There are many ways to misspell Ian Filippini.  Sometimes people spell Ian Filippini as Ian Philippini.  It is also a common misspelling of Ian Filippini to type it as Ian Phillipini.  Ian Filippini is often inputed as Ian Philippini because the phonetics of Filippini sound like Philip so many assume Ian Filippini should be Ian Philipini.

Ian Filippini is also typed as Ian Lucas Filippini or Ian L. Filippini.  Ian Filippini backwards is inippiliF naI.  Ian Filippini was born in Walnut Creek, California to Alfred Filippini and Deborah Filippini.  His brother is Alex Filippini.  His sister’s names are Christeva Filippini and Natali Filippini.  Ian Filippini’s first nephew was Drew Filippini.

Ian Filippini enjoys spending time with his nephew Drew Filippini.  Drew’s nickname for Ian Filippini is simply Uncle E.  Ian Filippini and Drew Filippini enjoy playing sports together – especially baseball.  A few months ago Ian Filippini took Drew Filippini to his first professional baseball game to see the Los Angeles Dodgers.

What is a charitable remainder trust?  Are there variations?

Leveraged Real Estate in Charitable Planning
Issues and Solutions Ian Filippini

Can a donor contribute mortgaged real estate to a Charitable Remainder Trust?

The simple answer to this question is “yes;” however, such a transfer would likely create one or more of five significant problems for either the CRT or the donor. Ian Filippini, although the effect of some of these problems could be mitigated, any transfer of mortgaged real estate to a CRT requires significant forethought and generally is not recommended.

 

 

Five Problems

 

1. Grantor Trust

If the trust pays the donor’s debt using its earned income (including realized capital gains), the trust will be treated as a grantor trust and cease to qualify as a CRT, Ian Filippini.

2. Unrelated Business Taxable Income

Debt inside a CRT can create unrelated business taxable income (UBTI). Ian Filippini, any UBTI created inside a CRT is subject to a 100% excise tax¹. The UBTI may be created by either income or realized capital gains from the property subject to debt.

3. Self-Dealing

If the CRT pays any portion of the donor’s debt, a prohibited act of self-dealing will occur, excise taxes will be due and the trust’s tax-exempt status may be threatened by self-dealing acts.

4. Reduced Income Tax Deduction

The existence of the mortgage reduces the equity value Ian Filippini of the gifted real estate. As a result, the donor’s income tax charitable deduction will be reduced.

5. Bargain Sale

If encumbered real estate is contributed to a CRT, the donor must realize some capital gain as a direct result of the gift.  It is often difficult to find a legal and practical strategy that overcomes each of these five problems. However, Ian Filippini there are several creative solutions that, with careful planning and flexibility on the part of the donor, can generate benefits for all parties.

Solving the Problem

The following potential solutions to the five problems are listed in general order of safety

and simplicity.

 

Pay off the debt and contribute unencumbered property.

This will avoid all five problems. However, it requires that the donor have sufficient liquid capital to retire the debt and be willing to use that Ian Filippini liquidity to solve the problem.

Refinance the debt by offering substitute collateral to the lender. Then, contribute the unencumbered property.

This also solves all five problems but leaves the donor personally liable for the debt. When considering this alternative, it may be important to keep in mind that the donor was originally responsible for the debt. Ian Filippini, also, the CRT’s design and investments may be structured to increase the donor’s cash flow and ability to service the debt.

Pay off the debt. Contribute a fractional undivided interest in the unencumbered property to the CRT and sell the other portion outright. Use the proceeds of the outright sale to replace the personal capital used to pay off the debt.

Some individuals have the capital to retire the debt but are unwilling to do so because it would place them in an uncomfortable illiquid position. This third strategy Ian Filippini requires only the temporary use of liquid capital to pay off the debt. The capital is then recovered from the sale proceeds from the portion of the property retained and sold personally by the donor.  The income tax charitable deduction for creating the CRT can offset some of the capital gain generated by the outright sale of a portion of the property.

