Wills, Trusts & Estates Prof Blog

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

Thursday, July 29, 2021

Impact of President Biden's Tax Plan on Estate Planning

Estate planningThere has been speculation on what President Biden's tax proposal will look like and what effects it will have on estate planning. There is also a question about the likelihood that President Biden's tax plan will be enacted into law. 

The Biden Administration announced the American Families Plan in April 2021, which proposed "significant tax law changes to increase taxes on both corporations and high-net worth individuals and to provide more resources to enhance IRS tax enforcement efforts. 

In May 2021, the United States Department of Treasury issued a report entitled, "General Explanation of the Administration's Fiscal 2022 Revenue Proposals (generally referred to as the Green Book) which included more details on the tax law changes previously proposed in the American Families Plan." The memo provided an overview of the proposed changes of the American Families Plan and the impact those changes may have on estate planning. 

Under the current proposal, "there will be a realization of capital gains to the extent such gains are in excess of a $1 million exclusion per person, upon the transfer of appreciated assets at death or by a gift. . .the proposal would provide various exclusions and exceptions for certain family-owned and operated businesses. 

One thing that was not addressed in the Green Book are changes to the federal estate, gift and generation skipping transfer (GST) tax system, although Biden did propose these changes during his campaign. 

There is a lot of uncertainty surrounding new tax laws, so high-net-worth individuals with estate tax concerns should consider taking advantage heightened exemptions by implementing wealth transfer strategies like the following: 

  • Intentionally Defective Grantor Trust (IDGT)
  • Spousal Lifetime Access Trust (SLAT)
  • Grantor Retained Annuity Trust (GRAT)
  • Charitable Lead Annuity Trust (CLAT)
  • Annual Gifts 
  • And more. 

See Jeffrey M. Glogower, Stephen J. Bahr, & Adam W. Randle, Impact of President Biden's Tax Plan on Estate Planning, The National Law Review, July 26, 2021. 

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

July 29, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Wednesday, July 21, 2021

Are 1031 Exchanges Right for Me?

Wealth taxAccording to Casey Robinson, CFP: "[t]here’s a possibility the tax-deferral benefit of such property exchanges could end for some high-net-worth real estate investors, so that could speed up some property owners’ decisions."

President Biden has proposed a plan called the American Families Plan, which is exposing a popular tax deferral strategy used by property owners and real estate investors. President Biden's proposed spending package would eliminate the strategy in certain cases. 

A 1031 exchange (named for Section 1031 of the tax code) allows someone to defer paying capital gains on real estate profits if the proceeds are reinvested in another similar property of equal or greater value within a certain time limit. Biden's proposal would end the exchanges on real estate profits of more than $500,000 for singles taxpayers and $1 million for married taxpayers. 

While some see the 1031 strategy as a loophole used by investors, others argue that the repeated use of the strategy "contributes to an active real estate market and, therefore stimulates the economy." 

Although 1031 exchanges seem appealing, it is important to consider that they are only tax deferral strategies, meaning the tax on capital gains must be paid eventually. Thus, 1031 exchanges save investors in the short term. 

It is also important to note that 1031 exchanges have different benefits for investors who deal in multimillion-dollar transactions than they do for someone who owns a handful of smaller properties. For the high-end investors, 1031 exchanges may be more useful for them given the resources they have available. On the other hand, owners of smaller properties will have more "hurdles involved" lie fees, rigid regulations, and other things. 

See Casey Robinson, CFP, Are 1031 Exchanges Right for Me?, Kiplinger, July 18, 2021. 

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

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

Sunday, June 27, 2021

Minnesota farmer concerned tax proposals could fundamentally change structure of family farms

Estate planningKirby Hettver, a fifth-generation farmer from DeGraff, Minnesota, expressed concerns about proposed changes to the estate tax. Hettver believes that the proposed changes could "fundamentally change the way family farms are structured. 

Hettver stated, “Obviously we don’t want to make any decisions without knowing a little more about what exactly they are going to end up with.”

