Wills, Trusts & Estates Prof Blog

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

Wednesday, October 13, 2021

Article: Incentivizing Wills Through Tax

Margaret Ryznar recently published an article entitled, Incentivizing Wills Through Tax, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article. Estate planning

There have been recent calls to loosen will formalities in order to allow more people to execute wills, the importance of which has been highlighted by the COVID-19 pandemic. The reduction of necessary will formalities can be successful in expanding the use of wills, as can potential tax incentives for creation of wills, such as a tax credit. However, there are numerous advantages to using tax to initiate change, as considered in this Article.

October 13, 2021 in Articles, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, Wills | Permalink | Comments (0)

Friday, October 8, 2021

Article: Closing Gaps in the Estate and Gift Tax Base

Daniel J. Hemel and Robert Lord recently published an article entitled, Closing Gaps in the Estate and Gift Tax Base, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article: Estate planning

Three transfer tax minimization mechanisms—zeroed-out grantor retained annuity trusts (GRATs), intentionally defective grantor trusts (IDGTs), and family-controlled entities with steep valuation discounts—significantly shrink the federal estate and gift tax base. This white paper explains how Congress can close all three loopholes. We estimate that these actions—along with complementary base-protecting and base-expanding proposals—would raise more than $65 billion over the fiscal year 2022 to fiscal year 2031 window (and possibly much more than $65 billion). They also would enhance the progressivity of the federal tax system and bolster the long-term revenue-raising capacity of the estate and gift taxes.

To summarize key conclusions:

— Congress should repeal section 2702(b)(1), the provision that enables high-net-worth individuals to achieve extraordinary transfer tax savings via GRATs;

— Congress should harmonize the income tax and transfer tax treatment of IDGTs,
preferably by treating these trusts as nongrantor trusts for income tax purposes;

— Congress should limit lack-of-marketability discounts and eliminate lack-of-control discounts with respect to transfers of interests in family-controlled entities; and

— Congress should supplement these three reforms with additional base-protecting and base-broadening measures: shifting to a tax-inclusive base for gift taxes; limiting the gift tax annual exclusion for transfers in trust; and expanding the requirement of consistency in value for transfer and income tax purposes.

All of these steps remain relevant—and in some respects, even more urgent—if Congress enacts the Biden-Harris administration’s capital income tax reform proposal, which would limit the tax-free step-up in basis at death to the first $1 million of unrealized gains ($2 million per couple). Unless Congress secures the estate and gift tax base, high-net-worth taxpayers will respond to stepped-up basis reform by exploiting transfer-tax loopholes even more aggressively. For this reason, estate and gift tax loophole closers and stepped-up basis reform should be considered complements, not substitutes.

October 8, 2021 in Articles, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0)

Monday, October 4, 2021

Article: How Soon Is Now: Estate of Moore & The Unraveling of Deathbed Estate Planning

Beckett Cantley and Geoffrey Dietrich recently published an article entitled, How Soon Is Now: Estate of Moore & The Unraveling of Deathbed Estate Planning, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article: Estate planning

On April 7, 2020 the U.S. Tax Court ruled in Estate of Moore v. Commissioner, T.C. Memo. 2020-40, that certain deathbed transfers should be includible in the decedent’s estate for United States Federal Estate Tax (“estate tax”) purposes. The court applied Internal Revenue Code (“I.R.C.”) § 2036 to the transfers due to the decedent’s continued interests in the transferred property. The Tax Court stated that I.R.C. § 2036 creates “a general rule that brings back all property that a decedent transfers before he dies, subject to two exceptions.” The first exception is for bona fide sales for full and adequate consideration. The second exception is for “any property that [the decedent] transferred in which he did not keep a right to possession, enjoyment, or rights to the issue of the transferred property.” The Tax Court stated that the first exception depends on the transferor’s motivations, and that the decedent’s actions made it clear there was no bona fide sale. As a result, the Tax Court determined that I.R.C. § 2036(a)(1) applied to the transfer.

