Wills, Trusts & Estates Prof Blog

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

Friday, May 14, 2021

Article: What Would Settlor Do? Immortal Trust Settlors, Federal Transfer Taxes, and the Protean Irrevocable Trust

Kent D. Schenkel recently published an article entitled, What Would Settlor Do? Immortal Trust Settlors, Federal Transfer Taxes, and the Protean Irrevocable Trust, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article: Estate planning

The increasingly protean irrevocable trust puts substantive trust law and the federal transfer taxes at cross-purposes. State trust law’s overriding objective is simply to carry out the intent of the trust settlor. Settlors intend to manage or control the benefits from gifts over some period of time—that is, after all, the purpose of the donative trust. In contrast, the federal transfer taxes seek, by major policy purpose, to decrease the incidence of dynastic wealth—wealth locked into single-family possession and passed on from generation to generation. Yet state legislative changes to trust laws—abandoning or extending the terms of rules against perpetuities, for example—pave the way for dynastic wealth by allowing trusts to entrench that wealth in families for generations, or even indefinitely. Evolving trust laws also increasingly permit trust settlors, often by postmortem proxy, to repeatedly modify, refresh or even completely restructure irrevocable trusts in response to post-transfer events.

This essay looks critically at a change to the common law equitable deviation doctrine that ensures that irrevocable trusts can always be optimized in the face of circumstantial uncertainty. This modified equitable deviation doctrine invites trustees and courts to first imagine how the settlor would respond to unanticipated circumstances affecting an irrevocable trust, then further directs modification of the trust terms accordingly. Although this development expands settlor control over irrevocable trusts qualitatively and chronically, thereby increasing both the durability and duration of dynastic wealth, current federal transfer tax provisions are likely insufficient to discourage its proliferation. Trust settlors privileged to take advantage of the post-disposition control offered by trust laws already own a vastly disproportionate share of the nation’s wealth. Perpetual post-transfer control of wealth by a trust settlor or his proxy further entrenches this inequality of ownership and contributes to the problems it causes, including the erosion of democratic institutions. Unmitigated allegiance to the expansive value of freedom of disposition and its corollary, “the intent of the donor,” should be tempered, in post-transfer analyses, with a view to its consequences. Failing that, especially but not exclusively where costs to third parties are implicated, certain post-disposition trust modifications should be deemed new dispositions that bring about transfer tax penalties to the trust corpus.

May 14, 2021 in Articles, Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Trusts | Permalink | Comments (0)

Monday, April 26, 2021

Article: The Federal Estate Tax Exemption and the Need for Its Reduction

Jay A. Soled recently published an article entitled, The Federal Estate Tax Exemption and the Need for Its Reduction, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article: Estate planning

One of the central components of the nation’s transfer tax system is the federal estate tax exemption. This is the amount that taxpayers can pass free of transfer tax imposition. While over the last 100 years the size of this exemption has fluctuated, Congress most recently increased it exponentially, jeopardizing the vitality of the entire transfer tax regime and potentially sapping it of its strength. To enhance the nation’s fiscal solvency and to reduce wealth inequality, this analysis contends that Congress must reduce the estate tax exemption (and, along with it, the gift and generation-skipping transfer tax exemptions). Furthermore, it proposes ways for Congress to efficiently and equitably accomplish this goal. As a practical matter, the failure to take action will relegate the nation’s transfer tax system to obscurity.

April 26, 2021 in Articles, Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Wednesday, April 21, 2021

Study Shows Repealing Stepped-Up Basis Would Damage the Economy

Wealth taxA new report that was released on Tuesday shows that "repealing the step-up in basis tax provision would damage the gross domestic product (GDP) and significantly decrease job creation." The study found that middle-class, family-owned businesses would be hit the hardest by the repeal. 

As of now, a person that inherits assets is not taxed on the appreciation that happened before they inherited them. This is particularly important for family-owned farms and small businesses or manufacturers because if they are forced to pay capital gains that were accrued by the pervious owner, their business would be at risk. 

The study found that repealing the step-up in basis would result in: 

  •       80,000 fewer jobs in each of the first ten years;  
  •       100,000 fewer jobs each year thereafter; and
  •      A $32 reduction in workers’ wages  for every $100 raised by taxing capital gains at death. 

