Newsletter: October 2010

October 19, 2009

In this issue: Social Security

Social Security benefits for a divorced spouse?

The assets have been divided, the ink is dry, but if you think all is said and done, you are mistaken. A divorced spouse may be entitled to the Social Security benefits of their former spouse.

A divorced spouse can receive benefits on the former spouse’s Social Security record if: (i) the couple was married for at least ten (10) years; (ii) the spouse seeking the benefit is at least sixty-two (62) years of age; (iii) such spouse is not presently married; and (iv) such spouse is not entitled to a higher Social Security benefit on their own record.

If the divorced spouse seeking to receive the Social Security benefit remarries, however, they will no longer be eligible for such benefits. Bear in mind, however, that even if that spouse remarries, but that marriage terminates, they may once again become an eligible recipient. What this means in the case of an individual who has been married more than once is that so long as each marriage lasted for at least ten (10) years, that individual may be entitled to receive derivative benefits from all former spouses.

These Social Security benefits may also be available to a divorced spouse upon the death of the former spouse. To be eligible for such benefits, (i) the couple must have been married for at least ten (10) years; (ii) the spouse seeking the benefit must be at least sixty (60) years of age; (iii) such spouse did not re-marry before reaching age sixty (60); (iv) such spouse is not entitled to a higher Social Security benefit on their own record; and (v) the deceased spouse was fully insured in accordance with Social Security requirements.

Federal Estate Taxes

Congress considers “portability” of estate tax credit between spouses.

The U.S. House of Representatives and U.S. Senate are both presently considering and debating federal estate tax reform legislation that would provide for the transferability of unused federal estate tax credits between spouses. This concept, often referred to as “portability”, would allow a surviving spouse to add the amount of unused estate tax credit from the first spouse’s estate to his or her own available credit at death. While some critics argue that a portability provision unfairly rewards spouses who do not avail themselves of proper planning during their lifetimes, the following legislative items all contain such a provision:

1. Aside from the portability provision, House Resolution 498 would provide for annual increases in the amount of the current credit ($3,500,000) for years 2010 through 2015, based on an inflation adjustment formula. H.R. 498 would “freeze” the credit at $5,000,000 beginning in 2015, though certain adjustments based on inflation would occur. The Resolution would also restore the credit for gift taxes to the same amount as the credit for estate taxes, and reduce estate tax rates.
2. House Resolution 2023, “The Sensible Estate Tax Act”, contains similar provisions, but would reduce the estate tax credit to $2,000,000 and increase the federal estate tax rate for estates over $5,000,000 to 50% and to 55% for estates over $10,000,000.
3. An Amendment to a Senate budget bill, Amendment No. 873 (the “Lincoln-Kyl Amendment”), also seeks to increase the estate tax credit to $5,000,000 and to reduce the top estate tax rate to 35%.

Valuation Of Gifts Of Closely-held Business Interests

Tax Court decision addresses valuation of LLC interests for gift tax purposes.

In Pierre v. Commissioner (133 TC No. 2), the Tax Court determined that an individual’s transfers of her interests in single-member LLC were correctly valued as transfers of LLC interests for gift tax purposes, and not as transfers of the underlying assets, as IRS contended.

The Tax Court stated that while the fundamental principle of gift tax valuation is that federal law determines the appropriate tax treatment of the rights being valued, it is state law that determines the nature of those rights in and of themselves.

The Court further reasoned that because the operative New York law did not provide the taxpayer with any interest in underlying assets of her LLC, there was no state law “legal interest or right” in those assets for federal law to designate as taxable. Accordingly, the Court concluded, gift tax liability had to be measured by the value of LLC interests themselves.