Estate of Moore is the latest in a line of cases in which taxpayers made deathbed transfers close to the date of death and the IRS successfully argued that the transferred property is includible in the decedent’s gross estate. In Estate of Bongard v. Commissioner, 124 T.C. 95 (2005), the Tax Court created a three-part test to determine whether I.R.C. § 2036 pulls property back into a decedent’s estate. In Estate of Strangi v. Commissioner, T.C. Memo. 2003-145, aff’d 417 F.3d 468 (5th Cir. 2005), the Tax Court provided additional guidance for how the court interprets I.R.C. § 2036(a)(1). In Estate of Nancy H. Powell v. Commissioner, 148 T.C. No. 18 (2017), the court builds on the rationale established by Strangi, but ultimately invokes I.R.C. § 2036(a)(2) to include the transferred assets in decedent’s gross estate. This article: (1) provides an overview of deathbed transfers case law; (2) describes typical such deathbed transfers; (3) outlines the I.R.C. § 2036 statute; (4) discusses the main seminal cases in the area of deathbed transfers, including Estate of Bongard, Estate of Strangi, Estate of Powell, and Estate of Moore; (5) synthesizes the case law on I.R.C. § 2036 and analyzers policy considerations regarding such law; and (6) concludes with a summary of the article’s findings.

October 4, 2021 in Articles, Estate Administration, Estate Planning - Generally, Estate Tax, New Legislation | Permalink | Comments (0)

Sunday, October 3, 2021

Final regulations establish a user fee for estate tax closing letters

Estate planningThe IRS issued final regulations instituting a user fee of $67 for the Service to issue an estate tax closing letter. 

Other than the adoption of the final regulations, there were no significant changes to the proposed regulations issued in late December 2020.

An estate tax closing letter informs its authorized recipient of the IRS's acceptance of the estate tax return (generally, Form 706, United States Estate (and Generation-Skipping Transfer Tax Return) and provides some return information, such as the amounts of the net estate tax, any state death tax credit or deduction, and any generation-skipping transfer tax for which the estate is liable. 

The new user fee will apply to "requests for estate tax closing letters received by the IRS on or after the date 30 days after publication of the final regulations in the Federal Register

(Publication occurred on September 28, 2021). 

See Paul Bonner, Final regulations establish a user fee for estate tax closing letters, Journal of Accountancy, September 27, 2021. 

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

October 3, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, New Legislation | Permalink | Comments (0)

Saturday, October 2, 2021

Charitable lead trusts do good while reducing estate taxes

Wealth taxCharitable lead trusts can be used as a wealth transfer technique to avoid estate taxes while also working "especially well in a low-interest rate environment. . ." 

Charitable lead trusts are typically implemented after your will, powers of attorney, and health care directives have been taken care of. Charitable lead trusts are often set up during your lifetime (inter vivos), but do not have to be and is a separate, standalone trust. 

Here is an example of how a charitable lead trust may work: 

Assume we have a couple with some extra money who want to benefit a charity. . .

The couple has an attorney draft a Charitable Lead Trust (CLT). The terms of the trust say that, for the lifetime of the couple (or the surviving spouse), the CLT will annually pay 5% of the trust to a qualified charity.

At the death of the surviving spouse, the money left in trust will go to (presumably) the couple’s children.

Because of the way it is set up, it is referred to as a “split-interest” gift where a portion of the gift to the trust goes to charity and a portion will ultimately go to the children.

Where do interest rates come in? The current interest rate is used to actuarially determine the amount of the gift going to the children, which the parents will use to file a gift tax return.

Of course, with limited exception, there is not actual tax assessed on a gift like that, it is just mandatory to report gifts that size to the Internal Revenue Service.

In low interest rate environments like the one we are currently in, "the calculated amount going to the children will appear to be lower, but the actual amount could be much higher, depending on the performance of the assets in the trust." 

For more information and examples of charitable lead trusts, 

See Beau Ruff (Guest Contributor), Charitable lead trusts do good while reducing estate taxes, Tri-Cities Area: Journal of Business, August 2021. 

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

October 2, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Trusts | Permalink | Comments (0)

Monday, September 20, 2021

Article: The U.S. Supreme Court In Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income

Beckett Cantley and Geoffrey Dietrich recently published an article entitled, The U.S. Supreme Court In Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article. Estate planning

As far back as 1929, several states have sought to broaden their tax base by expanding taxation to out-of-state trusts that have in-state beneficiaries, even when the beneficiaries possess only a contingent interest in the trust’s assets. On June 21, 2019, the U.S. Supreme Court confronted the constitutionality of this trust tax practice in North Carolina Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (“Kaestner Trust”). In Kaestner Trust, the Supreme Court issued a narrow decision in favor of the Trust, basing its opinion on a compilation of landmark constitutional law and civil procedure cases. Specifically, the Court ruled that the domicile of a contingent beneficiary on its own does not constitute sufficient “minimum contacts” between a trust and a jurisdiction for tax purposes, and thus the North Carolina statute violated the Due Process Clause of the U.S. Constitution.

