Wills, Trusts & Estates Prof Blog

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

Sunday, October 23, 2016

Taxable Inherited IRA Distributions

Inherited iraRecently, the IRS released an information letter, explaining the tax treatment on two inherited retirement accounts. The beneficiary requested that all distributions from both IRAs be rolled over in order to avoid taxable income. Unfortunately, the IRS, under IRC § 402(b)(2), treats all amounts distributed from a retirement plan as taxable income. However, there is an exception—under § 402(c), distributions from a retirement plan that roll over into another plan, such as a direct trustee-to-trustee transfer, are treated as a direct rollover contribution. Although, if this distribution does not go to a spouse, then it is not eligible for rollover. 

See Dawn S. Markowitz, Inherited IRA Distributions Treated as Taxable, Wealth Management, October 20, 2016. 


October 23, 2016 in Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Wednesday, October 19, 2016

Watch Out for the Tax Bomb in Retirement

Tax bombIf you set aside portions of your earnings in a 401(k) or IRA, then you will have to pay taxes upon distribution. Additionally, if your securities have appreciated, you will owe taxes on them as well. At the time of contribution, you placed tax-deferred dollars into these assets, so there can be a tax shock after previously not considering the taxable savings. You can, however, maximize after-tax income, further defusing the tax bomb. There is not one easy plan that allows a retiree to maximize their after-tax income, but there are efficient solutions to converting your savings into income. For example, fixed annuities often receive larger tax cuts while stock dividends are assessed at lower tax rates. Additionally, the equity in your home most likely receives the best tax treatment, making a reverse mortgage a viable option. 

See Jerry Golden, The Tax Bomb in Your Retirement Plans, Market Watch, October 18, 2016. 


October 19, 2016 in Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Tuesday, October 18, 2016

CLE on Estate Planning for Family Business Owner

CLEThe American Law Institute is holding a CLE entitled, Estate Planning for the Family Business Owner, which will take place Thursday–Friday, November 3–4, 2016, at Dallas Marriott City Center in Dallas, Texas. Provided below is a description of the event:

Don’t miss this comprehensive conference on estate planning for family businesses! It will help you become better prepared to recognize and evaluate family business issues and, as a result, better skilled than ever at designing customized succession plans for your family business clients.

Featuring updates on the hottest topics, including the new proposed Section 2704(b) regulations, this nationally recognized program examines:

  • Income tax issues and planning strategies for business entities
  • Incentive or deferred compensation
  • Practical uses of life insurance for the family business
  • Buy-sell agreements
  • Valuation of a family business
  • Family rivalries and divisive reorganization planning
  • Trust advisors, trust protectors for business interests

Register today for this webcast or in-person program on November 3-4. You can also register two or more from your organization and SAVE!


October 18, 2016 in Conferences & CLE, Current Events, Estate Planning - Generally, Income Tax, Trusts | Permalink | Comments (0)

Tuesday, October 11, 2016

Planning for Your Family Business in Light of Proposed § 2704

Increase estate taxThe IRS recently proposed regulations under IRC § 2704 that will potentially eliminate valuation discounts, affecting the gift and estate tax value of family-owned businesses. Individuals with interest in a family-owned business and further subjection to estate tax can be greatly affected by a significant increase in estate tax to those business interests. With such uncertainty to the passage of these regulations, there is still time to be combative and plan ahead. You can seek to transfer existing business interests before the regulations are finalized. Further, you can look to increase the liquidity of your estate in order to pay for the increase in estate taxes. However, the regulations stand to create some benefits, such as income tax benefits and a higher step-up in basis. 

See Day Pitney Estate Planning Update, Estate Planning Update September 2016 – Family Business Planning in Light of Proposed Regulations Under Section 2704, Day Pitney LLP, September 30, 2016. 

Special thanks to Jim Jay Stapleton (Account Director/Public Relations, Quinn & Hary Marketing) for bringing this article to my attention.


