Wednesday, October 19, 2022
Yesterday, the IRS released an advanced version of Rev. Proc. 2022-38 providing the annual inflation adjustments for more than 60 tax provisions to be used by individual taxpayers on their 2023 returns (to be filed in 2024.)
These updates are of particular interest to the estate planning field in regard to the following:
- New unified credit against estate tax (impacts the gift and GST exemptions) will increase from $12,060,000 to $12,920,000.
- Change in maximum reduction in valuation of qualified real property under Section 2032A. The new maximum decrease will be $1,310,000.
- Increase in the “2-percent portion” of the estate tax payable under Sections 6166 and 6601. This will be $1,750,000.
- The threshold amount for the maximum rate bracket for trusts and estates will kick in at $14,450.
- The exemption amounts under Section 55 (phaseouts) will be $94,600 for the threshold and $208,200 for the complete phaseout amount.
Special thanks to Jim Roberts, (Glast, Phillips & Murray, PC) for bringing this to my attention.
Thursday, August 11, 2022
The Inflation Reduction Act of 2022, which is a 755-page bill that tackles tax, climate, and health care, passed the Senate on Sunday. It will soon be up for vote in the House, where it is anticipated to pass.
The $700 billion package has many asking, what does this mean for the Estate Tax?
At this time, there are no changes to federal transfer taxes, gift taxes, estate taxes, or generation-skipping transfer taxes. However, with additional funding for the IRS, it is likely that the impact will be indirect, with an increase in enforcement in the form of audits and estate and gift tax returns will increase.
Bloomberg Tax Services prepared a summary, citing the big items as:
- A 15% corporate alternative minimum tax
- A 1% excise tax on stock buybacks
- Numerous environmental and green energy tax credits
For more information:
See Matthew Eskrine “The Tax Impact of The Inflation Reduction Act” Forbes, August 4, 2022.
Saturday, July 23, 2022
Due to recent changes from the IRS, those who have significant wealth will now find it easier to avoid federal estate taxes. The IRS improved “portability,” which is used by high-net-worth married couples expecting to owe federal estate taxes when one spouse dies. Now, surviving spouses will have up to five years, instead of only two years, to elect portability after their spouse passes.
In 2022, there is a $12.06 million exemption, meaning federal taxes won’t be levied on $12.06 million or less that is left to children or other non-spouse beneficiaries during life or at death. Anything above that will be subject to 40% estate taxes.
These new changes are made even easier by having the ability to elect portability on an estate tax return instead of having to request guidance from the IRS. While estate tax returns may cost between $5,000-20,000, that amount pales in comparison to 40% on every million dollars of the portability exemption.
For more information:
See Kate More, CFP “The wealthy now have more time to avoid estate taxes, thanks to an IRS change” CNBC, July 21, 2022.
Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.
Thursday, June 23, 2022
Albert Feuer recently published an article entitled, Would the Securing a Strong Retirement Act Secure More Retirement Equity?, Tax Management Comp Plan Journal, 2022. Provided below is an abstract of the Article:
On March 29, 2022 the House approved H.R. 2954 that is titled the Securing a Strong Retirement Act of 2022 (the SECURE Act 2.0) by a vote of 414-5.
On May 26, 2022, a discussion draft of the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act of 2022 was released by the Senate Health, Education, Labor, and Pensions Committee Chair Senator Patty Murray (D-WA), and Ranking Member Senator Richard Burr (R-NC).
The article argues that despite providing tax incentives in excess of more than $70 billion, the bills in concert would intensify rather than diminish retirement benefit disparities, while leaving tens of millions of American families and workers with insufficient savings to retire comfortably. The article analyzes those bills’ provisions and describes:
• those bills’ provisions that would secure more retirement equity and how to improve those provisions,
• those bills’ provisions that would secure less retirement equity, and
• provisions that would secure more retirement equity, if added to the bills would secure more retirement equity.
