Wills, Trusts & Estates Prof Blog

Healthcare Spending Is Sinking The Federal Budget

The U.S. federal budget deficit for the fiscal year ending in September 2024 reached $1.8 trillion, making it the third-largest in dollar terms after the pandemic years of 2020 and 2021. As a percentage of GDP, the deficit stood at 6.4%, the largest outside of wartime or a global crisis. Federal revenue was near the post-World War II average, but spending exceeded historical norms, particularly in healthcare. This divergence raises concerns about fiscal sustainability, as healthcare spending, in particular, has grown disproportionately compared to other federal expenses over the past decades.

Healthcare now constitutes a significant portion of federal expenditures, with spending in 2023 nearly double the 1962–2023 average and far exceeding defense spending. Medicare, Medicaid, and health insurance subsidies, driven partly by the Affordable Care Act, account for most of these costs. While Medicare spending has stabilized relative to GDP, Medicaid and subsidies have grown sharply. Without addressing the rising costs of healthcare services, cutting federal healthcare spending will be challenging. The U.S. spends far more on healthcare than other affluent nations, creating competitive disadvantages and fiscal pressures.

Reform ideas range from structural overhauls to more immediate cost-control measures. Proposals such as publicly financed basic healthcare services could align U.S. spending with international standards but require substantial tax increases. Incremental measures like value-based payment systems and cost-control policies, as seen with the ACA and prior efforts, might help curb healthcare inflation. However, with Republicans controlling the government and prioritizing privatization and spending cuts, significant healthcare reform is unlikely in the near term. The broader issue of healthcare affordability remains central to reducing federal deficits sustainably.

For more information see Justin Fox "Healthcare Spending Is Sinking The Federal Budget" Financial Advisor, December 4, 2024.

UK’s largest estates pay an average of £9mn in inheritance tax

The UK’s top 40 taxpaying estates paid an average inheritance tax (IHT) of £9.2 million in 2021-22, with an average effective tax rate of 22%, according to data obtained under the Freedom of Information Act. Despite the headline IHT rate of 40% on assets above the £325,000 tax-free threshold (plus a £175,000 allowance for passing a main residence to direct descendants), wealthy estates have historically utilized reliefs to reduce their liability. However, recent reforms in the Autumn Budget, including changes to agricultural and business property relief and the removal of IHT exemptions on pensions starting in 2027, could make it harder for families to avoid significant IHT bills.

Experts warn that the Budget changes will impact not only the wealthiest but also middle-income families, potentially increasing the number of estates facing IHT liabilities. Key reforms include capping agricultural and business property relief at 50% for assets above £1 million per person from 2026 and including pension wealth in the taxable estate from 2027. Tax advisors emphasize the importance of strategic planning, such as using trusts or lifetime gifting, to mitigate IHT exposure. Under "potentially exempt transfer" rules, individuals can gift assets tax-free if they survive seven years post-gift, though proper understanding of rules, such as the prohibition on living rent-free in gifted properties, is critical.

The removal of pension IHT exemptions is expected to drive up the number of taxable estates, with some advisors suggesting pensioners consider early withdrawals to avoid heavier taxes. However, such moves require caution to ensure sufficient funds for basic needs and to avoid higher income tax brackets. Overall, early and informed planning is vital to minimize IHT burdens and preserve family wealth for future generations.

For more information see Emma Agyemang "UK’s largest estates pay an average of £9mn in inheritance tax" The Financial Times, December 5, 2024. 

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

Flexible Gift Annuities For Baby Boomers

The aging of America’s baby boomers is creating unprecedented demographic and financial challenges. With 10,000 individuals turning 65 daily until 2030, this "gray tsunami" brings increased longevity, as a typical 65-year-old couple has a 50% chance of one spouse reaching 90. However, the shift from defined benefit pensions to defined contribution plans like 401(k)s has heightened the "longevity threat"—the risk of outliving retirement savings. Retirees relying on such plans may deplete their wealth faster than previous generations, requiring innovative strategies to sustain income and avoid financial insecurity.