October 11, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Friday, September 23, 2016

Unintended Consequences of the § 2704 Proposed Regulations

Income tax reductionThe estate-planning world is still buzzing over the § 2704 proposed regulations released last month. These regulations restrict discounts that may result in a net loss of revenue to the Treasury with higher transfer tax values, leading to higher bases for transferees. Seemingly, increases in the estate tax that result from higher valuations would offset the income tax losses on later dispositions of the inheritance. However, this valuation also applies to estates that are not large enough to incur an estate tax, further binding them to the reductions in discounts from the new proposals. Additionally, the IRS is also bound. It can potentially foresee a diminishment in income tax revenues when heirs sell those inheritances for a smaller gain. Consequently, businesses that have been successful but not lavishly so can benefit from passing inheritances to those with higher bases, creating the diminishment of future income tax liabilities and no estate tax burden.   

See Dominick Schirripa, The Law of Unintended Consequences Meets the §2704 Proposed Regulations: Will Estate Tax Increases Cause Income Tax Reductions?, Bloomber Estate Tax Blog, September 15, 2016. 

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


September 23, 2016 in Current Events, Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Thursday, September 22, 2016

How Delaware Benefits Trusts

DelawareDelaware has long-been known as a jurisdiction that benefits the grantors of trusts. Specifically, Delaware has built a trust-friendly body of legislation and supported these laws with an effective court structure. Another benefit allows trusts established in Delaware to be free from state income tax if the trust beneficiaries are not state residents. This is especially valuable for those who anticipate large taxable transactions through trust assets, like the sale of a business.   

See Mark Gudaitis, What Does Delaware Have to Do with Estate Planning?, Atlantic Trust Blog, September 14, 2016. 

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


September 22, 2016 in Estate Planning - Generally, Income Tax, Trusts | Permalink | Comments (0)

Tuesday, September 6, 2016

Article on Tax Changes for Partnerships

PartnershipMichael Hirschfeld recently published an Article entitled, New Challenges that Require Consideration, 30 Prob. & Prop., no. 5, 9 (2016). Provided below is a summary of the Article:

In the past, IRS efforts to audit partnerships have been thwarted by the need to chase every partner on audit or for collection of taxes due. The result has been IRS inaction in many situations. The Bipartisan Budget Act of 2015, Pub. L. No. 114–74, § 1101, 129 Stat. 584 (Nov. 2, 2015), enacted by Congress late last year (“Budget Act”), changes that situation by totally revamping how partnership tax audits will be conducted. These changes start with taxable years beginning on or after January 1, 2018, unless a partnership makes an election to apply these new rules earlier. The most dramatic change is that the IRS will be able to collect any unpaid tax directly from the partnership rather than having to pursue each partner.

These tax changes are important because real estate is commonly owned by a limited partnership or an LLC that is treated like a partnership for tax purposes. Partnerships are not taxable entities; their taxable income and loss flow through to their partners, who then report their share of the income or loss on their own tax returns and pay any resulting tax liability. Reduction of taxes flowing form partnership activity is of great importance. Planning to maximize taxes permeates nearly every real estate partnership, but such planning may be in gray areas in which the IRS and the partnership may disagree. One situation that routinely occurs is the decision on how much of the purchase price of a building is allocable to the land, the building itself, and its personal property components. This fact-dependent decision affects the depreciation deductions that can be claimed by the partnership and the tax liability of all partners, a determination with which the IRS may disagree.

September 6, 2016 in Articles, Income Tax | Permalink | Comments (0)

Monday, September 5, 2016

Drake University Law School Seeks Wills & Trusts or Tax Professor

Drake law schoolDrake University Law School invites applications from entry level and lateral candidates for a tenure-track or tenured position beginning in the 2017-18 academic year.  We are especially interested in candidates with demonstrated interest or experience in Wills and Trusts or Taxation. Qualifications include: a record of academic excellence, substantial academic or practice experience, and a passion for teaching. Appointment rank will be determined commensurate with the candidate’s qualifications and experience.