Thursday, June 9, 2022
Jay A. Soled and Richard Schmalbeck recently published an Article entitled, Substance Over Form in Transfer Tax Adjudication, Loyola of Los Angeles Law Review, 2022. Below is the abstract for the Article:
The elevated exemption level under the federal transfer tax system (now in excess of $23 million for a married couple) has opened up new and abusive tax-avoidance opportunities. In many areas of the tax law, the substance over form doctrine historically has been effective in controlling such abuses; however, for a myriad of reasons, transfer tax jurisprudence has been marred by the reluctance of courts to embrace this doctrine. In this analysis, we urge reconsideration of that posture.
Saturday, May 14, 2022
Jay A. Soled and Kathleen DeLaney Thomas recently published an article entitled, AI, Taxation, and Valuation, Iowa Law Review, Forthcoming 2023. Provided below is an abstract of the article:
Virtually every tax system relies upon accurate asset valuations. In some cases, this is an easy identification exercise, and the exact fair market value of an asset is readily ascertainable. Often, however, the reverse is true, and ascertaining an asset’s fair market value yields, at best, a numerical range of possible outcomes. Taxpayers commonly capitalize upon this uncertainty in their reporting practices, such that tax compliance lags and the IRS has a difficult time fulfilling its oversight responsibilities. As a by-product of this dynamic, the Treasury suffers.
This Article explores how tax systems, utilizing artificial intelligence, can strategically address asset-valuation concerns, offering practical reforms that would help obviate this nettlesome and age-old problem. Indeed, if the IRS and Congress were to take advantage of this new and innovative technological approach, doing so would bode well for more accurate asset valuations and thereby foster greater tax compliance. Put somewhat differently, in the Information Era in which we exist, it is simply no longer true that accurate asset valuations are unattainable.
Wednesday, May 11, 2022
Jeffrey Pennell and Reid K. Weisbord recently published an article entitled, Trust Alteration and the Dead Hand Paradox, ACTEC Law Journal, 2023 Forthcoming. Provided below is the abstract:
Trusts are popular instruments for wealth transmission because they can be crafted to suit almost any imaginable estate planning goal that is not contrary to public policy. With the abrogation of the Rule Against Perpetuities in most states, settlors may impose trust terms that will be legally enforceable for scores of future generations, if not in perpetuity. Long-term and perpetual trusts, however, present a paradox of dead hand control, because the specificity and the durability of settlor-imposed restrictions tend to be inversely related. As donative preferences become increasingly specific and restrictive, trusts become less durable with the passage of time, as changing circumstances imperil the settlor’s original intent or render the trust unadministrable.
The proliferation of perpetual trusts underscores the salience and need for trust alteration, which coincides with significant reforms in the law governing trust modification. The common law always allowed courts to fortify settlor intent against obsolescence by modifying irrevocable trusts in conformity with the settlor’s material trust purposes. Reforms under the Uniform Trust Code have codified, expanded, clarified, and liberalized the standards for judicial modification. And, most recently, a majority of states have privatized trust modification by authorizing “trust decanting,” an extrajudicial technique that grants the power to trustees who have distributive discretion to convert a settlor’s original trust into a new instrument. This Article examines the current landscape by surveying recent developments in the judicial and extrajudicial modification of trusts.
Applications of the modern rules of trust alteration have prevented beneficiaries from accelerating the termination of long-term trusts and allowed fiduciaries to reinvigorate older trusts for subsequent generations. By strengthening the grip of dead hand control and reinforcing the durability of settlor intent, these trust alteration rules also tend to increase the concentration of private wealth in the hands of trust fiduciaries, who are entrusted by settlors to protect the trust corpus from beneficiary improvidence, taxation, and creditors. The Article concludes by situating modern trust alteration rules within the current debate about wealth inequality in the United States.
Monday, May 2, 2022
Jason S. Oh and Etc M. Zolt recently published an article entitled, Wealth Tax Design: Lessons from Estate Tax Avoidance, Tax Law Review (2021). Provided below is the abstract to the Article:
Presidential candidates Elizabeth Warren and Bernie Sanders have both proposed ambitious new annual wealth taxes based on academic work by Emmanuel Saez and Gabriel Zucman. They project these proposals to raise trillions of dollars over the next ten years. Some critics challenge the Saez-Zucman approach to measuring the aggregate wealth of those subject to a wealth tax. Other critics including Larry Summers and Natasha Sarin have used data from estate tax returns and the relatively small amount of revenue the estate tax currently rai
ses to question the revenue projections of these proposals. This comparison can be useful only if one thinks carefully about specific estate tax strategies and how these strategies translate to an annual wealth tax. This article engages in that exercise. When one takes a closer look at estate tax avoidance and how it maps onto an annual wealth tax, a much more complex narrative emerges.
