Wills, Trusts & Estates Prof Blog

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

Monday, November 4, 2024

IRS Hikes Estate, Gift Tax Exemptions; Boosts Standard Deduction

IRSIn 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.

November 4, 2024 in Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

IRS Hikes Estate, Gift Tax Exemptions; Boosts Standard Deduction

IRSIn 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.

November 4, 2024 in Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Sunday, October 13, 2024

IRS Final Rules Identify Syndicated Conservation Easements as Abusive Tax Transactions

IRSThe 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.

October 13, 2024 in Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Saturday, September 7, 2024

Structuring Tax-Efficient Trust Decantings After ‘the Guidance’

Screenshot 2024-09-07 at 10.53.21 AMThe article discusses the impact of IRS Chief Counsel Advice Memorandum 202352018 (CCA) on the practice of trust decanting in estate planning. Trust decanting involves transferring assets from one trust to another, but the CCA has caused concern among practitioners due to potential tax consequences.

The CCA highlighted tax issues when modifying a trust, particularly if changes affect beneficial interests. While some feared the CCA signaled the end of irrevocable trust decanting, the article clarifies that the CCA primarily addressed trust modifications that result in "materially different" terms, which can trigger tax consequences, such as gift taxes.

The article outlines key considerations for avoiding tax issues in trust decanting, emphasizing that changes should not alter beneficial interests, as established by the Cottage Savings case. Practitioners must ensure that the appointed trust’s terms are not materially different from the invaded trust’s to avoid taxable events.

The IRS has been studying issues around decanting for over a decade and has not yet issued comprehensive rulings on certain matters. The article advises caution and careful drafting when modifying trusts to prevent unintended tax consequences, such as the loss of generation-skipping transfer (GST) tax exemption or triggering gift taxes. The author suggests timely filing of gift tax returns to limit the IRS's scrutiny window on these transactions.

For more information see Michael Borger "Structuring Tax-Efficient Trust Decantings After ‘the Guidance’" Bloomberg Law, September 3, 2024. 

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

September 7, 2024 in Estate Tax, Trusts | Permalink | Comments (0)

Sunday, August 25, 2024

Article: Wealth Taxes Under the Constitution: An Originalist Analysis

David M. Schizer (Columbia University - Law School) and Steven G. Calabresi (Northwestern University - Pritzker School of Law) recently published, Wealth Taxes Under the Constitution: An Originalist Analysis, 2024. Provided below is an Abstract:

A federal wealth tax is high on the wish list of progressive icons like Elizabeth Warren and Bernie Sanders, but is it constitutional? This Article shows that it is a "direct tax," which must be apportioned among the states. This means that the percentage of revenue collected in each state must match its percentage of the population. For instance, if two states each have three percent of the population, each must provide three percent of the revenue from a wealth tax. This leads to an unappealing outcome: if one state is less wealthy, it needs a higher tax rate to supply its share. To rescue wealth taxes from apportionment, distinguished commentators have offered a range of theories. For example, some treat apportionment as a mistake, while others dismiss it as a protection for the shameful institution of slavery.

But these commentators do not give the Framers enough credit. The taxing power was too important for them to be sloppy or to focus only on the institution of slavery. In our view, the taxing power reflects the same influences as the rest of the Constitution. Like the new government’s other features, the taxing power was supposed to be effective but limited. The Framers wanted to solve the fundamental problem under the Articles of Confederation (insufficient revenue), without recreating the fundamental problem under imperial rule (taxation without representation). Specifically, they sought to discourage what we call “fiscal raids,” in which states join forces to enact national taxes that mostly burden other states. As Professors Ackerman and Amar have shown, this risk could arise with an unapportioned tax on enslaved persons, since it would have been collected mainly in the South. But we show that the same was true of other region-specific practices, such as tobacco plantations and undeveloped land in the South, as well as ships, timber, farms, and manufacturing in the North. Apportionment was supposed to protect all these region-specific assets from fiscal raids.

In pursuing these various goals, what did the Framers mean by a “direct tax”? They considered a tax “direct” if it applied to taxpayers themselves, instead of to their transactions. A direct tax could be triggered merely by residing in the jurisdiction or owning property. In contrast, taxes on transactions—including on imports (“imposts”) and on domestic production and consumption (“excises”)—did not have to be apportioned. Admittedly, some courts and commentators have offered the narrower interpretation that “direct” is limited to head taxes and real estate taxes. But at ratifying conventions, John Marshall, Oliver Ellsworth, and other Framers offered a broader definition, which included livestock, business assets, and other personal property. Dicta in an early case, Hylton v. United States offered the narrower interpretation (head and land taxes), but the holding can be reconciled plausibly (although not perfectly) with our interpretation, while most other Supreme Court cases on the Direct Tax Clause align with our reading.