Drake University Law School sustains a vibrant intellectual culture, and Des Moines has been recognized as the Best U.S. City for Business (MarketWatch), the Best Place for Young Professionals (Forbes), and as the city with the Highest Median Income (US News/The Today Show). The Law School features innovative and nationally-recognized programs in agricultural law, constitutional law, intellectual property, and practical training. Our location in Iowa’s capital city also offers opportunities to participate in the synergy of law and politics. 

Drake is an equal opportunity employer dedicated to workforce diversity. We strongly encourage women, people of color, and others who would enrich the diversity of our academic community to apply. For more information on the law school and its programs, see www.drake.edu/law. Interested candidates should send a letter of interest, a CV, and a list of references to Professor Andrew Jurs, Chair, Faculty Appointments Committee, Drake Law School, 2507 University Ave., Des Moines, IA 50311 or submit by email to andrew.jurs@drake.edu.

September 5, 2016 in Estate Planning - Generally, Faculty Positions -- Permanent, Income Tax, Trusts, Wills | Permalink | Comments (0)

Friday, September 2, 2016

Weighing Options for Inherited IRAs

Inheriting IRASurviving spouses have several decisions to consider when inheriting IRAs. If a surviving spouse under the age of 59 ½ is the beneficiary of an IRA, he or she should consider placing the funds into an inherited IRA, allowing the beneficiary to take distributions from the account with no requirements. If the beneficiary wishes to roll over the inherited IRA into a personal IRA, the beneficiary must keep records and be restricted on the amount withdrawn for a minimum of five years. Additionally, there are limitations for taking distributions for which a 10% penalty will apply.

See Dan Moisand, When Inheriting an IRA, You Need to Weigh Your Options, Market Watch, August 12, 2016.

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

September 2, 2016 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0)

Article on Bypass Trusts

Bypass trustMichael Kitces recently published an Article entitled, Minimizing the Income Tax Bite of a Bypass Trust, (July 27, 2016). Provided below is a summary of the Article:

The bypass trust is a popular estate planning strategy used to reduce a couple’s exposure to estate taxes, by leaving the assets of the first spouse to die not to the surviving spouse, but to a trust for his/her beneficiary instead. If the surviving spouse doesn’t inherit the assets directly, they’re not subject to future estate taxes when the second spouse ultimately passes away.

However, while the bypass trust is effective for saving on estate taxes, it’s not very favorable for income tax planning, given that trusts reach a top 39.6% tax bracket (plus the 3.8% Medicare surtax on net investment income) at “just” $12,400 of taxable income. And at that threshold, long-term capital gains (and qualified dividends) are subject to a whopping 20% + 3.8% = 23.8% tax rate as well. Plus state income taxes to boot (if applicable).

Fortunately, though, the tax rules for bypass trusts (and other “non-grantor” trusts) allow trusts that distribute their income to beneficiaries to distribute the tax consequences to the beneficiaries as well – allowing those beneficiaries to claim the income on their own personal tax returns (and be subject to their far more favorable individual tax brackets) while the trust claims a “Distributable Net Income” (DNI) deduction to avoid any double taxation.

Of course, the caveat to passing through income from a trust to the beneficiary is that while distributing the income to the beneficiary may minimize income taxes, it just compounds the estate tax problem the bypass trust was designed to avoid (by pushing the income back into the spouse’s taxable estate). However, given the significant rise in the Federal estate tax exemption over the past 15 years – from “just” $1M in 2001 to $5.45M today – many bypass trusts are actually no longer necessary. Which means it has suddenly become a far more effective strategy to start deliberately making income distributions from a(n existing) bypass trust to the beneficiary, who may no longer face any estate taxes, but can materially reduce the family’s income tax exposure in the process!

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

September 2, 2016 in Articles, Estate Planning - Generally, Estate Tax, Income Tax, Trusts | Permalink | Comments (1)