It would also reduce GDP relative to the U.S. economy in 2021, by approximately: 

  •       $10 billion annually;
  •       $100 billion over 10 years. 

According to Doug Bibby, President of the National Multifamily Housing Council, "[r]epealing stepped-up basis is not a free lunch for those looking to generate tax revenue and would have significant consequences in the multifamily marketplace." Bibby also mentioned that, absent stepped-up basis, the resulting depreciation recapture and capital gains taxes placed on heirs could "exceed their ability to pay without selling the asset." 

See Study Shows Repealing Stepped-Up Basis Would Damage the Economy, American Farm Bureau Federation: Newsroom, April 20, 2021. 

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

April 21, 2021 in Estate Planning - Generally, Estate Tax | Permalink | Comments (1)

Wednesday, April 14, 2021

Client Alert: Are Changes Afoot for Estate and Gift Taxes?

Wealth taxUnder the current administration and "composition of Congress," changes to estate and gift taxes are likely. Senator Bernie Sanders recently proposed tax reform legislation that would "make major changes to the current estate and gift tax rules." 

If the legislation were adopted, there would be a reduction to the estate tax lifetime exemption. Under the proposed legislation, the current exemption ($11.7 million per taxpayer) would drop to $3.5 million, which would not be adjusted for inflation. Further, the gift tax lifetime exemption would be reduced to $1 million. 

Also, "gifts to irrevocable trusts and certain family entities, and gifts of assets subject to prohibitions on sale and those that cannot immediately be liquidated will be subject to a limit of $30,000 per donor annually." 

The rate of the estate tax which would change to a progressive rate and increase from 40 percent to 45 percent for taxable estates between $3.5 million and $10 million, "50 percent for estates between $10 million and $50 million, 55 percent for estates between $50 million and $1 billion, and 65 percent for estates over $1 billion." 

If adopted, the new legislation would affect the usefulness of grantor trusts, GRATs, and family entity discounts. 

The proposed legislation would also greatly affect trusts that are considered to be owned by a grantor for income tax purposes, which would be subject to federal estate tax upon the death of the grantor. Further, distributions from grantor trusts would be considered gifts from the grantor. 

Assuming that the proposed legislation, which would take effect in January 2022, would not be retroactive, taxpayers should consider taking advantage of the current laws so that they do not miss out on them if the proposal passes. 

See Carol A. Sobczak, Client Alert: Are Changes Afoot for Estate and Gift Taxes?, Shumaker, April 9, 2021. 

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

April 14, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, New Legislation | Permalink | Comments (0)

Friday, April 2, 2021

U.S. Senate Introduces Legislation for Higher Taxes on Wealth

Wealth taxOn March 25, 2021, Senator Bernie Sanders introduced the For the 99.5 Percent Act (the 99.5 percent Act). The Act looks to modify the estate, gift, and generation-skipping transfer tax. 

If accepted, the Act would "reduce the estate tax exemption, set the gift tax exemption at an amount lower than the estate tax exemption, and increase tax rates on large gifts and estates, effectively returning the gift and estate tax rules to the law in effect in 2009, but with higher rates." The changes would apply to transfers occurring after December 31, 2021. 

Other changes under the Act include: 

  • The estate tax exemption amount would be reduced to $3.5 Million per individual ($7 Million for married couples), with no adjustment for changes in the cost of living. Under current law, the estate tax exemption amount is $11.7 Million per individual ($23.4 Million for married couples), adjusted annually for changes in the cost of living. However, the current exemption amount is scheduled to be reduced by 50% after December 31, 2025. 
  • The amount of the exemption available to shelter lifetime transfers from gift tax would be reduced to $1 Million per individual ($2 Million for married couples), with no adjustment for changes in the cost of living. The portion of the $1 Million exemption used during an individual’s lifetime to shelter lifetime gifts from gift tax would reduce the amount of the $3.5 Million exemption available to shelter transfers at the individual’s death from estate tax. Under current law, the gift tax exemption is the same as the estate tax exemption (and will also be reduced by 50% after December 31, 2025), and any amount not used during an individual’s lifetime is available to shelter transfers at death from estate tax. 
  • The estate tax rate would increase using a progressive tax rate based upon the value of the decedent’s estate:
    • There would be no tax on the first $3.5 Million of the estate.
    • There would be a 45% tax on the estate in excess of $3.5 Million up to $10 Million.
    • There would be a 50% tax on the estate in excess of $10 Million up to $50 Million.
    • There would be a 55% tax on the estate in excess of $50 Million up to $1 Billion.
    • There would be a 65% tax on the estate in excess of $1 Billion.