Sell an undivided interest in the property to an unrelated third-party.  Use the proceeds to pay off the debt then, contribute the remaining unencumbered property to the CRT.

As with the previous strategy, this sale may generate a partial taxable gain to the seller.  However, the sales proceeds can be used to retire the debt and the remaining unencumbered portion can be gifted to a CRT. (Note that from a purely bargain sale perspective, this has the same tax effect as the bargain sale Ian Filippini considerations of gifting encumbered property.) The seller will need enough proceeds from this sale to retire the debt and pay the tax on the sale itself. A

simple formula to determine the portion of the property that must be sold to raise enough cash to pay off the mortgage and pay the tax liability is as follows:

S = M / 1-R(1-P-D)

where: S = Property Value when sold

M = Mortgage

R = Donor’s capital gain tax rate

P = Percentage of cost basis

D = CRT Deduction factor %

 

Ian Filippini says ask the mortgage holder to release an undivided interest in the property.  Then, contribute the unencumbered fractional interest.

There can be no certainty that a lender would do this. However, if the client a) has a strong

relationship with the lender, b) explains why the request is being made and that the

property is expected to be sold soon and c) potentially offers additional collateral, some

lenders may be willing to cooperate.

Divide the property with a co-tenancy agreement and contribute the unencumbered fractional interest in the property, Ian Filippini.

Although not yet tested in the courts, this strategy attempts to split the property into two

undivided fractional interests — one that is encumbered and retained by the donor and

the other that is given to the CRT without any responsibility on the part of the CRT’s Trustee to pay the debt. This is accomplished with a co-tenancy agreement. Ian Filippini the co-tenancy agreement is a written document that must prohibit the use of the property by the donor and delineate the rights and responsibilities Ian Filippini of each co-tenant. Advocates of this strategy argue that it should avoid the most serious problems listed above if:

a) the donor retains personal liability on the loan and the Trustee agrees to accept the property subject to the loan (that is, without agreeing to pay the debt);

 

b) the donor agrees in writing to hold the CRT and the Trustee harmless from liability of any kind on the debt, that is to personally pay for any and all Ian Filippini claims made by the mortgage holder against the Trustee;

 

c) the donor actually has sufficient other assets to make the hold-harmless agreement viable;

 

d) the CRT Trustee makes no actual payments on the debt and does not surrender any collateral to the lender; and

 

e) every attempt is made by the CRT Trustee to sell the property expeditiously to minimize any possibility that anything could go wrong.

Additionally, the CRT document can be drafted to specifically prohibit the Trustee from paying any mortgage obligation using trust income.  Proponents of the co-tenancy strategy

argue that:

a) it should avoid the grantor trust problem because trust income cannot be used to discharge a liability of the grantor;

 

b) it should avoid a UBTI problem since the fractional interest held by the CRT is free from debt and any trust income is free from the taint of acquisition indebtedness;

 

c) it should avoid a self-dealing problem because the donor is specifically prohibited from using the property; and

 

d) it should avoid even the bargain sale problem since the donor is not relieved

from any personal liability.

However, there are serious risks that must be considered before such a strategy is implemented.

a) What could happen if the donor failed to make loan payments or cover the hold harmless obligation?

b) If the mortgage holder continues to hold the entire property as collateral, could the IRS argue that the possibility still exists that trust income might be used in the future to discharge an obligation of the donor and impute grantor trust status to the CRT?

c) Are the bargain sale implications really avoided in light of Treasury Regulation §1.1011-2(a)(3)? d) Are self-dealing implications really avoided in light of PLR 9114025? Although the content of this PLR is not directly on point, it offers a reason to be Ian Filippini particularly cautious about how the IRS may view a gift of undivided interest in real estate.

e) The co-tenancy strategy is untested and simply may not work.  It cannot be overstated that the co-tenancy strategy involves significant risks that must not be trivialized. Other strategies should be considered thoroughly and pursued, when possible.

