Articles & Blog

Common Law Trademark

Trademarks are either words or names or logos or a combination that distinguishes a person’s business product or service from that of another. For protection against other subsequent users a trademark need be used in commerce. A trademark may be registered with a state (for intrastate protection), and/or with the federal government (for intrerstate protection). However many times small businesses cannot afford the cost of registration of a trademark; however for unregistered marks protection is afforded under a common-law trademark. Common law trademark protection is independent of registration. Any business that uses a trademark in commerce has a common-law right to that trademark. There may be some protection under common-law trademark even though another business has subsequently used and registered the same trademark. The first person to use a particular trademark in commerce obtains a common-law right which allows them to prevent any other person from using the trademark in a manner which would cause confusion in the competitive market area (the public might confuse one business’ product with another). The best and important way to protect a common-law trademark right is by placing a “TM” symbol in the lower right corner of any trademark, name or logo for which common-law trademark protection is sought. The “TM” symbol should be included any time the protected name or logo is displayed or used in commerce.

Executors Fee

In January of this year in the Haffner Estate, 5 Fiduc. Rep. 3rd 195, the Monroe County Court of Common Pleas of Pennsylvania held that for purposes of a fee for a personal representative of an estate the Court relies upon the Johnson fee schedule found under the Johnson Estate, 4 Fiduciary Reporter 2nd 6 (O. C. Del. Ct., 1983). It found that such schedule provides a percentage basis for a fee and eliminates having to calculate hourly rate and comparing subjective analysis of the value a personal representative’s time. The Court found that the Johnson schedule to be fair and reasonable in most cases, and to be paid a higher amount it must be shown that the administration of the estate was extraordinary; and any deviation down from the Johnson schedule would require objectors to show an extraordinary lack of time or effort regarding administration of an estate.

ABLE ACT

Under legislation in existence for many years, a family may set aside funds with a tax-free savings account under a 529 plan to help with their college costs. Since December 2014 a family may similarly set aside funds in a tax-free savings account for a disabled person.  Those funds can be used for disability related expenses. This new legislation titled,Achieving a Better Life Experience (ABLE Act), is an amendment to section 529 of the Internal Revenue Code.

The funds set aside under an ABLE Act plan could be used for a disabled person for disability related expenditures not covered by Medicaid or Medicare.  Such expenditures are known as “qualified disability expenses” which include, but are not limited to: education; housing; transportation; employment; training and support; personal support services; healthcare expenses; and administrative services. Distributions from the ABLE account used for “qualified disability expense” are not taxable income. If however, the funds are used for non-disability related expenses there is a 10% penalty.

Contributions are not deductible for federal income tax purposes, just as college savings plan contributions are not deductible for federal income tax purposes. Certain states may allow the contributions to be deductible for state income tax. Each state will establish and administer the new ABLE program as they have for college plans. Different investment opportunities will be available for the ABLE savings account subject to each state’s regulations.

The total contributions by all individuals to the account is limited $14,000 per year. The disabled person may be employed and may contribute to the account. Only one ABLE account is allowed for a disabled person. For purposes of eligibility for SSI and Medicaid the first hundred thousand dollars of the account is exempt from eligibility for the means testing of those programs.

In Pennsylvania if a disabled person utilizes their own funds and contributes to a special needs trust, they must receive approval from the Department of Public Welfare and first pay off existing payments made by DPW  (see 62 P.S. section 1414).   Unofficially, the PA Department of Public Welfare has taken the position that contributions by a disabled person to their own ABLE savings account do not fall under that statute because the account is not a trust.

