deemed an indirect gift.

And in, Harper Est., T.C. Memo., 2002-121 (2002), the collective indifference to the sanctity of the partnership arrangement, including the decedent's retention of benefits from partnership assets and the commingling of personal and partnership funds led the Tax Court to affirm the IRS in including such assets in the decedent's gross estate. The bottom line here is that FLPs remain under scrutiny.

CLTs In Season

The 4.2% October rate for the valuation of split interest charitable gifts and various other transfers under section §7520 is as low as the rate has gone since the adoption of §7520 in 1989. The November, 2002 rate was 3.6%. This period of low interest rates presents an opportunity for a number of estate-planning strategies to be implemented. Grantor remainder annuity trusts and charitable lead annuity trusts are more effective when rates are lower.

September 11 Follow Ups

"Let's roll," said Todd Beamer when he and other brave Americans Jeremy Glick, Mark Bingham, and Thomas Burnett, took back flight 93 from terrorists and kept it from crashing into the White House on September 11, 2001. Beamer's family established a foundation that attempted to trademark the phrase, "Let's Roll," but two men had gotten their application in to the Trademark office a few days before them. However, overuse of the phrase is already diluting its value. After being used by the Florida State University football team, it was used by car dealerships, public relations firms, and on all kinds of merchandise.

After September 11, generous compensation funds were accumulated. Now they are being distributed to families but not without wrangling over career profiles and projected earnings. It is a sad commentary on the human condition. It certainly does not reflect the dignity of those who have left the concerns of this lifetime behind them and now stand as equals. May they rest in peace.

Minnesota handyman Joe Temeczko, a Polish immigrant who had survived Nazi and Soviet prison camps, had accumulated an estate of $1.3 million in his 86 years. On September 29, he took an hour-long bus ride to his attorney's office and executed a new will. He left his entire estate, "to the City of New York, New York to honor those who perished in the disaster of September 11, 2001." On October 14, 2001, Joe Temeczko died. The will was not contested at a November 19 probate hearing. New York officials made no response until reporters raised the issue in March, 2002.

Famous Estates

Ted Williams, 83, will long be remembered for his athletic achievements, but the unseemly public battle over the disposition of his body now stands as a stark warning to settle such matters in a definitive and private manner. "I will rescue my father's body," said Bobby-Jo Ferrell (William's daughter from his first marriage) upon learning that her half brother, John Henry Williams (the product of Ted Williams' third marriage), had his father's body moved from a Florida funeral home to a cryonics facility in Arizona. "He said we can sell Dad's DNA, and people will buy that because they'd love to have little Ted Williamses," complained Ferrell about her half brother.

The family of Sani Abacha, the late Nigerian dictator, reached a settlement in which it will return $1 billion to the Nigerian government. The family will be permitted to keep $100 million that Abacha acquired prior to his term in office.

Businessman Charles Mayhew, Sr., 81, was slain with a shotgun in 1998 but the police investigation was unsuccessful. Using circumstantial evidence, Mayhew's daughter convinced a civil jury that the murderer was Charles Mayhew, Jr. As a result, the victim's son is barred from sharing in an estate once estimated to be $8 million.

In 1973, the family of Avery Fisher donated $10.5 million to renovate a building that is part of Lincoln Center in New York City on the condition that it bears the deceased's name. The building is now being rebuilt and the Fisher family retained famed Trust and Estates attorney William Zabel to enforce that condition. Quoted in The New York Times (June 21, 2002 pB2), Zabel said, "If you get into the philosophy of giving, Maimonides said that the higher moral gift is the anonymous gift. That doesn't make the others wrong."

"It's peevish, pious, and anti-urban. He is acting like my father. If he is my father, I hope I am in the will." - Fran Lebowitz, protesting New York's billionaire Mayor, Michael Bloomberg's efforts against public smoking.

"Darn, I can't lie about my age any longer." - Brooke Astor, on the occasion of a party for her 100th birthday. As the widow of Vincent Astor, the son of John Jacob Astor, IV who went down with the Titanic, Brooke Astor inherited $122 million. She invested these funds and personally supervised the donation of $195 million to cultural institutions over half a century.

Unclassifiable Outrages

It was his last wish. He instructed his family on the scattering of his ashes. But in life, Daniel Zirkle had stabbed and killed his 4-year-old daughter and her 14-year-old step-sister. And in death, the killer's family is now barred by injunction from scattering his ashes on the graves of his victims.

"Dead peasants insurance," i.e., corporate-owned life insurance (COLI), was part of a story that The Wall Street Journal broke on April 19, 2002. Employers insure rank and file employees (without their knowledge). The employees and their families receive no benefits. Employers claim tax deductions and keep the death benefits. Thus when music-store worker Felipe Tillman, 29, died, his family received no life insurance proceeds while his employer collected $339,302.

Historical Corrections

Descendants of wronged ancestors can be relentless in trying to correct the historical record. Thus, in 2001, the great, great, great, great, great, great, great, great, granddaughter of Susannah Martin, an accused witch who was hung on Gallows Hill in 1692, was able to convince the Massachusetts legislature to clear her ancestor's name 309 years after the fact.

Descendants of Thomas Jefferson through his slave, Sally Hemings, have used DNA to support their lineal claims. In 2002, Jefferson's heirs proposed creating a separate cemetery at Monticello for Hemings descendants, but refused to invite them into the family association. "Nothing's changed in 200 years," said July Westerinen, one of Hemings' descendants.

Another in this category involves the unfortunate tale of Dr. Samuel Mudd. The expression "his name is mud," dates from about 1820, but it gained new prominence after April 14, 1865. That's when John Wilkes Booth inflicted a mortal wound to President Abraham Lincoln. In leaping from the balcony of the Ford theater to the stage, Booth broke his leg before escaping into the countryside with an accomplice. Dr. Mudd set Booth's leg, gave him lodging and a fresh horse. A military tribunal convicted Mudd of aiding and abetting Booth and he was sentenced to life in prison.

Scholars note Mudd's likely complicity in an earlier plot with Booth to kidnap President Lincoln. However, the jurisdiction of the military tribunal has been in question for 137 years. Richard D. Mudd, a doctor like his father and grandfather before him, spent 70 years trying to clear his grandfather's name. He died at the age of 101 on May 25, 2002, shortly before the case was re-argued in the U.S. Court of Appeals in September. In November, the case was dismissed. The Mudd family intends to press on with its case in Congress.

© MMII.12 K.S.