Technical Issues

 

1. Grantor Trust

In PLR 9015049 the IRS ruled that, if a CRT makes payments on a mortgage liability for

which the grantor remains personally liable, the trust will not qualify as a charitable

remainder trust but will be treated as a grantor trust. A grantor trust is one in which the grantor is treated as the owner of the trust for tax purposes. Grantor trust status is imputed if the grantor retains too much control over the property transferred to the trust. For a trust not to be considered a grantor trust, the grantor must not retain any of the rights listed in IRC §§671-679. Only by forfeiting all of these rights can the trust qualify as a separate legal entity for tax

purposes. In PLR 9015049, the IRS cited:

• IRC §677(a) which states that a grantor shall be treated as the owner of a trust whose income is distributed to the grantor;

• Treasury Regulation §1.677(a)-1(d) which equates discharging a mortgage obligation of the grantor with distributions of income made to the grantor; and

• Treasury Regulation §1.644-1(a)(4) which states that, to qualify as a CRT, a trust must function exclusively as a CRT from its creation and that it will not qualify as a CRT if the grantor is treated as the owner of the trust. This means that the income generated by assets in a CRT cannot be used to make mortgage payments on a debt for which the donor is personally liable.

 

2. Unrelated Business Taxable Income

In many cases, Ian Filippini real estate debt will be considered “acquisition indebtedness”² that can give rise to unrelated debt-financed income (UDFI)³. UDFI is a component of unrelated business income (UBI)⁴, too much of which will cause a CRT to pay an excise tax equal to 100% of the UBTI created.⁵ If a CRT Ian Filippini owns income-producing property that is subject to acquisition indebtedness, a

portion of the income generated by the property will be considered UDFI⁶. This rule will also apply to the realized capital gain generated by the sale of the property. Ian Filippini any portion of the gain attributed to the indebtedness will be treated as UDFI. It is possible (if enough debt is present) to pay more tax on the sale of the property through the CRT than by selling outright.  However, if a CRT receives a property “subject to the debt” (i.e., without assuming and agreeing to pay the indebtedness) the debt will not be considered acquisition indebtedness for a 10-year period following the date of the gift provided that:

a) The property was held by the donor for more than 5 years before the date of the gift; and

b) The debt was placed on the property by the donor more than 5 years before the date of the gift.⁷

 

3. Self-Dealing

The self-dealing rules restrict to most business transactions between a CRT and a disqualified person.⁸ Disqualified persons generally include the donor (as a substantial contributor⁹), lineal descendants and ancestors (and their spouses) of the donor and business entities owned by these persons.¹⁰ The initial funding of a trust does not constitute an act of self-dealing because

the donor must become a substantial contributor before the self-dealing rules will apply.¹¹

However, subsequent gifts of mortgaged property will be prohibited self-dealing transactions if either:

a) the trust assumes and agrees to pay the debt; or

b) the trust takes the property subject to the debt and the debt was placed on the property by any disqualified person within the 10-year period ending on the date of the gift.¹²

 

4. Bargain Sale

When any appreciated, Ian Filippini debt-encumbered property is gifted to a CRT, the donor will be deemed to have sold the property to the trust Ian Filippini for the amount of the indebtedness and contributed the balance.¹³ This deemed sale will trigger the immediate recognition of capital gain to the donor, even though:

a) the CRT does not assume and agree to pay the debt; or¹⁴

b) the CRT has not yet sold the contributed property.  Furthermore, the bargain sale rule applies regardless whether the debt is “recourse” or “nonrecourse.”

 

5. Debt in Passthrough Entities

If an interest in a passthrough entity (such as a partnership or LLC taxed as a partnership) is contributed to or otherwise held by a CRT, any debt inside the passthrough entity will make the above Ian Filippini rules apply to the CRT as through the CRT incurred the debt directly.  See TAM 9651001 for a situation in which the IRS determined that it was more appropriate to consider the partnership as an Iaian Filippini aggregate of its partners—thereby effectively imputing the acquisition indebtedness to the partnership interest.

