In this article, guidance is offered regarding attempting to complete a taxable gift of securities, held in a brokerage account, before the gift can be reflected on the broker’s books. In the process, some of the governing law is identified to give the reader a foundation from which to answer other questions involving brokerage accounts. The author concludes that a declaration of trust, immediately followed by a conforming directive to the broker, labeled “irrevocable,” is generally the surest approach.
Wednesday, February 1, 2023
Article: A Survey of Preferences for Estate Distribution at Death Part 2: Children and Other Beneficiaries
Yair Listokin (Yale Law School) and John Morley (Yale Law School) recently published a paper, A Survey of Preference for Estate Distribution at Death Part 2: Children and Other Beneficiaries, 2023. Provided below is an abstract to the Paper:
This is the second of two papers presenting the results of a nationally representative survey of 9,000 American adults in which we asked people how they want to distribute their property when they die. In the first paper, we focused on gifts to spouses and partners. In this second paper, we focus on gifts to children, parents, siblings, and other beneficiaries. We offer several important findings. First, respondents depart to a surprising degree from the pattern of lineal familial descent favored by intestacy law. Respondents give much less to their parents than the law of intestacy currently provides and much more to siblings, extended relatives, and friends. Second, people are surprisingly generous to their stepchildren. Our respondents prefer stepchildren over every type of family member other than their spouses and their own children. This result starkly contrasts with state intestacy law, which almost never provides stepchildren anything. Taken together, our results suggest unexpectedly strong preferences for younger generations over older ones and for personal affinities over blood relationships. Our survey method improves upon prior empirical studies of probated wills by offering a less biased sample and by providing the first reliable data on unconventional families and less common beneficiaries.
Sunday, January 29, 2023
Kelly M. Perez (J.P. Morgan) recently published an article, Grantor Trusts: The MVP of the IRC, 15 Est. Plan. & Comm. Prop. L.J. , 2023. Provided below is an introduction to the Article:
Since the passage of the Tax Cuts and Jobs Act of 2017 (TCJA), taxpayers have enjoyed the benefit of increased exclusion amounts for the combined gift and estate tax, and the generation-skipping transfer (GST) tax (collectively referred to herein as transfer taxes). The terms "lifetime exclusion" or "exclusion amount" generally refer to the amount that an individual can give or pass on to others during one's lifetime or at death without triggering the payment of transfer tax, currently at a rate of 40%. This ever-changing exclusion amount has been a huge focus for wealthy families, tax and estate planning practitioners, and Congress over the last few decades.
We live in an era of heightened "bonus exclusion," where the current exclusion is at an all-time nominal high (since the introduction of the estate tax in 1916) of $12.06 million in 2022, going to $12.92 million per person for 2023. Like most of the individual tax benefits under the TCJA, this increased exclusion amount is scheduled to sunset after December 31, 2025, reverting to pre-TCJA amounts. When Joe Biden won the Presidency in 2020 and the Senate flipped to a very narrow Democratic majority in 2021, including any tie-breaking vote by Vice President Kamala Harris, the planning community was upended. It was fully expected, based on then Candidate Biden's platform and comments made by the Biden-appointed Secretary of Treasury, Janey Yellen, that any tax package proposed by a Biden Administration would include some form of reduction of this bonus exclusion, or an earlier sunset. Exclusion reduction, as well as fear of the elimination of the "step-up" in basis at death rule under Section 1014 of the Internal Revenue Code (the Code), was fully anticipated by taxpayers and resulted in a flurry of anxious tax consulting and planning at the end of 2020.
While everyone was focused on the exclusion and basis planning, Democrats in Congress, with the support of the Biden Administration, also had plans to make substantial changes to the grantor trust rules under Subpart E or Part I of Subchapter J of the Code. Many of these proposed changes seemed to come out of left field. On September 13, 2021, the House Ways and Means Committee introduced a bill known as the Build Back Better Act (BBBA), which threatened to effectively gut the efficacy of grantor trust planning. The bill itself was expected; it included some ideas from the Obama Administration's General Explanations of the Administration's Fiscal Year 2015 Revenue Proposals (the 2015 Green Book), as well as revenue-raising packages enacted in 2020 and 2021. What was not predicted by most were the proposed changes to the grantor trust rules.
These proposals were, without a doubt, more profound than a proposed rollback of the gift, estate, and GST tax exclusion amounts because of the sheer broad design of a grantor trust generates endless planning opportunities for families of wealth. Once a taxpayer uses all of his or her gift tax exclusion amount, planning techniques involving the use of grantor trusts can take wealth transfer into "extra innings," because they offer opportunities to shift additional wealth without the use of the exclusion. Arguably, there is no better estate planning tool than a properly structured irrevocable grantor trust to transfer wealth from grantor's taxable balance sheet to the non-taxable side of the family's balance sheet. This is why grantor trusts are the most valuable player of the Internal Revenue Code for purposes of wealth transfer. The possibilities are almost endless.
