Wills, Trusts & Estates Prof Blog

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

Wednesday, August 5, 2020

Higher Taxes Are Coming —Here's How to Prepare

TaxThe COVID-19 pandemic has produced a lot of uncertainty around our economy. Most of us have been worried about when we will be able to return to a normal work life or when our kids will be able to go back to school. For some of us, our lives have completely changed.

There is one thing that not everyone has been worried about: Taxes. It is likely that there will be an increase in taxes in the upcoming year. However, the good news is that unlike the many other issues we are uncertain about, we may actually have some control over this one. 

There are certain steps that we can take to mitigate the effects of future tax increases. 

As far as estate planning strategies, here are a few things you can do to prepare for an increase in taxes. 

  • Plan to gift exemption amounts
  • Take gains before your death 

Income Tax Strategies:

  • Accelerate income recognition by:
    • Converting your traditional IRA's to Roth IRA's
    • Selling appreciated assets now to fund your future spending needs
    • Intentionally taking gains in your revocable grantor trusts
    • Opting not to defer income into your deferred compensation plan
  • Defer deductions
  • Structure your investments to reduce taxes by:
    • Using lower tax realizing investments such as index funds
    • Investing inside life insurance policies

Devising tax planning strategies is a great way to plan ahead for an increase in taxes. Moving forward, this is a must to avoid harsh consequences from a tax increase. 

See John Jennings, Higher Taxes Are Coming – Here’s How To Prepare, Forbes, July 28, 2020. 

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

August 5, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, Trusts | Permalink | Comments (0)

Tuesday, August 4, 2020

The Magic Hour For GRATs

GratIt has been tough to find many positives during the COVID-19 pandemic, however, Grantor Retained Annuity Trusts (GRATs) are one of them. GRATs allow donors to transfer income-producing assets into a trust and out of his or her estate, which will lower or eliminate an estate tax upon death of the grantor. 

Although the donor has to pay gift tax or use gift tax/estate tax exemption on the transferred property when the trust is created, the transferred property will appreciate at a rate that will eventually exceed the interest rate used to compute the value of the gift. 

The IRS sets the interest rate in Section 7520. You should check here to find the interest, which fluctuates on a monthly basis. The lower the rate, the greater the chance for tax savings. 

The reason why GRATs are a positive during the pandemic, is that the interest rates are currently very low, making the GRAT a perfect tool for saving. 

There are two main types of GRATs: a zeroed-out Gray and a non-zeroed-out GRAT. 

So, if you are interested in acquiring a GRAT, you should do some research to learn which one is best for you and your family. 

See, Lia Momtsios, The Magic Hour For GRATs, Mitchell, Silberberg, & Knupp, L.L.P., July 28, 2020.

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

August 4, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Friday, July 31, 2020

Benefits of captives: They can insure against pandemics

CaptiveInsurance companies represent an overwhelming majority of Fortune 500 companies and many of those companies have created wholly-owned insurance companies, referred to as "captives." A captive insurance company is a "closely-held insurance company that does not write policies for the general public. A typical captive insurance company insures risks of the captive owner’s businesses that are otherwise unavailable in traditional insurance markets or that are extremely expensive to obtain."

There are many pros to captives. Since captive insurance companies are a C corporation, they can issue more than once class of stock and can also pay out “qualifying” dividends at preferential income tax rates. Captives also create a safety net for future risks. Further, captives may offer expanded coverage while significantly reducing insurance costs. 

Further, a captive "can insure against pandemics and other non-damage related business interruption events, such as loss of rental income and lost profits."

"On an annual basis, the premiums paid to the captive in excess of its claims and operating expenses can be made available for investment or distribution to shareholders. An added benefit of captives is that there may also be opportunities for gift and estate tax savings to the shareholders of captives."

