FROM THE COVER
Ah, l’amour. In honor of Valentine’s Day, we present Man Ray’s obviously appreciative portrait of his second wife, “Juliet,” dancing the flamenco, the Andalusian dance of love. The oil on canvas was painted in 1947 and sold on Dec. 13, 2007, at Sotheby’s “Impressionist and Modern Art” auction in Paris for about $722,766. Man Ray—born Emmanuel Radnitzky in Philadelphia to Russian-Jewish immigrants—grew up in Brooklyn and lived in both New York and Los Angeles. But the quintessentially surrealist artist lived most of his adult life in Paris. Juliet, for her part, was a Bronx-born dancer and artists’ model, whom Man Ray met in 1940 on a blind date in Hollywood, Calif. The artist and his model were married for about 30 years. (Cover Image: Courtesy of Sotheby’s)
A great exception is made in this issue to Trusts & Estates’ usual rules about article length. David F. Powell’s and Tye J. Klooster’s “Blockbuster Guide to Drafting Florida Trusts,” starting on p. 47, fills nearly 12 full pages. Normally, we confine features to about five pages. Though many readers are lawyers adept at slogging through tomes, the editors and writers of Trusts & Estates strive to pack the most information into the least space out of respect for our readers’ time. Extra space is warranted for Powell’s and Klooster’s mini-treatise because all trust forms in Florida must be updated now that state’s new trust code is in effect. This effort requires insight and precision. Powell, one of drafters of the Florida Trust Code, is well-suited to make suggestions, so his article with Klooster is an excellent start. Also, the two have been so helpful as to draft sample trust provisions, available at trustsandestates.com in the Bookstore & Library’s “Supporting Documents” section. Look for this icon:
BRIEFING
Tax Law Update
David A. Handler, partner in the Chicago office of Kirkland & Ellis LLP, reports on the U.S. Supreme Court decision in Knight on the deductibility of trusts’ investment advisory fees; the U.S. Tax Court decision in Estate of Lee finding there is no estate tax marital deduction unless the spouse actually survives; Private Letter Ruling 200751022 finding the rental of a caretaker house didn’t nix a QPRT; and PLR 200750019 finding new individual retirement accounts (IRAs) created from a decedent’s IRAs are inherited IRAs.
Mega Gifts
David T. Leibell and Daniel L. Daniels, partners in the Stamford, Conn., office of Wiggin & Dana LLP, report on a comprehensive study that reveals how the largest gifts in the United States are being distributed. Higher education tops the list.
FEATURES
Retirement Planning
Adjusting IRAs’ Investment Returns
By David S. Sennett
Trustees be warned: Using the Internal Revenue Service’s approved route could expose you to personal liability for improperly exercising the Uniform Principal and Income Act’s adjustment power. Don’t go there. Instead, a custodial IRA should offer the trustee of the individual retirement account (IRA) beneficiary the opportunity to exercise the power to adjust. Or, if state law permits, an amendment could enable the trustee of the IRA beneficiary to direct adjustment of the account’s investment return. There also are “the self-contained individual retirement trust remedy,” “the adjustment remedy with a unitrust twist,” and “the legislative remedy.” Author David S. Sennett explains.
David S. Sennett is an independent fiduciary risk consultant in Delray Beach, Fla.
Charitable Giving
A Symphony of Philanthropy
By Kim Wright-Violich & Christopher W. Geison
For some donors, using giving vehicles in combination minimizes the trade-offs associated with selecting just one. But while using charitable gift vehicles in combination can achieve significant benefits for donors and for the social sector, we must exercise caution when combining gift structures. The Internal Revenue Service has invalidated numerous arrangements, so that assets held in the faulty giving structure were included in the donor’s estate and tax advantages were lost. The authors look at the merits and trade-offs of using grant-making vehicles such as donor-advised funds, private foundations and split-interest charitable trusts in different combinations, beginning with the most basic and proceeding to more advanced arrangements.
Kim Wright-Voilich is president and Christopher W. Geison is a director at Schwab Charitable in San Francisco.