Every jurisdiction has its own method of defining the minimum contacts necessary to bring a trust into its taxation orbit. In light of the Court’s decision, other state statutes that impose a fiduciary income tax based on weak connections may face constitutional scrutiny in the near future, including tax regimes containing “throwback” rules, “one-dollar” rules, and testamentary trust residency standards that rely indefinitely on the domicile of a testator. The main purpose of this article is to understand the Kaestner Trust decision, discuss how the impacted states have adjusted, and identify any statutes peripheral to the case that may face constitutional inquiry in the future.

The introduction to this article provides the foundation for understanding state trust taxation regimes and frames the controversy of multi-state taxation. Part II explains the facts within Kaestner Trust and analysis used by the Supreme Court in rendering the North Carolina statute unconstitutional. It also discusses how the North Carolina trust statute has been impacted. Part III identifies the other states, besides North Carolina, directly impacted by the Kaestner Trust decision and how these states have responded to the case. Part IV analyzes how the decision might promote further inquiry into the constitutionality of statutes that lie on the margins of Kaestner Trust. Finally, the article considers estate planning and trust drafting opportunities created by the case and concludes by briefly summarizing the significance of Kaestner Trust.

September 20, 2021 in Articles, Estate Administration, Estate Planning - Generally, Estate Tax, Income Tax, Trusts | Permalink | Comments (0)

Sunday, September 12, 2021

Democrats may rein in big estates without reforming the estate tax

Wealth taxDemocrats may limit some strategies used by wealthy Americans to reduce or avoid estate taxes. The list of potential tax reforms connected to the Democrats' $3.5 trillion budget plan include grantor-retained annuity trusts, intentionally defective grantor trusts and non-economic valuation discounts. 

The targeted strategies are often used by multimillionaires and billionaires to "gift appreciated assets to heirs tax-free while reducing the size of their taxable estate. . ." 

In addition to disallowing certain complex trust-planning techniques, Congressional Democrats may also ask the Treasury Department to update regulations to "prevent the abuse of non-economic valuation discounts."

According to Robert Lord, counsel for progressive group Americans for Tax Fairness, "[b]asically you've got this basket of loopholes that collectively can be used to defeat the estate tax at really any level, even billionaires." 

"Interestingly, Democrats don't seem to be weighing reforms to the estate tax itself, such as a higher tax rate or a reduced asset threshold that would subject more estates to federal levies." 

The Democrats' proposed estate-tax reforms "are part of Democrats' broader theme of raising taxes on the wealthy to help fund climate, paid leave, childcare and education measures. . ." 

See Greg Iacurci, Democrats may rein in big estates without reforming the estate tax, CNBC Personal Finance, September 10, 2021. 

Special thanks to Deborah Matthews (Virginia Estate Planning Attorney) for bringing this article to my attention.

September 12, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, New Legislation | Permalink | Comments (0)

Monday, August 30, 2021

To get the wealthy to pay more tax, first we need to work out why they avoid it

Wealth taxYou do not often hear rich people advocating for paying taxes. John McAfee, who in June was found dead in a Spanish prison from an apparent suicide, was "inarguably the most [colorful] character in the world of antivirus software." 

Mere hours before McAfee's death, the Spanish authorities agreed to extradite him to the US to face tax evasion charges. McAfee was openly against taxation. In 2018 McAfee tweeted, that he had not filed a US tax return in eight years because "taxation is theft" claiming he had already paid "tens of millions already and received jack [expletive] in services."

Abigail Disney, wrote in an article that she was "taught from a young age to protect [her] dynastic wealth." 

The ultra rich often use legal tax-avoidance strategies to limit their federal income tax bills. A report by non-profit ProPublica concluded that legal tax-avoidance strategies allowed the 25 richest Americans to limit their federal income tax bills to $13.6 billion in the five years to 2018 even though their wealth had been boosted by an estimated $401 billion. 

