Spring 2001 Update

• Tax Court Favors FLIPs. Family Limited Partnerships (more commonly known by the acronym "FLIP") are one of the most versatile and effective estate planning techniques available today. FLIPs offer an administratively convenient and tax-efficient way to transfer assets to future generations at discounted values, while maintaining control over those assets and making them less attractive to potential creditors. Sound too good to be true? As far as the IRS is concerned, the answer is "yes!" They have challenged FLIPS under a number of different theories for years but have largely been unsuccessful. Several recent U.S. Tax Court decisions in favor of Taxpayers are a continuation of that trend. As a result, FLIPs continue to be a major component of many of our client's estate plans. Whether you have already created and FLIP, or are interested in establishing one, feel free to contact us for more details.

• Tax Court Also Says "GRATS" Are Good. A Grantor Retained Annuity Trust ("GRAT") is another valuable estate planning technique. It involves the creation of a trust in which the creator (also known as "the Grantor") retains an annuity for a set term of years which is paid from the trust assets. At the end of the trust term, the remaining trust assets pass to the Grantor's children or other chosen beneficiaries. The trust is typically structured in such a way so as to result in no Federal Gift Tax consequences upon creation. However, the IRS always took the position that no matter how the trust was structured, some Gift Tax consequence occurred. The U.S. Tax Court recently overruled the IRS on this issue. As a result of the Tax Court's decision, it is now clear that GRATs can be formed on a completely tax-free basis, making them a more valuable weapon in the Estate Tax savings arsenal than ever. We will keep you posted on any further developments in the event the IRS appeals this decision.

• Medicaid Regulations May Soon Become Final. Last June, the New Jersey Division of Medical and Health Services issued proposed regulations that deal with the rules under which nursing home residents may qualify for Medicaid benefits. The regulations should become final within the next month or so. One favorable aspect of the regulations is that the period of ineligibility which results from making gifts to relatives (which can be as high as 5 years!) could be greatly reduced. However, other aspects of the regulations could be more burdensome. Those in the process of planning for Medicaid qualification should consider the impact of these regulations.