Wills, Trusts & Estates Prof Blog

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

Millennials 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.

How to Avoid Pitfalls When Loaning Money to a Family Member

Loaning money to family members is a generous but potentially risky move. To avoid common pitfalls, it’s crucial to formalize the arrangement with a written agreement detailing the loan amount, repayment schedule, and any interest charged. This not only sets clear expectations but also helps in case of disputes.

Charging a reasonable interest rate, even if it's minimal, can emphasize the seriousness of the loan and ensure compliance with IRS guidelines. It’s equally important to consider the impact on your own finances and be prepared for the possibility that the loan might not be repaid as planned. Always lend an amount you can afford to lose.

Clear communication is key. Discussing terms and expectations openly can prevent misunderstandings and preserve the relationship. Consulting with a financial advisor or lawyer can provide guidance on the legal and tax implications, ensuring the loan is structured correctly. By approaching family loans with the same diligence as any financial transaction, you can protect both your finances and your personal relationships.

For more information see Andrea Riquier "How to Avoid Pitfalls When Loaning Money to a Family Member," Barrons.com, June 11, 2024.

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

Article: The Nation's Transfer Tax Regime and the Tax Gap

Jay A. Soled (Rutgers University) recently published, The Nation's Transfer Tax Regime and the Tax Gap, 2024. Provided below is an Abstract:

For over a century, the nation’s transfer tax regime, comprised of the gift, estate, and generation-skipping transfer taxes, has played a pivotal role in curbing inherited wealth while simultaneously raising much-needed revenue. But for a variety of reasons, a sizable number of taxpayers are derelict in fulfilling their transfer tax obligations. This analysis explores the reasons for this phenomenon and the reforms that Congress should consider instituting to curb this behavior.

Article: Donationes Mortis Causa of Real Property: Missed Opportunities and Foreclosed Possibilities

David Pittavino (University of New South Wales) and Xavier Walsh (Independent) recently published, Donationes Mortis Causa of Real Property: Missed Opportunities and Foreclosed Possibilities, 2024. Provided below is an Abstract:

The doctrine of donatio mortis causa defies and problematises the taxonomy of the common law. It stands both as an archaic monument to Western legal thought several millennia old, and as an informal, intimate, and human mode of disposition of property in the face of death. In New South Wales, there is stark resistance to extending the doctrine to gifts of real property. This article examines the justifications usually proffered for that resistance; critiques the strengths thereof; and argues that none, as a matter of doctrine, survives proper scrutiny. Part I of this article outlines three common objections raised against donationes mortis causa of realty, and contends that each fails fully to accord with fundamental tenets of the doctrine, in both its historical and contemporary contexts. Part II of this article explores the place for donatio mortis causa in the era of e-Conveyancing, and suggests that, in relation to Torrens Title land, any room left for the doctrine is now confined to circumstances where a donor transfers legal title to the property to the donee, revocation of which may give rise to an in personam exception to indefeasibility of title.

Article: Is the Inheritance and Gift Tax a Reasonable Alternative for the Net Wealth Tax?: A Legal and Economic Analysis Across OECD Countries

Anna-Maria Anderwald (University of Graz) and Rainer Niemann (University of Graz) recently published an Article, Is the Inheritance and Gift Tax a Reasonable Alternative for the Net Wealth Tax?: A Legal and Economic Analysis Across OECD Countries, Intertax Volume 50, Issue 6 & 7, 2023. Provided below is an abstract:

Net wealth taxes are one of the most controversial topics in taxation. Strained government finances due to the Covid-19 pandemic and the increasing inequality in the distribution of wealth are fuelling this debate (See, for example, Wealth Tax Commission, A Wealth Tax for the UK, Final Report (2020) that refers to the need to raise substantial revenue after the pandemic). While some countries (Especially France: The net wealth tax – referred to as the ISF (impôt sur la fortune) – was abolished in 2017. See also the overview in Rainer Niemann & Caren Sureth- Sloane, Investment timing effects of wealth taxes under uncertainty and irreversibility, Journal of Business Economics 89, 385 (2019), 405) have abolished net wealth taxes, their (re)introduction is being considered in others (For example, Austria, Germany, and the United States (proposed by Senators Elizabeth Warren and Bernie Sanders), to specify just a few of them). Unfortunately, legal and economic arguments are rarely brought together in the public discussion, and the academic tax community has remained relatively quiet. Given the politically delicate nature of net wealth taxes, an interdisciplinary discussion seems necessary.

This policy note focuses on the policy discussion on net wealth taxes from both economic and legal perspectives. It begins by identifying the characteristics of a net wealth tax compared to related taxes, such as property taxes and inheritance and gift taxes (Chapter I.). This is followed by an overview of the status quo of net wealth taxes and wealth-related taxes in the OECD (Organisation for Economic Cooperation and Development) countries (Chapter II.). Building on this, the article deals with the main arguments proposed in the literature in favour of and against the (re)introduction of net wealth taxes (Chapter III.). Since a net wealth tax has far-reaching effects on economic decision-making and on taxpayer compliance, a purely legal analysis is necessarily incomplete and requires an economic counterpart. Likewise, economically motivated tax reform proposals require an analysis of their legitimacy. A comprehensive discussion therefore requires a simultaneous legal and economic analysis.

