1. Estate Planning Update January/February 2015 1
Planning Thoughts
Achieving a Better Life Experience
Congress sent a tax extenders bill to President Obama in December, which he
signed into law on December 19, 2014. The Tax Increase Prevention Act of 2014
[TIPA, P.L. 113-295] provided for a one-year retroactive extension of most of the
provisions that had expired 11½ months earlier, for the 2014 tax year. Now the
extenders have expired again, and further action by Congress will be needed
to restore them for 2015. At this writing it is uncertain whether that will be the
traditional stand-alone extenders legislation or part of a broader tax reform
effort.
For those advising the elderly affluent, the restoration of the “charitable IRA
rollover” may have been the most important provision, though it came so late
in the tax year that the restoration may have gone underutilized. According to
the Joint Committee on Taxation, the one-year “tax cost” of allowing those
over age 70½ to directly transfer up to $100,000 from their IRAs to charity will
be $239 million, and the ten-year cost will be $384 million. Evidently, the JCT
assumes that in the absence of this provision, a substantial amount of charitable
gifts simply won’t be made, and so more taxable income will be generated.
TIPA also included the Achieving a Better Life Experience Act [ABLE], a
permanent expansion of IRC Sec. 529 savings accounts for the benefit of
disabled young people. The purpose is to encourage private savings to support
disabled individuals in a manner that supplements, but does not supplant, other
benefits that may be provided by private insurance, Medicaid, the supplemental
security income program, or the beneficiary’s employment.
Qualified ABLE Programs
A new section has been added to the Tax Code, IRC §529A, Qualified ABLE
programs. ABLE programs will need to be established in each of the states,
as with Sec. 529 college savings plans. ABLE accounts will be available only
to residents of the state establishing the program [§529A(b)(1)(C)]. A disabled
person is limited to a single ABLE account [§529A(b)(1)(B)], except that creating
a successor account for rollover purposes is permitted.
Contributions to an ABLE account generally must be made in cash [§529A(b)(2)];
Estate Planning Update
January/February 2015
This Issue:
Planning Thoughts ..............1
Cases and Rulings ...............2
Washington Talk ..................3
Upcoming Events ................5
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2. Estate Planning Update January/February 2015 2
an exception allows for the rollover of funds to another
ABLE account for the same beneficiary or an eligible
individual who is a family member of the beneficiary
[§529A(c)(1)(C)]. As with 529 college savings plans, there
is no deduction for making a contribution to an ABLE
account. Investment changes are limited to twice each
year [§529A(b)(4)].
More than one donor may contribute to an individual’s
ABLE account, but the aggregate of such contributions
may not exceed the amount of the gift tax annual
exclusion in any calendar year ($14,000 in 2015) [§529A(b)
(2)(B)].
The beneficiary of an ABLE account must have become
disabled or blind before reaching age 26 [§529A(e)(1)].
Amounts accumulated in 529A ABLE accounts generally
will not be counted for purposes of means-testing
eligibility for federal programs. However, amounts
distributed for housing expenses will not be disregarded
for the supplemental security income program. In the
event that the ABLE account balance exceeds $100,000,
SSI benefits may be suspended, but Medicaid benefits will
not be [TIPA Division B, Sec. 103].
Tax Treatment
In contrast to a conventional special needs trust, which
has the same broad goals as an ABLE account, these
accounts offer the potential for freedom from income
tax. No taxes are imposed upon the investment earnings
of ABLE accounts [§529A(a)]. Similarly, there are no
income taxes on distributions for qualified disability
expenses [§529A(c)(1)(B)]. Qualified disability expenses
are defined quite broadly. They include “education,
housing, transportation, employment training and support,
assistive technology and personal support services, health,
prevention and wellness, financial management and
administrative expenses, legal fees, expenses for oversight
and monitoring, funeral and burial expenses,” and any
other expenses as may be provided in future Regulations
[§529A(e)(5)].