Below is a list of candidates for captives:

  • Profitable business entities seeking substantial annual tax deductions.
  • Business owners with multiple entities or businesses that can create multiple operating subsidiaries or affiliates.
  • Businesses with $1,000,000 or more in annual profits.
  • Businesses with uninsured or underinsured risk.
  • Business owners interested in personal wealth accumulation and/or estate planning.

See, Eric Allon. Allen Hankins and Jonathan L. Korb, Benefits of captives: They can insure against pandemics, Boston Business Journal, July 28, 2020.

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

July 31, 2020 in Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Tuesday, July 14, 2020

Don’t Overlook Your Trust Funding

UnknownIf you have updated your estate plan during the COVID-19 crisis and even found a way to sign your documents while maintaining social distancing, do not overlook the last step of trust funding. 

Trust funding is a critical step in estate planning. Many people either overlook this step or fall victim to procrastination and never get to it. If properly done, trust funding will avoid probate, provide for you in the event of your incapacity, and save on estate taxes. 

With a revocable trust, you have control over the trust and can make changes and amendments during your lifetime. Think of the trust like an empty box: you can fill it up now, or on your death. If you transfer assets to the trust now, the executor of your will does not need to do that on your death. The trust is already funded.

You want to make sure to protect yourself and your family if you become incapacitated. A revocable trust is another way to ensure that you and your family have that protection. Funding the trust now will enable the successor trustee to manage the assets for you and your family in that instance.

Depending on what state you live in, the trust can also reduce state estate taxes.

You worked hard on updating your estate plan. Take the final step and fund your trust now to get the most out of your updated documents.

See Christine Fletcher, Don’t Overlook Your Trust Funding, Forbes, July 13, 2020.

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

July 14, 2020 in Current Events, Death Event Planning, Estate Planning - Generally, Estate Tax, Trusts | Permalink | Comments (0)

Saturday, July 4, 2020

Inside the intentionally defective grantor trust

UnknownThe art of estate planning is affected by a multitude of variables that change over time. The currently low-interest-rate environment and the imminent return of a lower estate tax exemption are among the factors shaping estate planning today. 

According to Jere Doyle, senior VP at BNY Mellon Wealth Management, a sale to an intentionally defective grantor trust is one vehicle which works well to transfer wealth in the current low-interest-rate economy. The effect of an IDGT is to freeze assets for estate tax purposes but not for income purposes. 

A typical power retained in an IDGT is the swap power, Doyle observed. "Thats the ability of the grantor to go into the trust and pull out assets, and substitute assets he owns on the outside that are of the same value. That causes income of the trust to be taxed back to the grantor. That’s one of the things that people are using now because the interest rate is so low. You’re lending money to the trust at a low interest rate. The grantor has no interest income to report, there’s no tax on the sale, and when interest income comes back there’s no income tax on that.”

This is particularly favorable for people who own a business to get appreciation out of their estate, Doyle noted. 

However, the regular GRAT, or grantor retained annuity trust, might be a better choice for someone with publicly traded stock that they anticipate will appreciate. Further, the spousal lifetime access trust (SLAT) allow the making of sizable gifts to use up part of the gift tax exemption. 

There are a few vehicles you can use to take advantage of the lower estate tax exemptions, but you should consider your options and be cautious before making a decision. 

See Roger Russel, Inside the intentionally defective grantor trust, Accounting Today, June 30, 2020. 

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

July 4, 2020 in Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Friday, July 3, 2020

Is Now the Time to Use Your Lifetime Exemption?

_2018_11_money-boxMany clients are asking about how to plan in light of possible changes to the federal estate tax law. In response to current events and the impact on state and federal budgets, it is very possible that the federal estate tax exemption could be reduced from the current amount of &11.58 million per person. 

Given the uncertainty surrounding estate taxes and gains, planning for income taxes will be a concern and states may be adding or increasing state income taxes as a result of budgetary shortfalls. 

One strategy that emerges from these concerns is the importance of lifetime gifts to children or other family members, in order to use some or all of the federal estate tax exemption during lifetime. 

