Wills, Trusts & Estates Prof Blog

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

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Monday, January 26, 2015

Questions Surrounding Obama's Tax Proposals

Tax QuestionsThe tax proposals from President Obama, including increased capital-gains tax rate for top earners and an end to step-up basis, and a White House fact sheet has raised questions. Here are some inquiries raised by the proposals:

  • Whether the person giving or receiving the gift would owe the capital gains tax?
  • Whether the new tax structure would include a provision directing executors how to handle property when they do not know how much they paid for it originally?
  • Will trust distributions trigger capital-gains tax?
  • Where is the line between which family heirlooms will be considered excluded?

See Laura Saunders, 5 Questions on Obama's 'Step Up' Tax Proposal, The Wall Street Journal, Jan. 22, 2015.

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

January 26, 2015 in Estate Planning - Generally, Income Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Sunday, January 25, 2015

Trusts That Are Trimming Taxes

Trust Despite the funny-sounding names, incomplete grantor trusts are serious tax-minimization tools.  These trusts are often formed in Delaware, Nevada and sometimes Wyoming (hence the acronym, “DING,” “NING” and “WING”) because these states do not tax the income of trusts established there, even by people who live elsewhere, or have favorable tax rules. 

Advisers say this strategy is especially in demand with residents of California and New Jersey, where top marginal income-tax rates are 13.3% and 9.97%.  New York, another high-tax state, came down on the practice last year and no longer allows residents to use the trusts to avoid state taxes.  

One risk is that additional states could negate the tax benefits for their residents.  Moreover, people contemplating the creation of such trusts should think about timing.  If an asset put into a trust is immediately sold and the money distributed back to the person forming it, which is likely to raise red flags with state tax authorities as a sham. Yet by creating a trust, selling the assets years down the line then distributing them some time thereafter is less likely to raise negative attention.

See Liz Moyer, Trusts That Can Trim State Income Tax, The Wall Street Journal, Jan. 23, 2015.

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


January 25, 2015 in Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Friday, January 23, 2015

Tax Court Holds Payments to Egg Donors Are Taxable Income

Egg donation

Many women who are actively trying to become pregnant are unable to do so; fortunately, there is no shortage of available alternatives for these women.  Often, however, these are typically intrusive and expensive.  One option is “egg donation,” whereby a female donor is supplied with hormones that increase her egg production.  The eggs are subsequently removed, fertilized in a laboratory, and ultimately implanted in the intended recipient. 

The term “donation” is somewhat of a misnomer, as the donor is typically compensated.  This has led to a tax conundrum: do the amounts received by the donor in exchange for her eggs constitute taxable income?  The Tax Court recently held in Perez v. Commissioner, 144 T.C. 4, (2015) that amounts received by a donor represented taxable compensation income.

Nichelle Perez, contracted with several donor companies to sell her eggs to women who struggled to conceive on their own.  Perez was compensated, not for selling her eggs, but for her physical pain and suffering during the egg donation process.  Perez argued that the $20,000 she earned from the contracts was not taxable income.  The Tax Court concluded that because the pain and injuries she would incur were anticipated and consensual, was within the scope of the medical procedures to which she consented contractually.  The payments were to compensate her for services rendered, thus, the amounts paid to her represented taxable income. 

See Tony Nitti, New Ruling: IRS Can Tax Payments To Egg Donors As Income, Forbes, Jan. 22, 2015.

January 23, 2015 in Estate Planning - Generally, Income Tax, New Cases | Permalink | Comments (0) | TrackBack (0)

Thursday, January 22, 2015

Implications of Obama's Capital Gains Plans

Capital gains

In President Obama’s State of the Union address Tuesday night, he largely focused on middle class economics.  With a new tax plan, administration officials say that marginal capital gains would increase to 28 percent and eliminate the stepped-up basis of capital gains assets at death. 

The question for financial advisors and their clients is how could these changes affect us and what planning considerations must we subsequently take?  If these changes are passed, advisors serving owners of closely held businesses and clients holding significant, highly appreciated securities would have to rethink clients’ estate plans to avoid leaving heirs huge tax bills. 

