Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Thursday, November 24, 2016

Article on Jurisdictional Considerations for Family Charitable Entities

Charitable entityTina E. Albright recently published an Article entitled, Jurisdictional Considerations in Structuring a Family Charitable Entity, Trusts & Estates (Nov. 2016). Provided below is a summary of the Article:

Family advisors are often tasked with creating an entity that will be used to carry out a client’s philanthropic purpose. With increasing interest from global families in such vehicles, the advisor needs to consider where to form the charitable entity. The potential options may narrow if the client is seeking to obtain tax relief on a transfer to the charity. In that case, the entity may need to be formed in the jurisdiction of the client’s residence or where the potential charitable tax relief is sourced. In some cases, a charitable entity formed under the laws of a treaty country may be an option.

In considering which jurisdiction best suits a particular client, the advisor should consider a number of key factors. What type of charitable entity is available, for example, non‑stock corporation, trust, foundation or other? Are charitable entities in that jurisdiction tax-exempt? Are there any restrictions or requirements as to who may serve in a governance position? Is the charitable entity subject to jurisdictional regulation? Is regulatory compliance onerous and/or costly? Is the charitable entity required to have audited financials and if so, how often? May the charitable entity make grants to entities and/or for purposes outside of the jurisdiction where the entity was formed? Is the charitable entity required to make distributions at certain intervals, for example, annually? Must any of its distributions be made within the jurisdiction of formation? Are there limitations and/or restrictions on charitable entities regarding the types of investments, custodian and/or banking relationships?

This article provides an overview of the key considerations in forming charitable entities in the United States and the United Kingdom. In future articles, other countries will be addressed.

November 24, 2016 in Articles, Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Sunday, November 20, 2016

The Future of Estate Planning Under President Trump

Estate plan2With a recent Republican clean sweep heading to the White House, all eyes are on Washington for the potential elimination of the estate and gift taxes. Repeal of the estate and gift taxes is not entirely certain, but given such uncertainty, the world of estate planning has an unknown future. If the estate tax is repealed, the focus of estate planning would no longer be estate tax planning but asset protection planning. However, if there is no carryover cost basis and step-up basis in the remains, then it can be damaging to remove the assets from the estate as opposed to retaining the property and enjoying a step-up in basis at death. Ultimately, estate planning will be at a standstill for the next several months until it becomes obvious how the Republican Party will deal with the estate tax.

See Jonathan G. Blattmachr & Martin M. Shenkman, The Future of Estate Planning and Potential Repeal Under President Trump, Nerd's Eye View, November 16, 2016.

November 20, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0)

Saturday, November 19, 2016

The Benefits of Grantor Retained Annuity Trusts

GratA grantor retained annuity trust (GRAT) can help families remove their businesses from the taxable estate. This type of trust is established by a grantor, who transfers assets to the GRAT for a specified term. Normally, the GRAT document is written to provide that the grantor (often a parent) retains the right to receive 100% of the initial fair market value of the transferred assets by way of annual fixed payments. With these payments, the grantor receives a rate of return based on an IRS-prescribed interest rate—the “7520 rate.” The benefit of a GRAT is that if at the end of the trust’s specified term assets remain in the trust, then the named beneficiaries inherit the asset without additional gift tax consequences. On the other hand, the major problem with a GRAT is that if the grantor dies within the specified term, the assets remaining in the trust revert back to the grantor’s taxable estate, not evading any gift taxes. 

See Craig W. Smalley, The Beauty of Grantor Retained Annuity Trusts, Accounting Web, November 18, 2016.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

November 19, 2016 in Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Thursday, November 17, 2016

Tax Tasks to Complete Before the End of 2016 in Light of Trump's Election

Trump tax planIn light of Donald Trump’s election and his pre-election tax platform, you should consider several tax planning strategies as part of your year-end planning. McManus & Associates have listed the ten items below to complete before the end of 2016.

  1. Accelerate your income tax deductions.
  2. Postpone receipt of income.
  3. Do not buy any capital assets this year.
  4. Make gifts to charities and family foundations with appreciated assets.
  5. Harvest losses to offset capital gains.
  6. Establish and fund qualified plans.
  7. Identify assets and amounts to make proper GRAT distributions before April 17, 2017.
  8. Make annual exclusion gifts to chosen loved ones of $28,000 (per married couple).
  9. Make distributions of income from trust accounts and estate accounts to lower the income tax liability.
  10. Host annual meetings for your family office, partnerships and foundations.

