Wills, Trusts & Estates Prof Blog

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

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Wednesday, November 26, 2014

Article on the Estate Tax Charitable Deduction

Edward Zelinsky

Edward A. Zelinsky (Yeshiva University, Benjamin Cardozo School of Law) recently published an article entitled, Why the Buffett-Gates Giving Pledge Requires Limitation of the Estate Tax Charitable Deduction, Florida Tax Review, Vol. 16, No. 7, 2014.  Provided below is the abstract from SSRN:

The Buffett-Gates Giving Pledge, under which wealthy individuals promise to leave a majority of their assets to charity, is an admirable effort to encourage philanthropy. However, the Pledge requires us to confront the paradox that the federal estate tax charitable deduction is unlimited while the federal income tax charitable deduction is capped. If a Giving Pledger leaves his wealth to charity, the federal fisc loses significant revenue since the Pledger thereby avoids federal estate taxation as charitable bequests are deductible without limit for federal estate tax purposes. Despite its laudable qualities, the Giving Pledge is a systematic (albeit inadvertent) threat to the estate tax base. 

The Giving Pledge requires the amendment of the federal estate tax to restrict an estate’s charitable deduction to a percentage of the estate, just as the income tax charitable deduction is limited to a percentage of the taxpayer’s income. In this fashion, the sensible compromise embedded in the income tax charitable deduction would be carried over to the federal estate tax to simultaneously encourage charitable giving while ensuring that all large estates pay some federal estate tax. 

The Giving Pledge need not be the death knell of the estate tax. It should instead be the catalyst to reform the tax by limiting the estate tax charitable deduction.

November 26, 2014 in Articles, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 25, 2014

Finish Out the Year Tax Smart

Tax CutIn addition to the hustle and bustle of the holiday season, the end of the year is also a time to fit in some last minute tax related strategies. Here are three tips to have a tax smart end of the year:

  1. Don't forget about mutual fund distributions and consider offsetting gains with losses by selling stock of decreased value.
  2. For investors nearing or above the adjusted gross income threshold for application of the investment surtax, postponing the sale of appreciated securities or moving funds to tax-advantaged retirement accounts if possible, may be beneficial to avoid or lower the surtax.
  3. Consider giving appreciated securities as gifts, up to $14,000 can be gifted without the need for a gift-tax return.
  4. Consider donating appreciated securities to a charity that can accept them and deduct the securities' value and avoid the capital gains tax on those securities.

See Sandra Block, Smart Year-End Moves to Trim Your 2014 Tax Bill, Kiplinger's Personal Finance, Nov. 2014.

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

November 25, 2014 in Estate Planning - Generally, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Monday, November 24, 2014

CLAT 101

Signing

A charitable giving and tax planning strategy known as the Shark-Fin charitable lead annuity trust (Shark-Fin CLAT), is a split-interest trust that is designed to offer substantial fixed and determinable benefit to a taxpayer’s favorite charity, while also providing the taxpayer’s heirs with the potential for an excess benefit that is contingent on assets held in the trust outperforming the IRS’s established rate of return. 

A CLAT involves the contribution of property to an irrevocable trust that requires annual annuity payments to charity over a term that can either be: (1) a fixed number of years; or (2) based on the life of an individual.  The value of the charitable annuity is determined by discounting the scheduled annuity payments to charity back to present value at the IRC section 7520 rate, which the IRS sets monthly.  A CLAT that is structure as a grantor trust for income tax purposes provides the grantor with an income tax charitable deduction for the present value of the charitable annuity, but the grantor must pay tax on any income that may be earned by the CLAT during the term. Additionally, the grantor receives a gift tax charitable deduction for the present value of the charitable annuity so the only difference between the amount contributed to the CLAT and the present value of the charitable annuity is preserved as a taxable gift to the remaindermen. 

See Jordan Smith, Time to Head Back Into the Water, Wealth Management, Nov. 21, 2014. 