Valuations
Lack of Marketability
By Annika M. Reinemann
There is no doubt that one of the most difficult areas of valuation is quantifying and justifying a lack-of-marketability adjustment. While it’s undisputable that some downward adjustment is justified to account for a lack of ability to convert an investment into cash, the magnitude of that adjustment is often a contentious subject. Valuation professionals are being challenged to refine their conclusions. Practitioners should be familiar with the latest thinking on marketability and illiquidity. Author Annika M. Reinemann therefore offers an overview of the available methodology and current theory.
Annika M. Reinemann is a managing director of Cogent Valuation in San Francisco.
COMMITTEE REPORT
Estate Planning & Taxation
Dancing in the Dark
By David R. Nave
About 30 years ago, Congress passed the Tax Reform Act to help protect against abusive tax shelters. In that act, Internal Revenue Code Section 469 curtails the use of deductions for losses from passive investments. And at the last minute, Congress decided that the passive loss rules also should apply to estates and trusts (other than grantor trusts). Yet the federal lawmakers did not take into account the complexities of Subchapter J of IRC 469 in applying the passive loss provisions. And all these years later, the Treasury Department has yet to promulgate regulations coordinating the passive loss rules with Subchapter J. Trustees and tax practitioners are left with many unanswered questions. Author David R. Nave discusses how practitioners are coping—and the issues they should consider.
David R. Nave is a senior vice president and tax director at Pitcairn Financial Group in Jenkintown, Pa.
Basic Trust Issues In 1031 Exchanges
By David Shaleuly
Has the real estate market meltdown prompted you to consider reshuffling holdings? Under IRC Section 1031, a taxpayer may exchange property held for investment or business use, for like-kind property. If the exchange is handled properly, a taxpayer receives a deferral of the capital gains tax associated with the transfer. Any realized gains are deferred until the sale of the replacement property. However, the IRS has imposed mechanical requirements on Section 1031 exchanges that must be followed if a taxpayer is to achieve a successful tax-deferred exchange. The author explains how the new rules work.
David Shaleuly is president of Wachovia Exchange Services in Winston-Salem, N.C. He also founded and manages Wachovia Exchange Services, a subsidiary of Wachovia Corporation.
Discretionary Trusts Primer
By Michael J. Cenatiempo & Caroline S. Marciano
For decades, wealth planners have had discretionary trusts in their arsenal. These types of trusts have significant advantages, including the flexibility to deal with changing circumstances and a relatively simple preparation process. But there are significant differences between discretionary trusts that are “pure” and those that have standards for a trustee to follow. Understanding the merits of both types and knowing how they operate is essential.
Michael J. Cenatiempo is a managing partner and Caroline S. Marciano is an associate at Cenatiempo & Ditta, L.L.P. in Houston.
Blockbuster Guide To Drafting Florida Trusts
By David F. Powell & Tye J. Klooster
The Florida Trust Code (FTC), which came into effect on July 1, 2007, changed the rules for nearly all of the Sunshine State’s trusts, regardless of when they were created. Now, all these Florida trusts must be updated. The question is how practitioners should do that. The authors are particularly well-situated to offer suggestions, as one of them, David F. Powell, helped draft the FTC. Here are their suggestions, along with some sample forms, available on the Trusts & Estates website at www.trustsandestates.com.
David F. Powell is a professor at Florida State University College Law in Tallahassee, Fla., and Tye J. Klooster is an attorney in the Chicago office of Katten Muchin Rosenman LLP.
PERSPECTIVES
Estate Planning & Taxation
Savings Plans Are Threatened
By Susan T. Bart
Practitioners must voice objections before it’s too late. The advantages of Section 529 educations savings plans will be lost if the IRS adopts the rules in its Advance Notice of Proposed Rulemaking issued Jan. 17, 2008. While the Service simply wants to deter abuse, what it’s doing is throwing the baby out with the bathwater. Here’s what the IRS proposes to do and why some of these changes are misguided. The Service is accepting comments until March 18, 2008.
Susan T. Bart is a partner in the Chicago office of Sidley Austin LLP.