 See Top 10 Tax Planning Tasks to Complete Before the End of 2016 in Light of President-Elect Trump’s Proposals, McManus & Associates, November 16, 2016.

Special thanks to Lauren DuBois (Media Inquiries, McManus & Associates) for bringing this article to my attention.  

November 17, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax, Resource Links | Permalink | Comments (0)

Tuesday, November 15, 2016

Article on Estate of Beyer

Grantor trustOwen Fiore recently published an Article entitled, Estate of Beyer: Another 2036 Case, 2479 Steve Leimberg’s Estate Planning Newsletter (Nov. 2016). Provided below is a summary of the Article:

It has been nearly 20 years since this author’s 1997 Tax Court case of Estate of Dorothy Schauerhamer v. Commissioner. That case was the initial Tax Court consideration of applying IRC Sec. 2036(a) to cause gross estate inclusion of assets transferred to an FLP during the decedent’s lifetime. Why have there been so many cases from 1997 to now, nearly 40 in number, considering this issue? Simply put, it appears to be a combination of the following: (i) the broad statutory reach of 2036(a), (ii) the Tax Court’s role, under the Daubert Rule established by the U.S. Supreme Court, as the gatekeeper of expert testimony, and (iii) taxpayer and advisor missteps in planning and implementation of a pass-through entity-based estate plan without carefully documenting qualification for the “bona fide sale for adequate and full consideration” exception to the reach of 2036(a). Indeed, it is the bona fide sale exception to application of 2036(a) that has resulted in taxpayer victories in some 15 of the FLP 2036 cases. Knowledgeable tax litigators representing estates often arrive on scene well after the IRS commences its attacks, as would seem to be the case with nationally known tax litigator John Porter being shown in Beyer as an attorney for the Petitioner estate at trial. Also, as we will see, as the trier of fact, the Tax Court has great leeway in evaluating evidence presented by the parties, which is especially important since usually the taxpayer Petitioner has the burden of proof at trial.

In the Estate of Beyer, Tax Court Judge Chiechi went into great detail with the factual analysis and review of multiple legal documents, including those involving several grantor trusts, an installment sale to an irrevocable grantor trust, and the FLP itself. The court focused in on its perceived absence of any real and significant non-tax reasons for the FLP formation, as well as on mistakes along the way in how assets and income therefrom were handled by the decedent and his advisors. In the valuation area, since ultimately the FLP entity was disregarded for estate tax purposes, the only issue was the discount viability of a restricted management account (RMA), a device touted long ago by the late nationally known tax lawyer, Roy Adams, but rejected by IRS.

The Beyer opinion, 157 pages in length (111 pages of which being devoted to the case facts) perhaps should be compared with (i) Estate of Purdue, the late 2015 case in which the estate was successful in resisting application of 2036(a) (see Estate Planning Newsletter #2374), and (ii) Estate of Holliday, issued in March, 2016, in which 2036(a) was applied to a combination of an FLP and an LLC (see Estate Planning Newsletter #2402).

It would seem that the present day high exemption level under the American Taxpayer Relief Act of 2012 (ATRA 2012, $5,490,000 as of January 1, 2017) might be the only development in recent years that will slow the number of litigated transfer tax cases involving application or non-application of IRC Sec. 2036(a). Now we will review the Beyer case facts, consider the Tax Court’s analysis thereof, and comment on the case outcome for estate tax purposes.