That narrative has four major themes. First, there are some estate tax planning techniques (like valuation games and charitable contributions) which pose similar challenges to an annual wealth tax. These structures provide some support for critics like Summers and Sarin who argue that the annual wealth tax will struggle to raise the projected revenue. Second, other structures (such as grantor-retained annuity trusts ) work well to minimize estate taxes but are of limited use for structuring around an annual wealth tax. Projecting wealth tax revenue using estate tax revenue without considering the revenue consequences of these strategies will understate wealth tax revenue. Third, other techniques (including the use of lifetime estate/gift exemptions) highlight possible synergies between an estate and wealth tax. In many ways, a robust estate tax will make the wealth tax harder to avoid and vice-versa. The converse is also true: a poorly designed estate/gift tax will undermine an annual wealth tax. Adopting a wealth tax without strengthening the gift and estate makes little sense. Fourth, one of the major lessons of estate tax planning is that it is much easier to minimize estate taxes on future wealth than existing wealth. A myriad of techniques allow taxpayers to “freeze” the value of assets for estate tax purposes. Freezing techniques will also prove helpful in minimizing wealth taxes. It is possible that even a well-designed wealth tax will have a base that shrinks rather than grows over time.
Friday, April 29, 2022
The following is from an announcement by the Urban-Brookings Tax Policy Center:
Wealth inequality is often discussed in terms of its economic effects rather than its political implications. But money is a form of power, and the wealthy exert an outsized influence on politics. Wealth taxation has the potential, therefore, not only to reduce the concentration of economic power in America, but to strengthen democracy itself.
On Monday, May 2, the Urban-Brookings Tax Policy Center will host an event considering wealth taxation as a tool of democratic reform. Jeremy Bearer-Friend, associate professor of law at George Washington University Law School, and Vanessa Williamson, senior fellow in Governance Studies at the Brookings Institution, will present their new paper, exploring and updating an underappreciated wealth tax proposal made by the American revolutionary, Thomas Paine, in his 1792 book, “Rights of Man.” Phyllis Taite, professor of law at Oklahoma City University School of Law, will address the potential effects of wealth taxation on the racial wealth gap, and Rakeen Mabud, chief economist at the Groundwork Collaborative, will discuss how taxation fits into a broader reconsideration of economic policy’s political and social purposes.
Wednesday, April 27, 2022
Family-Owned Life Insurance™ (FOLI) is a new planning tool that refers to the specialty use of private placement life insurance policies for family offices, which is closely related to the concept of Corporate Owned Life Insurance (COLI), Bank Owned Life Insurance (BOLI), and Insurance Only Life Insurance (IOLI).
FOLI allows a family office to utilize investment capital on an income and estate tax-free basis and is not dictated by the size of the family, health status, or longevity of the patriarch and matriarch. As an added bonus, the policy can be quickly issued because there is no need for medical underwriting and unlike COLI, BOLI, and IOLI, IRC Sec 101(j) is not applicable. Some critics say that the strategy is not long-lasting, however, large corporations and banks have been utilizing COLI, BOLI, and IOLI for at least 50 years.
Most ultra-high net worth families do not require additional life insurance for estate liquidity planning purposes and are looking for a tool where they can invest and grow on an income and estate tax-free basis for generations to come. FOLI is a variable universal life policy that can be issued with full underwriting, simplified underwriting, and guaranteed issue underwriting with the mortality risk reinsured by investment-grade reinsurers. Like all PPLI policies, investment options are customizable.
For more information:
See Gerald R. Nowotny, “All in the Family – Introducing Family-Owned Life Insurance™ (aka FOLI)“, Law Office of Gerald R. Nowotny, April 15, 2022.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.