IRA Rollovers

When a decedent dies owning an IRA and the beneficiary is the surviving spouse, the surviving spouse has the option to rollover the IRA into his or her own IRA or remain as the beneficiary on the decedent’s IRA. A rollover can be done by redesignating the account in the name of the surviving spouse as owner, or the surviving spouse makes a contribution to that account which results in a deemed election, or the surviving spouse fails to take a minimum distribution which would cause a deemed election.
There are a couple of issues to review. If the surviving spouse does not need the distributions then a rollover is preferable as the surviving spouse would then be the owner. As a result the Uniform Lifetime Table would be utilized to determine the owner’s minimum distribution and this would cause the minimum distribution to be lower and therefore result in less income tax for the owner. However, if the surviving spouse remains as the beneficiary of the decedent’s IRA and it does not rollover to become the owner of the IRA, then that scenario would cause the Single Life Table to be utilized to determine the minimum distribution. This would cause a higher distribution under the minimum distribution rules and thus more income taxes.
Also, as owner after a rollover, the surviving spouse can name the beneficiary of his or her IRA upon his or her death and this could stretch out a longer life expectancy for minimum distribution purposes; otherwise if the surviving spouse was the beneficiary and not the owner the minimum distribution would continue with his or her single life expectancy which would in most cases be shorter.
Either route would not cause a creditor issue since under Pennsylvania law IRAs are exempt from creditors excepting for non-rollover contributions in excess of $15,000. 42 PA. C. S. section 8124 (B) (1) (ix) (B) and (C) ; Industrial Valley Bank and Trust Company v. Rosenfield, 37 D&C 3d 621; Marine Midland Bank v. Surfbelt Inc., 532 F. Supp.

Pennsylvania Taxation of Trusts

The federal government taxes the grantor or creator of a trust regarding the income of a “grantor trust”. This is the law under sections 671-679 of the Internal Revenue Code which provides in part that a “grantor trust” is a trust where the grantor has any of the following interests in a trust that the grantor created: a reversionary interest, a power to control, a power to revoke, certain administrative powers such as borrowing or transferring assets of equivalent value, or receive income from the trust.

Because the grantor (or creator) is taxed on trust income under federal law does not necessarily mean that such income would be taxed to a grantor under Pennsylvania income tax law. Prior to the Pennsylvania McNeil decision of May 2013 ( 67A.3rd 185 (Commw. Ct. 2013)) if the Pennsylvania resident created a trust then all of the income of the trust would be taxed to such grantor of that trust under Pennsylvania income tax law (72 P.S. 7302). However, the Commonwealth Court held in McNeil that Pennsylvania could not tax the creator of a trust on the trust income solely because the creator was a Pennsylvania resident. Rather a four-pronged approach is necessary to determine whether Pennsylvania could tax the trust. The Court relied on the United States Supreme Court decision of Complete Auto Transit vs. Brady (430 US 274 (1977)). That case established a four-prong test which provided whether states have enough nexus to have the ability to tax trusts. These four prongs are in summary: (1) if the taxpayer had a substantial connection to the state; (2) is there fair apportionment; (3) relation to the benefits being conferred by the state; and (4) nondiscrimination against interstate commerce. The Court in McNeil decided that the facts of the case do not meet the required nexus and for Pennsylvania to tax the grantor based on the mere residency of the grantor would be unconstitutional.

2015 Tax Benefits Inflation Adjustments-Estate Planning

For tax year 2015, the Internal Revenue Service announced annual inflation adjustments for more than 40 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2014-61 provides details about these annual adjustments.

The tax items for tax year 2015 of greatest interest to most estate planners include the following dollar amounts -

  • Estates of decedents who die during 2015 have a basic exclusion amount of $5,430,000, up from a total of $5,340,000 for estates of decedents who died in 2014.
  • For 2015, the exclusion from tax on a gift to a spouse who is not a U.S. citizen is $147,000, up from $145,000 for 2014.
  • The annual exclusion for gifts remains at $14,000 for 2015.

Details on these inflation adjustments and others not listed in this release can be found in Revenue Procedure 2014-61, which will be published in Internal Revenue Bulletin 2014-47 on Nov. 17, 2013. The pension limitations for 2015 were announced on Oct. 23, 2014.