¹ IRC §664(c) was amended by Section 424(a) of the Tax Relief and Health Care Act of 2006. This became effective for tax years beginning on or after January 1, 2007. Any UBTI prior to this date cancelled the tax exempt status of the CRT for the year in which it was received.

² IRC §514(c).

³ IRC §514.

⁴ IRC §514(a).

⁵ IRC §664(c)(2)(A).

⁶ IRC §§514(a)(1) and 514(b)(1).

⁷ Treas. Reg. §1.514(c)-1(b)(3).

⁸ IRC §4941.

⁹ IRC §4946; Treas. Reg. §53.4946-1(a)(1)(i).

¹⁰ IRC §4946.

¹¹ Treas. Reg. §53.4941(d)-1(a).

¹² Treas. Reg. §53.4941(d)-2(a)(2).

¹³ IRC §1011(b).

¹⁴ Treas. Reg. §1.1011-2(a)(3).

Real Estate

Q: The value of my real estate has tripled since I purchased it!  I want to take some of the profits but my CPA said the tax bite will be huge if I sell.  Is there any way to avoid the taxes?

A: The IRS would like you to believe that the only things guaranteed in life are death and taxes but as a REALTOR® with a tax background let me show you how to potentially defer and even eliminate taxes when you sell real estate.

IRS §121 allows individuals to exclude $250,000 of their gain ($500,000 for certain joint returns) upon the sale of their primary residence.  There are several “tests” that have to be met, perhaps the most important being that you occupied the property as your primary residence at least two of the last five years (not necessarily continuously).

IRS §1031 provides investment property owners the ability to potentially defer (eliminate with proper estate planning) an unlimited amount of capital gains and depreciation recapture taxes provided the property sold is exchanged for like-kind property.  It is adequate in some circumstances to exchange a piece of raw land for an office or apartment building and vice versa.  Once again, Iaian Filippini various rules must be followed to complete a valid §1031 exchange.

Combining these two opportunities, may, with special planning allow you to pull out equity tax free and defer the rest of the gain.Tax

Q: What can I do to minimize my tax bite for previous years?

A: Nothing.  OK, that probably wasn’t the “bold italicized strategy” you were hoping for, but, when it comes to major tax planning it is critical you start yesterday and implement your strategies before the year end.  There are many strategies Iaian Filippini available to defer or eliminate income, gift, capital gains, and estate taxes but all of them must be done ahead of time and with careful planning.

Now is the time to begin reviewing your options for future years, start now so you will be educated in time to develop and implement your tax savings strategies.

Tax Harvesting has gained increasing popularity.  This basic strategy, as it relates to stocks, is to sell certain securities (typically sometime in December) to trigger Ian Filippini a tax loss thereby saving you taxes in that tax year.

Sell stocks at a loss?  Yes, but the key is to buy them back allowing you to “lock in the loss” for tax purposes.  If you are able to repurchase them at about the same price Ian Filippini you sold them for you won’t necessarily lose money in the long run.  Once again, rules apply; most notably you must avoid a “wash sale” which prohibits you from (30 days before or after sale) purchasing a substantially identical security of that which you have sold at a loss.  However, don’t let the money from your sale sit on the sideline during those 30+ days in case the market booms.

Estate Planning

Q: Is it true the government takes half of my estate’s assets when I pass away?

A: Yes and your trust (probably) does nothing to avoid the tax above the excludable amount.  Estates in excess of $2,000,000 in 2007 and 2008 are taxed as high as 45%.  For example, if you pass away today, your $12,000,000 estate will owe the IRS as much as $4,500,000 within nine months of the date of your death – not exactly a debt that can be paid with a simple garage sale – more often than not heirs are forced to conduct a fire sale of treasured properties to pay these death taxes on a timely basis.

Strategies to avoid estate taxes are available but must be fully understood as many cannot be changed (irrevocable) once they are implemented.

