New IRS Ruling May Boost Use of Real Estate Planning Tool
© The Wall Street Journal
A new ruling appears likely to bolster the popularity
of a tax-saving technique used by many wealthy people concerned
about estate and gift taxes.
The Internal Revenue Service ruling this week involves the use of
a type of trust often referred to as an “intentionally defective
irrevocable trust.” Lawyers and accountants say the decision
– which comes at a time when the IRS have been taking a very
hard line on tax shelter – eliminates a question mark that
had dangled over this estate-planning technique for years.
“This is a very helpful, tax-payer friendly
ruling,” say Bernard S. Kent of PricewaterhouseCooper in Detroit.
As a result, “even more taxpayers will try to take advantage”
of these trust. Though there are not hard number on how many people
employ this strategy, its use is said to be widespread.
The IRS ruling is “very good news for wealthy
people who are trying to get property out of their estate”
to benefit their heirs, say N. Jerold Cohen, a lawyer at Sutherland,
Asbill & Brennan in Atlanta. Mr. Cohen, a former chairman of
the American bar association tax section, says the decision “will
be a comfort” to many tax advisers who long had assumed –
but weren’t certain – that the IRS would adopt the position
that it now has taken.
Congress and the White House have cut estate taxes
sharply in recent years/ under current law, the basic exclusion
from the federal estate tax is scheduled to increase further, and
the top rate s set to decline, in stages through the year 2009.
The estate tax is set to vanish entirely in 2010 – but then
bounce back to life again in 2011.
As a result, there still is enormous interest in
estate-planning tools. Financial planners at several recent conferences
sat they doubt the federal estate tax will ever disappear entirely.
President Bush is fighting for permanent repeal, but that issue
went nowhere this year and remains a highly politically charged
matter in Congress.
Instead, many people are betting that Congress and
the White House eventually will agree to a compromise. The most
likely outcome: Raise the estate-tax exclusion (which is $1.5 million
this year) sharply, thus eliminating the estate tax for most people
now affected but leaving it in place for a very small number of
the nation’s super-rich.
Special types of trusts can be very valuable tools
to cut taxes. Suppose you want to give money to your kids. You can
transfer assets into an intentionally defective irrevocable trust,
or IDIT. Because of the trust’s special nature, the income
it generates is included on your personal income-tax return while
you are alive, but its asset aren’t included in your taxable
estate, says Martin Nissenbaum of Ernst & Young. “This
is a positive thing” if your goal is “to have as much
money as possible go to your kids” or other heirs.
You “effectively wind up paying the kids’
income tax on the trust income” without having to worry that
the IRS will label that payment as a taxable gift to the kids, says
Lawrence P. Katzenstein, a lawyer at Thompson Coburn, LLP, in St.
Louis.
By Tom Herman