According to Abigail Disney, a big part of the problem is that wealth is not income and tax avoidance is not tax evasion. Legal tax avoidance strategies are just that—legal. Disney also acknowledged that, like Jeff Bezos, the system allows the rich legally to avoid paying tax on huge fortunes that grow every year. 

Some argue that we live in a world in which the rich do not need to practice illegal tax evasion because legal tax avoidance is "so easy and effective." Disney then posed the question: "What motivates people with so much money to try to withhold every last bit of it from the public's reach." 

Alex Rees-Jones, a behavioral economist at Wharton Business School, wrote that "analysis of tax data confirms that tax decision [the desire to pay or avoid] are influenced by loss aversion." In other words, taxpayers engage in strategies that make losses smaller and gains larger. 

From here, Rees-Jones suggested "reframing taxpayer perceptions of what constitutes a gain or a loss." 

The "fix" may be to convince taxpayers that the losses they take as a consequence of tax avoidance are worse than whatever loss they may take if they were to avoid the loopholes. 

See Rhymer Rigby, To get the wealthy to pay more tax, first we need to work out why they avoid it, Financial Times, August 29, 2021. 

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

August 30, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Friday, August 27, 2021

Asset Basis and the Future of the Federal Estate Tax

Wealth taxThe federal estate tax has been a topic of conversation for quite some time now. However, the conversation is evolving to include Basis. So what is Basis? 

Basis is typically determined based on what you paid for an asset. This can be the amount you pay in cash, the amount of debt you incur in paying for the asset, or the value of other assets or services you exchange in return for the asset. Basis is then used for tax purposes to determine your gain or loss on the later sale of the asset. It is also used to determine depreciation, amortization, depletion and casualty loses. Your basis in an asset is not necessarily stagnant. For example, it can be increased by the costs of improvements or decreased by items such as depreciation.

Basis is determined differently at death than when property is gifted during life: 

While the estate tax uses a step-up in basis, the gift tax employs what is known as carryover basis. With carryover basis when you receive a gift of an asset from someone while they are alive, you take that person’s basis in the assetsThus, if you later sell the property you will have the same gain on the sale that the person you received the property from would have. Looking back at our example above with the commercial real estate purchased in 1995, this means that if the owner gifted the property to his or her child in 2021 and the child then sells it for $700,000, the child would owe capital gains tax on $500,000 because he carried over the parent’s basis of $200,000, even though the property was worth $700,000 at the time of the gift. Thus, you can see how different the treatment is between assets transferred by gift versus assets transferred at death.

As of now, there are several different proposals regarding how the federal estate tax will handle basis. 

See Casey Dorman Lawson, Asset Basis and the Future of the Federal Estate Tax, Mitchell | Willams, August 17, 2021. 

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

August 27, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Tuesday, August 17, 2021

Elizabeth Warren makes fresh push for wealth tax – ‘Yes, Jeff Bezos, I’m looking at you’

Wealth taxSenator Elizabeth Warren "reignited" her push for a wealth tax on the richest Americans. Warren called out billionaire Amazon founder Jeff Bezos, insinuating that he has failed to pay his fair share. 

Senator Warren stated, "I want to see us tax wealth, however your wealth is tied up. It shouldn't make a difference whether you have real estate, or whether you have cash or whether you have a bazillion shares of Amazon. Yes, Jeff Bezos, I'm looking at you." She further stated, "[w]hatever form you have your assets—diamonds, yachts, paintings—I think there ought to be a tax on that annually." 

As of now, Bezos is the wealthiest person on Earth and has a net worth of $207.7 billion, according to Forbes. 

Along with the 2020 presidential race came a growing conversation surrounding wealth tax. Both President Biden and Elizabeth Warren pushed tax proposals aimed at the ultra rich. 

Warren proposed a 2% annual "ultra millionaire tax on net worth over $50 million and 6% on fortunes of more than $1 billion." The apparent goal was to use the revenue from the wealth tax to improve health care, child care,  and housing and education programs. 

See Thomas Franck, Elizabeth Warren makes fresh push for wealth tax – ‘Yes, Jeff Bezos, I’m looking at you’, CNBC: Politics, July 28, 2021. 

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.

 

August 17, 2021 in Estate Planning - Generally, Estate Tax | Permalink | Comments (2)