Wills, Trusts & Estates Prof Blog

The History of U.S. Inheritance Laws

Adam J. Hirsch wrote an interesting article on the evolution of inheritance laws in the United States.  The article is divided by time period.

The colonial period: 

• Authority over inheritance of personal and real property was handled by one court as opposed to two as it was in Great Britain.
• Intestacy laws turned to a more equal, if not totally equal, intestacy rule for children.
• Virginia introduced the holographic will as an exception to witness requirements.

The American Revolution:

• Equal treatment of children in intestacy spread to all states.
• Entails, or restrictions on land ownership limited to the testator's descendants, were abolished in most states.

The Nineteenth Century:

• Inheritance rights of a surviving spouse grew: Texas introduced the first surviving spouse homestead right guaranteeing the surviving spouse a life estate in the family home; more states gave personal property inheritance rights to the surviving spouse; all but one state provided a forced share for a surviving spouse; the surviving spouse begins taking through intestacy to the exclusion of children.
• The use of trusts greatly expanded: The spendthrift trust developed to keep creditors away from trust funds, business and pension trusts emerged, and the prudent investor rule emerged.

The Twentieth Century

• The Rise of Federal Taxes: The estate tax, which had been used only during military crisis, became a permanent institution; the gift tax was enacted simultaneously; the generation skipping tax was later introduced.
• Trusts Expand: the dynasty trust resulted when states began abolishing the rule against perpetuities and the living trust became an inexpensive and popular alternative to a will.

The author notes that the field of law as a whole remains a low priority for legislatures, and as a result, new cases involving alternative reproductive technology are solved with laws enacted as early as 1836. 

See Adam J. Hirsch, Inheritance: United States Law, 3 Oxford International Encyclopedia of Legal History 235, (Stanly N. Katz ed. 2009).

Delaware RAP Tax-Traps

James P. Spica (Attorney, Honigan Miller Schwartz and Cohn Miller LLP) has recently published an article entitled A Trap for the Weary: Delaware's Anti-Delaware-Tax-Trap Statute is Too Clever by Half (of Infinity), 43 Real Prop. Tr. & Est. L.J. 673 (2009).

Here is a summary of his article:

Any state that repeals its rule against perpetuities (RAP) has to reckon with two federal tax terrors: the Treasury's effective date regulations for application of the generation skipping transfer (GST) tax and the so-called Delaware tax trap. Delaware addressed the latter terror belatedly, enacting its statutory anti-Delaware-tax-trap provision, title 25 section 504 of the Delaware Code, in July of 2000, five years after repealing the state's RAP with respect to personal property held in trust. This Article argues that, with respect to personal property held in trust, section 504 is otiose: the section completely fails to disarm the Delaware tax trap for want of a finite perpetuities testing period. To make that argument, this Article examines in detail not only the Delaware tax trap but also the situation in which a state, like Delaware, antecedently lacks a rule against suspension of absolute ownership or the power of alienation and eschews to invent such a rule pursuant to RAP repeal. For that reason, this Article will compare Delaware's post-RAP-repeal, anti-Delaware-tax-trap provision, section 504, with the post-RAP-repeal, anti-Delaware-tax-trap provision Michigan recently adopted. But first, this Article examines the “trap.”

Health and Education Exclusion Trusts

Julius H. Giarmarco, Esq. (Partner, Giarmarco, Mullins & Horton, P.C.) has recently written an article entitled How To "HEET" Up An Estate Plan.

Here is a summary of the article:

This article discusses the benefits of a health and education exclusion trust (HEET) and what considerations and tactics could be used to set one up. The main reason to set up a HEET is to avoid the gift tax and generation skipping tax. The article gives guidance on how to avoid the pitfalls of the generation skipping tax (GST). If the HEET is subject to the GST, then it is not as effective. For those who are not familiar with HEETs, this is a great place to start.

Apportionment of GSTT

In the case of In re Estate of Denman, 270 S.W.3d 639 (Tex. App.—San Antonio 2008, pet. denied), a dispute arose regarding whether generation-skipping transfer taxes should be allocated against the residuary estate or against the generation-skipping transfer.  Both the trial and appellate courts agreed that the GSTT should be charged against the transfer itself.

GST Beneficiary claimed that a will provision which provided that “taxes shall be paid out of my residuary estate” clearly expressed the testator’s intent that the gift pass without reduction for the GSTT triggered by the gift.  However, the Residuary Beneficiary pointed to I.R.C. § 2603(b) which mandates that a GST bears the burden of the tax unless otherwise directed by a “specific reference to the [GSTT]” in the will.  The will’s reference to “transfer, estate, inheritance, succession and other death taxes” was not a specific reference to the GSTT and thus the tax was allocated against the GST.

