Friday, September 20, 2024
Five Common GST Allocation Mistakes and How to Avoid Them
The Generation-Skipping Transfer Tax (GSTT) is a complex aspect of estate planning that aims to prevent large wealth transfers from bypassing estate taxes by skipping generations. The article outlines five common mistakes taxpayers make in GST exemption allocation. These mistakes include failing to account for automatic GST exemptions for unreported gifts, overfunding trusts without enough GST exemption, and relying too heavily on automatic GST exemption allocation. Additionally, gifting to Spousal Lifetime Access Trusts (SLATs) without understanding gift-splitting implications and making distributions to non-skip persons from GST-exempt trusts can lead to inefficiencies in applying the GST exemption.
The first mistake involves taxpayers neglecting to report certain generation-skipping transfers on Form 709, which complicates tracking the GST exemption allocation. This can result in an incomplete gifting history, causing difficulties when determining the remaining GST exemption in the future. To avoid this, the article recommends filing a gift tax return even if not required, and maintaining a detailed record of automatic GST exemption allocations to ensure accurate future planning.
The other mistakes highlight the importance of thorough planning and record-keeping in estate tax strategy. For example, if a trust is overfunded with insufficient GST exemption remaining, a portion of the trust may become taxable, potentially incurring unexpected GSTT liabilities. To address these challenges, the article suggests careful review of all prior transfers, making an affirmative election regarding the GST exemption, and strategically structuring trusts to avoid misallocation or unintended use of the exemption. Ultimately, the article emphasizes proactive estate planning to avoid costly tax consequences.
For more information see Carol G Warley, Amber M Waldman, and Rachel Ruffalo "Five Common GST Allocation Mistakes and How to Avoid Them" ABA Probate and Property Journal, September 1, 2024.
September 20, 2024 in Estate Planning - Generally, Generation-Skipping Transfer Tax | Permalink | Comments (0)
Tuesday, January 16, 2024
Solving Generation-Skipping Transfer Tax Problems: Five Practical Remedies to Resolve Exemption Allocation Issues
Carol Warley, Abbie M. B. Everist, Amber Waldman, and Rachel Ruffalo (Washington National Tax) recently published, Solving Generation-Skipping Transfer Tax Problems: Five Practical Remedies to Resolve Exemption Allocation Issues, ABA Probate & Property Magazine, January/February 2023. Provided below is an Abstract:
The intricacies of estate planning often bring to light a range of complex tax considerations, including the generation-skipping transfer tax (GSTT). Understanding the implications associated with the imposition of the GSTT is crucial when reviewing an estate plan, as it can significantly affect the distribution of wealth and the preservation of family assets.
The allocation of a transferor’s generation-skipping tax (GST) exemption protects transfers from the GSTT. The inclusion ratio of a trust, calculated under IRC § 2642(a), determines the portion of the trust assets that is subject to GSTT. The 40 percent flat GSTT is imposed on three triggering events: (1) a direct skip with no remaining GST exemption available under section 2612(c), (2) a taxable distribution from a trust with an inclusion ratio other than 0.000 under section 2612(b), and (3) a taxable termination of a trust with an inclusion ratio other than 0.000 under section 2612(a).
Below, we delve into five common GST exemption allocation problems that may arise when reviewing the GST status of a trust. We then provide suggested remedies to mitigate potential unintended consequences.
January 16, 2024 in Articles, Estate Planning - Generally, Generation-Skipping Transfer Tax | Permalink | Comments (0)
Wednesday, May 11, 2022
Article: Trust Alteration and the Dead Hand Paradox
Jeffrey Pennell and Reid K. Weisbord recently published an article entitled, Trust Alteration and the Dead Hand Paradox, ACTEC Law Journal, 2023 Forthcoming. Provided below is the abstract:
Trusts are popular instruments for wealth transmission because they can be crafted to suit almost any imaginable estate planning goal that is not contrary to public policy. With the abrogation of the Rule Against Perpetuities in most states, settlors may impose trust terms that will be legally enforceable for scores of future generations, if not in perpetuity. Long-term and perpetual trusts, however, present a paradox of dead hand control, because the specificity and the durability of settlor-imposed restrictions tend to be inversely related. As donative preferences become increasingly specific and restrictive, trusts become less durable with the passage of time, as changing circumstances imperil the settlor’s original intent or render the trust unadministrable.
