Wills, Trusts & Estates Prof Blog

1031 "Like-Kind" Exchanges Are Under Fire. Again

Section 1031 of the tax code allows individuals selling and then reinvesting in new real estate to defer capital gains taxes. The provision was introduced in the 1920s as a means to settle disputes among farmers. Now, real estate professionals use 1031 exchanges as an effective tax-mitigation tool when reinvesting in new property. The ability to postpone capital gains taxes allows investors to purchase new property with 100% of the proceeds of a prior sale. Without section 1031, only about 65% of the total proceeds could be reinvested, substantially reducing earnings potential.

There have been a number of attempts in the past to repeal this tax deferral. Many decry the provision as a tax loop-hole and would like to see it gone. Given the current state of affairs in D.C., it seems unlikely that any changes will happen soon. Most tax reform is aimed at large-scale changes, not like-kind exchanges. Though estimates indicate repealing the tax break would generate billions of dollars in revenue, there is substantial risk of reduced economic growth and heavy job losses.

See Ben Mattlin, 1031 "Like-Kind" Exchanges Are Under Fire. Again, Financial Advisor, June 29, 2017.

 

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

I Have A Trust?

Irrevocable trusts that defer distributions to beneficiaries are commonly used to minimize estate taxes and avoid legal and financial risks. Deferring these distributions to beneficiaries has both advantages and drawbacks. Many settlors do not want beneficiaries to know about of the existence of the trust until some set age or life achievement is reached. The beneficiary may still be financially immature or suffering from addiction. The ability of the settlor to limit information regarding a trust varies by state. It is important to speak to advisors about statutory requirements for divulging trust information. Telling a young beneficiary that they will be inheriting millions of dollars may serve as an impetus for apathy.

A drawback to withholding information from beneficiaries, if allowed by state law, is the lack of notice that occurs when a trustee is shirking their fiduciary duty. A trustee using trust funds for personal gain may so do relatively unencumbered if no annual statement is being sent to beneficiaries. Trust drafting and estate planning can be an extremely complicated endeavor. Addressing the client’s trust disclosure expectations in the trust document and developing a plan to fully prepare the beneficiaries to receive the wealth will help balance the scales and may aid in avoiding many perils.

See Scott Mahon, I Have A Trust?, Financial Advisor, June 22, 2017.

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

Article on Family Limited Partnerships and Section 2036: Not Such a Good Fit

Mitchell Gans & Jonathan G. Blattmachr recently published an Article entitled, Family Limited Partnerships and Section 2036: Not Such a Good Fit, Wills, Trusts, & Estate Law eJournal (2017). Provided below is an abstract of the Article:

The IRS has struggled to close down abusive family limited partnerships. At first unreceptive to IRS arguments, the courts eventually embraced section 2036 as an estate-tax tool for attacking such partnerships. Because the section was not designed to apply to partnerships, difficulties have arisen as the courts have struggled with the fit. In its most recent encounter, the Tax Court in Powell grappled with a fit-related issue that implicates the Supreme Court’s landmark decision in Byrum. The Powell court, it will be argued, misread Byrum, conflating the majority opinion with the dissent – and converting the rule-based approach adopted by the majority into the standard-based approach advocated by the dissent. The article examines Powell, its reading of Byrum and its struggle with fit-related issues. Before concluding, planning suggestions will be offered.

Special thanks to Robert H. Sitkoff (John L. Gray Professor of Law, Harvard Law School) for bringing this article to my attention.

New-ish Tax Planning Instrument Gathering Billions

The use of insurance dedicated funds (IDFs) is growing more popular among the wealthy as a means to avoid taxes. IDFs have been around since the 2000s and they are typically managed by hedge funds, including Paulson & Co. and Millennium Partners. The insurance wrapper on these funds prevents taxes on death benefits and avoids capital gains taxes. This tremendous advantage of tax-free growth appeals to investors for estate planning purposes. Despite the negative connotation associated with hedge funds, the use of the IDF as an investment vehicle is expected to become increasingly prevalent.

 See New-ish Tax Planning Instrument Gathering Billions, Barron’s, June 28 2017.