If changes to capital gains rules gain traction, advisors should keep in mind that a heavy tax bill could force heirs to sell a business they do not want to sell.  Children with a large bill upon inheritance may not have the liquid assets to satisfy what they owe, forcing a sale of the business that the grantor wished to remain in the family.  While the tax bill is unavoidable, planning to transfer enough liquid assets to cover the costs could prevent this occurrence. 

Advisors must also be conscientious that changes in capital gains rules could mean higher rates of charity donation.  This would be the only remaining way of avoiding the heavy tax bill of highly appreciated securities.  Higher capital gains taxes and elimination of stepped up basis could heighten the incentive to donate those assets to charity. 

See John Nersesian, What Obama’s Cap Gains Plan Would Mean for You & Your Clients, Financial Planning, Jan. 21, 2015.  

January 22, 2015 in Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 21, 2015

Article on The Federal Constitution, Out-of-State Nongrantor Accumulation Trusts, and the Complete Avoidance of State Income Taxation

Jeffrey SchoenblumJeffrey Schoenblum (Centennial Professor in Law, Vanderbilt University Law School) recently published an article entitled, Strange Bedfellows: The Federal Constitution, Out-of-State Nongrantor Accumulation Trusts, and the Complete Avoidance of State Income Taxation, 67 Vand. L. Rev. 1945 (2014). Provided below is the abstract from the article:

With the maximum rate of federal income tax at 39.6%, the Obamacare Tax adding another 3.8% tax, and some state income tax rates exceeding 9%, taxpayers in the highest brackets have been seeking to develop strategies to lessen the tax burden. One strategy that has been receiving increased attention is the use of a highly specialized trust known as the NING, a Nevada incomplete gift nongrantor trust, which eliminates state income taxation of investment income altogether without generating additional federal income or transfer taxes. A major obstacle standing in the way of accomplishing this objective, however, are the laws of a number of high-tax states. These laws assert taxing jurisdiction over trusts created by grantors who were resident in the state when the trust was created, even if the grantor has long since departed the state or if the trust has been continuously administered from out of state. Other high tax states claim jurisdiction to tax the trust as long as there is a beneficiary resident in the state at the time that the income is being accumulated out-of-state or at the time a distribution is made. One state, New York, simply outlaws the NING technique. In order to overcome these state laws, tax planners have found an unlikely ally—federal constitutional law. This Article explores whether and how the federal Constitution can be used to undermine state income taxation. As it makes clear, interpretations of the federal Commerce and Due Process Clauses, though developed in other contexts, are proving to be powerful tools in neutralizing state jurisdiction to tax high bracket taxpayers with substantial investment income and an out-of-state trust such as a NING.

January 21, 2015 in Articles, Income Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Tuesday, January 20, 2015

State of the Union: Obama Proposals Call for Tax Increases


In tonight’s State of the Union address, President Barack Obama will call on the new Republican-led Congress to raise taxes on investments and inherited property as well as create or expand a range of tax breaks for middle-income families.

The President’s new initiatives include tripling the child-care tax credit, creating a new credit for families in which both spouses work, and consolidating and expanding education tax breaks.  The administration also plans to make retirement savings programs available to more people by requiring employers to enroll workers in an individual retirement account if they have not already done so. 

The plan would make sweeping changes to the tax bills of wealthier taxpayers by raising the taxes they pay in investments.  The top capital gains rate would rise to 28 percent form 23.8 percent.  Furthermore, the plan proposes to tax capital gains at death rather than allow them to pass income tax free to heirs as under current law.  This implementation would eliminate arguable the biggest loophole in the tax code for wealthy households since postponing realization of capital gains until death may allow a taxpayer to avoid millions of dollars in taxes on substantially appreciated assets.

While it seems unlikely Congress will approve the President’s proposals, they will surely provoke heated discussion. 

