October is an excellent month to consider plans for end-of-year charitable gifts. These gifts could include an IRA charitable rollover, a gift of cash or a gift of appreciated land.

1. IRA Charitable Rollover — The IRS refers to the IRA charitable rollover as a qualified charitable distribution (QCD). An individual over age 70½ is permitted to make a transfer directly from his or her IRA custodian to a qualified charity. The transfer is not included in taxable income. If the IRA owner is over age 73, the distribution may fulfill part or all of the IRA owner’s required minimum distribution (RMD).

Because many individuals have invested their IRAs in stocks, bonds or other securities, it may be necessary to exchange the IRA stock or bond accounts for a money market fund prior to the distribution. Most custodians require a QCD to be paid from a money market account or similar fund.

There are some limits for the IRA charitable rollover. The IRA owner must be at least age 70½ and the maximum transfer for 2024 is $105,000. The transfer must be to a qualified exempt charity and may be for a designated purpose or field of interest fund. However, it may not be to a donor advised fund (DAF) or supporting organization (SO). In addition, the donor may not receive a charity dinner or other event ticket that involves a partial benefit to the donor. The entire QCD must be for a qualified charitable purpose.

2. Gifts of Cash — Individuals who itemize deductions may deduct 2024 gifts of cash up to 60% of their contribution base, which is usually your adjusted gross income (AGI). A couple with $100,000 in income may give and deduct up to $60,000 this year. While the 60% of AGI limit is substantial, some generous individuals give more than this and may carry forward and deduct the excess gift amounts during the next five years.

3. Gifts of Land — With substantial increases in value for real property, many donors will find that a gift of appreciated property is attractive. A gift of appreciated land provides two benefits for the donor. First, the donor may receive a charitable deduction for the fair market value of the land. Second, the charity is tax-exempt and therefore the donor is able to bypass tax on the capital gain. If the donor purchased development land ten years ago for $50,000 and it is now worth $250,000, the donor would pay capital gains tax on $200,000 if he or she sold the property. However, by giving the land to charity, the donor may receive a deduction for the $250,000 in value and bypass the tax on the $200,000 of potential gain. Because the donor is receiving both the deduction and capital gain bypass benefits, this type of charitable deduction is permitted for up to 30% of a donor’s adjusted gross income (AGI). If the gift value is more than this limit, it may be carried forward for five years. For example, Mary Smith has adjusted gross income of $100,000 this year and makes a gift of appreciated land with fair market value of $80,000. She can deduct $30,000 this year, carry forward $50,000 and deduct that amount over the following five years.

Editor’s Note: Many donors make their largest gifts in November or December. This is a good time to plan and consider options for end-of-year gifts.

$17 Million End-of-Life Partnership Included in Estate

In Estate of Ann Milner Fields et al. v. Commissioner; No. 1285-20; T.C. Memo. 2024-90, the Tax Court held that a gross estate must include $17 million in assets transferred to a partnership one month prior to the demise of the decedent.

Anne Milner Fields, born approximately in the year 1925, was a native of Texas and married to an oil businessman, Bert Fields, Sr. When Mr. Fields passed away in 1963, Ms. Fields enrolled in accounting and business classes and successfully operated the oil business she inherited from her husband.

Ms. Fields had no children and subsequently became a benefactor for her great-nephew Bryan Milner. He had worked for a bank in commercial lending for 17 years and held a durable power of attorney (POA) and a medical power of attorney for Ms. Fields. While he was the principal beneficiary of her estate, there also were specific bequests to three nonprofits and other family members.

The general POA did not include any restrictions. If, in the opinion of a medical doctor, she was "mentally incapable of managing my financial affairs," then Mr. Milner would be qualified to assume control of her estate.

Ms. Fields was diagnosed with Alzheimer's dementia in 2011. She then fell and broke her hip and was in a long-term care facility. She was dissatisfied with the facility and Mr. Milner purchased a home near his personal residence and had it modified based upon her health requirements. Dr. Garcia signed a medical opinion that Ms. Fields had sufficient mental capacity to execute a valid POA on January 29, 2010. However, another medical opinion by Dr. Dar indicated that on April 20, 2012, she was no longer able to handle her legal and financial affairs. Therefore, Mr. Milner purchased the home and hired three caregivers to provide assistance for her.