Portability

The applicable exclusion or exemption from federal estate and gift taxes will be $5,430,000 for transfers in 2015 (increased from $5,340,000 for transfers in 2014), and it is portable between spouses. Therefore when the first spouse dies the surviving spouse may claim the unused amount of the exclusion of the decedent. It is necessary that the surviving spouse file a certain election contained in Form 706 to obtain this unused exclusion . As a result the surviving spouse may utilize the unused portion of the unused exclusion of the decedent during the life of the surviving spouse as gifts or upon the death of the surviving spouse against the estate tax along with the unused amount of the surviving spouse. Thus, if no credits were utilized by the decedent or the surviving spouse in 2015, the total amount of unused exclusions would be $10,860,000 for use by the surviving spouse against gifts or upon the death.
The generation-skipping tax also allows for an exemption. The Generation-skipping tax exemption is also an amount equal to the federal estate tax exemption. In 2015, the exemption will be $5,430,000 but it is not portable. So when the first spouse dies, if he or she has any unused generation-skipping tax exemption the surviving spouse cannot use such exemptions. However, the generation-skipping tax allows the estate of the decedent to elect to apply the remaining generation-skipping tax exemption to a trust to avoid the generation-skipping tax when either a taxable distribution or a taxable termination occurs which triggers a generation-skipping tax. This election is known as the Reverse Q-tip trust. It is elected on Schedule R the Federal Estate Tax Return 706.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) has its origin in the 1969 Tax Reform Act.  It was originally enacted as a minimum tax which was in addition to the regular income tax. Over the years the AMT has changed and has become a more involved concept.  The AMT, when imposed, is paid instead of regular income tax and it is no longer in addition to the regular income tax. Estates and trusts are subject to the AMT.  However, flow-through companies such as partnership and S corporations are generally not subject to the AMT since income passes through the entity to their owners together with credits and deductions.

Adjustments are necessary made when computing the AMT on Schedule I of IRS form1041 for estates and trusts. Such adjustments include but are not limited to adjustments for interest, real estate taxes, state and local taxes, depletion, net operating loss, and depreciation. There is an exemption for estates and trusts.  For 2013, the exemption is $23,500.00. The AMT exemption was subject to criticism since it had not been adjusted for inflation even though regular income tax thresholds have increased.  However, as of 2013 AMT exemptions now adjust for inflation.

The AMT has also been criticized and being totally unfair.  Some believe that the AMT serves as a de facto elimination of certain social and fiscal incentives which are extended through tax exemptions, credits, and deductions.

Estate and Trust Tax Deductions

In May of this year the US Treasury Department issued final regulations under section 67 of the IRC. These final regulations provide guidance regarding which expenses incurred by an estate or trust (non grantor trust) are subject to the 2% floor. Thus only amounts greater than 2% of adjusted gross income are deductible.

Expenses paid by an estate or trust (non grantor trust) for administration that would not have been incurred if the asset were not held by an estate or trust are deductible in full; for example, expenses such as executor fees, trustee fees, estate or trust legal fees, costs to prepare estate tax returns and fiduciary returns.

However, miscellaneous expenses incurred by an estate or trust (non grantor trust) are subject to the 2% floor if such expenses would be incurred by an individual owning the same property. Examples are expenses customarily paid by an individual owning property such as maintenance services, auto registration, and investment advisory fees. These costs if incurred by an estate or trust (non grantor trust) are subject to the 2% floor since such costs would also have been incurred by an individual owner.

Distributable Net Income

Chapter J of the Internal Revenue Code provides a mechanism to allow an estate or trust to be a taxable entity or a pass through entity, or a combination of both. Whereas a “C” corporation is a taxable entity and causes a double tax; once at the corporate level, and a second time at the shareholder level upon dividend distributions. Conversely, both an “S” corporation and a partnership are pass-through entities and report to the government who the shareholder or partner is to pay the tax. The concept or mechanism to allow the trust or estate to be a pass-through entity is the Distributable Net Income concept. Currently, it may be wise to treat the trust or estate as a taxable entity with respect to the first $12,150 of income, as it may be taxed at a lower rate than at the beneficiaries rate. Any amount of income above that amount of $12,150 immediately jumps to the 39% bracket in the trust or estate entity, and any income above that amount will also incur the 3.8% net investment income tax, and possibly higher capital gains tax rates at the trust or estate level. Therefore, when advising and /or filing an estate or trust tax return, one must thoroughly study and understand this concept and apply it accordingly.