November 24, 2014 in Estate Administration, Estate Planning - Generally, Gift Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Thursday, November 20, 2014

Year-End Tax Tips

Tax planning

As 2014 is headed to a close, year-end tax planning will soon take the stage.  Below are a few strategies that may help in producing substantial tax savings:

  • Trust Distributions. Tax brackets for trust are more compressed compared to brackets for individuals.  Thus, trustees should consider making discretionary distributions of income to beneficiaries at the end of 2014 to reduce taxes. 
  • Harvesting Ordinary Income. This may be considered in order to “fill-up” your marginal tax bracket, which is especially true today with the advent of seven different ordinary income tax brackets. 
  • Harvesting Capital Gains. Taxpayers with a lower long-term capital gain bracket in 2014 should consider selling appreciated assets to take advantage of a lower tax rate. 
  • Harvesting Capital Losses. If a taxpayer recognized capital gains anytime this year, it might be best to harvest capital losses to offset the gains recognized.
  • Charitable Remainder Trusts. Taxpayers planning to make large sales at the end of the year should consider creating a CRAT or CRUT to smooth income. 
  • Charitable Lead Trusts. Consider creating a charitable lead trust (CLT) at the end of the year.  With a CLT, payments are made to the charitable beneficiary and at the end of the term any assets remaining in the trust pass to non-charitable remaindermen with favorable gift tax results.
  • Roth IRA Conversions. Whether a Roth IRA conversion is favorable for a taxpayer is fact dependent.  There are several ways to reduce the cost and risk associated with conversion.  One way to reduce cost is by staging it over several years to hold down the marginal tax rate applied to the conversion amount. 

See Robert S. Keebler, 2014 Year-End Tax Planning, Blog for Estate Planning Professionals, Nov. 3, 2014. 

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

November 20, 2014 in Estate Planning - Generally, Gift Tax, Income Tax, Non-Probate Assets, Trusts | Permalink | Comments (0) | TrackBack (0)

Monday, November 17, 2014

International Estate Planning

International

While estate planning is crucial for almost everyone, if you have international ties, you have even more reasons to take the time to carefully plan your estate.  Whether you are part of an international family, married to a non-citizen, or you live abroad, here are four reasons to look into international estate planning:

  1. Decrease your tax burden. Non-citizens of the United States must follow different estate tax and gift tax laws.  If you own property abroad, you could end up getting taxed twice, in two different countries.  These are just a few rules that illustrate why you should seek guidance on your international estate plan.
  2. Prevent confusion and delay. If you fail to plan your estate, the red tape could delay your loved ones in getting the support they need.  Worst case, it could prevent your loved ones from getting what you wished.
  3. Shield wealth and property. When you forego planning your estate, it is left in the hands of the government.  If you have international property, the future of your assets depends heavily on where they are located, and estate law can vary from country to country.
  4. Protect children. If you want your children to have a guardian who lives abroad, it is essential you plan your estate so your guardianship wishes are clear.  International families should appoint both a temporary and permanent guardian.

See Janet Brewer, Four Great Reasons For International Estate Planning, JD Supra, Nov. 17, 2014. 

November 17, 2014 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Guardianship, Travel | Permalink | Comments (0) | TrackBack (0)

Friday, November 14, 2014

Donor Advised Funds Versus Private Foundations

Charity 2

North Dakota’s recent oil boom has created hundreds of millionaires.  Among those are individuals who want to give back to their communities. 

“A lot of people want to give, but haven’t found a way to really align their values with their capital to have maximum impact in their community.”  Although the number of donor advised funds have increased, some advisors say a private foundation is more practical. 

One of the biggest advantages of a private foundation is that donors enjoy more flexibility and control over their assets and grants than they would if they gave through a donor-advised fund.  Foundations may also make hardship grants, which are not possible through donor advised funds.  Moreover, with IRS approval, clients with private foundations can select individual scholarship recipients.  Foundations can also be used to create a family legacy, “The family can then contribute to charitable endeavors it wants to support.” 

Of course, there are downsides to foundations.  Startup expenses can range from a few thousand dollars to tens of thousands, depending upon complexity.  Legal fees can also be substantial with a foundation.  Unfortunately, tax benefits are usually less with a foundation than with a donor advised fund.

Private foundations are generally created for donors intending to put in at least $5 million in assets into the foundation.  “Below $5 million, often the administrative costs and the required ongoing administration to run the foundation is not worth the benefits.”

See Bruce W. Fraser, Does Your Client Need a Private Foundation? Financial Planning, Nov. 11, 2014. 

November 14, 2014 in Estate Administration, Estate Planning - Generally, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Friday, October 31, 2014

Limits on Tax-Free Lifetime Gifts Increase

IRC

The Internal Revenue Service has raised the limit on tax-free transfers during life or at death.  Beginning in 2015 that amount, known as the basic exclusion, will increase to $5.43 million per person, up from $5.34 million this year.  This announcement, in Revenue Procedure 2014-61, indicates there will be no change in the annual exclusion, allowing you to give $14,000 in cash or other assets each year to as many individuals as you want without using the basic exclusion. 