One advantage to making a large gift now is that the appreciation will not be taxed in your federal estate and will be shifted to the recipients. Also, if you live in Oregon or Washington, your estate will not pay those states' estate tax on those gifts. If you are able to make a gift larger than what the federal exemption may be in the future, a larger gift may provide these advantages.

If you are worried about the federal exemption being lowered, the Treasury Department and the IRS have confirmed that there will be no "clawback" for gifts made under the increased estate and gift tax exclusion put in place by the Tax Cuts and Jobs Act of 2017.

One thing you should think about before making a large gift is the amount of assets to retain in order to maintain your lifestyle, which may affect which types of assets you give away. Another thing to consider is asset basis and built in capital gain as the recipient of your gift will take on your basis and may pay capital gains tax if the assets are subsequently sold. Therefore, the best assets to give are cash, assets in high basis, or assets that your recipient is very unlikely to sell. 

See Susan B. Bock, Wendy S. Goffe, & Emily V. Karr, Is Now the Time to Use Your Lifetime Exemption?, Stoel Rives LLP, June 30, 2020.

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

July 3, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Friday, June 5, 2020

Is it Time to "Use it or Lose it?"

Tax-exemption-image-e1516143026899Due to COVID-19, we will likely see significant statutory changes to the federal estate, gift, and generation-skipping transfer tax exemptions. 

"The United States Congress and the Federal Reserve have been taking unprecedented steps to shore up our economy – massive stimulus packages have already made their way into law, and more appear to be coming down the pike."

Market observes are backing these strategies as a way to help businesses and families make it through the coronavirus pandemic. However, as the continued pandemic affects the market-volatility, legal and tax observers have a recurring thing: "At some point, taxpayers will have to replenish the government's piggy bank."

The Tax Cuts and Jobs Act of 2017 (the "TCJA") increased the unified federal estate, gift, and generation-skipping transfer tax exemption to $10 million per person with an annual inflationary adjustment. In 2020, an individual can transfer – by lifetime gift, transfer at death, or a combination of the two – a total of $11.58 million to non-spouses without incurring these transfer taxes. However, the heightened exemption amounts are set to "sunset" on January 1, 2026, in which the $5 million baseline exemption will be back in effect. 

Given the stimulus spending and the current political climate, many are wondering how long the exemption high-water-mark can last. Thus, it may be more imperative now than ever before for individuals facing potential estate tax liabilities to find a way to use this massive exemption amount while it is still available.

See Jennifer Boyer, Is it Time to "Use it or Lose it?", Ward and Smith, P.A., June 3, 2020.

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

June 5, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax | Permalink | Comments (0)

Wednesday, June 3, 2020

23 Ridiculous Tax Loopholes

Tax-LoopholesThe IRS allows tax deductions in order to promote certain behaviors like saving for retirement and it is your right to know about the ones you are entitled to. Contrary to what many people think, you do not have to be rich to take advantage of tax loopholes. Ordinary people like married couples, single people, and even poor people can take advantage of tax loopholes. 

Here are a few of the loopholes available:

The 529 Plan Double Dip Loophole

When you use a 529 plan to pay for college expenses, you don't have to pay taxes on the amount you earned from what you invested. If you qualify based on income limits, you can take advantage of the American opportunity tax credit or the lifetime earning credit. 

The Backdoor Roth IRA Loophole

There are some income restrictions for people who contribute to a Roth IRA, but there's a way around these restrictions. If you earn more than $139,000 for a single taxpayer or $206,000 as a couple, you make too much to contribute directly to a Roth IRA. However, you can contribute to a traditional IRA. You can then convert the regular IRA into a Roth IRA. When you retire you can withdraw from your Roth without paying income taxes when you take the money out. 