See Carol E. Lee, Colleen McCain Nelson, and John D. McKinnon, Obama to Propose Tax Hikes on Investments, Inherited Property, Market Watch, Jan. 18, 2015.

See also Len Burman, President Obama Targets the ‘Angel of Death’ Capital Gains Tax Looophole, Forbes, Jan. 18, 2015.

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

January 20, 2015 in Current Affairs, Estate Planning - Generally, Estate Tax, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Friday, January 9, 2015

Beneficiary Defective Irrevocable Trusts


An increasingly popular trust for estate, gift, and income tax planning purposes is called a beneficiary defective irrevocable trust (BDIT). 

To illustrate how a BDIT operates, imagine a mother creates a written BDIT where her son and grandchildren are the trust beneficiaries.  The trust is designed purposely so that the trust is “defective” for income tax reasons as to the son.  The heart of the BDIT trust planning is to enable the son to be a trust beneficiary of the BDIT to which the son sells his apartment building.  The son then sells the apartment to the BDIT for the purpose of asset protection for the apartment, to freeze and avoid having any future appreciation value of the apartment, and so that the son can receive distributions from the trust. 

The term “defective” trust means all trust income, gains, losses, deductions for the BDIT trust are reportable on the son’s own personal income tax return Form 1040.  These items are not reportable each year on a separate trust income tax return. 

See BDIT: What is a Beneficiary Defective Irrevocable Trust? James M. Kane Legal Blog, Nov. 14, 2014.

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

January 9, 2015 in Estate Planning - Generally, Income Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Wednesday, January 7, 2015

New Trust Tax in Portugal

TaxNew tax laws in Portugal now tax trust distributions to residents of Portugal. Trust distributions that previously went untaxed in the country, will now be taxed at 28% for income distributions.

See Simon Danaher, Trusts in Portugal to be Taxed for First Time, International Advisor, Jan. 5, 2015.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

January 7, 2015 in Income Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Monday, January 5, 2015

FATCA Issue Added to IRS No Rulings List

AntiThe Internal Revenue Service has recently released Rev. Proc. 2015-7, which lists issues that letter rulings and determination letters will not be issued for. Newly added section 4.01(27) states that a ruling or letter "will not ordinarily be issued" on "[w]hether a taxpayer, withholding agent, or intermediary has properly applied the requirements of chapter 4 of the Internal Revenue Code (sections 1471 through 1474, also known as “FATCA”) or of an applicable intergovernmental agreement to implement FATCA."

January 5, 2015 in Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 31, 2014

Financial Trends To Watch For 2015

New year

With 2014 coming to a close, many of us look forward to the possibilities of 2015—and for the financial market, the New Year may bring many things.  With the legislative cycle, market regulators, industry disputes and geographical angst, 2015 will be a busy year.  Below are a few topics that are likely to surface:

  • The IRS remains a wild card.  While the tax situation in 2015 looks settled, the IRS has $346 million less to work with, meaning customer service and enforcement are going to be operating under resource constraints.
  • Technology fatigue sets in.  Until a particular iWatch, data band, or next-generation phone opens up new professional vistas, incremental productivity gains are what is at stake. 
  • Generation Y gets serious.  The oldest members of “Generation Y” turn 35 this year and the rest of the “echo boom” coming up behind them are ready to settle down and start their financial planning. 
  • Oil slick helps some, hurts others.  Although petroleum may not stay at $55 a barrel for long, cheap fuel is a relief for 90 percent of the U.S. economy that is not focused on energy extraction.  With low gas prices, odds are good that consumer inflation will be put off for a while. 
  • Data security becomes real.  Global enterprise has become easy to infiltrate.  Many banks have already failed to keep their customer accounts from not only being hacked but exposed to public scrutiny as well.  Apple’s payment system might be a slow fix to these data breaches. 

See Scott Martin, Predictions for 2015: 10 Wealth Management Trends to Watch, Trust Advisor, Dec. 28, 2014.

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

December 31, 2014 in Current Affairs, Estate Planning - Generally, Income Tax, Technology | Permalink | Comments (0) | TrackBack (0)