August 25, 2024 in Articles, Estate Tax, Income Tax | Permalink | Comments (0)

Sunday, July 7, 2024

Transferring Ownership of Appreciated Stocks to Your Parents Could Limit Your Tax Hit

Screenshot 2024-07-07 at 12.59.48 PMThe strategy known as "upstream planning" is gaining popularity among wealthy individuals seeking to mitigate taxes on appreciated assets. Instead of transferring these assets to their children, they transfer them to their parents. This approach allows the assets to be absorbed into the parents' wealth, avoiding capital gains taxes through a step-up in cost basis upon inheritance. Pamela Lucina, chief fiduciary officer at Northern Trust in Chicago, highlights the importance of ensuring that this strategy aligns with individual circumstances due to its benefits and potential drawbacks. Key considerations include the size of both generations' estates and whether they have utilized their estate and gift tax exemptions.

The current estate and gift tax exemption is at a record-high of $13.1 million per person or $26.2 million per couple. However, this exemption is set to decrease to around $7 million at the end of next year unless Congress intervenes. This creates a sense of urgency for those considering upstream appreciated gifts. The strategy works best when the parents' estate is smaller than the children's and they haven't used their exemption. Risks include potential estate-tax burdens for parents once the exemption drops and the possibility of creditors claiming the assets if the parents are in debt. Additionally, gifting assets outright means losing control over them, with the risk of parents bequeathing them to someone else.

Health and timing are critical factors in upstream planning. If parents die within a year of receiving the appreciated assets, the step-up in cost basis is lost. The strategy was successfully implemented by one of Lucina's clients, an only child with a strong relationship with their parents. Publicly traded securities are the most common assets transferred due to their market-established value. However, transferring real estate is less common because of existing tax benefits for primary residences. To mitigate risks, using a trust can ensure assets are more likely to be returned to the original giver, though they may still be subject to the parents' creditors. Lucina underscores the importance of open communication in optimizing family wealth through estate planning.

For more information see Karen Hube "Transferring Ownership of Appreciated Stocks to Your Parents Could Limit Your Tax Hit", Penta, July 2, 2024.

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

July 7, 2024 in Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Friday, June 28, 2024

Democrats’ Billionaire Taxes Still Have a (Slight) Chance

CongressThe Supreme Court has left a very narrow legal path open for the billionaire taxes that are central to the Democrats' economic agenda. In a recent international-tax case related to the 2017 tax law, the court avoided ruling on whether the 16th Amendment mandates that income taxes apply only to realized income. Instead, the court upheld a tax on U.S. shareholders’ portion of a foreign company’s earnings based on Congress’s power to attribute an entity’s realized income to its owners. Justice Brett Kavanaugh, writing for the majority, noted that the issue of realization was not resolved, leaving the door open for future legal challenges.

Democrats, aiming to address wealth inequality and seeking new revenue sources, hope to tax billionaires on the appreciation of their stock values even if those assets are not sold. The court's limited ruling provides a glimmer of hope for progressives, but four justices explicitly ruled out such taxes, and the majority acknowledged unresolved questions. Any new legislation would face significant hurdles, including whether it can pass Congress and survive legal scrutiny over taxing unrealized income. Conservative groups, like the Buckeye Institute, argue that there are significant legal constraints that would prevent the application of a wealth tax.

The current composition of the Supreme Court presents a formidable obstacle for advocates of taxing unrealized gains. Four justices—Barrett, Alito, Thomas, and Gorsuch—have expressed that the 16th Amendment requires realization. Meanwhile, Justice Ketanji Brown Jackson contends that the amendment does not mandate such a requirement. This split puts proponents in a difficult position, as they must convince both Kavanaugh and Chief Justice Roberts, in addition to the three most liberal justices, to uphold any novel tax concept. Despite past legislative failures, Democrats, including President Biden and Senator Ron Wyden, continue to push for taxing unrealized gains, viewing the current system as flawed. They propose various measures to address political and administrative challenges, aiming to close loopholes and ensure that the wealthiest individuals contribute their fair share.

For more information see Richard Rubin "Democrats’ Billionaire Taxes Still Have a (Slight) Chance", The Wall Street Journal, June 22, 2024.