See U.S. Senate Introduces Legislation for Higher Taxes on Wealth, Greenberg Glusker, March 26, 2021. 

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

April 2, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, New Legislation | Permalink | Comments (0)

Thursday, April 1, 2021

Democrats Weigh Capital Gains Tax Hike For Millionaires At Death

Tax"Senate Democrats are circulating a plan that would trigger tax bills on the assets of the wealthy after they die as the lawmakers seek new sources of revenue to fund trillions of dollars in infrastructure spending and social programs." 

The legislation seeks to end a part of the tax code that allows assets to be passed onto heirs without "immediately generating tax bills." Democrats have long been aiming at these assets to be taxed. Joe Biden's campaign has encouraged the idea. 

Under current tax law, people are able to pass assets to their heirs without transferring capital gains from the property's appreciation, referred to as "stepped up basis at death." Basically, heirs will not have to pay taxes "on any of the gains that accused under the previous owner." 

Under the new plan, taxes would be levied on those assets of the wealthy at death subject to a $1 million exemption. 

According to Chris Van Hollen of Maryland, “The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to the wealthiest heirs every year. . . “It’s time to stop subsidizing massive inheritances for the rich and start investing in everyday Americans.”

This stepped up basis tax provision has become increasingly popular for the Democratic Party, although, under President Barack Obama, the proposal was blocked by Congress. 

With recent changes in the Senate and the House, it'll be interesting to see where the new proposed legislation goes. 

See Laura Davison, Democrats Weigh Capital Gains Tax Hike For Millionaires At Death, Financial Advisor, March 30, 2021. 

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

April 1, 2021 in Current Events, Estate Planning - Generally, Estate Tax, Income Tax, New Legislation | Permalink | Comments (0)

Wednesday, March 31, 2021

Here's Where The 4% Withdrawal Rate Fails

Estate planning"A 4% retirement asset withdrawal rate remains the standard for financial planning, but it doesn't hold up against every scenario." 

With longevity, volatility, and inflation, the usefulness of the 4% rule for retirement distributions. 

A new white paper that was released by the Alliance for Lifetime Income. The paper is called "Planning for Retirement Income Within a Increasingly Volatile and Uncertain World," and discusses common retirement planning income assumptions. 

The paper was written by Colin Devine and Ken Mungan who stated in the paper, “[t]he results provided by our research and models present substantial cause for concern, particularly within a world where increasing volatility has arguably become the norm.”

The authors of the paper found that, under normal conditions, the 4% rate is strong and "it poses a small 16% risk that retirees will run out of assets within the first 20 years of retirement." 

Devine and Munger found that the 4% rule could be faulty by extending their research beyond the 20-year point in retirement. "In each portfolio allocation assumption, the failure rate of the 4% rule crossed the 50% threshold somewhere between a person’s 30th and 40th year of retirement." 

The authors further mentioned that looking at a person's average life expectancy is not enough since "half of the population could be expected to exceed it. . .Extending the time horizon out to 25, 30, 35 or even 40 years suggests that for each of these time periods there is simply much too high a risk of outliving income.”

See Christopher Robbins, Here's Where The 4% Withdrawal Rate Fails, Financial Advisor, March 8, 2021. 

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

March 31, 2021 in Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Saturday, March 27, 2021

The Art of Estate Planning

ArtMany people may not consider what to do with their art collection when they are creating their estate plan. However, an art collection can "represent a significant portion of your estate." Therefore, it is critical that you include your art in your estate plan. 

You may want to consider how much your art is worth as well as how it will be handled after your death. 

