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That Underwater Policy Does Not Have Any Value, Right?!

SCUBATaxpayers/insureds are often surprised when they are taxed on the value of an old policy that was underwater, when it was transferred to them, causing them to assume that the policy had no value for the government to tax. Here again, the taxpayers in Schwab v. Commissioner (9th Cir. 2013), were surprised that they had recognized taxable income on the distribution to them of life insurance policies from their non-qualified plan, which had surrender charges that exceed their cash value.

Michael and Kathryn, a married couple, were employees of Angels and Cowboys, Inc., which sponsored a non-qualified multi-employer welfare benefit plan that was administered by a third party. Each of them caused the plan to purchase, with a single premium, a variable universal life insurance policy with a three-year no lapse guarantee.

When a Woman Loves a Woman: The Supreme Court Strikes Down DOMA

US Supreme CourtThis morning, in a landmark ruling for gay rights, the Supreme Court of the United States struck down the Defense of Marriage Act (DOMA), on Fifth Amendment Equal Protection grounds, in the case of U.S. v. Windsor (570 U.S. ______ (2013)). DOMA is the 1996 federal statute preventing federal recognition of same-sex marriages.

Under DOMA, marriage is defined for federal purposes as a union between one man and one woman. Such definition determined who was covered by more than 1,100 federal laws, programs and benefits, including Social Security survivor benefits, immigration rights and family leave, as well as federal tax benefits, including, as was the issue in Windsor, the unlimited federal estate tax marital deduction. Under the law, gay couples who are legally married in a state (or foreign country) that allows

When a Woman Loves a Woman: Another Federal Judge Strikes Down DOMA — Part II

Update: The United States Supreme Court heard oral arguments today in Windsor v. United States.

Update: On Friday, December 7, 2012, the Supreme Court announced that it would hear arguments in Windsor v. United States and Hollingsworth v. Perry. These cases, addressing the Defense of Marriage Act (DOMA) and California’s Proposition 8 will mark the first time the Supreme Court has addressed the question of same-sex marriage.

Update: On October 18, 2012, the Second Circuit Court of Appeals issued an opinion striking down the so-called “Defense of Marriage Act” (“DOMA”) in the ACLU and NYCLU’s Windsor v. United States case. The Court decided that when government discriminates against lesbians and gay men, the discrimination should be presumed to be unconstitutional. The Second Circuit was not the first appeals court to strike down DOMA,

To Do: Year-End Gifting. Check (or Not)

With nine days left in the year, many people are still planning how to make 2012 gifts, whether by making “annual exclusion” gifts of $13,000 per beneficiary, or by taking advantage of the 2012 gift tax exemption amount of $5,120,000. Maybe they couldn’t make up their mind before now, maybe they were waiting for the election results, or maybe they wanted to see whether the Mayan calendar was accurate before making any gifts. Whatever the reason for the last minute gifting, as the end of the year approaches, people may be tempted to make a “quick and easy” gift to their beneficiaries by simply writing a check. As the year draws to a close, however, if your gift is dependent on utilizing 2012 tax law, beware of the potential trap of making a gift by check.

A gift is not complete for tax purposes until the gift is no longer

Gifting Real Estate: A Comparison of QPRTs and Intentional Grantor Residential Trusts

As discussed in our prior post, “2012 Gift Tax Opportunities: Wait to Gift, but Do Not Wait to Plan“,  we discussed how the 2010 Tax Relief Act has provided a great opportunity for lifetime gifts to family members with a temporary increased estate and gift tax exemption of $5.12 million making these gifts potentially free of ever incurring gift or estate tax. The exemption will return to $1 million on January 1, 2013 unless Congress acts, and although most commentators think a return to $1 million is unlikely, there is a good possibility the exemption will be reduced.  However, many people are reluctant to make gifts of their liquid assets, in case they might have need of them as the get older.  Many people, therefore, are looking for ways of making a gift on a non-liquid asset, such as their home or another piece of real estate, such as

IRS Releases New Private Letter Ruling Relating to Gift and Generation-Skipping Transfer Taxes

With guest co-blogger, Washington University School of Law student, Anne Jump.

The IRS recently released Private Letter Ruling 201233008 (the “PLR”), in which the IRS ruled that a proposed partial termination and modification of a trust pursuant to state law will not (1) cause the trust to be includible in the grantor’s estate under Internal Revenue Code sections 2036 or 2038, (2) result in a transfer by settlor of trust assets pursuant to Code section 2501, and (3) will not cause the trust to lose its exempt status for purposes of chapter 13 of the Code.

The Uniform Trust Code (UTC) provides that an irrevocable noncharitable inter vivos trust may be modified or terminated upon consent of the settlor and all of the beneficiaries. U.T.C. § 411(a). From the facts set forth in the PLR, the proposed partial termination and modification of the trust at issue was likely being

Mission: Possible — Saving Estate Taxes on Life Insurance

Since Tom is back in the news this week, and because I finally watched Ghost Protocol this weekend, I thought I’d re-post this November 2011 blog on Tom Cruise’s possible use of life insurance in his estate planning.  Keep in mind, based on any divorce settlement agreement he reaches with Katie Holmes, Tom’s need to maintain life insurance may change.

When I first saw this video of Tom Cruise performing his own stunts on the outside the Burj Khalifa in Dubai (the tallest building in the world), a mile and a half above the earth, for the movie Mission: Impossible — Ghost Protocol (aka Mission: Impossible IV),  my first thought was, “Wow, how much life insurance do you think he has?”  My next thought was “Think of the estate taxes his estate will have to pay on those life insurance proceeds if the life insurance isn’t held in a proper

When a Woman Loves a Woman (With Apologies to Percy Sledge…): Another Federal Judge Strikes Down DOMA

The year was 1963, the restaurant Portofino – an eclectic restaurant in Greenwich Village, a part of New York City known as one of the centers of the gay and lesbian liberal movement. It was this night that Edie Windsor met Thea Spyer. “We immediately just fit,” said Thea, in the award-winning 2009 documentary film, Edie and Thea: A Very Long Engagement by Susan Muska and Greta Olafsdotir. After sharing their lives together as a couple in New York City for 44 years, the two women wed in Canada, where same-sex marriage was legal. Two years later, Thea died of complications of multiple sclerosis. At that time the Defense of Marriage Act (“DOMA”), a 1996 federal statute, took effect, transforming Edie’s story from a personal tragedy to a public trial.

Girlfriends Come and Go, but Daughters are Forever: the Case for Adult Adoption

With guest co-blogger Melissa Fernley.

Last month, prominent businessman and Florida socialite John Goodman filed a petition to adopt…his girlfriend. This unconventional move, coupled with Goodman’s notoriety as the multimillionaire founder of the International Polo Club Palm Beach, prompted news outlets around the world to pick up the story. The public responded with more than a few raised eyebrows, and many questions. Is this even possible? Is their relationship now incestuous? Why would someone do such a thing?

Yes, adult adoption is possible, and is allowed in many states across the country, including Missouri, although a few states require some sort of previous familial relationship. The result of such adoptions is not a traditional parent-child relationship, but rather a legal relationship that creates the same rights and responsibilities as would the adoption of a child. Adopted adults also become heirs of the adopting parent, although some states restrict the extent

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