On the other hand, distributions not used for qualified
disability expenses are taxable to the beneficiary, and
a 10% penalty tax applies as well [§529A(c)(3)]. The
distribution may not be treated as a taxable gift [§529A(c)
(2)].
There is a price to pay for the tax favors accorded to
the ABLE account. At the death of the ABLE account
beneficiary, the state may make a claim on the account
up to the total medical assistance paid for the beneficiary
after the establishment of the account [§529A(f)].
Prognosis
Once ABLE programs are established by the states, the
ABLE accounts will have the advantage of simplicity
coupled with tax freedom. However, some observers
believe that the low annual limit on contributions
coupled with the clawback of state benefits will make
ABLE accounts less attractive than the alternative of
conventional special needs trusts.
The JCT apparently does not agree, as it scored the
provision as reducing tax revenue by a whopping $2 billion
over the next 10 years. The assumptions behind that
score were not available, but, presumably, the baseline
is that the earnings on the amounts contributed would
otherwise have been taxed at the donor’s top tax rate. For
the sake of unpacking this projection, assume that in one
of the next ten years, the amount of lost revenue is $200
million and assume further that the avoided tax rate was
40%. That implies that $500 million worth of income from
ABLE accounts avoided the income tax in that year. How
large would the aggregate of ABLE accounts have to be
to generate that much income? If the rate of return that
year were 10%, the principal amount would have to be
$5 billion. With contributions limited to $14,000 per year,
how many accounts would be needed to reach $5 billion?
If we assume five years of contributions, that suggests
total per account contributions of $70,000, which means
that more than 70,000 such accounts would have to be
established. This example ignores the probability that
ABLE funds already will have been spent for the disabled
beneficiary to some extent, so, in fact, the JCT must have
thought hundreds of thousands of these accounts will be
established.
Cases and Rulings
Relying upon an incompetent attorney does not excuse
late filing of estate taxes.
Janice C. Specht et al. v. U.S., No. 1:13-cv00705
Virginia Escher died on December 30, 2008, at age 92,
with an estate worth some $12.5 million. Her cousin,
Janice Specht, was named executor of the estate. She
had no experience at being an executor, never had owned
stock, and, in fact, never had been in an attorney’s office.
Nevertheless, she accepted the job. Ms. Escher’s lawyer
was Mary Backsman, who had 50 years of experience in
estate planning. Ms. Specht retained Ms. Backsman as the
estate’s attorney.
Backsman did not reveal that she was battling brain cancer
at the time.
Specht knew that a substantial estate tax was going
to be due, and she knew the due date. She also knew
that shares of UPS stock would have to be sold to raise
the needed cash. Specht followed up with Backsman
concerning progress on administering the estate, and

3. Estate Planning Update January/February 2015 3
she was assured that everything was fine. The assurances
continued after Specht received notices from the probate
court that estate accountings had not been timely filed.
When the deadline for the estate tax went by, Backsman
reported that she had filed for an extension, but she had
not. Additional irregularities piled up, but Specht did not
act.
Fourteen months after the estate tax should have been
paid, Specht obtained a new attorney, who filed an estate
tax return within 90 days. IRS assessed some $1.1 million
in penalties and interest, which the estate paid. The estate,
in turn, sued Backsman for malpractice, a suit that was
settled about a year later.
Now the estate seeks a refund of the penalties and
interest, because the estate had relied upon the advice of
counsel. No such relief is available, the Court holds, even
if the attorney involved were incompetent. Specht had
many warning signs of trouble. Her failure to act sooner
amounted to willful neglect of the problem. The disability
of the attorney did not render Specht disabled.
The Court noted that, in view of the malpractice action
against Backsman, the State of Ohio had refunded the
late penalty and interest on its estate taxes. “It is truly
unfortunate that the United States did not follow the State
of Ohio’s lead,” the Court concluded.
• • •
Estate tax values may not be based upon hypotheticals.
Estate of Natale B. Giustina et al. v. Comm’r, CA-9, No.