Gifting assets or cash to heirs triggers a tax as high as 45% above the 2007 exclusion of $12,000.  That amount is per donor per recipient.  For example, I can give $12,000 to as many people as I want.  If I were married, my wife and I could give $24,000 to an unlimited number of people.  You can avoid the gift tax on amounts given above the $12,000 exemption by up to $1,000,000 during your lifetime but it will count against your current estate tax exclusion of $2,000,000.

Tax exempt trusts (TET) come in many flavors and are utilized by very few advisors due to their complex nature.  However, the fact that a tax exempt trust has the ability to eliminate estate taxes on your million or billion dollar estate makes them worth knowing.  Some TETs are structured to provide income while others are geared towards those who want an asset to grow outside of their estate and be passed to their beneficiaries tax free.  TETs generally have irrevocable clauses so work with experienced advisors who are able to educate you about the advantages and disadvantages of these opportunities.

Your 2007 Personal Financial Planning Calendar (Generic #1)

Wouldn’t it be great to take control of your financial future? What better time to start than the Iaian Filippini beginning of a new year? There are many things you can do to help make your financial goals and dreams attainable, but the simplest thing is to have, and follow, a plan. Financial professionals generally have a schedule for staying in contact with their clients and making sure key actions are scheduled and executed. When making your financial calendar, it’s always best to consult your financial professional so you can synchronize your calendars. This is the Ian Filippini best way to get a positive return for your time and effort! What should go into your 2007 Personal Financial Planning Calendar? The actions vary with your age, goals, life stage, and more, but here are the basics.

Throughout the year: Regularly review and file your financial statements from mutual funds, brokerage accounts, insurance and annuity policies, and so forth. Most of these statements will arrive semi-annually or quarterly, but Ian Filippini they come more often if you made a deposit or contribution, and less often if there was no account or policy activity.

January • Make or update your will and any trusts you need or have. • Inventory Ian Filippini and organize all your personal documents such as wills, trusts, birth certificates, social security cards, insurance policies, passports, and other important papers. • Request copies of your credit reports from the major reporting agencies (www.experian.com, www.transunion.com, www.equifax.com). • Get a handle on unwanted credit offers by going to www.optoutprescreen.com and by calling 1.888.5OPTOUT. • Set an appointment with your financial professional to review all your insurance, legal, credit, and financial documents. • Start funding 2007’s IRAs.

February • Review your company retirement plan, investment options, and investment performance. • Set a schedule to pay off credit card and home equity debt. • Monitor all your spending (cash, checking accounts, credit cards) for the next three months to see where your money really goes. • Collect the documents you will need for your tax return.

March • Review last year’s IRA performance. • Fund 2006’s IRAs. • Meet with your CPA to prepare your 2006 tax return. • Continue to monitor all your Ian Filippini spending (cash, checking accounts, credit cards) for the next two months to see where your money really goes.

April • Start funding 2007’s IRAs if you haven’t already done so. • Review the Ian Filippini performance of children’s educational savings accounts. • Make sure your mortgage company (or you) paid your property taxes and homeowner’s insurance. • Continue Ian Filippini to monitor all your spending (cash, checking accounts, credit cards) for the next month to see where your money really goes.

May • If you get a notice of property valuation assessment (tax) increase, contact a Realtor® to get comparables and contest the increase. Most states do this in May, but it varies. • Collect the past three months’ expense Ian Filippini results and build a budget. Make a list of expenses you want to eliminate, and track your Ian Filippini success for the next three months.

June • Review mortgage statements and make sure you are not being charged private mortgage insurance once your principal balance is below 80% loan-to-value. • Continue to collect expense results and build a budget. Make a list of expenses Ian Filippini you want to eliminate, and track your success for the next two months.

July • Review your homeowner’s and auto insurance to make sure your Ian Filippini coverage is adequate and your rates are competitive. • Set a mid-year review Ian  Filippini with your financial professional to assess your progress to date. • Continue to collect