Wills, Trusts & Estates Prof Blog

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

A Member of the Law Professor Blogs Network

Thursday, March 26, 2015

Covering Your Basis

InvestmentWhen selling an asset such as a stock, you owe capital gains tax on the difference between the sale price and what you paid for it, which is your cost basis.  Yet, if you inherit certain assets, including marketable securities, you can “step up” their tax basis to whatever they were worth at the benefactor’s death.  This means highly appreciated inherited stock can be sold immediately with no capital gains, or later, when all the gains before you inherited are not counted.

Step-up became a more significant concept after the legislative deal Congress passed in 2013, which made permanent a generous exclusion from estate and gift tax.  In the same tax bill, Congress raised the top rate on long-term capital gains. 

There are several ways to minimize capital gains tax.  One includes making charitable donations.  For gifts of marketable securities to a public charity, donors are entitled to an income tax deduction for up to 30 percent of adjusted gross income if the stock is held for more than a year. 

Another tax-planning tool is to convert a Traditional IRA to a Roth.  Although you must pay income tax on the amount you are converting, after that no income tax is assessed on distributions by you or your heirs.  Moreover, any withdrawals by you or your heirs do not get added to taxable income. 

Finally, married couples who live in a community property state have a basis advantage.  Most of what you acquire once you are married and living in a community property state, you and your spouse are each considered a half-owner.  Thus, when the first spouse dies, both halves of the property get a step up in basis, effectively minimizing capital gains tax if the surviving spouse sells the property.

See Deborah L. Jacobs, What Every Investor Needs to Know About Basis, Morningstar, March 25, 2015.

March 26, 2015 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Monday, March 23, 2015

Tax Court Limits Charitable Deduction For Estate

GavelWhen Eileen Belmont died, the bulk of her estate was left to charity including a post-death cash distribution from her retirement plan. But a legal challenge by her brother caused the money to be used to defend the will but after the estate claimed a charitable tax deduction on the amount.

In Estate of Belmont v. Commissioner, the Tax Court denied the deduction because the amount had not been permanently set aside for future distribution to the charity. To be considered permanently set aside, the court stated, the possibility the money would not go to the charity must be “so remote as to be negligible.”  Since there were many indicators the money would be required to fend off the brother’s challenge the estate should have known the set aside would not be permanent and waited to make the deduction until a later taxable year.

See Jillian Merns, Estate Loses Out On Charitable Deduction, Wealth Management, March 16, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.

March 23, 2015 in Estate Administration, Income Tax, New Cases, Wills | Permalink | Comments (0) | TrackBack (0)

Thursday, March 19, 2015

Avoiding the IRA "Double Tax"

Tax CutWhen an IRA account holder dies, their estate may be facing the "double tax" of both federal income and estate taxes on the IRA, as well as possible state income and estate taxes. A possible solution to the heavy taxes is designating a charity as the beneficiary.

See  Russell E. Towers, How to Eliminate the "Double Tax" at Death, Life Health Pro, March 16, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.

March 19, 2015 in Estate Planning - Generally, Estate Tax, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Wednesday, March 18, 2015

Article on Bitcoin

Sasha KleinSasha A. Klein (Sabadell Bank & Trust, Palm Beach, Florida) and Andrew R. Comiter (Comiter, Singer, Baseman & Braun, LLP, Palm Beach, Florida) recently published an article entitled, Bitcoin: Are You Ready for This Change for a Dollar?, 29 Probate & Property No. 2, 11 (March/April 2015).  Provided below is the introduction from the article:

Welcome to a world that includes virtual currency. Whether you are a skeptic or supporter, virtual currency is unavoidable. The most prominent virtual currency is bitcoin. On can't pass the water cooler without hearing the work "bitcoin"--from discussions on its fluctuating value, alleged identification of its creator, and collapse of the main exchange, to the likelihood of its success. Bitcoin continues to gain consumer confidence and become more accepted as a legitimate medium of exchange, resulting in the world's heightened interest, including that of the IRS. How will bitcoin be taxed in the United States? This article provides an overview of the taxation of bitcoin under Notice 2014-21 (the "Notice"), issued by the IRS on March 25, 2014, and the resulting tax issues. Before discussing the tax implications, this article first provides background on bitcoin.

March 18, 2015 in Articles, Income Tax | Permalink | Comments (0) | TrackBack (0)

Tuesday, March 17, 2015

Court Finds for Taxpayer in IRS Dispute Over Virgin Island Tax Credits

Beyer Blog IRS LogoThe estate of a taxpayer that had transferred his residency to the U.S. Virgin Islands has won a victory concerning claimed benefits under an economic development tax incentive program.  The case arose when the IRS issued a deficiency notice in 2010 for the returns of the taxpayer from 2002-2004.