Flexible charitable gift annuities offer a promising solution to mitigate these risks. These annuities allow clients to make a charitable gift in exchange for lifetime income, with the flexibility to choose a start date for payments within a specified range. This deferral increases the payout rate, while the donor receives immediate tax benefits. Depending on funding sources, such as cash or appreciated assets, the annuity provides a mix of tax-free, ordinary income, and capital gains. This structure ensures stable income, lessens reliance on market-sensitive retirement accounts, and offsets required minimum distributions' impact on retirees' assets.

For charitably inclined retirees, these annuities provide a dual benefit: financial security and the ability to give back confidently. With 73% of retirees expressing concerns about outliving their savings, many hesitate to draw down assets for charitable contributions. Flexible gift annuities address this by providing a guaranteed income stream, empowering retirees to support causes they care about while maintaining their financial independence. As retirement planning evolves, these tools can help baby boomers navigate longevity challenges and achieve a fulfilling, balanced retirement.

For more information see Kara Morin "Flexible Gift Annuities For Baby Boomers" Financial Advisor, November 1, 2024. 

Don't Leave Your Heirs an IRA Tax Bomb

Without proper planning, an inheritance from a traditional IRA can lead to significant taxes for beneficiaries, as their tax bracket determines the rate of taxation, not the original owner’s. Retirees often fall into lower tax brackets, while their children—typically working professionals—may fall into higher brackets. Additionally, under the IRS's 10-Year Rule, beneficiaries must withdraw the entire account within 10 years, potentially resulting in large annual taxable income.

One way to reduce this tax burden is by converting a traditional IRA to a Roth IRA. While taxes must be paid upfront during the conversion, withdrawals from a Roth IRA are tax-free for both the account owner and beneficiaries. Timing and strategy are crucial, as Roth conversions can impact Medicare premiums and Social Security taxes. Consulting a financial adviser can help determine the best approach for managing these variables and maximizing tax benefits.

Another strategy is to consider the tax brackets of your children when dividing assets. Allocating more funds from a traditional IRA to children in lower tax brackets and assigning less-taxed accounts, like money market funds, to those in higher brackets can help balance the tax impact. Though it may seem fair to split assets equally, post-tax outcomes can vary significantly among beneficiaries based on their respective income levels.

Additionally, retirees can prioritize withdrawing from their IRAs earlier in retirement. By doing so, they can reduce the account's taxable size, lowering the tax burden on heirs. This strategy not only helps beneficiaries but may also minimize the account owner’s taxes over time.

Finally, meeting with a financial adviser is crucial for those planning to leave an IRA to their children. Advisers can guide investments into other vehicles, such as CDs or annuities, that may be more tax-efficient while allowing the funds to continue growing. With proper planning and professional guidance, parents can ensure their inheritance is a financial benefit rather than a burden for their children.

For more information see Kelsey M. Simasko "Don't Leave Your Heirs an IRA Tax Bomb", Kiplinger Personal Finance, December 2024. 

Mysterious $7B estate tax payment spurs questions about source of funds

A mysterious $7 billion estate tax payment received by the Treasury Department on February 28, 2023, sparked intrigue as it dwarfed daily averages of $86 million. Tax policy expert John Ricco noted it was unprecedented, especially since it occurred on an ordinary day with no tax filing deadlines. Journalist Tim Fernholz investigated the source, focusing on billionaires who had passed within the appropriate timeframe but hit a dead end until a source pointed to Fayez Sarofim, a wealthy investor and immigrant from Egypt who amassed over $20 billion. Sarofim's Texas ties matched IRS data, but Fernholz could not confirm him as the payer.

The payment's scale suggests a $17.5 billion estate given a 40% tax rate, and experts deemed it highly unusual for such a large estate to forgo common tax minimization strategies like trusts or charitable donations. Speculation remains, as the IRS cannot legally disclose the taxpayer's identity. While some viewed the gesture as patriotic, others noted its minimal impact on the nation's $1.8 trillion deficit.

