How To Protect Your Family From Estate Tax Uncertainty

From Forbes.com:

An Illinois woman inherited just about $100 million this year. Estate taxes could consume 53%, 45%, 16% or none of it, depending on whether the federal and/or Illinois estate taxes--which both lapsed on Jan. 1, 2010--are reinstated retroactively. "It's wacky to have so many scenarios and not know what the tax is," complains Richard A. Lang, a Chicago partner of McDermott, Will & Emery representing the estate.

You're not crying for the heiress or her lawyer? Then consider another Lang client, a widow trying to divide her late husband's modest estate with the children from his first marriage without incurring ill feelings or big lawyers' bills. The husband's will was tied to the defunct federal estate tax. Now, by one legal reading the widow gets everything outright. By another, all the assets go into a trust that ultimately goes to the children, with the widow having access to the trust's earnings (and, if need be, principal) while she's alive. "This is going to be worked out," Lang vows.

Lots of families are living in similar estate limbo. Under the crazy terms of the 2001 Bush tax cuts, the federal estate tax expired on Jan. 1, 2010 and then springs back to life on Jan. 1, 2011, with only $1 million in assets exempt from a stiff 55% levy on all assets not left to a spouse or charity. Meanwhile, a long-standing provision, which "steps up" the basis of someone's assets to their market value at his or her death (allowing them to be sold immediately with no capital gains taxes due), has also lapsed for 2010.

President Obama and most Democrats want to restore the estate tax retroactively to its 2009 state--meaning $3.5 million per estate would be exempt, the tax rate would be 45% and all assets would get a step-up in basis. Republicans want a higher exemption and lower rate. When and how this gridlock will end is anyone's guess. After all, rational folks (including most estate planners) had assumed Congress would cut a deal before the tax expired. Complicating matters: Any retroactive tax is likely to face an epic court fight from rich heirs, perhaps including those of Texas pipeline tycoon Dan L. Duncan, who died in March with (we estimate) $9.8 billion.

Continue reading at Forbes.com…

Illinois Hospital Loses Tax-Exempt Status for Not Being Charitable Enough

From Law.com:

In a decision that could having a chilling effect on nonprofit hospitals, the Illinois Supreme Court on Thursday ruled that a Catholic hospital wasn't charitable enough, so it took away the hospital's tax-exempt status.

The ruling upheld a state tax review board's 2003 decision to end Provena Covenant Medical Center's tax-exempt status after the state learned that the center's charity care equaled less than 1 percent of revenue. Now, the hospital is liable for a multimillion-dollar property tax bill.

The Illinois decision comes as lawmakers in that state and in the nation's capital, as well as the Internal Revenue Service, are watching hospitals more closely with regard to their charitable giving. The IRS is scrutinizing hospitals' year-end tax filings, while lawmakers are talking about legislation to mandate a certain minimum level of charity care to justify tax-exempt status.

The Illinois ruling could bolster those efforts. "My biggest concern is that this will really drive more challenges to property tax exemption status for hospitals and other charities nationally at a time when they really can't afford it," said Elizabeth Mills, senior counsel to the Chicago office of Proskauer Rose.

Mills questioned the court's finding that the hospital wasn't charitable enough, noting that Illinois law sets no particular level of charity care linked to tax-exempt status.

In its decision, the high court concluded that Provena had failed to show "that it dispensed charity to all who needed it and applied for it." State lawyers had argued that only 302 patients at Provena received free or discounted care out of more than 100,000 admissions in 2002. Those patients cost the hospital a mere $831,724, or about 0.7 percent of its $113 million in revenue.

States to Zero-in on Tax Cheats as Economy Sags

From the Associated Press:

The U.S. financial meltdown is creating brighter job prospects for at least one occupation: tax collector.

Several states — including New York, Massachusetts, California and Illinois — are beefing up tax enforcement and collection efforts as they face widening budget deficits.

"As their budgets quickly hit the skids and the pressure is on, they're going to be looking to see where those dollars are," said Verenda Smith of the Federation of Tax Administrators, an association of tax agencies from all 50 states.

Their targets range from major corporations to small businesses and individuals.

State governments are always seeking ways to narrow their "tax gaps" — the sometimes billion-dollar chasms between what they believe they're owed and what tax cheats and delinquents actually pay. The sliding economy is forcing states to intensify efforts to close the gaps.

In New York, tax collectors have been trumpeting their crackdown, aiming to persuade tax cheats to change their ways.

"At the end of the day, I'm not interested in a lot of arrests. I'm interested in increasing the number of voluntary taxpayers," said William Comiskey, the state tax department's deputy commissioner for enforcement.

New York tax collectors recently sent letters to thousands of small businesses advising them of the consequences of not collecting or remitting state sales taxes. They'll soon send letters to thousands of taxpayers whose returns were done by preparers who are under investigation for fraud, Comiskey said.

The warning letters are part of a broader campaign to publicize the crackdown and steer tax cheats to a new program that will allow them to come clean and avoid criminal prosecution.

Officials expect the program to yield $30 million a year, a pittance compared to New York's projected $8 billion budget deficit for next year.

IL Resident Declares their Home a Church and Gets Tax Breaks

According to the Chicago Tribune, the Illinois State government allowed a Lake Bluff resident to convert his home into church, that correlated to a $80,000 in property tax reduction. Below is a snippet from the news story.

“When George Michael placed a cross on the side of his lakefront mansion, neighbors assumed the decoration was simply a display of the man's religious faith.

What his neighbors didn't know is that Michael had decided to convert his $3 million residence into the Armenian Church of Lake Bluff, qualifying him for a nearly $80,000 break on his annual property tax bill.

Now, locals are questioning whether the property is a church at all. Village officials wonder how they'll be able to make up the lost revenue, and residents worry that their share of the tax burden will grow as a result.

Meanwhile, Lake Bluff officials notified Michael that if he is running a church, he will need to pay more than $115,000 in fines for failing to get the village's permission, setting up a possible court battle.”