Table of contents for the September 2007 issue of Trusts and Estates magazine.


What better way to pay hommage to a friend than to immortalize him in a painting? That’s precisely what German artist Lucian Freud, grandson of Sigmund Freud, did for Bruce Bernard, who was initially reluctant to sit for the portrait. Bernard was one of Lucian Freud’s closest friends for 58 years. Bernard also was the picture editor of The Sunday Times Magazine, a photographer, and prolific writer, including the author of a famous monograph of Freud’s works. His portrait, simply titled “Bruce Bernard,” broke the world record price for a work by a living European artist, selling for an astounding $15.6 million at Christie’s “Post-War and Contemporary Art” auction on June 20, 2007 in London.

Other highlights from this record-breaking auction include these works by Freud’s contemporary, Francis Bacon:
•“Landscape With Car,” which the artist painted during 1945-1946, was one of only a few paintings Bacon made that survived World War II. It sold for a little over $8.5 million.
•“Two Men Working in a Field,” painted in 1971, is Bacon’s depiction of two mysterious, muscular figures digging in an irrigated field. It sold for a little over $10 million.


Tax Law Update
David A. Handler, partner, and Margaret L. Hudgins, associate, in the Chicago office of Kirkland & Ellis LLP, report:
Qualified severance regulations—The Internal Revenue Service has issued final and proposed regulations regarding “qualified severances” of trusts for generation-skipping transfer (GST) tax purposes under Internal Revenue Code Section 2642(a)(3).
Trust reformation—In Private Letter Ruling 200728033, the IRS said the reformation of a trust for a grantor’s grandchild born out of wedlock would not affect the trust’s GST status.
• No duty—In the Matter of Galloway, a Minnesota state court held that a corporate trustee does not have a duty to transfer marketable securities held in a qualified terminable interest property marital trust to a family limited partnership.
• Trumped again— In PLR 200730011, the IRS has once again held that IRC Sections 671 through 677 trumps Section 678.

Type III SO Noose To Tighten
The IRS has announced it intends to issue proposed regulations on Type III supporting organizations (SOs). Private foundations will no longer be able to masquerade as Type III SOs. In fact, it’s likely that Type III SOs will be held to much higher standards of accountability and that those involved in them will lose significant control.



Pepperidge Farm Legacy
By John M. Janiga and Louis S. Harrison

Beyond goldfish crackers, it’s also going to be a Supreme Court ruling in Knight, a case addressing the long-debated question: Does Internal Revenue Code Section 67(e) allow estates and trusts to claim a full deduction for investment management fees (IAFs), or are such deductions allowable only to the extent that they exceed 2 percent of a trust’s adjusted gross income? The stakes are substantial for the wealthy. Having their trusts pay IAFs without full deductibility whittles away at the trust corpus over time. For the financial industry, full deductibility means firms can keep more assets under management, reduce administrative costs, have fewer arguments with clients over fees, and generally have simpler accounts and tax planning.

John M. Janiga is a professor in the School of Business Administration at Loyola University Chicago. He is also of counsel at Spagnolo & Hoeksema in Hoffman Estates, Ill.

Louis S. Harrison is a name partner at Harrison & Held LLC in Chicago. He also is a co-chair of Trusts & Estates’ estate planning and taxation committee.

Disclaimer QTIP Trusts
By Peter D. Crawford, Jr.

One viable alternative to the grantor-retained annuity trust is what author Peter D. Crawford, Jr. calls “disclaimer QTIP trusts.” This technique has some significant advantages (including mutability) but also some disadvantages. The grantor-retained annuity trust offers greater gift tax leverage. The disclaimer qualified terminable interest property (QTIP) trust works best for owners of closely held businesses with the potential for explosive growth—and it only works for married donors. Still, it’s an option worth knowing and considering.

Peter D. Crawford, Jr. is a partner at Greenbaum, Rowe, Smith & Davis LLP in Iselin, N.J.


Insurance LLC
Helps Business Owners
By Steven B. Gorin

Author Steven B. Gorin helped procure for a client a PLR that approves a life insurance funding mechanism that will help owners of closely held businesses buy the interests of a co-owner who dies. This is the first time that the IRS has ruled on such a premium-splitting technique.

Steven B. Gorin is a partner at Thompson Coburn, LLP in St. Louis.



Roth IRAs and You
By Marcia Chadwick Holt

Thanks to the final regulations under Internal Revenue Code Section 402A, even if your modified adjusted gross income exceeds the income limitations, you may establish a Roth IRA by rolling over a Roth account that’s in a 401(k) plan (a “Roth 401K account”) into a Roth IRA. But you can only do this in 2007 and again after 2009. In 2007 and 2008, there’s a problem. Author Marcia Chadwick Holt explains.

Marcia Chadwick Holt is a partner at Davis Graham & Stubbs LLP in Denver and is a member of Trusts & Estates’ retirement benefits committee.

Sticky Situations
By Natalie B. Choate

Retirement benefits present unique challenges to the fiduciary of a decedent’s estate. In fact, an executor may have to grapple with three problematic scenarios: (1) Does an executor have the option—or duty—to “recharacterize” a decedent’s Roth IRA conversion? (2) Can or should an executor roll over plan distributions that a decedent received? And (3) what is an executor’s personal liability for penalties incurred due to a decedent’s failure to take required minimum distributions (RMDs)? These questions don’t have easy answers, so executors must be aware of their choices and the possible consequences.

Natalie B. Choate is of counsel at Bingham McCutchen and is a contributing editor on Trusts & Estates’ retirement benefits committee.

Section 409A Alert
By Thomas C. Foster

Quick—learn to issue spot. Section 409A and its recently issued final regulations establish rules that must be followed to avoid punitive tax treatment of many arrangements intended to defer receipt of compensation for both employees and independent contractor service providers. Knowing those rules and properly designing arrangements to comply with them is primarily the responsibility of employee benefits attorneys advising employers and other service recipient organizations. But wealth advisors must be able to identify potential problems—because it is their clients who’ll have to pay the penalties. Deadline for compliance is Jan. 1, 2008.

Thomas C. Foster is the director of McCandlish Holton, PC, in Richmond, Va. and a member of Trusts & Estates’ retirement benefits committee.



Surviving and Thriving in the Tax Patent Arena
By Gerald B. Treacy, Jr.

Debate rages over whether tax patents are appropriate, or even legal. Congress is considering bills that would eliminate or curtail the ability to procure tax patents. But even if the federal lawmakers stop future patents, those that have been granted or are pending at the time of the legislation likely will remain valid. And that means all estate-planning practitioners must immediately adopt practices to ensure that they do not infringe—or give cause for clients to file legal malpractice claims. A tax patent applicant offers this guide.

Gerald B. Treacy, Jr. is a partner at Treacy Law Group, PLLC in Poulsbo, Wash. He also is of counsel at Montgomery Purdue Blankinship & Austin, PLLC in Seattle.

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