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

Preparing Heirs for Successful Wealth Stewardship

There is a plethora of research available detailing the difficulty of maintaining wealth through multiple generations. This simple fact highlights the importance of teaching children to be competent financial stewards. Claudia Sangster, Northern Trust’s director of Family Education and Governance, encourages families to introduce children to monetary concepts at an early age. With young children, Sangster promotes using day-to-day activities, like grocery shopping, to teach the value of money. Parents explaining their reasoning behind certain product choices may help children in understanding the differences between price and quality and how these characteristics affect decisions. As children get older, implementing an allowance opens up an avenue for independent spending. Sangster suggests structuring the allowance by placing it in three jars: one for spending, another for saving, and the final for giving. Whatever your personal or family philosophy regarding money, bring your children into that discussion so they are aware of the expectations and can plan more strategically for their own future.

See Preparing Heirs for Successful Wealth Stewardship, Wealth.

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

Thouron Estates

Judge Mark L. Tunnell, in a 212-page-long opinion, wrestles with the issue of the appropriateness of attorney, accountant, and executor fees. There are two sizable estates considered in the opinion. The Estate of Sir John Rupert Hunt Thouron had a value of $46 million. His son, John Julius Thouron, had an estate valued at $13 million. Regarding the son’s estate, Executor Charles Norris was surcharged $753,000. The firm of Lamb McErlane PC was ordered to disgorge $135,882. In the estate of Sir John Thouron, Executor Charles Norris was surcharged a total $5,672,999. Lamb McErlane was ordered to disgorge $4,351,310 in fees, and Norris and the Lamb firm were jointly surcharged $557,001.

See Patti S. Spencer, Thouron Estates - READ ALL ABOUT IT!, Spencer Law Firm, June 21, 2017.

Special thanks to Patti S. Spencer for bringing this article to my attention.

State: 111 Terminally Ill End Lives Under New California Law

Tuesday, California health officials released a report revealing that 111 individuals opted to end their lives with prescribed drugs after a 2016 law made it legal to do so in the state. According to the report, physicians prescribed life-ending drugs to 191 people after they were diagnosed with having fewer than six months to live. Of the 191, 111 ended their lives with the drugs, 21 died prior to taking the drugs, and 59 patients were not reported on in the applicable timeframe. The typical demographic of those requesting the drugs tended to be older, white, college educated, and receiving hospice or palliative care. A hearing will be held later this year to determine how the law is playing out in California. Testimonies of families with individuals who have pursued this option will be included in the hearing.

See State: 111 Terminally Ill End Lives Under New California Law, The New York Times, June 27, 2017.

A Unique "Last Ride"

Derek Dunn, owner of Black Diamond Limousine and Hearse Service in Levelland, TX, just added a very unique hearse to his small fleet. Pulled by a 3-wheeled, motorized tricycle, the stunningly red trailer holds a casket that is plainly viewable from the outside. Dunn did not paint the hearse a traditional black as he designed it for people with outgoing personalities. The setup is designed to appeal to bikers, but Dunn stated that there are multiple graphics packages tailored to Marines, police, firefighters, etc.

See Courtney Fromm, A Unique "Last Ride", Everything Lubbock.com, June 27, 2017.

A Second, Even Bigger Foreclosure Reaches NYC Billionaires’ Row

Manhattan’s One57 boasts opulently luxurious condominiums, expansive views of the New York City skyline, and price tags that exclude all but the ultra-wealthy. Oddly, the property is now experiencing its second foreclosure in a month. Apartment 79 is a full-floor penthouse, the eighth most expensive space in the building, that sold for just over $50 million. The shell company that owned the property failed to pay back a $35.3 million mortgage. The default represents one of the most expensive foreclosures ever seen in luxury development. Until last month, no property in this high-end area had been subject to foreclosure auction.

See Oshrat Carmiel, A Second, Even Bigger Foreclosure Reaches NYC Billionaires’ Row, Bloomberg Pursuits, June 23, 2017.

Special thanks to Lewis Saret (Attorney, Washington, D.C.) for bringing this article to my attention.  

Disputes over Prince’s Estate Throw the Future of His Vault into Question

Hidden in the bowels of two storage vaults in Paisley Park, hundreds, possibly thousands, of unheard songs recorded by Prince await release to expectant fans. Unfortunately, fans will have to wait. Prince died in April 2016 without a will. This has made probate of his estate difficult at best. New upheaval has made release of this previously unheard music even less likely to occur in the near future. Universal, in the midst of a $31 million deal for rights to the music, has accused representatives from Bremer Trust of misleading and possibly defrauding the company. According to Universal, it was not until they closed the deal that they became aware that some of the rights they paid for conflicted with rights owned by Warner. It now looks as though Universal wants to back out of the deal.

See Ben Sisario, Disputes over Prince’s Estate Throw the Future of His Vault into Question, The New York Times, June 25, 2017.

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