May 2009 TOC

May 2009 Issue of Trusts and Estates

On the Cover

Spring is here, harbinger of hot, summer nights. Hemendranath Mazumdar's "Untitled (Manas Kamal)" reminds us of just that. The oil on canvas sold on March 19, 2009 at Christie's "South Asian Modern and Contemporary Art" auction in New York for $74,500 - that's almost $15,000 more than its high estimate. It's an alluring image that reflects the influence that both Indian nationalism and British imperialism had on this famous Bengali artist.

Indeed, Mazumdar's background is a true "East meets West" story. Born in 1894 in what is now Bangledesh, he studied at various art school schools in Calcutta. Women of his native Bengal, most bathing or draped in wet saris are considered the artist's trademark. But his painting style is clearly western.

Mazumdar became one of the few Indian artists of the 20th century to enjoy both monetary success and critical appreciation. After India gained its independence in 1947, he was invited to paint a mural to decorate an "All India" art exhibition held in Calcutta, for which he painted several scenes of Bengali life. Painting this mural reportedly drained the artist's health. Mazumdar passed away in 1948 when he was just 53-years-old.

Some of our other favorites from this Christie's auction of South Asian art were:

  • p. 22, B. Prabha's 1960 painting, which sold for $11,250; and
  • p. 41, Kamal Mitra's 2007 painting, which sold for $38,750;


BRIEFING

9/ Tax Law Update

David A. Handler, partner, and Alison E. Lothes, associate in the Chicago office of Kirkland & Ellis LLP, report on:

  • Estate of Erma V. Jorgensen v. Commissioner - Once again, the Internal Revenue Service has triumphed over a family limited partnership - this time in a fight over the estate of a war hero's widow, T.C. Memo 2009-66 (March 26, 2009).
  • Private Letter Ruling 200910008 (March 6, 2009) - An extension of time was granted for S corporation elections - but the Service made an unusual and noteworthy comment on Internal Revenue Code Section 675 substitution power.

11/ The Appeal of Christiansen

David T. Leibell and Daniel L. Daniels, partners in the Stamford, Conn., office of Wiggin and Dana LLP, discuss the government's appeal and the just-filed briefs in an important legal victory for taxpayers trying to do "charitable lid" planning. Christiansen v. Commissioner, 2009 WL 789131, case identification number 08-3844 (8th Cir. 2009).

FEATURES

Retirement Benefits

13/ Cleaning Up the Mess Madoff Made of IRAs
By Robert S. Keebler, Michelle Ward, & Peter Melcher

There are some measures that taxpayers might take to soften, somewhat, the toll that frauds have taken on their retirement plans. They might claim deductions for IRA losses, reverse wasted tax payments on Roth conversions, avoid tax on amounts recovered from the Securities Investor Protection Corporation or the bankruptcy estate, eliminate current tax on excess distributions and minimize the value of the IRA in their estates. Consider your options and whether you wish to exercise them.

Robert S. Keebler is a partner and the chair of the Financial & Estate Planing Team at Virchow Krause & Company, LLP, in Appleton, Wis.

Michelle Ward is a senior consultant at Virchow Krause & Company, LLP, in Appleton, Wis.

Peter Melcher is a senior manager at Virchow Krause & Company, LLP, in Milwaukee.

Philanthropy

18/ What Form Should Your Foundation Take?
By Don R. Weigandt & Janine Racanelli

When establishing a private foundation, donors are faced with a choice: which of two types of legal entities should they select: a trust foundation or a corporate foundation (also known as a non-profit corporation)? Most advisors favor one form over the other, and more often than not the corporate form is chosen. The reasoning varies, but often liability or governance concerns rank high in the decision. That choice deserves a second look. In most situations, the trust form is as effective as, and in some cases it's actually superior to, the corporate form.

Don R. Weigandt is a managing director in JP Morgan Private Bank's Los Angeles office.

Janine Racanelli is a managing director in JP Morgan Private Bank's New York office. She also heads the firm's Advice Lab.

24/ How To Help Foundations From Being "Madoffed"
By David T. Leibell & Phyllis Maloney Johnson

If private foundations losing billions to Bernard Madoff's Ponzi scheme and going out of business weren't enough of a cautionary tale for private foundations everywhere, add this: At least two state attorneys general are examining the actions of the foundation boards that were caught flatfooted by the Madoff disaster. And, of course, the glare of these bad headlines and state investigations comes after a decade of the federal government's increasing scrutiny of how charities handle their money and a recent doubling of the federal excise tax rates on private foundations. Clearly, now is an excellent time for foundation managers and those who advise them to review the laws and latest decisions governing their investment decisions. Here's your guide.

David T. Leibell is a partner in the Stamford, Conn., office of Wiggin and Dana LLP. He's also chair of the Trusts & Estates advisory committee on philanthropy.

Phyllis Maloney Johnson is an associate in the New Haven, Conn., office of Wiggin and Dana LLP.

COMMITTEE REPORT

Estate Planning & Taxation

38/ QPRT Exit Strategy
By Bruce J. Bettigole

How do you respond when your client asks what'll happen when the term of his qualified personal residence trust is finished and he still wants to use the property? Do you reassure him: "You'll just enter into a lease providing for fair market rent - no problem." And are there really no problems? Such lease arrangements raise some serious administrative questions: (1) Who's the lessor? (2) How is rent determined? (3) How are rental payments administered? And, (3) how are rental payments treated for income tax purposes? Here are some answers to consider.

Bruce J. Bettigole is senior partner with the Wellesley Hills, Mass. law firm of Gilmore, Rees & Carlson, P.C.

42/ The Pomeroy Bill Sledgehammer
By William H. Frazier

The valuation of fractional interests in family-owned businesses and investment entities faces possible extinction. And the two possible executioners are Congress and the Treasury Department. In the House of Representatives, the threat comes in the form a bill introduced by Democratic Congressman Earl Pomeroy of North Dakota that seeks to eliminate the use of valuation discounts in valuing family limited partnerships (FLPs). The Pomeroy bill, formally known as "Certain Estate Tax Relief Act of 2009," also seeks to eliminate the use of minority interest discounts for family businesses. The Treasury is considering making similar changes through regulation. But these efforts are wrongheaded because they're based on faulty assumptions, distort the law, and, worse, they're completely unnecessary for preventing taxpayer abuse.

William H. Frazier is the Dallas-based senior managing director and owner of Howard Frazier Barker Elliott, Inc. He's also a member of the Trusts & Estates advisory committee on valuations.

46/ Borrowing To Pay the Estate Tax
By Louis S. Harrison

Liquidity planning for estate taxes in our current economic environment is one of the most important aspects of estate planning. Estates with a closely held business, family limited partnership, or commercial real estate (and occasionally, very expensive residential real estate) often run into issues of how to pay the estate tax within nine months of the owner's death. And often insurance is not always available or purchased to provide the liquidity. In such cases, the primary decisions are which of four methods the estate could or should use to pay estate taxes when readily available liquidity is insufficient: internal financing, third party financing, a discretionarily allowed extension under Internal Revenue Code Section 6161, or a mandatory extension under IRC Section 6166. Here's a step-by-step look at the principles and decisions that go into choosing.

Louis S. Harrison is a name partner in the Chicago law firm of Harrison & Held LLP. He's also a co-chair of the Trusts & Estates advisory committee on Estate Planning & Taxation.

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