How Mitt Romney's Use of a "Defective" Trust Saves Him Taxes

A tax and estate planning attorney has a wide array of tools that can be implemented to help individuals and families save when it comes to gift and estate taxes.  Often, these tools come in the form of complex trusts with even more complex sounding acronyms.  For instance, Charitable Lead Annuity Trust ("CLAT"), Grantor Retained Annuity Trust "("GRAT"), Qualified Personal Residence Trust ("QPRT"), and the Irrevocable Life Insurance Trust ("ILIT").

On tool, however, is extremely effective and unique--the Intentionally Defective Grantor Trust ("IDGT").  Despite the use of the term "defective", this trust has a tremendous capacity to allow for the maximization of wealth transfers to younger generations with minimal gift/estate taxes.

Not surprisingly, Mitt Romney (one of many politicians) has benefited greatly from the implementation of an IDGT.

From the San Fransisco Chronicle:

Romney’s vehicle is known as an “intentionally defective grantor trust” or by the acronym IDGT -- hence the nickname: “I Dig It.” Such trusts permit donors to give potentially unlimited amounts to children free of estate and gift taxes.

Here’s how they work: the person setting up the trust, like Romney, contributes assets such as an interest in a fund or shares in a company. If he makes that contribution before those assets appreciate -- particularly when they are privately held and difficult to value -- he can claim the gift tax obligation is low or non-existent since the declared value is low or zero.

If the trust generates any income -- such as by selling stock -- the eventual tax bill is the responsibility of Romney, not the trust. By paying the capital gains tax, which was 20 percent in the late 1990s and is now 15 percent, he can avoid depleting the funds in the trust -- in essence making an additional donation that’s free of gift taxes.

That benefit in particular makes this type of trust “a more powerful driver of wealth transfer in estate planning than almost anything else,” ....

Fresno County Keeps Williamson Act Tax Break...For Now

From the Fresno Bee: 

Fresno County supervisors agreed Tuesday to preserve a longtime tax benefit for farmers, even as the benefit is costing the county millions in lost revenue.
The state's 47-year-old Williamson Act, which provides property tax breaks for landowners who commit to keeping their land in agriculture, has been under scrutiny ever since state reimbursement for the program dried up.
But amid heavy lobbying from the Valley's powerful ag industry, the county Board of Supervisors narrowly voted to continue the tax-relief program and absorb the losses.
The 2-2 vote not to touch the Williamson Act pitted two rural supervisors, who were not in favor of changes, against two members from the county's urban core.
The decision was cheered by the farm community, many of whom turned out for Tuesday's hearing in downtown Fresno to deliver personal accounts of how they couldn't afford a tax hike. ...

The Williamson Act was passed by the Legislature in 1965 as a way to provide incentive for farmland conservation.
Because the state no longer provides reimbursement for the program, counties have the option of partially recouping losses by reducing tax breaks for farmers by 10% -- in exchange for shorter conservation commitments from farmers.

Amazon Sales Tax Loophole? When your purchase will NOT have sales tax withheld

On Saturday, September 15th, pursuant to an agreement reached with the Board of Equalization and State politicians, Amazon.com will begin to collect CA sales tax on items it sells to CA residents. 

But, not every item sold through Amazon.com to a CA resident will have sales tax withheld.  From CNET:

...Amazon will continue to not collect taxes on hundreds of thousands of items that it lists for sale on its Web site, stores in its warehouses, and packages for quick shipment to California residents. Those orders -- called "fulfilled" by Amazon -- amount to a tax loophole that has left Sacramento tax collectors a tad unhappy....

A representative of the State Board of Equalization, which collects California sales taxes, told CNET today that whether Amazon can be required to collect taxes on "fulfilled" orders is a tricky question. "It's difficult for us to comment on the way Amazon is set up within its family of companies (and) whether there there would be a consignment relation," the representative said.

Amazon says the law is clearly on its side. Spokesman Scott Stanzel said that for fulfillment sales, "sales tax collection depends on the tax obligations of the seller," not Amazon itself.

Roughly one-fifth to one-quarter of the items that Amazon offers to ship are "fulfilled by" products. It's a staggering selection, including everything from Calphalon non-stick pans, iced tea, stereo speakers, video games, and even the PetZoom Pet Park Indoor Pet Potty. 

  Of course, even if Amazon does not withhold sales tax on the purchase, the CA resident is supposed to pay a "use" tax on the item in CA equal to what the sales tax would have been.  In reality, this use tax is often not reported or paid by CA consumers, which can be a significant sum as tax rate can top out at 9.75%.   