In Estate of Sanders v. Commissioner, the Tax Court held that the Service failed to issue notice, settle the matter administratively, or file for an extension within the three year statutory period and was barred from reexamining the old returns. This decision could bring relief to many Virgin Islands residents who took advantage of tax breaks in the early 2000’s and did not have their returns reexamined with the limitation period. However, this respire might be brief as the IRS will likely litigate potentially fraudulent claims to island residence rather than any specific transaction.

See Josh Ungerman, IRS Expected To Issue Hundreds of Deficiency Notices TO USVI Residents, Forbes, Feb. 16, 2015.

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

March 17, 2015 in Current Affairs, Income Tax, New Cases | Permalink | Comments (0) | TrackBack (0)

Monday, March 16, 2015

Article on FATCA in Canada

IRCRoy A. Berg (Moodys Gartner Tax Law LLP) and Paul Barba (Moodys Gartner Tax Law LLP) recently published an article entitled, FATCA in Canada: The Restriction of the Class of Entities Subject to FATCA, Canadian Tax Journal/Revue Fiscale Canadienne, Vol. 62, No. 3, 2014, p. 587.  Provided below is the abstract from SSRN:

This article provides an introduction to the Foreign Account Tax Compliance Act (FATCA) for Canadians, and analyzes Canada's implementing legislation regarding FATCA. The implementing legislation uniquely classifies entities subject to FATCA, in that it departs from the classification in the US Treasury regulations, the Canada-US intergovernmental agreement regarding FATCA (the Canadian IGA), and the implementing legislation adopted or proposed by other jurisdictions with signed IGAs with the United States. Thus positioned, the implementing legislation places Canada either in the vanguard of legislative drafting regarding FATCA or as discrepant with both the United States and these other jurisdictions. This article analyzes Canada's position and rationale for its restrictive classification of entities subject to FATCA under the implementing legislation, and concludes that the legislation is likely discrepant in its interpretation.

FATCA is problematic for all parties involved, in both the private and the public sectors. Unfortunately, Canada's implementing legislation appears to exacerbate the situation. The legislation restricts the Canadian IGA's definition of "financial institution" to an exclusive list of 13 types of entities. Whether Canada's restriction on that term is proper remains to be seen. The implementing legislation classifies all personal Canadian trusts, or family trusts and other private trusts that are Canadian residents, as entities exempt from the Canadian IGA's requirements, while these trusts would be classified as entities subject to the Canadian IGA under the Treasury regulations, the IGA itself, and the implementing legislation of other jurisdictions with signed IGAs. Consequently, Canada has obscured the application of FATCA through the Canadian IGA and may have unilaterally overridden an international agreement. Specifically, the legislation could cause over-withholding on certain payments to Canadian entities properly subject to FATCA under the Canadian IGA -- particularly personal Canadian trusts -- or may prevent the Canadian IGA from entering into force. Over-withholding would increase FATCA's burden on the affected Canadian entities by requiring them to recover the otherwise unnecessary withholding taxes from the withholding agent or, most likely, the Internal Revenue Service.

Of course, negotiations between the US Department of the Treasury and the Canadian Department of Finance regarding FATCA occurred behind closed doors, and it is uncertain what the parties discussed, the nature of any possible debate, and the tacit agreements that may have been reached. Accordingly, we do not opine on the correctness of the Canadian implementing legislation, but instead simply analyze the relevant law in the hope that our analysis will serve as a framework for the evolution of foreign implementing legislation regarding FATCA in Canada and beyond.

Specifically, this article analyzes (1) FATCA generally and the Canadian IGA in particular; (2) why some personal Canadian trusts should be classified as entities subject to FATCA under the Canadian IGA as investment entities, custodial institutions, or both, and why the Financial Action Task Force reference in the definition of an investment entity does not alter this classification; (3) the implementing legislation under the Canadian IGA, particularly its unique classification of personal Canadian trusts as entities exempt from the Canadian IGA, and a history of the legislation; and (4) the potential consequences of restricting the class of entities subject to FATCA under the Canadian IGA, including overwithholding and invalidation of the IGA.