Ms. Fields had been a victim of financial elder abuse in 2011. A home repair scam caused $20,000 worth of loss. Subsequently, the caregivers for Ms. Fields used her debit card to acquire funds in "cash back" transactions.

In May of 2015, Milner formed two LLCs: AMF Capital, LLC (AMF Capital) and Winnsboro Capital, LLC (Winnsboro Capital). On May 11, 2016, Milner and his attorney created documents for AM Fields Management, LLC (AMFM), and on May 20, 2016, he filed a certificate of formation for AMFM with the Texas secretary of state. Milner contributed $1,000 for 100% interest in AMFM. AMFM entered into a partnership agreement with AM Fields, LP (AM Fields) a partnership he formed on May 20, 2016, and signed the agreement as the POA holder for Ms. Fields. Afterwards, Milner transferred approximately $17 million to the partnership. Ms. Fields held a 99.9941% interest in the partnership. The transfers included securities and brokerage account funds and were completed in early June of 2016. Ms. Fields had previously been in the hospital with a heart attack and spine fracture. She was diagnosed in "end-stage-Alzheimer's” and passed away on June 23, 2016.

Her estate did not have sufficient cash to pay the bequests and the more than $4 million in estate tax. Milner sold marketable securities in an amount sufficient to fund the charitable bequests and the estate taxes. The estate filed a federal estate tax return and claimed partnership discounts which reduced the estate value to approximately $10.9 million.

The Tax Court noted that the federal estate tax may apply under Section 2036(a) if a decedent has made an inter vivos transfer, the decedent has retained an interest or right and the transfer is not a bona fide sale for adequate and full consideration.

The parties agree that there was a clear transfer of the property. The Tax Court determined that the issue was whether Ms. Fields had retained a "substantial present economic benefit" under Section 2036(a)(1). While Milner had contributed $1,000 for the rights to AMFM, this was a token transfer. Ms. Fields essentially retained the right to all income. Although the income amounts were not paid, the Section 2036(a) provision does not require that the payment was made, but only that the potential right existed.

Because Ms. Fields retained only $2.15 million of assets outside the partnership and needed more than $5 million in funds for the bequests and estate tax liability, the court found "an implicit agreement between Mr. Milner and Ms. Fields that he, as manager of AM Fields’s general partner, would make distributions from the partnership to satisfy her expenses, debts, and bequests if and when necessary."

In addition, the partnership agreement allowed Ms. Fields together with Mr. Milner to dissolve the partnership and designate the disposition of assets. Therefore, Ms. Fields retained enjoyment of the partnership assets.

The final question is whether there was a "bona fide sale for an adequate and full consideration." This is a question of motive. The estate claimed that the legitimate nontax purposes for the end-of-life transfers to AM Fields were to protect Ms. Fields from financial abuse and to consolidate and streamline the management of assets.

However, the timeline with the hospitalization in late May, the transfer of the assets to the trust on June 13 and the demise of Ms. Fields on June 23, 2016, indicates that the only reason for the transactions were to reduce estate tax. There were no instances in 2016 of financial abuse, there was no working interest in any business and no other nontax reason for the transfer.

Therefore, the Tax Court determined there was no bona fide sale. The assets were included in the estate at date-of-death fair market value. There was a modest change in valuation based on the illiquidity discount for the North Dallas Bank Trust stock.

Finally, the IRS assessed a 20% accuracy-related penalty on the underpayment of tax. The estate claimed that Mr. Milner had reasonable cause for the underpayment. Because the estate did not demonstrate that Mr. Milner "relied in good faith on competent and informed advice," the penalty was applicable.

Editor's Note: This case is another "bad facts" case relating to Section 2036. The transfer was made when demise was imminent, the actions were taken by the holder of a power of attorney and the partnership transfer left the estate with insufficient assets to fulfill future cash obligations.