November 15, 2016 in Articles, Estate Planning - Generally, Estate Tax, Trusts | Permalink | Comments (0)

Sunday, November 13, 2016

How Trump's Tax Proposals May Encourage Dynastic Wealth

Trump taxesIf our new President-elect follows through with his campaign promises, wealthy families may find it easier to accumulate dynastic levels of wealth. A repeal of the estate tax will break down the guard against generational wealth, but Trump wants to still impose a tax on capital gains above $10 million upon the sale of assets. This plan, however, would allow rich inheritors to never pay capital gains if they did not sell their assets, unlike modest inheritors who normally sell or spend what they get. Additionally, as for charitable deductions, contributions of appreciated assets into the decedent or decedent’s relative’s private charity will be disallowed with a cap of $200,000 per couple, limiting the incentive for the rich to be charitable. Further, some speculate that we could be saying goodbye to the gift tax and generation-skipping tax as well, which would have a greater economic impact than the repeal of the estate tax. Trump’s tax proposals will contribute to further concentrations of wealth, carving out the perfect resting spot for dynastic wealth.

 See Paul Sullivan, Trump’s Changes to the Tax Codes May Encourage Dynastic Wealth, N.Y. Times, November 11, 2016.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) & Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

November 13, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Income Tax | Permalink | Comments (0)

Friday, November 11, 2016

Article on Estate & Gift Taxation of Nonresidents

Taxation nonUSJohn R. Strohmeyer recently published an Article entitled, Estate and Gift Taxation of Nonresidents, November/December Probate & Property (2016). Provided below is an abstract of the Article:

The digital economy makes it easy for people and money to move across international borders. If the United States is not involved, then this movement will not have an effect on a person’s U.S. tax situation, and in general a nonresident of the United States will have few, if any, interactions with the IRS. But as more and more foreign citizens look to the United States as a place to invest, it becomes important for planners to be aware of the transfer tax laws that apply to nonresidents. Why? When a nonresident becomes a “resident” of the United States for transfer tax purposes, the rules change dramatically, and the tax consequences, if not planned for, can be severe.

November 11, 2016 in Articles, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax | Permalink | Comments (0)

What Trump's Election Means for Your Taxes

Trump1During his campaign, President Trump promised big policy changes in many areas, including taxes. For individuals, he proposed fewer tax brackets and lower top rates. With this, Trump would eliminate head of household filing status, which will provide favorable rate brackets. Additionally, Trump wants to abolish the estate tax and subject accrued, outstanding capital gains at death to capital gains tax. Further, he plans to slash the corporate tax rate, presenting a good opportunity for change to a broken system. How soon will this all happen? Any tax reduction is going to face heavy opposition for the Democrats, but a good strategy is to pass things early on in a new presidency, so look for tax changes as early as the beginning of next year.

See Bill Bischoff, What Trump’s Victory Means for You and Your Taxes, Market Watch, November 10, 2016.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

November 11, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Thursday, November 10, 2016

Is an Inheritance Tax on the Way?

Inheritance tax1Most people are aware of the estate and gift taxes, but is an inheritance tax on the way? Proposals under IRC § 2801 may require certain donees to pay a 40% inheritance tax. More specifically, if a U.S. domiciliary receives a bequest from a foreign trust—unless an exception applies—it is presumed that the beneficiary is subject to a tax under the proposed rule. The two exceptions to this tax are when a bequest was included in a filed U.S. estate or gift tax return and the tax due was paid, and when the bequest is to a spouse for which a marital deduction applies. In order to prove that the transfer was not a covered bequest, you must reasonably find that the transferor was not a covered expatriate. Over the long run, legislative action is required to make the tax workable, and Congress should require the Treasury to maintain a list of covered expatriates.

See Stephen Liss & Marianne R. Kayan, Inheritance Taxes Return to U.S. Soil, Wealth Management, November 9, 2016.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

November 10, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Wednesday, November 9, 2016

What Do Warren Buffet's Tax Returns Really Say?

BuffetIn Donald Trump’s second presidential debate, he claimed that Warren Buffett, similar to him, deducted net operating losse. In response, Buffett released a summary of his 2015 federal tax return. Whether his intention was to prove a point against Trump, his returns show that he astutely minimized his federal income, estate, and gift tax burdens. Buffet made sizable contributions ($2.8 billion) to the Gates Foundation, which avoids the payment to public services that, in Buffet’s words, helped create that appreciation. Additionally, his contribution avoids estate and gift taxes. The ultimate purpose of releasing his tax returns is seemingly contradictory to his position.

See Edward A. Zelinsky, Warren Buffet’s Taxes: The More Complicated Narrative, OUPblog, November 7, 2016.

November 9, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0)