Monday, April 3, 2017
After the United States House of Representatives recently failed to pass the American Health Care Act, President Trump and his administration will have their sights set on new legislation for tax reform. Consequently, insurance companies and estate planners are taking notice, as their clients will be greatly affected. In lieu of repealing the estate tax, a capital gains tax could be imposed, while the fate of the gift tax is still unclear. These uncertainties make for a hazy tax-planning environment.
See Warren S. Hersch, Now in the GOP’s Crosshairs on Capitol Hill: The Estate Tax, Think Advisor, March 27, 2017.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
Wednesday, March 29, 2017
Richard Schmalbeck, Jay A. Soled & Kathleen DeLaney Thomas recently published an Article entitled, Advocating a Carryover Tax Basis Regime, Notre Dame L. Rev. (Forthcoming 2017). Provided below is an abstract of the Article:
For close to a century, an important (but unfortunate) feature of the Internal Revenue Code has been a rule that the tax basis of any asset is made equal to its fair market value at death. Notwithstanding the substantial revenue losses associated with this rule, Congress has retained it for reasons of administrative convenience.
But from three different vantage points, pressure has been mounting to change what is commonly referred to as the “step-up in basis rule.” First, politicians and commentators have historically tied the step-up in basis rule to the estate tax on the theory that income be taxed only once, rather than twice. However, with the recent emasculation of the transfer tax regime, no estate tax is levied in most cases, while taxpayers routinely capitalize on the step-up in basis rule. On another front, technological advances have greatly simplified tax basis identification and record keeping, making a carryover tax basis regime eminently feasible, which it previously was not. Finally, in an era of growing income inequality, retention of a rule that primarily benefits the wealthy seems wholly unjustified, necessitating reform.
Congress essentially has two different reform options to consider, namely, a deemed realization rule or a carryover tax basis rule. While a deemed realization rule has many advantages, it appears to be politically unachievable, at least for the time being, due to liquidity and administrative concerns. On the other hand, in light of the fact that a carryover tax basis rule is widely utilized, vetted, and accepted in the related context of inter vivos gift giving, extending its application to transfers at death appears entirely feasible. Its institution would have many virtues, including improved administrability, equity, and revenue generation.
Wednesday, March 8, 2017
Todd A. Flubacher recently published an Article entitled, How to Deal with Repeal: Dynasty Trust Planning Will Be an Essential Tool, Tr. & Est. 18 (March 2017). Provided below is an abstract of the Article:
Once again, it appears there’s a strong possibility that the federal estate tax and generation-skipping transfer (GST) tax may be repealed. President Donald J. Trump and the Republican majority in the House and Senate all support a repeal of the “death tax.” One must only revisit the last time Republicans held control of the House, Senate and the White House in 2001 to identify the last time the estate and GST taxes were repealed under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA was former President George W. Bush’s tax plan that gradually increased the gift, estate and GST tax exemptions from $675,000 to $3.5 million and lowered the tax rates from 55 percent to 45 percent, culminating in a single year of outright estate and GST tax repeal in 2010, followed by a “sunset” of the entire law on Jan. 1, 2011, returning the transfer tax system to its draconian pre-EGTRRA state. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act), signed into law on Dec. 17, 2010, established a $5 million exemption and 35 percent estate and GST tax rate beginning Jan. 1, 2011. However, heirs of wealthy individuals who died during 2010 benefited greatly from the only period in the last 100 years when our nation had no federal estate or GST tax.
Unless Congressional Democrats have a dramatic change of heart, or Republicans pick up eight additional Senate seats in 2018, it’s safe to assume that any bill that includes estate tax repeal will sunset in 10 years. Without the vote of 60 Senators, the only way repeal can pass without getting blocked by a filibuster is to enact the law as a “reconciliation” bill, which, under Senate procedure, can’t last beyond 10 years. Of course, it’s also possible that repeal could be undone in as little as four years if enough Democrats are elected to the White House and Congress. Thus, any future transfer tax relief is likely to be only temporary, lasting as few as four and not more than 10 years.
Monday, February 20, 2017
As we all know, President Trump has promised to repeal the estate tax, claiming that the tax is just plain wrong. It is easy to say that our country should repeal the estate tax, considering so few families actually pay the tax, but other tax areas will have to give in order to make up for the loss. The estate tax has two siblings—the gift tax and the generation-skipping tax. As of now, it is unclear how President Trump will balance the three taxes. His campaign website sketched out a plan that involved replacing the estate tax with a tax on all capital gains and no mention of the other two taxes. Ultimately, with the estate tax only generating 0.005% of annual tax collections, the tax incites more of a political debate than a federal revenue one.
See Brian J. O’Connor, Once Again, the Estate Tax May Die, N.Y. Times, February 18, 2017.
Special thanks to Joel Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.
Friday, January 27, 2017
Russell James III recently published a book entitled, Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning (2017). Provided below is a summary of the book:
This book provides an introductory overview of the wide range of charitable gift planning topics with implications for income, capital gain, gift, estate and generation skipping transfer taxation, including elements of a gift, documentation requirements, valuation rules, income limitations, bargain sales, charitable gift annuities, charitable remainder trusts, charitable lead trusts, remainder interest deeds with retained life estate in homes and farms, life insurance, gifts of retirement assets, private foundations, and donor advised funds.