This Article briefly reviews the grantor trust rules contained in Subpart E of the Code, and specifically focuses on the current legislative standing of grantor trusts, as well as some of the more detailed nuances of grantor trust planning. Some of these special considerations are techniques such as: (1) terminating grantor trust status; (2) "toggling" grantor trust status on and off; (3) income tax consequences; (4) the efficacy of tax reimbursement clauses; and (5) other special considerations.
Friday, January 27, 2023
David Johnson (Winstead PC) recently published an article, The More the Merrier? Issues Arising from Co-Trustees Administering Trusts, 15 Est. Plan. & Comm. Prop. L.J. , 2023. Provided below is an introduction to the Article:
Settlors can draft a trust to have one trustee that has the sole authority and power to administer the trust. However, settlors can, and often do, require or allow a trust to be administered by co-trustees. Co-trustees generally have equal rights to administer the trust and should administer the trust in all respects together as a unit. There are certain advantages and drawbacks to using a co-trustee structure to administer a trust. Further, there are a number of permutations that can be used to effectuate a co-trustee management structure.
The co-trustees can be any potential combination. One potential combination is a settlor and a corporate trustee acting as co-trustees. In this example, the settlor intends for the corporate trustee to take the lead on investing and accounting functions, but the settlor is involved in big picture issues and distributions. Further, co-settlors (e.g., husband and wife) can create a trust with themselves as co-trustees so they can have equal say in how the trust is administered. Further, a settlor may want a corporate trustee and a family friend to be co-trustees. The thought once again, is that the corporate trustee takes the lead on investing and accounting functions, but the family friend knows the family dynamics, the settlor’s intent and is involved in big picture issues such as distributions. There is no limit to the combinations of co-trustees or the purposes of same.
When a trust is administered by co-trustees, many issues can arise. This Article is intended to address some of the more common issues so that settlors and potential trustees can evaluate the ramifications of co-trustee administration.
Thursday, January 26, 2023
One of the threshold questions in planning for a ranch is whether the owner intends the ranch be passed on to subsequent generations in perpetuity. While many Texas ranches are multi-generational family legacies, recreational rural properties for high-net-worth individuals are also quite common and may not hold any specific sentimental value for the owner of his or her descendants. In the latter case, the owner may expect the ranch to be liquidated during his or her lifetime or shortly after his or her death.
Wednesday, January 25, 2023
Paul M. Cathcart Jr. (Hemenway & Barnes LLP) recently published an article, Attempting a Weekend Taxable Gift of Securities from a Brokerage Account (If You Must), ABA Probate & Property Magazine, Jan/Feb 2023. Provided below is an abstract to the article:
Tuesday, January 24, 2023
I recently posted on SSRN my article entitled Danger Ahead! – Will Your New Estate Planning Associate Know Texas Law? Here the abstract of the article:
The Texas Bar Examination has changed and may change again. Recent conversations with Texas estate planning attorneys have revealed a lack of knowledge of current and upcoming changes to the Texas Bar Examination, which are likely to result in first-year associates lacking even basic understanding of Texas wills and trusts concepts. This article explains how this situation has developed, the steps you may take to hire Texas law-prepared associates, and how you may influence the future of the bar exam.
Albert Feuer recently posted his article entitled Secure Act 2.0: A Missed Opportunity to Enhance Retirement Equity which appears in Tax Management Compensation Planning Journal, 51 01, 1/6/23, The Bureau of National Affairs, Inc., on SSRN. Here is the abstract of his article:
SECURE Act 2.0, which was enacted on December 29, 2022, represents a missed opportunity to enhance retirement equity. The Act’s 92 provisions provide small new tax incentives to those American workers struggling to save for a comfortable retirement, larger tax incentives to those with few retirement concerns, more complex retirement tax rules, and weaken compliance rules that are primarily applicable to those with few retirement concerns.
Monday, January 23, 2023
Lucas Clover Alcolea (University of Otago, Faculty of Law) recently published an article, ‘Reform, Reform: Aren’t Things Bad Enough Already?’: The Case of the Trusts Act 2019, 17 J Equ, Forthcoming. Provided below is an abstract to the article:
New Zealand has recently conducted a comprehensive reform of its trust law, both reforming certain rules and restating others in the New Zealand Trusts Act 2019. Although the Law Commission intended to replace what it had, in earlier law reform efforts, described as a “tyre in a hazardous state of deflation” it is unclear whether the provisions finally enacted by Parliament are an improvement on this position. This is because the Act contains significant innovations on the existing law which are nowhere defined or explained, such as the requirement for those interpreting the act to take into account a trust’s “terms and objectives” and trustees to take into account a trust’s “context and objectives” when carrying out their duties. Equally the provisions on information rights whilst intended to guide trustees as to when to provide information are so complex that they could provide a cloak for unscrupulous trustees to unreasonably refuse requests for information or even loot trust property. Additional issues are caused by creating a vague duty for the trustees to act honestly and in good faith and the codification of the duty of loyalty as merely a default rather than a mandatory provision. The present article aims to analyse these shortcomings and suggest means by which the courts may, in due course, patch the Act before it deflates altogether.