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

June 28, 2024 in Current Affairs, Estate Tax, Income Tax | Permalink | Comments (0)

Sunday, June 23, 2024

Managing an Inheritance: When 'Mom's Money' Becomes Yours

Screenshot 2024-06-16 at 5.19.52 PMMillennials are set to inherit a substantial amount of wealth over the next two decades, as the silent generation and baby boomers transfer their assets. This shift, amounting to an estimated $90 trillion, could significantly impact millennials' financial futures. However, many millennials might not receive as much as they anticipate. A disconnect exists between millennials' expectations and the actual amounts boomers plan to leave, often due to high healthcare costs that diminish potential inheritances​.

The influx of wealth can create both opportunities and challenges for millennials. Financial advisers note that many young inheritors are unprepared to manage large sums of money, leading to potential stress and financial mismanagement. Guidelines for managing inheritances typically recommend spending a small portion on personal enjoyment, donating to charity, and prioritizing significant financial goals such as debt repayment or home purchases​​.

Despite the potential for increased wealth, millennials face unique economic pressures, including student debt and an inaccessible housing market. The financial confidence among this generation remains low, partly due to economic instability witnessed during their formative years. This cautious approach could either hinder their financial growth or safeguard against reckless spending, depending on individual perspectives and preparedness​.

For more information see "Managing an Inheritance: When 'Mom's Money' Becomes Yours", The New York Times, June 8, 2024. 

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

June 23, 2024 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Trusts, Wills | Permalink | Comments (0)

Tuesday, June 11, 2024

IRS can tax death benefits used to purchase stocks, high court rules

CongressThe U.S. Supreme Court ruled that the IRS can tax death benefits used to purchase stocks, impacting the valuation of shares in closely held corporations for estate taxes. The case involved Crown C Supply Company, which used life insurance proceeds to buy the deceased CEO's shares. The IRS argued, and the Court agreed, that the value of the shares should include the insurance proceeds, leading to higher estate taxes.

The decision stems from Crown C Supply's buy-sell agreement to purchase CEO Michael Connelly's shares using life insurance. After Connelly's death, the IRS assessed the stock's value higher than reported by the estate, including the death benefit proceeds. The Supreme Court's unanimous ruling supported this valuation method, emphasizing that the redemption agreement did not reduce the shares' value for tax purposes.

Justice Clarence Thomas, writing for the majority, stated that the contractual obligation to redeem shares at market value does not offset the insurance proceeds' value. This ruling means closely held corporations may face more challenges in succession planning, as life insurance-funded redemptions increase estate taxes. The Court acknowledged these concerns but upheld the IRS's valuation approach.

For more information see Kelsey Reichmann "IRS can tax death benefits used to purchase stocks, high court rules", Courthouse News, June 6, 2024.

Special thanks to Naomi Cahn (Harold H. Greene Professor of Law, George Washington University School of Law) for bringing this article to my attention.

June 11, 2024 in Death Event Planning, Estate Planning - Generally, Estate Tax | Permalink | Comments (0)

Saturday, June 8, 2024

Article: Seeing Through the Sleight of Hand: Estate Tax Consequences of Redeeming Stock With Life Insurance Proceeds

Timothy M. Todd (Liberty University - School of Law) and Philip Manns (Liberty University - School of Law) recently published, Seeing Through the Sleight of Hand: Estate Tax Consequences of Redeeming Stock With Life Insurance Proceeds, 2024. Provided below is an Abstract:

The Supreme Court granted certiorari in Connelly v. United States to resolve a circuit court split concerning the federal estate tax valuation of shares in a closely held corporation when that corporation uses life insurance proceeds to satisfy its obligation to redeem the decedent-shareholder’s shares.

We argue that treating the insurance proceeds as suddenly appearing and then quickly disappearing is akin to the magician’s “now you see it, now you don’t” sleight of hand. Seeing through this sleight of hand, we advance the literature by explaining that the secret to dispelling this illusion is to properly consider the mortality gain, when it occurs, in the insurance policy. To accomplish this, we argue that life insurance used for liquidity purposes in the buy-sell context operates no differently than any sinking fund funded with corporate cash. Consequently, using that sinking fund analogy, the valuation of the corporate shares for estate tax purposes should include the corporation’s mortality gain, when it occurs. We also show that treating the redemption obligation as a liability does not change the value of the corporation because that liability arises from a transformation of the redeeming shareholder’s residual equity claim into a liability claim on corporate assets.

June 8, 2024 in Articles, Estate Planning - Generally, Estate Tax | Permalink | Comments (0)