12-71747
Erminio Giustina and two of his brothers entered the
lumber business in Oregon in 1917. Over time they
purchased lumber mills and substantial timberlands.
However, by 1988 the lumber mills had been sold,
and the family business was limited to managing the
timber. Erminio’s two sons, Natale and Ehrman, ran the
business for many years, and then their sons took over
management. The partnership agreement governing the
business limited transferability of ownership interests,
and provided that only general partners had the power
to sell the company’s timber or property. At his death in
August 2005, Natale owned a 44.128% limited partnership
interest.
The estate hired experts to appraise the value of that
interest, and that figure, $12,995,000, was reported on the
estate tax return. The IRS believed that $33.5 million was
closer to the mark. At trial the estate defended its value
by capitalizing the cash flows that could be expected from
the company in the coming years. The IRS expert took that
approach as well, but also asserted that the liquidation
value of the company was $150 million and offered a final
valuation that blended the two figures. The Tax Court
agreed that there was a 25% chance that the firm would
be liquidated, and assigned that probability to the asset-
based element of the calculation. The Tax Court’s final
figure for estate tax determinations was $27,454,115.
Despite the fact that this was double what the estate had
reported on the estate tax return, the Court held that the
estate had acted in good faith and relied upon qualified
experts. Accordingly, the accuracy-related penalty was not
assessed [Estate of Natale B. Giustina et al. v. Comm’r, T.C.
Memo 2011-141].
On appeal, the Ninth Circuit rejects the Tax Court’s
methodology as clear error. “Although the Tax Court
recognized that the owner of the limited interest could
not unilaterally force liquidation, it concluded that the
owner of that interest could form a two-thirds voting bloc
with other limited partners to do so, and assigned a 25%
probability to this occurrence. This conclusion is contrary
to the evidence in the record.” The Court outlined the
nearly preposterous chain of events needed to get to a
sale, and concluded that the sale was too speculative.
Accordingly, the decision was reversed and remanded
for a determination of value based only upon the
capitalization of cash flows, and ignoring the theoretical
liquidation value of the firm’s holdings.
• • •
Reformation of a charitable trust is approved.
Private Letter Ruling 201450003
At his death, Grantor’s revocable trust became irrevocable,
providing life income for his mother and another
beneficiary with the remainder passing to charity. As such,
the trust does not qualify for an estate tax charitable
deduction. Within 90 days of the date that the estate tax
was due, the estate’s executor sought a reformation of the
trust, transforming it to a charitable remainder unitrust in
order to secure the deduction.
The IRS agrees that this will work. The original trust
included a “reformable interest” that was ascertainable
and severable from the noncharitable interests. It would
have qualified for the charitable deduction before
enactment of IRC §2055(e)(2). Furthermore, on the facts
presented, the value of the qualified interest will be within
5% of the reformable interest.
Washington Talk
The Congressional tax-writing committees had new

4. Estate Planning Update January/February 2015 4
leaders, beginning in January. Paul Ryan (R-Wis.) will
chair House Ways and Means, and Orrin Hatch (R-Utah)
will helm Senate Finance. After his selection, Ryan
said: “We will work together to fix the tax code, hold
the IRS accountable, strengthen Medicare and Social
Security, repair the safety net, promote job-creating
trade agreements, and determine how best to repeal and
replace Obamacare with patient-centered solutions.”
2014 was a difficult year for the IRS, with hearings into
the inappropriate targeting of conservative groups, the
loss of Lois Lerner’s e-mails, the discovery of those e-mails
in November, and a major cut in funding. 2015 promises
more of the same.
• The new chair of the House Ways and Means
Oversight Committee, Peter J. Roskam (R-Ill.), has
demanded all of the Lerner e-mails and will be looking
closely for comments that suggest political bias.
• Jason Chaffetz (R-Utah), incoming chair of the House
Oversight and Government Reform Committee, is
expected to follow up on that Committee’s report on
the IRS targeting of conservatives, released just before
Christmas.