Sunday, January 22, 2023
Beck Groff (University of Oregon School of Law) and Susan N. Gary (Professor of Law Emerita, University of Oregon School of Law) recently published an article, Patagonia, Purpose Trusts, and Stewardship Trusts—Business with a Purpose, ABA Probate & Property, Jan/Feb 2023. Provided below is an introduction to the article:
On September 16, 2022, news media reported that Yvon Chouinard and his family had transferred voting control of Patagonia to a purpose trust and their nonvoting interests in the company to a 501(c)(4) nonprofit organization. The purpose trust will manage Patagonia as a for-profit company, continuing Chouinard’s emphasis on employee well-being. Profits from the company will be distributed to the nonprofit, which will support efforts to address climate change and work to protect undeveloped land.
The noncharitable perpetual purpose trust used by Patagonia is referred to as a stewardship trust in Oregon, Or. Rev. Stat. § 130.193 (2019). This strategy for business ownership is finding increasing interest among founders who want to protect their businesses’ missions into the future. A purpose trust ownership structure can hold a business accountable to a business’s founding purpose, such as protecting the environment or promoting education. The purpose can also include providing employee control of the business and an emphasis on benefits for employees. The purpose is integral to the trust, with all decisions being made in furtherance of the trust and, therefore, in furtherance of the purpose. The trust operates without beneficiaries and may seek both economic benefits, like profit, and noneconomic benefits, like the ones described in this paragraph.
Although this structure seems to resemble a charitable trust because of the lack of ascertainable beneficiaries, the trust has a noncharitable purpose. The business held by the trust generates profits and uses these profits in furtherance of the purpose. Instead of generating profits for shareholders, the trust is held accountable to its purpose above all else. Therefore, organizations that follow this structure are able to stay true to the purposes of the trust and operate into the future. The structure allows firms to maintain profitability and operate outside of the nonprofit realm while still being socially responsible and carrying on the central purpose the founders envisioned. The structure can be particularly helpful for family businesses with owners who want to retire but who do not have family members to take over the business. If the family business owners care about their employees, the community, or other noneconomic purposes, they may be able to use the stewardship trust model as a way to preserve the business for posterity.
Saturday, January 21, 2023
Beckett Cantley (Northeastern University) and Geoffrey Dietrich (Cantley Dietrich) recently published an article, Pop & Perjury: The IRS Valuation War with the Estate of Michael Jackson, University of New Hampshire Law Review, 2022. Provided below is an abstract to the article:
When Michael Jackson died unexpectedly in Los Angeles, California, on June 25, 2009, his career and earnings were nearing an all-time low. Plagued by past sexual abuse allegations, scandals, and questionable health, Michael Jackson’s personal finances were purported to be in complete disarray. However, following his unexpected death, the value of his estate, which was reported to be near to nothing, swelled as the world remembered his beloved contributions to the world and began to purchase accordingly. Sales of Michael Jackson’s music began to soar high. The estate’s value soared even higher as it signed licensing agreements and released new feature films and theatrical material of Michael Jackson.
Not surprisingly, the Internal Revenue Service (“IRS”) and the estate disagreed over the amount of estate tax owed. The IRS also remembered how beloved Michael Jackson had been and decided to take issue with the valuation used on the estate’s tax return. There were three primary points of valuation disagreement, all of which involve intellectual property rights: (1) the estate’s image and likeness rights; (2) the estate’s share of the Sony/ATV music catalog; and (3) the estate’s interest in Mijac Music, a music publishing catalog owning copyrights to many compositions written by Michael Jackson and other artists. With neither side willing to budge on its valuations, the dispute was to be settled in the U.S. Tax Court of Judge Mark Holmes.
One would think that with the outcome of such a high-profile case resting almost exclusively on the testimony of valuation experts, the IRS would take great care with any experts selected to testify since any error on the part of an expert would have a damning effect on the entire case. However, one would be disappointed. The IRS’s sole expert witness perjured himself in court testimony. In its opinion, the court reasoned that the expert’s creditability “suffered greatly at trial” and his lack of creditability “affected our factfinding throughout [the case].”
The article discusses: (1) the rise and fall of Michael Jackson during his life; (2) the details of the valuation battle with the IRS that took place after his death over various intellectual property; and (3) Judge Holmes’ reasoning for his conclusion, including the perjury committed by the IRS’ expert.