Wednesday, January 11, 2017
Gail E. Cohen recently published an Article entitled, In Like a Lamb, Out Like a Lion: For Fiduciaries, 2016 Started Out Quietly, but 2017 Promises to Be a Wild Ride, Tr. & Est. 28 (Jan. 2017). Provided below is a summary of the Article:
The year 2016 started out quietly, seemingly a continuation of the status quo. We continued acting as fiduciaries of trusts that took advantage of tried and true tax strategies. Professional fiduciaries received good news in April when the Supreme Judicial Court of Massachusetts overturned the troubling Pfannensitehl decision of 2015, thereby providing assurance that discretionary trusts weren’t subject to claims of divorcing spouses in Massachusetts. Later in the year, as expected, the Internal Revenue Service put forth long-awaited proposed regulations intended to curtail the use of valuation discounts in gift and estate planning for family entities.
Then came Donald J. Trump. Seemingly everyone expected Hillary Clinton to win the presidency, thereby continuing the status quo, albeit with higher income taxes and higher estate and gift taxes (or at least a lower exemption from those taxes). Up until the election, there was a flurry of activity to take advantage of valuation discounts prior to the Internal Revenue Code Section 2704 regulations becoming final. Now, we don’t know exactly what 2017 will bring.
A few items to watch: lower income tax rates; elimination of gifts of appreciated assets to private charities; elimination of estate and gift taxes and presumably the generation-skipping transfer (GST) tax; income tax at death or carryover basis; and non-adoption of the proposed IRC Section 2704 regulations. Looking ahead, we should examine the potential impact that these actions may have on professional fiduciaries.
Friday, January 6, 2017
With the election of Donald Trump, Americans want to know: will he follow through on his vow to deliver death to the death tax? There is a good chance that Trump will abolish the estate tax because it has become complicated and costly to administer and the increase in capital gains tax would provide a simpler system. The estate tax as well as its counterparts, the gift tax and the generation-skipping transfer tax, all bring complications while raising little revenue. In order to evaluate whether keeping these taxes, it will be important for the new President-elect to consider their social purposes.
See Jeff Schlegel, Death to the Death Tax?, Financial Advisor, January 3, 2017.
Monday, December 19, 2016
Christopher P. Woehrle recently published an Article entitled, Capital Without Borders: An Insider’s Research into the Advisors of the World’s Wealthy, Tr. & Est. (Dec. 2016). Provided below is a summary of the Article:
In Capital Without Borders: Wealth Managers and the One Percent, Dr. Brooke Harrington, associate professor of Economic Sociology at Copenhagen Business School, applies the principles of ethnography to learn the practice of wealth management and understand the outsized role of advisors in representing their clients. Her book is very timely, as the release of the Panama Papers spotlighted the issue of offshore tax havens, while the number of U.S. citizens renouncing their tax citizenship continues to climb. The self-perpetuating nature of the wealthy avoiding the payment of income and transfer taxes exacerbates global income and wealth inequality.
I’ll highlight the major findings from Dr. Harrington’s interviews with wealth managers, whose role she sees as the defenders of ultra-high-net-worth (UHNW) individuals and their families ($30 million minimum in investable assets) through legal and financial expertise. I’ll also examine the workhorse techniques of asset protection and the positioning of philanthropy. I’ll conclude with the policy implications of the owners of capital increasingly free of any tax home.
Wednesday, December 14, 2016
The recent presidential election marks a good opportunity for retirees to review their long-term financial plans and implement new strategies, especially with Trump’s tax proposals. If you are a high net worth retiree, there are things you can do to protect yourself. With the proposed reduction in income tax brackets, it is important for these retirees to plan accordingly with discretionary income sources. Additionally, if Trump’s modification for tax deductions takes effect, retirees should reconsider their current deductions, specifically in the areas of mortgages and charitable donations. High net worth retirees should also understand that even if the estate tax is repealed, estate planning is still a necessity. Lastly, eliminating the basis “step up” will not allow retirees to avoid capital gains taxes upon death, so you should consider reducing your investment risk.
See Jeff Fosselman, What the Trump Tax Proposals Mean for High Net Worth Retirees, Forbes, December 12, 2016.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
Tuesday, December 6, 2016
Joseph M. Dodge recently published an Article entitled, Three Whacks at Wealth Transfer Tax Reform: Retained-Interest Transfers, Generation-Skipping Trusts, and FLP Valuation Discounts, 57 B.C. L. Rev. 999 (2016). Provided below is an abstract of the Article:
This Article offers three sets of proposals to reform the existing federal wealth transfer tax system, the common theme being the link between the timing of the taxable transfer and valuation. Under the first set of proposals, transfers with retained interests would be taxed at the first to occur of the transferor's death or the date the interest expired. In addition, the term “retained interest” would be broadly construed to encompass the power to revoke and the possibility of receiving income or corpus under another person's power. The second set of proposals relates to the generation-skipping tax. To achieve accurate valuation, the tax would be imposed only on taxable distributions, and the exemptions would either be the unused gift/estate exemptions of deemed transferors or separate per-transferee exemptions. The third set of proposals relates to valuation discounts of interests in family-held entities, mostly family limited partnerships. The lack-of-marketability discount for family investment-holding entities should be ignored because the tax-motivated destructions of non-unique value are against public policy, and the removal of the value-depressing restrictions is likely to occur in the future. Minority-interest discounts should not be recognized where minority status exists by reason of marital property rights or arises by gift or bequest. As a transition rule (or as an alternate approach), the disappearance of value-depressing restrictions and the recombining of minority interests into a majority interest should, where valuation discounts were previously obtained, be subject to a recapture excise tax.