The lifetime gift tax exclusion and the estate tax exclusion are expressed as a total amount and it is possible to use this basic exclusion to transfer assets at either stage or a combination of the two.  If you exceed the limit, you or your heirs, will owe up to 40%. 

For people who had previously used this basic exclusion have the option to top off with an additional $90,000 available for tax-free gifts next year.  Another way to use this extra exclusion amount is to benefit a descendant who was born after your initial planning, and is therefore not a beneficiary of earlier gifts. 

Although these decisions apply to just a portion of the population, these rules now apply to same-sex married couples.

See Deborah L. Jacobs, IRS Raises Limit On Tax-Free Lifetime Gifts for 2015, Forbes, Oct. 30, 2014.

October 31, 2014 in Estate Planning - Generally, Gift Tax, New Legislation | Permalink | Comments (0) | TrackBack (0)

Book on Federal Gift, Estate, and Generation-Skipping Transfer Taxation of Life Insurance

Federal Gift, Estate, and Generation-Skipping Transfer Taxation of Life InsuranceLawrence Brody & Mary Ann Mancini published the third edition of their book entitled, Federal Gift, Estate, and Generation-Skipping Transfer Taxation of Life Insurance. Provided below is a description of the book from ABA:

This concise primer will guide you in minimizing the transfer tax of an estate plan and avoiding the pitfalls that can occur. The authors discuss gift tax issues, estate taxation of life insurance, generation-skipping transfer tax and its application to life insurance and irrevocable life insurance trusts, community property considerations, and more.

Now updated and completely revised, this volume in the popular Insurance Counselor series will help you take full advantage of minimizing the transfer taxation of the estate plan as well as avoid the many pitfalls that can arise. The first chapter deals with life insurance as a gift, informing you about the valuation of policies and their qualification for the gift tax annual exclusion. Among the areas discussed are:

  • Outright transfers, transfers in trust, indirect gifts
  • The uses and issues relating to Crummey powers
  • The gift tax marital deduction

Further issues discussed in the second chapter are the gift tax, including consideration of cases when a gift occurs with respect to a life insurance policy, the valuation of the gift, and the availability of the gift tax annual exclusion and the gift tax charitable or marital deduction. The third chapter deals with the estate taxation of life insurance, with emphasis on the two IRC sections that have particular application to life insurance: sections 2035 and 2042. The fourth chapter discusses the generation-skipping transfer tax and its application to life insurance and irrevocable life insurance trusts, while the final chapter specifically addresses important community property considerations.

October 31, 2014 in Books, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 21, 2014

Article on the Gift Tax

Wendy Gerzog

Wendy C. Gerzog (University of Baltimore School of Law) recently published an article entitled, A Simplified Verifiable Gift Tax (October 20, 2014).  Provided below is the abstract from SSRN:

The purpose of this article is to create a simpler and more accountable federal gift tax. The proposed tax would simplify gift completion rules, adopt a hard-to-complete rule of transfer taxation, reduce the annual exclusion while expanding the consumption exclusion, and, by replicating the portability reporting rules, employ gift tax preference inducements to increase gift tax compliance. The proposed gift tax reaffirms basic principles of transfer taxes, encourages simple, outright gifts, and eliminates some of the major valuation abuses in the current gift tax regime.

October 21, 2014 in Articles, Estate Planning - Generally, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Minor Beneficiary May Disclaim Without Gift Tax

 TaxesIn a recent Private Letter Ruling, a taxpayer who is a beneficiary of two trust that were created prior to taxpayer's birth may severe her interest in discretionary payments and contingent beneficial interest. The minor beneficiary intended to to disclaim any right to beneficial interest within nine months of the age of majority, and the IRS concluded in Private Letter Ruling 2014400071 that as long as all other applicable laws are followed the disclaimer may successfully be made without creating federal gift tax liability.

See Debra Doyle, Disclaimers of Distribution Rights Aren't Transfer to Gift Tax, Wealth Management, Oct. 10, 2014.

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

October 21, 2014 in Estate Planning - Generally, Gift Tax, New Cases, Trusts | Permalink | Comments (0) | TrackBack (0)