For more information see Eric Revell "Mysterious $7B estate tax payment spurs questions about source of funds" Fox Business, October 19, 2024. 

How One of the World’s Richest Men Is Avoiding $8 Billion in Taxes

Nvidia CEO Jensen Huang has used multiple advanced financial strategies to shield his $127 billion fortune from estate taxes, reflecting common practices among the ultrawealthy. By employing techniques like "I Dig It" trusts and grantor retained annuity trusts (GRATs), Huang has structured his estate to avoid billions in taxes.

In 2012, Huang placed $7 million in Nvidia shares into an irrevocable trust, now valued at over $3 billion, reducing potential estate taxes from over $1 billion to mere hundreds of thousands. In 2016, Huang and his wife established four GRATs containing $100 million in Nvidia shares. With Nvidia’s meteoric rise as a leader in AI chip technology, these shares are now worth over $15 billion, potentially saving the family $6 billion in estate taxes.

Huang also leveraged a charitable foundation to donate Nvidia shares worth $330 million, reducing income taxes while directing 84% of these funds to a donor-advised fund (DAF). This DAF, called GeForce, faces no legal obligation to distribute funds to charities and can remain under family control, further reducing the family's estate tax liability by about $800 million.

Despite efforts under previous administrations to close loopholes in GRATs and trusts, political resistance has left these strategies available. The cumulative effect of such maneuvers has hollowed out the estate tax, allowing billionaires like Huang to pass wealth to future generations with minimal tax burdens while depriving the government of significant revenue.

For more information see Jesse Drucker "How One of the World’s Richest Men Is Avoiding $8 Billion in Taxes" The New York Times, December 5, 2024. 

Special thanks to Naomi Cahn (University of Virginia School of Law) for bringing this article to my attention.

Article: The Tie-Breaker Rule in Inheritance Tax Treaties: The Asymmetry of Taxing Rights by Migrants

Mari Takahashi (Independent) recently published, The Tie-Breaker Rule in Inheritance Tax Treaties: The Asymmetry of Taxing Rights by Migrants, 2024. Provided below is an Abstract:

There are more than 3,000 income tax treaties in the world, but fewer than 100 inheritance tax treaties. Why is the number of inheritance tax treaties so low compared to income tax treaties? This article attempts to answer this question by analysing the tie-breaker rule of inheritance tax treaties.

Article: Integration of Taxes on Inheritances, Estates and Gifts into the OECD Model Tax Convention on Income and on Capital: The Curious Case of Special Provisions - Part 1

Jan Karol Szczepański (Independent) recently published, Integration of Taxes on Inheritances, Estates and Gifts into the OECD Model Tax Convention on Income and on Capital: The Curious Case of Special Provisions - Part 1, 2024. Provided below is an Abstract: 

Part 1 of this article considers the interaction between the special provisions in the OECD Model Tax Convention on Income and on Capital, and the conceptual foundations of taxes on inheritances, estates and gifts.

IRS Hikes Estate, Gift Tax Exemptions; Boosts Standard Deduction

In a move that wealthier taxpayers and their financial advisors will welcome, the Internal Revenue Service announced inflation-adjusted increases to both the estate and gift tax exemptions for 2025, as well as a higher standard deduction and new income tax brackets.

The basic estate tax exclusion amount will increase to $13.99 million for the estates of taxpayers who die in 2025, up from $13.61 million in 2024, the agency said. The agency also increased the annual exclusion for gifts to $19,000 for calendar year 2025, up from $18,000 in 2024. The exemptions apply to tax-free transfers during life and at death, the IRS said.

The agency also increased the standard deductions that all taxpayers can use for tax year 2025. For single taxpayers and married individuals filing separately, the standard deduction will increase by $400 to $15,000. For married couples filing jointly, the standard deduction will jump by $800 to $30,000. Heads of households will get a $600 increase in the standard deduction to $22,500.

Once again, there are no limitations on the itemized deductions that taxpayers can claim and the personal exemption remains at zero, which was established by the Tax Cuts and Jobs Act of 2017, the IRS said.