Carried Interest Loophole

This one is for hedge fund managers that get their income from funds whose profits are considered carried interest realized over the long term, so their income is taxed at the long-term capital gains rate instead of the standard income tax rate.

Click the link below for the other 20 loopholes, there may be a few you can take advantage of!

See Brian Nelson, 23 Ridiculous Tax Loopholes, GO Banking Rates, June 2, 2020. 

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

June 3, 2020 in Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Monday, June 1, 2020

9th Circuit Affirms Decision Including Entire Value of GRAT in Decedent’s Gross Estate

Taxforms_10723080In the Ninth Circuit's decision in Badgley v. U.S.the court affirmed the lower court's ruling that the entire date-of-death value of the assets of a Grantor Retained Annuity Trust (GRAT) were includible in the settlor's gross estate for federal estate tax purposes. The decedent in Badgley created the GRAT in 1998 in order to facilitate the transfer of interests in a family-run partnership to the decedent's children. 

The decedent died in 2012, a matter of months before the expiration of the annuity term. The assets of the GRAT had appreciated to almost $11 Mil and had the decedent survived the annuity term. the assets would have been successfully transferred to the decedent's children free of federal estate taxes. 

The issue in Badgley was the extent to which the decedent's retained annuity interest caused the assets of the GRAT to be included in the decedent's gross estate. The question was essentially what extent of the assets were subject to estate tax. The decedent's representative argued that inclusion should be limited to the net present value of unpaid annuity payments. However, the IRS argued that the entire date-to-death value of the GRAT should be included. The court ultimately sided with the IRS reasoning that the decedent's retained annuity right was a substantial present economic benefit, which requires the inclusion of the entire GRAT under the Internal Revenue Code.

Despite the picture of GRATs that the Badgley decision paints, GRATs are a great way to transfer wealth with minimal transfer tax consequences, especially with the historically low interest rates. One thing the Badgley decision did accomplish is providing the lesson that one should consider the variables carefully in order to decide if a GRAT is an advisable strategy. 

See Joseph Owens, 9th Circuit Affirms Decision Including Entire Value of GRAT in Decedent’s Gross Estate, Dickinson-Wright (Tax Blog), May 26, 2020. 

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

June 1, 2020 in Estate Planning - Generally, Estate Tax, New Cases | Permalink | Comments (0)

Saturday, May 23, 2020

Wealth Transfer Planning Opportunities in the Current Environment

UnknownThe current COVID-19 crisis and has created significant wealth transfer opportunities for those high net worth families who are subject to the Federal estate and gift tax. The Federal exemption, which is the amount of assets that every individual can transfer during life or death without paying an estate or gift tax is $11.58 million for 2020. Given the current low interest rates, there are a variety of wealth transfer opportunities available to those who want to pass assets down to future generations with little to no tax cost. 

Grantor Retained Annuity Trust (GRAT)

One of the wealth transfer opportunities is the GRAT, which is an irrevocable trust to which an individual transfers assets one exchange for an annuity payable over a specified term. When the term expires, the remaining assets of the GRAT pass onto the grantor's beneficiaries or trusts for their benefit. The GRAT is an effective way to take advantage of the low rates that have resulted from these uncertain times.

Sales to Intentionally Defective Grantor Trust (IDGT)

For owners of closely held businesses or real estate interests, sales to IDGT for the benefit of family members is another great opportunity. The goal of this transaction id to transfer the future income and appreciation of the asset to the next generation at a reduced gift tax cost. 

Loans to Family Members

Another simple and effective way to take advantage of the times in a ways that benefits and assists the next generation is through intra-family loans. Loans to family members must bear interest at a rate at least equal to the AFR; but given the historically low rates, borrowing costs are reduced. 

In sum, these wealth transfer opportunities are not mutually exclusive and can be considered in tandem in order to achieve a significant amount of wealth transfer. 

See Wealth Transfer Planning Opportunities in the Current Environment, csglaw.com, May 20, 2020. 

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

May 23, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)