Tax Court Rejects The "TurboTax" Defense

In an argument that reminds me of Tim Geithner's painful Senate hearings, a taxpayer claimed that her failure to account for all of her taxable income was the result of "honest mistakes" resulting from her lack of familiarity with the TurboTax progam.  Unfortunately for her, the Tax Court did not buy it, Bartlett v. Commissioner, T.C. Memo. 2012-254 (Sept. 4, 2012):

Petitioner claims she used the audit portion of the TurboTax program, believing the audit portion would catch any mistakes she otherwise might make. ...It is apparent that a portion of the information petitioner entered into the TurboTax program was incorrect; hence the mistakes made (which resulted in the underpayment) were made by petitioner, not TurboTax. TurboTax is only as good as the information entered into its software program. See Bunney v. Commissioner, 114 T.C. 259, 267 (2000). Simply put: garbage in, garbage out.

Hat Tip (Tax Prof Blog)

Brown's Plan to Stem CA Public Pension Costs Not Sufficient

From the LA Times regarding Gov. Jerry Brown's newly released plan to reduce public sector pension costs:

Even by the most ambitious forecasts, the plan Gov. Jerry Brown and fellow Democrats are championing to contain government worker pensions in California could leave state taxpayers awash in debt to public employees.
The governor's plan, announced Tuesday, is unlikely to save cities on the brink of bankruptcy. The relief his proposal would provide to the strained state budget is modest.
Analysts who study the issue say far more aggressive action — including reduction of benefits for hundreds of thousands of current employees left untouched by Brown's proposal — will be needed to get runaway retirement costs under control.
Taxpayers still face the prospect of major bailouts to cover retirement promises made to public employees whether lawmakers pass the plan as expected Friday or not.
...[E]very California household may be on the hook for roughly $23,000 for public retirements over the coming decades. Brown's plan might whittle that tab to $18,000.
"It doesn't solve the problem," said Joe Nation, a former Democratic assemblyman and professor of the practice of public policy at Stanford University. "We still have many, many miles to go."
Brown's negotiations with lawmakers resulted in a more modest plan focused on raising the public retirement age, limiting the annual sums collected by retirees whose jobs paid them six-figure salaries and tinkering with the formulas on which pensions are based.
The leaders' decision not to take any benefits away from workers already on the payroll, however, limited their ability to confront the soaring debt.
"You can't address these problems unless you address the existing liability," said David Crane, who advised former Gov. Arnold Schwarzenegger on pension issues.
"The only way to do that is to go after benefits for existing employees."
An exhaustive study last year by the Little Hoover Commission, an independent oversight agency that reports to the Legislature, warned that pension debt will continue to overwhelm government budgets if benefits for existing workers are not scaled back.
Making changes that affect only new employees, the commission's report said, "will not deliver savings for a generation, while pension costs are swelling now as baby boomers retire.... The promised benefits are unaffordable and leave taxpayers facing all the risk as the bill becomes due."

Draft Form 706 Released--Includes "Check the Box" Feature to Opt Out of Portability

From Bloomberg News:

IRS releases a draft version of the 2012 Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, that for the first time includes a check-the-box feature for executors to opt out of electing portability of a spouse's unused gift and estate tax exclusion amount. The draft includes a portability election section (Part 6) that reminds estate executors that to elect portability, they must simply complete and timely file the Form 706. If they are opting out, they must check a box saying the decedents do not want to pass on their unused estate and gift tax exclusion amount to their surviving spouses.

Homeowners See Jump in Property Taxes--what happened to prop 13?

Many California homeowners, while owning properties worth less than what they paid for, are at least getting some benefit by paying lower property taxes.

While many homeowners are familiar with Proposition 13 (which caps the tax assessed value on properties to a growth rate of no greater than 2%) they are most likely unfamiliar with Proposition 8 (the other one).  When Proposition 13 was passed in 1978, Proposition 8 was also passed. 

When your property declines in value, it is actually Proposition 8 which kicks in and allows you to claim a lower taxed assessed value on your property.  The tricky part is that once the housing market rebounds, the cap on Proposition 13 doesn't kick in until you reach a value essentially equal to your purchase price of the home.  In other words, if values rebound over night, the property's tax assessed value will be allowed to increase at more than the 2% rate until the purchase price value is met.  So surging home values could mean surging property taxes as well. 

While most homeowners are faced with depressed values, there are a few counties where property values are increasing and homeowners are getting assessed additional property taxes. For instance, some 37,000 residents in Santa Clara County received notice that their property taxes were increasing this year as a result of rebounding housing values:

"It's a double-edged sword,'' said Kreshel, a senior manager at eBay. "The value is going up and so are my property taxes, even though it's still below what I had to pay for it,'' she noted with a sigh. "It's part of being a homeowner.''

It is really only a matter of time before home values start to recover state-wide and homeowners realize that the property taxes will increase dramatically as result.