March 16, 2015 in Articles, Estate Planning - Generally, Income Tax | Permalink | Comments (0) | TrackBack (0)

Saturday, March 14, 2015

Article on Advising Donors and Managing Gifts of Oil, Gas and Mineral Interests

Megan SandersMegan C. Sanders (Associate, Bourland, Wall & Wenzel, P.C.) recently published an article entitled, It's Tea Time – "Texas Tea" Time: Advising Donors and Managing Gifts of Oil, Gas and Mineral Interests, 7 Est. Plan. & Community Prop. L.J. 237 (Fall 2014). Provided below is an excerpt from the introduction to the article: 

Here in Texas, we have a strong attachment to out mineral interests--when someone offers us a royalty interest, we are not likely to decline. But advisors and directors of charitable organizations do not always understand and welcome a gift of mineral interests, due to the uncertainties of how to manage and dispose of these interests within the fiduciary duties and the charitable goals of the organization.

. . . .

A whole mass of questions and uncertainties spring up when approached with a gift of such nature, or when this type of gift is handed over by an administrator of an estates part of a testamentary disposition. This article addresses these uncertainties, provides strategies for managing these concerns and working with donors, and discusses the most challenging issues presented to charitable organizations when considering the receipt of a unique gift such as mineral interest, including whether to accept the gift, how to value the property, whether to retain or sell the interests, how to dispose of the items if such decision is made, and what income or excise tax consequences may arise from accepting that type of gift.

March 14, 2015 in Articles, Estate Planning - Generally, Income Tax, Wills | Permalink | Comments (0) | TrackBack (0)

Thursday, March 12, 2015

Article on Retaining, Obtaining, and Sustaining Basis

Turney_BerryTurney P. Berry (Wyatt, Tarrant & Combs, LLP, Louisville, KY) and Paul S. Lee (Bernstein Global Wealth Management, New York, NY) recently published an article entitled, Retaining, Obtaining, and Sustaining Basis, 7 Est. Plan. & Community Prop. L.J. 1 (2014). Provided below is an excerpt from the introduction to the article: 

The year 2013 marked the beginning of a significant change in perspective for estate planners with the enactment of the American Taxpayer Relief Act of 2012 (ATRA) and the imposition of the 3.8% Medicare contribution tax on unearned passive income (3.8% Medicare tax), enacted as part of the Health Care and Education Reconciliation Act of 2010 (HCERA) which amended the Patient Protection and Affordable Care Act (PPACA).

. . . .

The enactment of ATRA marked the beginning of a "permanent" change in perspective on estate planning for high net worth individuals. The large gap between the transfer and income tax rates--which was the mathematical reason for aggressively transferring assets during lifetime--has narrowed considerably, and in some states there is virtually no difference in the rates. With ATRA's very generous applicable exclusion provisions, the focus of estate planning will become less about avoiding the transfer taxes and more about avoiding income taxes.

March 12, 2015 in Articles, Estate Planning - Generally, Income Tax | Permalink | Comments (0) | TrackBack (0)

Monday, March 2, 2015

IRS Letters to Watch for and Answer Promptly

WriteWhile all letters received from the IRS should garner careful attention, some carry more quickly approaching deadlines and serious consequences if ignored. Here are three important letters that the IRS sends that require prompt attention:

  • Statutory Notice of Deficiency, which can be disputed if a Petition is filed within 90 days.
  • Final Notice of Intent to Levy, or Letter 1058, which can be appealed within 30 days.
  • Trust Fund Recovery Penalty, or Letter 1153, which can be appealed within 60 days.

See Paul G. Topolka, Tax Alert: Three Critical Letters from the IRS, Nexsen Pruet, Feb. 19, 2015.

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

March 2, 2015 in Income Tax | Permalink | Comments (0) | TrackBack (0)

Sunday, March 1, 2015

3 Roth IRA Considerations

Roth ira

There is no better way to secure your financial future than by taking advantage of the tax benefits offered by a Roth IRA.  These retirement accounts do not allow you to deduct contributions up front, but enable you to make tax-free withdrawals in retirement.  Before opening a Roth, learn the associated rules and limits.  Here are a few things to know:

  • Mind the Cap.  If your annual income is in the six figures, you may not be eligible to contribute to a Roth, because the IRS limits the use of Roth IRAs to those whose income falls below a certain threshold. 
  • Tax Breaks.  Roth IRAs do not offer an up-front tax break, so benefits of tax-free withdrawals can only be realized if your tax rate will be higher in retirement than it was when you were working. 
  • Health History.  By choosing a Roth IRA instead of a traditional IRA, you are assuming that you will live long enough to enjoy the tax benefit of those tax-free withdrawals.  It is important to consider your health and your likelihood of living decades into retirement, especially if you will be relying on Roth IRA withdrawals for income.

See Todd Campbell, 3 Things You Should Consider Before Contributing to a Roth IRA, The Motley Fool, Feb. 28, 2015.

March 1, 2015 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)