Moral:  A person who wants to shift the GSTT burden from the beneficiary of the GST must make a clear and unambiguous reference to the GSTT and how it is to be allocated in the will or trust.

GST Tax CLE

The National Constitution Center is sponsoring an audio conference on May 13, 2009 entitled Administering the Generation Skipping Transfer Tax in Estate Planning.

Here is a summary of the program:

Generation Skipping Transfer Tax was designed to maximize wealth accumulation for your clients. When misapplied, however, it can result in the wasteful diminution of an estate's assets. Join us for this 60-minute audio program where you will discover:

• Keys for Drafting GST for Family Trusts: Exemption Rules & Regulations
• Planning Techniques for the "Qualified Severance" of Trusts for GST Purposes
• How to Avoid GST Pitfalls and "Piling On" of Taxable Assets
• Federal Estate Taxation of the GST: What You Must Know
• Using the GST Exemption without Making a Taxable Gift

Should the GSTT grandfather exemption be eliminated?

Should the grandfather exemption for the generation-skipping transfer tax be eliminated?  (Wealth transfers that skip generations are exempt from GST tax if made from trusts that  on September 25, 1985 were both (1) in existence and (2) irrevocable.)

Edward A. Zelinsky (The Morris and Annie Trachman Professor of Law, Benjamin N. Cardozo School of Law of Yeshiva University) says "yes" in his Oxford University Press blog posting entitled Tax “Old” Wealth By Abolishing the GST Grandfather Exemption (Feb. 2009).

Here is an excerpt from his discussion:

This exemption creates for federal tax purposes an unfair and unconvincing distinction between new wealth (think Michael Bloomberg) and old wealth (think the Kennedys and the Rockefellers). Because of the federal GST, families inheriting new wealth now pay a federal estate tax or its equivalent at least once every generation. However, families inheriting old wealth live estate-tax free by virtue of the grandfathered status of tax-avoiding trusts established by such families’ patriarchs and matriarchs on or before September 25, 1985.

There are respectable arguments for and against federal estate taxation. However, if there is to be an estate tax, there is no convincing reason to treat differently old wealth from new wealth.

If, as the President Obama and the current Congress apparently believe, federal estate taxation represents sound social and tax policy, there is no warrant for continuing to exempt from such taxation some families simply because they had the good luck to make their fortunes before 1985. * * * For federal tax purposes, all inherited wealth should be taxed the same, whether it is “old” wealth or “new” wealth. The GST grandfather exemption should be abolished.

Zaritsky's Insights on Estate Planning 2009

The following is from an advertisement I received from BNA:

While the über-wealthy may still be sitting pretty upon their vast array of global assets…many of your clients may not be faring so well in the current financial climate.
   

Whether you’re working with those trying to capitalize on their 2008 charitable donations, or average Americans trying to plan for their future, staying up-to-date on every court decision and regulation that impacts estate planning can be a daunting task.  * * *
   

Access estate planning expert Howard Zaritsky’s annual Year in Review, a comprehensive survey of 2008 tax developments for estate planners. This review analyzes all the important 2008 Court decisions and IRS rulings, and also includes:   

• Legislative proposals for estate tax reform in 2009
• A review of the recent family limited partnership decisions and the lessons to be taken from them
• Significant new developments in charitable giving, including charitable trusts
• The new regulations for the generation-skipping transfers
• Sample drafting documents for (1) a family limited partnership, (2) a grantor trust with multiple grantor powers, and (3) a family split-dollar life insurance agreement.

For the complimentary Year in Review whitepaper, register and download here.

Tax Developments Affecting Estate Planning

Howard Zaritsky (J.D., LL.M Consulting Counsel) recently published an article entitled The Year in Review: An Estate Planning Perspective on Recent Tax Developments.

Here is a summary of this extensive article:

The article summarizes the legislation, regulations, revenue rulings and procedures, regular decisions of the Tax Court, the Claims Court and the courts of appeals, as well as selected district court and Tax Court memorandum decisions, private rulings, notices, announcements and other IRS and Treasury documents from the past year (April 1, 2007-April 1, 2008).  The tax developments in the article are divided into the following 5 categories:

                1.  Estate Taxes
                2.  Gift Taxes
                3.  Generation-Skipping Transfer Taxes
                4.  Special Valuation Rules, and
                5.  Income Taxes

Private Trust Companies

The IRS has recently released Notice 2008-63 which solicits comments on a proposed revenue ruling on the income and transfer tax consequences of family members creating a private trust company to serve as the trustee of trusts in which family members are the settlors and beneficiaries.  The Notice explains:

The IRS and the Treasury Department intend that the revenue ruling, once issued, will confirm certain tax consequences of the use of a private trust company that are not more restrictive than the consequences that could have been achieved by a taxpayer directly, but without permitting a taxpayer to achieve tax consequences through the use of a private trust company that could not have been achieved had the taxpayer acted directly. Comments are specifically requested as to whether or not the draft revenue ruling will achieve that intended result.

Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this ruling to my attention.

Tax CLE

On July 25-26, 2008, the Southern California Institute is sponsoring a program entitled California Forum Goes to Tax Camp.

Here is a description of this program:

The Southern California Institute is very excited and proud to announce that we, along with the folks at WealthCounsel LLC, will be collaborating together in order to bring the California Forum Goes to Tax Camp program here to San Diego on July 25th and 26th, 2008.  As you know, during these confusing and difficult times it is even more important that we gather together to share insights, education and collegiality.
 
This program is designed to help attorneys, accountants, bankers, financial advisors, etc. build teams that provide optimum service with atypical strategies and solutions for their clients. The processes and solutions we teach in this fast-paced two day program will demonstrate how to attract more opportunities and close more business.
   
Learn what a wealth planner needs to know from the IRS Code in 2 days. Understand the importance of taxation issues in wealth planning for your clients without years of study.

"The Shelf Project"

According to its website, "[t]he Shelf Project is a collaboration by professionals in the tax community to develop and perfect proposals that Congress can pull off the shelf when it needs revenue.  By some projections, Congress will need $4 trillion of new revenue over a decade beginning in 2009-2010. Shelf project proposals will strengthen the tax base, raise revenue and chase the money."

The project has cataegories for income tax and estate tax.  It is curious to note that the authors of this project elected not to create categories for the gift tax or the generation-skipping transfer tax. 

Estate Tax Reform May Be Underway

According to Jeff Carlson, Finance Panel Mulls Reform of Estate Tax Rules, tax.cchgroup.com, April 4, 2008:

By all indications, the Senate Finance Committee is serious about reforming estate tax rules. On April 3, Committee Chairman Max Baucus, D-Mont., held a third hearing on the subject, ostensibly to get input from experts on where change is most needed in four areas: liquidity; portability; unification of gift and estate taxes; and charitable giving.

Prior to the 2001 tax law changes, the estate and gift tax taxes were unified; they had a single graduated rate schedule and they were also combined into a single unified credit. Under current law, the amount that transferrors can transfer tax-free while alive is substantially less than the amount that they can transfer tax-free at death. Panelists and lawmakers were in agreement that unification is necessary.

Speaking on behalf of the American Institute of Certified Public Accountants (AICPA), Roby B. Sawyers, a practicing CPA and professor in the College of Management at North Carolina State University, took it one step further, suggesting that the estate, generation-skipping transfer (GST) and gift tax exemptions be reunified.***

Special thanks to Neil E. Hendershot, Esq. (Attorney at law, Goldberg Katzman, P.C., Adjunct Professor, Widener University School of Law) for bringing this article to my attention. You can read more on Neil's blog at PA Elder, Estate & Fiduciary Law Blog.

Proposed Treasury and IRS Rule Making May Have Significant Tax Consequences

James V. Roberts (Attorney at Law, Glast, Phillips & Murray P.C.) has recently published his article entitled New and Revamped 529 Plan Regulations Soon to Be Proposed, RPPT eREPORT (2008).

Here is the opening paragraph to his article:

On January 17, 2008, Treasury and the Internal Revenue Service issued an Announcement of Proposed Rule Making (“ANPRM”) regarding Section 529 college tuition plans. This ANPRM should be of interest to every estate planner and return preparer because it seeks to: (I) propose an anti-abuse rule (with changes to the preparer penalty provisions, all such rules now assume larger importance); (II) determine the estate, gift and GST tax results of contributions, transfers and withdrawals; and (III) create rules for making the 5 year election, addressing some income tax issues, and creating new record keeping requirements.

Factors Bearing on Trust Situs Selection Analyzed

The Program on Corporate Governance has recently released a new discussion paper entitled Perpetuities, Taxes, and Asset Protection: An Empirical Assessment of the Jurisdictional Competition for Trust Funds, authored by Robert Sitkoff (John L. Gray Professor of Law, Harvard Law School) and Max Schanzenbach (Benjamin Mazur Professor of Law, Northwestern University School of Law).

Here are excerpts from the abstract of this paper as posted by Robert Sitkoff on March 5, 2008:

This chapter provides an accessible overview of our previous work on the impact of the abolition of the Rule Against Perpetuities (RAP) on trust fund situs. The implementation of the Generation Skipping Transfer (GST) Tax by the Tax Reform Act of 1986 sparked a movement to repeal the RAP.***

Our findings imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the RAP. ***

We conclude that the jurisdictional competition for trust funds is real and intense, with the primary margin of competition being the rules that bear on trust duration, and that the enactment of the GST tax sparked the rise of the perpetual trust.***

GST and the Qualified Severance Rules for Trusts

Marc Chorney  (Attorney at Law, Chorney & Millard LLP) has recently posted on SSRN his article entitled GST Qualified Severance Regulations: Final and Proposed. 