• The new Chair of the Senate Finance Committee,
Orrin G. Hatch (R-Utah), has been quite vocal in his
criticism of the targeting, the missing e-mails, and
the IRS’ efforts in writing new Regulations for exempt
organizations. A round of Senate hearings may mean
another set of appearances by top IRS officials.
• The IRS has identified some 2,500 e-mails from the
White House concerning taxpayer information. Some
of these requests may have been inappropriate, even
illegal. So far, the IRS has refused to turn over those
e-mails for outsider review. This could prove to be a
whole new area of investigation in 2015.
A new voice for repealing the federal estate tax joins
the House Ways and Means Committee. Rep. Kristi Noem
(R-S.D.) has first-hand experience with the estate tax.
When her father died in a farming accident in 1992, she
had to leave college to return home to help run the family
ranch. The family had no money in the bank but lots of
land, machinery and cattle. “All of a sudden, I owed the
federal government hundreds of thousands of dollars
because a tragedy happened. That’s unfair,” Noem has
said.
Although the $5.43 million federal exemption provides
better protection than her family experienced in 1992, it’s
not enough to protect most family agricultural operations,
according to Noem. She favors complete repeal and was
a co-sponsor of the “Death Tax Repeal Act of 2013.” “As a
lifelong farmer and rancher, I will be a strong voice for the
agriculture industry on the panel,” she said.
Members of the Senate Finance Committee will be
organized into five bipartisan working groups to explore
tax reform issues and come up with solutions. The subjects
for study are individuals, infrastructure, savings and
investment, business, and international. Each group will
have a Republican Chair and a Democratic Vice Chair. The
plan parallels the earlier effort by the House Ways and
Means Committee, which had 11 working groups. Their
report did not lead to legislation; perhaps this time it will
be different.
H.R. 5872, the American Solution for Simplifying the
Estate Tax Act of 2014, an optional alternative to the
estate tax, was introduced by Rep. Andy Harris (R–Md).
Taxpayers could elect out of having their estates owe
federal estate tax by choosing instead to be subject to a
1% income tax surtax for the rest of their lives. The surtax
would apply to modified adjusted gross income, which
would include tax-exempt interest income. The surtax
would have to be paid for at least seven years before the
estate tax waiver would become effective.
According to the Congressional findings included in
section 2 of the bill, such a change is expected to be
revenue neutral. The goal is to eliminate all the complexity
that tax planning injects into estate planning. On the other
hand, the bill would impose carryover basis on estates
electing the surtax, which would bring its own set of
complexities into the planning picture.
In the estate and gift area, President Obama’s 2015
budget includes most of the proposals from earlier
budgets, including:
• return to the 2009 transfer tax regime;
• require consistent values for income tax and transfer
tax purposes;
• have a minimum ten-year term for grantor-retained
annuity trusts; limit the duration of dynasty trusts; and
• extend the lien when estate taxes on a closely held
company have been deferred.
The new wrinkle in this year’s budget proposal is an
attempt to rein in the use of Crummey powers over
irrevocable life insurance trusts. A new type of transfer
would be defined, which would include transfers to
trusts and pass-through entities and restricted transfers
that can’t be immediately liquidated by the donee. Such
transfers would be capped at $50,000 per year, even if
total gifts to individual donees do not exceed the annual
exclusion.

5. Estate Planning Update January/February 2015 5
Upcoming Events
Cannon Estate Planning Teleconferences
Tuesday, February 24, 2015
Protecting an Inheritance from Spousal and Creditors’ Claims
If you are interested in attending, please contact Katie
Nedrow at knedrow@fnni.com or 402.602.3305.
This article does not constitute legal, tax, accounting or other professional advice. Although it is intended to
be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on
this material. Each individual’s tax and financial situation is unique. You should consult your tax and/or legal
advisor for advice and information concerning your particular situation.
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800.538.7298 www.firstnationalwealth.com