The proliferation of perpetual trusts underscores the salience and need for trust alteration, which coincides with significant reforms in the law governing trust modification. The common law always allowed courts to fortify settlor intent against obsolescence by modifying irrevocable trusts in conformity with the settlor’s material trust purposes. Reforms under the Uniform Trust Code have codified, expanded, clarified, and liberalized the standards for judicial modification. And, most recently, a majority of states have privatized trust modification by authorizing “trust decanting,” an extrajudicial technique that grants the power to trustees who have distributive discretion to convert a settlor’s original trust into a new instrument. This Article examines the current landscape by surveying recent developments in the judicial and extrajudicial modification of trusts.
Applications of the modern rules of trust alteration have prevented beneficiaries from accelerating the termination of long-term trusts and allowed fiduciaries to reinvigorate older trusts for subsequent generations. By strengthening the grip of dead hand control and reinforcing the durability of settlor intent, these trust alteration rules also tend to increase the concentration of private wealth in the hands of trust fiduciaries, who are entrusted by settlors to protect the trust corpus from beneficiary improvidence, taxation, and creditors. The Article concludes by situating modern trust alteration rules within the current debate about wealth inequality in the United States.
May 11, 2022 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Trusts | Permalink | Comments (0)
Friday, April 22, 2022
ACTEC Shares Useful Resources
ACTEC 2022 Pocket Tax Tables (helpful resource for professionals)
The ACTEC Pocket Tax Tables guide is a handy resource available for download as a pdf, online and mobile devices, and as a printed booklet. Content includes tables for Income Tax; Social Security; Estate and Gift Tax; Generation-Skipping Transfer Tax; Treasury Unisex Actuarial Table Examples; Inflation-Adjusted Numbers; Life Expectancy Tables; Qualified Plans, including SECURE Act details; Interest Rates; and Charitable Deduction.
ACTEC Trust and Estate Talk (podcast series for professionals)
The Future of Digital Assets and the Dollar Estate planning and family law attorneys share what to be aware of and some pitfalls when drafting premarital agreements and prenups.
Capital Letter No. 56: The Administration’s Fiscal Year 2023 Budget Proposals
ACTEC Fellow Ronald D. Aucutt offers commentary regarding the Treasury Department's "General Explanations of the Administration's Fiscal Year 2023 Revenue Proposals" and how it provides a few new and a lot of previously presented ideas.
ACTEC Trust and Estate Talk (podcast series for professionals)
California Tax Trap and Residency for Trusts - Words of caution for trust fiduciaries, beneficiaries and residents; CA has liberal definitions of who is considered a resident and subjected to tax on trusts.
April 22, 2022 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)
Friday, March 4, 2022
Planning: 2022 Planning Guide
Below is information about a 2022 planning guide put together by the Advanced Planning Group.
Indeed, the bulk of 2021 was spent under the specter of seemingly inevitable changes: in May of 2021, the Administration released its wish list of tax proposals, then the House released a draft bill in September that proposed serious changes—some even retroactive—to income tax, capital gains, and corporate tax rates, as well as wide-ranging changes to the estate and gift tax regime, retirement planning, and international corporate taxation. Yet, despite the House passing legislation in November to make significant tax changes, we are now into 2022 without any changes to the tax landscape passed into law, other than some moderate inflation adjustments. This doesn’t mean that tax changes are not still possible sometime this year.
The purpose of this guide is to summarize some key aspects of tax laws affecting ultra-high net worth (UHNW) individuals and families and is organized into three sections:
– Income tax planning
– Retirement planning, and
– Estate planning.