President Biden's proposed changes, which include elimination of the stepped-up basis, will affect a lot of families, farm families included. The elimination of stepped-up basis would cause "inherited assets, like land, to be taxed upon the previous owner's death, and lower the estate tax threshold from $11.7 million to $500,000.

Hettver further stated, “In order for us to maintain (the farm) and pass it onto the sixth generation, based on the new policies if we need to make changes we’ll have to figure out what rules we’re playing by and play by them.”

See Mark Dorenkamp, Minnesota farmer concerned tax proposals could fundamentally change structure of family farms, Brownfield Ag News, June 25, 2021. 

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

June 27, 2021 in Current Events, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, New Legislation | Permalink | Comments (1)

Tuesday, June 8, 2021

Tax Trial of the Century…

MJWhen one things of words associated with Michael Jackson (moonwalk, singer, dancer, performer, etc.) they do not typically thing of the words "tax court." However, due to a monstrous tax trial, those words are now associated with Michael Jackson. 

Following Michael Jackson's death in 2009, the Executors of his estate filed an estate tax return reporting the value of his property. Included in this valuation was "Jackson's image and likeness, his 50% interest in Sony/ATV, a music catalog and music publishing business, and his interest in Mijac Music, which owned musical compositions from a variety of artists, including Jackson." 

The IRS challenged the valuation of the assets and the Tax Court was left to determine the fair market value at Jackson's date of death. The Estate valuation was a reported $2.2 million and the IRS's valuation of the assets was a whopping $964 million. 

Due to the unique nature of the assets, the market values were difficult to assess. This difficulty lead to the necessity for professional appraisers to value the assets. 

The Court engaged in a thorough analysis of the valuations performed by experts retained by both sides, while also performing its own analysis. The Court ultimately came to a conclusion which can be seen at the link posted below. 

According to Jackson's Executors:

"This thoughtful ruling by the U.S. Tax Court is a huge, unambiguous victory for Michael Jackson's children. For nearly 12 years Michael's Estate has maintained that the government's valuation of Michael's assets on the day he passed away was outrageous and unfair, one that would have saddled his heirs with an oppressive tax liability of more than $700 million. . ." 

See Mark Dana, Tax Trial of the Century…, SGR Blog, (last visited June 8, 2021). 

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

June 8, 2021 in Current Events, Estate Administration, Estate Planning - Generally, Estate Tax, Music, New Cases | Permalink | Comments (0)

Friday, May 28, 2021

IRS Practice Units

IRS"As part of LB&I's knowledge management efforts, Practice Units are developed through internal collaboration and serve as both job aids and training materials on tax issues. For example, Practice Units provide IRS staff with explanations of general tax concepts as well as information about a specific type of transaction. Practice Units will continue to evolve as the compliance environment changes and new insights and experiences are contributed."

Visit the link below to view the practice units: 

https://www.irs.gov/businesses/corporations/practice-units

Special thanks to Mark J. Bade (CPA, GCMA, St. Louis, Missouri) for bringing this article to my attention. 

 

May 28, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Monday, May 24, 2021

Democrats Mull Weakening Biden Tax On Capital Gains For Estates

Wealth taxThe Biden administration's proposal to "dramatically expand the inheritance tax bill for wealthy Americans" is beginning to frequent obstacles as Democrats on Capitol Hill are becoming nervousness about the "scope and size of elements of the White House's ambitious plans." 

One of the key elements of the Biden Administration's proposal is ending the step-up in basis, which allows heirs to use the market value of assets at the time of inheritance (as opposed to the purchase price) as the cost basis for capital gains. 

According to those in the loop, "[i]nstead of hitting heirs with a hefty tax payment at the time of the death of their benefactor, staff for House Ways and Means Chair Richard Neal have floated allowing the beneficiaries to defer the bill as long as they hang on to the asset. . ." 

The "Green Book," which is a report from the Treasury Department, is expected to provide some detail on the Biden Administration's tax plans.

See Laura Davison & Nancy Cook, Democrats Mull Weakening Biden Tax On Capital Gains For Estates

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

May 24, 2021 in Current Events, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, New Legislation | Permalink | Comments (0)

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)