Marginal federal income tax brackets were also adjusted for tax year 2025, the IRS announced. While inflation triggered larger adjustments in the past two years—7% in 2023 and 5.4% in 2024—the IRS provided more modest inflation adjustments to incomes in each bracket for 2025 to prevent workers from being pushed into higher brackets simply because they received cost-of-living pay increases, the IRS said.

The top tax rate remains at 37% for individual single taxpayers with incomes greater than $626,350 ($751,600 for married couples filing jointly), the IRS said.

The IRS also increased the alternative minimum tax exemption amounts for tax year 2025. The exemption for unmarried individuals will increase to $88,100 ($68,650 for married individuals filing separately) and begins to phase out at $626,350. For married couples filing jointly, the exemption increases to $137,000 and begins to phase out at $1,252,700.

For those who earn income offshore, the service increased the foreign earned income exclusion to $130,000, from $126,500 in tax year 2024.

For taxpayers who have three or more qualifying children, the maximum earned income tax credit amount was hiked to $8,046 up from $7,830 for tax year 2024, the IRS said.

Health flexible spending cafeteria plans also got a small boost. “For the taxable years beginning in 2025, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements rises to $3,300, increasing from $3,200 in tax year 2024. For cafeteria plans that permit the carryover of unused amounts, the maximum carryover amount rises to $660, increasing from $640 in tax year 2024,” the IRS announced.

Deductions for medical savings accounts (MSAs) also increased for tax year 2025. For participants who have self-only coverage, the plan must have an annual deductible that is not less than $2,850, a $50 increase from the previous tax year, but not more than $4,300, an increase of $150 from the previous tax year, according to the IRS.

For individuals with MSAs, “the maximum out-of-pocket expense amount rises to $5,700, increasing from $5,550 in tax year 2024. For family coverage in tax year 2025, the annual deductible is not less than $5,700, increasing from $5,550 in tax year 2024; however, the deductible cannot be more than $8,550, an increase of $200 versus the limit for tax year 2024. For family coverage, the out-of-pocket expense limit is $10,500 for tax year 2025, rising from $10,200 in tax year 2024,” the IRS said.

The IRS made adjustments to more than 60 tax provisions that will impact taxpayers when they file their taxes in 2026.

For more information see Tracey Longo, "IRS Hikes Estate, Gift Tax Exemptions; Boosts Standard Deduction" Financial Advisor Magazine, October 22, 2024. 

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

IRS Final Rules Identify Syndicated Conservation Easements as Abusive Tax Transactions

The IRS and U.S. Treasury Department have finalized regulations identifying certain syndicated conservation easement transactions as "listed transactions," marking them as abusive tax schemes that must be reported. Released on October 7, these rules aim to curb tax avoidance strategies involving inflated charitable deductions through conservation easements. These easements allow property owners to limit land use for conservation and claim tax breaks, but the IRS has found that many are misused through exaggerated valuations. The new regulations require participants and advisers in these transactions to disclose their involvement to the IRS, with penalties for non-disclosure.

IRS Commissioner Danny Werfel stated that the regulations target abusive syndicated conservation easements, which have been used as tax shelters through inflated land appraisals. The Senate Finance Committee’s investigation into these schemes revealed that they often involve partnerships designed solely to generate tax deductions, with no genuine business purpose. By inflating land values, participants could claim excessive deductions, exploiting tax provisions meant for genuine conservation efforts. The new rules are part of an effort to enhance transparency and hold participants accountable.

The final regulations amend the Income Tax Regulations under 26 CFR Part 1, requiring taxpayers and advisers to file specific forms—Form 8886 for taxpayers and Form 8918 for advisers. These regulations took effect on October 8 and apply to open tax years. The IRS’s crackdown comes after several promoters were sentenced to over 20 years in prison for orchestrating a large-scale easement tax scam that caused the IRS $450 million in losses.

For more information see Tom Ozimek "IRS Final Rules Identify Syndicated Conservation Easements as Abusive Tax Transactions" The Epoch Times, October 6, 2024.