Here is the abstract of his article:          

Prior to 2001, downstream divisions of trusts were prohibited for Generation-skipping Transfer Tax (GST) purposes. A Qualified Severance of a trust is now allowed. If a trust is properly severed, unnecessary payment of GST tax can be avoided. Final and proposed regulations were issued in August, 2007 explaining the Qualified Severance rules. This article discusses those regulations.

Patents for Tax Planning Inventions – An Update

In Proposal to Prohibit Tax Planning Patents - S. 2369, RPPT eREPORT (2007), Rana Salti (Attorney at Law, McDermott Will & Emery LLP) "keeps us up to date on the continuing saga of the patenting of tax planning devises. On November 15, 2007, legislation was introduced in the United States Senate that would prohibit the issuance of any patents for tax planning inventions."

Taxes in 2008

In Tax Thresholds for 2008, Est. Analyst (Jan. 2008), Robert L. Moshman covers some estate-planning related tax facts for 2008:

TOP ESTATE TAX RATE: * * * the estate tax was repealed in 2001 but we are in the seventh year of an eight-year phase-out. The top estate tax rate remains at 45% this year and through 2009 and applies to estate assets in excess of $1.5 million.

ESTATE TAX EXEMPTION: We remain at $2-million estate tax exemption for 2008, the third and final year at that level before increasing to $3.5 million in 2009. This could be modified by new tax legislation during 2008, of course. * * *

GENERATION-SKIPPING TRANSFER TAX: Also unchanged. Both the tax rate and exemption for estates continue to apply to the GST tax, i.e., 45% and $2 million.***

STATE DEATH TAX: The state death tax credit had been phased out. State death taxes are treated as a deduction. The number of states with some form of death taxes (24) seems to have stabilized. Some of these states have “decoupled” from the Federal approach.

Generation-Skipping Transfer Tax and IRS Regulations

Julie Kwon, (Attorney at Law, McDermott Will & Emery LLP) has recently published her articles entitled Qualified Severances for GST Tax Purposes - Final and Proposed Regulations issued August 2, 2007, RPPT eREPORT (2007).

Here is a summary of her article as posted on RPPT eREPORT:

Julie Kwon thoroughly summarizes IRS Final and Proposed Regulations concerning the qualified severance of trusts for Generation-Skipping Transfer Tax planning purposes.

Inequalities in the Taxation System

Lester B. Snyder   (Professor of Law, University of San Diego School of Law) has recently posted on SSRN his article entitled Taxation of the New Era 'Family Unit'.

Here is an abstract of his article:

Virtually everyone in this country is directly affected by the material in this chapter. Whether you are single, married, cohabitating with someone of the opposite or same sex, a child, an elderly person, someone going through a divorce or separation, rich or poor, there are numerous tax issues and tax disparities that impact your daily lives. Over the past 90 or so years, the taxation of the family unit has undergone numerous changes, resulting in unequal treatment of significant numbers of citizens. The evolution of the tax law of the family unit provides us with an opportunity to view the constant interplay and conflict between federal and state laws. Keeping with the theme of this book, this chapter will focus on some of these major inequalities, many of which have received only sparse public attention and are generally unknown to the ordinary taxpayer.

Generation-Skipping Transfer Tax and Power of Appointment

The following is from Robert L. Moshman, Esq., GST Grandfathering Debated, Est. Analyst (Oct. 2007):

The Benjamin Gerson Trust became irrevocable when Mr. Gerson died in 1973. Mr. Gerson left a $22-million estate for which $7.16 million of estate tax was owed. Marital Trust A, containing $6.24 million, was subject to a power of appointment that Mrs. Gerson exercised in her will on behalf of five grandchildren. At her death in 2000, Trust A was distributed to two of the grandchildren outright and to three others in trust until they were to turn 40.

Since Mrs. Gerson held a general power of appointment over property at death, the value of such property was includible in her gross estate for Federal estate tax purposes under section 2041.

The IRS treated the transfer to the grandchildren as direct skip transfers coming from Mrs. Gerson and therefore assessed a tax deficiency of $1.14 million based on the GST tax.***

[T]he IRS*** found that the lapse of a general power of appointment resulted in a “constructive” addition to the trust and was therefore subject to GST tax.

The estate argued that the transfer was grandfathered as a transfer from a trust that was irrevocable prior to October 22, 1986, under section 1433(b)(2)(A) of the Tax Reform Act of 1986[.]***

[A] divided tax court sided with the IRS and noted that Congress used the transitional rule to apply to trusts involving a specific volitional generation-skipping transfer and not a general power of appointment. Also, there was congressional intent to provide uniformity in GST tax application.