Life Insurance Trust Excluded from Gross Estate

In Estate of Larry Becker et al. v. Commissioner; No. 10166-20; T.C. Memo. 2024-89, the Tax Court rejected the IRS argument that a potential claim by the decedent for an improperly issued insurance policy was an incident of ownership that required inclusion of the insurance trust in the estate.

Dr. Larry Becker created an irrevocable life insurance trust (ILIT) on July 21, 2014. The trust benefited wife Alma Cohen Becker, their children and grandchildren. The trust was irrevocable, and Dr. Becker did not retain any beneficial interest or control over the trust.

On July 25, 2014, Dr. Becker applied for a policy from Zurich American Life Insurance Co. (Zurich). He indicated there was no agreement to borrow to pay the premiums and claimed an estate of $29.5 million. The policy was issued and the initial premium of $999,693 was borrowed from another doctor by insurance broker, Barry Steinfelder. The funds were transferred first to Dr. Becker, then to the trust and to Zurich. This initial premium covered the premium obligation for 30 months.

Dr. Becker also subsequently applied for a second policy with Zurich. He indicated there was no borrowed money for the premium and his estate remained at $29.5 million. The second policy was also issued. Mr. Steinfelder borrowed $697,257 from the third-party doctor and transferred the funds to Dr. Becker. He gave the funds to the ILIT, and a second payment was made to Zurich. Once again, this premium covered the obligation for 30 months. An LLC controlled by Mr. Steinfelder repaid the debt obligation to the doctor and the benefits under the policy agreement were in large part transferred to LT Funding LLC. LT Funding was obligated to pay any future premiums and would receive 75% of the Zurich policy death benefit and a return of premiums with interest.

Dr. Becker passed away in a car accident on January 8, 2016. Zurich conducted an investigation and paid approximately $19.47 million to the trust. The Trust and LT Funding contested the amount of payment due under the agreement and settled with a payment by the Trust of $9 million to LT Funding.

The estate filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. It reported a gross estate of $12.5 million, a marital deduction of $3.7 million and an estate tax of approximately $1.05 million. The estate tax return also noted there were insurance policies with death benefits of $7 million held by other ILITs.

The IRS audited the estate and claimed that the $19.47 million death benefit was included in the estate under a step transaction theory. The IRS permitted an offsetting deduction for the $9 million payment to LT Funding.

The Tax Court determined that Maryland law applied. The question raised by the IRS was whether there was an insurable interest because, under the step transaction doctrine, LT funding was the policy owner.

A step transaction is applicable if there is a binding commitment, an “end result” test or an “interdependence” test. The binding commitment is applicable if there is a legal obligation to commit multiple steps. That was not the fact in this case. The “end result” applies if there are prearranged parts of a single transaction. However, the funding for this plan could have been covered by assets from the estate of Dr. Becker. There was no requirement for him to transfer the death benefits to LT Funding.

Finally, there is the "interdependence" test. If the steps are such that there is an essential requirement to complete the steps, then a step transaction is applicable under the interdependence test. However, in this case, Dr. Becker had sufficient assets to select among other potential funding options. Therefore, there was no binding commitment, it was not a prearranged single transaction and there was sufficient independent significance of the other options that there was no step transaction.

The IRS claimed that the failure on the Maryland insurable interest requirement created a potential claim that was an incident of ownership for Dr. Becker. However, while the application may have misrepresented the facts, the claim under the Maryland insurable interest is simply a potential right and not an "incident of ownership" under Section 2042 (2). Therefore, the insurance trust is not included in the estate and there is no offsetting $9 million deduction.

Applicable Federal Rate of 4.4% for October: Rev. Rul. 2024-21; 2024-41 IRB 1 (16 September 2024)

The IRS has announced the Applicable Federal Rate (AFR) for October of 2024. The AFR under Sec. 7520 for the month of October is 4.4%. The rates for September of 4.8% and August of 5.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”