In considering how much your collection is worth, you should have it appraised periodically by a professional. This is one of the most important steps. Although the frequency of appraisals will vary based on what type of art you collect, it is recommended that you get an appraisal at least every three years, if not annually. 

Obtaining appraisals regularly will allow you to keep track of how your collection is growing in value and will all you to "anticipate tax consequences down the road." 

There are three main options that you have in dealing with your art collection in your estate plan. You can sell it, bequest it to your loved ones, or donate it to a museum or charity. 

The best option for one may not be the best option for another, so it is advisable that you seek out help from an estate planning advisor to help you decide which is the best strategy for you. 

See David T. Riedel, The Art of Estate Planning, Adler, Pollock, & Sheehan P.C.: Insight in Estate Planning, March 24, 2021. 

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

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

Thursday, March 25, 2021

Legislation Introduced to Repeal Federal Estate Tax

TaxLegislation has been introduced by lawmakers that would repeal the federal estate tax, also known known as the death tax. 

The proposed legislation is called the Death Tax Repeal Act of 2021 and currently has the support of close to 150 lawmakers in both houses of Congress. 

According to Zippy Duvall, President of American Farm Bureau Federation (AFBF), “Farmers and ranchers already face unpredictable challenges beyond our control yet persevere to protect our nation’s supply of food, fiber and renewable fuel. The tax code should encourage farm business growth, not add to uncertainty.”

Duvall also stated, “[e]liminating the estate tax removes another barrier to entry for sons and daughters or other beginning farmers to carry-on our agricultural legacy and make farming more accessible to all.”

Through research and analysis, the AFBF has found that federal estate taxes threaten more than 74,000 farms around the nation. Due to the increase in the transition of farmland that is projected to occur over the next 20 years, ag groups are "concerned about how estate taxes are going to impact the future of the farm economy," and for good reason. 

The Death Tax Repeal Act of 2021 could remove limitations on farmlands and would almost definitely create some comfort for ag groups. 

See Brian German, Legislation Introduced to Repeal Federal Estate Tax, Ag Net West, March 15 2021. 

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

March 25, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, New Legislation | Permalink | Comments (0)

Wednesday, March 10, 2021

Hire the Funeral Clowns, Blast My Ashes into Orbit and Deduct it All

ClownsIn Hire the Funeral Clowns, Blast My Ashes into Orbit and Deduct it All, William A. Drennan examines the federal estate tax funeral expense deduction and arguments stipulating that the reasonableness restrictions in the regulations are invalid. 

Congress made all funeral expenses deductible under Internal Revenue Code § 2053(a), if those same expenses are allowed under applicable probate law. In doing so, Congress did not create a separate reasonableness requirement under federal law. However, Treasury Regulation § 20.2053-2 "creates a negative implication that certain categories of funeral expenses must be reasonable to be deductible." 

Brennan stipulates that "as there is no federal reasonableness requirement in the statute for deductibility of funeral expenses, the regulation may be invalid because it seeks to impose an extra requirement on some funeral expenses." 

This may be especially true for families that want to use funeral clowns in order to "let [their] loved one go down with a smile." Or for a person that want their ashes spread in a spectacular manner, like rocketing them into outer space. The later example is even more likely these days as the cremation rates continue to increase. In 1947, only 4% of US decedents were cremated and 96% were buried; in 2019, almost 55% were cremated and only 39% were buried. 

At death, a decedent's loved ones have an obligation to dispose of the decedent's corpse in a respectable manner, so in a way, funeral expenses are involuntary. The statutory language regarding funeral expense deductions allows a deduction for "funeral expenses . . . as are allowable by the laws of the jurisdiction . . . under which the estate is being administered." 

Essentially, the federal tax deduction is dependent on the application of state law, which could pose a problem, especially because there are public policy doctrines that could affect an "allowable" test. 

Given the unpredictable nature of the doctrine of public policy, funeral expense deductions for federal estate tax purposes could go unrestricted.

See William A. Drennan, Hire the Funeral Clowns, Blast My Ashes into Orbit and Deduct it All , American Bar Association: Probate & Property, March/April 2021. 

March 10, 2021 in Death Event Planning, Estate Administration, Estate Planning - Generally, Estate Tax | Permalink | Comments (0)