The first of these sections deals primarily with income tax planning and lists updated figures for applicable rates and brackets, as well as a discussion of key concepts in income tax planning. The second section discusses retirement planning, including an outline of the tax rules for IRAs, Roth IRAs, and required minimum distribution rules, before concluding with a discussion of Social Security and Medicare benefits.
Finally, the section on estate planning outlines key concepts and changes to the gift and estate taxes in 2022.
See Planning: 2022 Planning Guide, UBS (2022).
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
March 4, 2022 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)
Wednesday, February 23, 2022
Article: Revitalizing the Generation-Skipping Transfer Tax
Daniel J. Hemel and Robert Lord recently published an article entitled, Revitalizing the Generation-Skipping Transfer Tax, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article:
Congress first enacted the generation-skipping transfer (GST) tax in 1976 to protect the estate and gift tax base and to ensure that extraordinary fortunes would bear their fair share of the transfer tax burden. Nearly a half-century into the life of the GST tax, those goals remain unrealized. In recent decades, high-net-worth individuals have succeeded in shifting hundreds of billions of dollars to “dynasty trusts” that—under current law—are poised to escape federal wealth transfer taxation indefinitely. The rise of dynasty trusts reduces the revenue-raising potential of the estate and gift taxes and allows a privileged class to exert vast economic and political power based solely on an accident of birth.
This white paper presents a legislative reform agenda designed to reinvigorate the GST tax, stem the rise of dynasty trusts, and bring hundreds of billions of dollars back within the federal transfer tax base. We highlight three flaws in current law that account for the GST tax’s failure: (1) very high exemption amounts; (2) loopholes that allow high-net-worth taxpayers to stuff GST-exempt trusts with assets worth many multiples of the exemption amount; and (3) the lack of any durational limit on dynasty trusts in states that have abolished the rule against perpetuities. Our three-part reform agenda addresses each of these flaws. First, we propose a reduction in the GST exemption from the current level ($11.7 million) to the 2009 level ($3.5 million). A $3.5 million GST exemption still would be higher, in inflation-adjusted terms, than the exemption amount advocated by the Reagan administration. Second, we propose a set of common-sense loophole closers that would prevent high-net-worth taxpayers from stuffing GST-exempt trusts with assets worth far more than the exemption amount. Third, we propose to limit the maximum duration of a trust’s GST exemption to two generations, with an exception that would allow tax-free distributions to beneficiaries who were alive at the time of the trust’s inception. Our plan would shore up the estate and gift tax base and stem the rise of dynasty trusts while allowing more than 99 percent of American families to pass wealth across multiple generations tax-free.
February 23, 2022 in Articles, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax | Permalink | Comments (0)
Sunday, October 3, 2021
Final regulations establish a user fee for estate tax closing letters
The IRS issued final regulations instituting a user fee of $67 for the Service to issue an estate tax closing letter.
Other than the adoption of the final regulations, there were no significant changes to the proposed regulations issued in late December 2020.
An estate tax closing letter informs its authorized recipient of the IRS's acceptance of the estate tax return (generally, Form 706, United States Estate (and Generation-Skipping Transfer Tax Return) and provides some return information, such as the amounts of the net estate tax, any state death tax credit or deduction, and any generation-skipping transfer tax for which the estate is liable.
The new user fee will apply to "requests for estate tax closing letters received by the IRS on or after the date 30 days after publication of the final regulations in the Federal Register.
(Publication occurred on September 28, 2021).
See Paul Bonner, Final regulations establish a user fee for estate tax closing letters, Journal of Accountancy, September 27, 2021.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
October 3, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, New Legislation | Permalink | Comments (0)
Thursday, July 29, 2021
Impact of President Biden's Tax Plan on Estate Planning
There 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)
Friday, May 28, 2021
IRS Practice Units
"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)
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:
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)