Since net wealth taxes are predominantly justified with distributional reasons, this note also discusses whether an inheritance and gift tax represents a reasonable alternative to a net wealth tax (Chapter IV.). After all, an inheritance and gift tax could also counteract the inequality of wealth. The objective of this article is to provide an interdisciplinary basis for the tax policy debate on wealth-related taxes.

You Take a Friend on Your Yacht. Is It a Taxable Gift?

Supreme Court Justice Clarence Thomas has recently found himself in hot water over benefits received from his longtime friend, Dallas billionaire, and political donor Harlan Crow. The controversy has given rise to important questions about judicial ethics and disclosures, and begs the question, is generosity between friends taxable?

The U.S. gift tax was established in 1924 to prevent wealthy Americans from minimizing taxable estates by transferring assets to others before death. This year, the combined gift-and-estate-tax exemption is $12.92 million per individual or $25.84 million per married couple. 

However, there is a gift-tax exemption in addition to the lifetime exemption, allowing a person to make annual tax-free gifts to another individual. The 2023 limit is $17,000 per giver, per recipient, and as seen in Justice Thomas’ case, experts aim to answer when hosting a friend on an expensive vacation becomes taxable.

The answer is whether or not the giver is present. In the yacht scenario, if the giver of the boat cruise is present, the trip looks more like a party than a gift despite the fact that the price of hosting said guest exceeds $17,000.

For more information see Laura Saunders “You Take a Friend on Your Yacht. Is It a Taxable Gift?” The Wall Street Journal, May 19, 2023.

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

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.  

Taking the Sting Out of “Death Taxes”

Since September 2021, there has been a lot of talk about the Build Back Better Act, which included some major tax increases. However, it is most likely that the Build Back Better Act will not come to fruition. 

Although the Act is likely dead, the contents of the Act may be an indicator of what type of things Congress is likely to focus on in regard to taxes. An example of one of these areas are "death taxes." "Death tax" is a form of transfer tax and is formally refereed to as estate tax. 

There are three types of transfer taxes: 

1. The gift tax, which applies to gifts made during a life;
2. The estate tax, which imposes a tax on the gross estate prior to any bequests being made; and
3. The generation skipping transfer tax, which applies to gifts or bequests that are received by a person who is more than one generation removed from you (for example, a gift an individual makes to their grandchild).

 

Much of the conversation is surrounded around gift tax and estate tax. Congress sets a dollar cap "for gifts that a person can make during life or bequests after death before a transfer tax will apply. . ." This cap is referred to as the "exemption amount." A lot of the talk around the Build Back Better Act was focused on the potential change of this "exemption amount." 

Given the potential impact a change in the exemption amount can be, it is important to plan for the uncertainty. 

For more information: 

See Dylan H. Metzner, Taking the Sting Out of “Death Taxes”, Jones & Keller, April 1, 2022. 

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

Oscar nominees will receive gift bags worth nearly $140,000—but they could come with a hefty tax bill

The 94th Academy Awards this Sunday will host a slew of Hollywood A-listers hoping to walk out with an Oscar Statuette. 25 of the nominees will also receive a gift bag worth over $137,000. 

The gift bag is given to the five nominees in each of the four acting categories and nominees for "Best Director." The gift bag includes a collection of expensive items, including gold-infused olive oil and even up to $10,000 worth of plastic surgery. 

Unfortunately, if the gift bag is accepted by the nominees, they will also be accepting a "hefty tax burden." The tax must be applied because the gift bags are not technically "gifts" that were given "solely out of affection, respect or similar impulses for the recipients. . ." 

According to Eric Bronnenkant, head of Tax at Betterment, it comes down to intent. With the gift bag, the intent of providing these gift bags is to influence behavior and get celebrities to use a certain product or go on a specific vacation. 

Thus, the value of the gifts is calculated as income on the recipients' taxes. 

See Nicolas Vega, Oscar nominees will receive gift bags worth nearly $140,000—but they could come with a hefty tax bill, CNBC, March 27, 2022. 

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.

Tax Court in Brief: Estate of Levine v. Commissioner | Split-Dollar Life Insurance and Estate Planning

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose. For a link to the podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

 

One of the cases recently covered in Tax Court in Brief is Estate of Levine v. Commissioner.

 

Below is a summary of the case and the issues of law examined and decided on in the case: 

 

Short Summary: This case involves a split-dollar life insurance estate-planning arrangement. Marion Levine (Levine) entered into a transaction in which her revocable trust paid premiums on life insurance policies taken out on her daughter and son-in-law that were purchased and held by a separate and irrevocable life-insurance trust that was settled under South Dakota law. Levine’s revocable trust had the right to be repaid for the premiums. Decisions for investments within the irrevocable life-insurance trust, including for its termination, could be made only by its investment committee, which consisted of one person—Levine’s long-time friend and business partner. Levine died, and the policies had not terminated or paid out at that time as her daughter and son-in-law were still living. The question was what has to be included in her taxable estate because of this transaction: (1) the value of her revocable trust’s right to be repaid in the future (i.e., $2,282,195), or (2) the cash-surrender values of those life-insurance policies at the time of Levine’s death (i.e., $6,153,478)?

 

Primary Holdings:

• The split-dollar arrangement in this case met the specific requirements of the Treasury Regulations. The policies in question were purchased and owned by the irrevocable trust, not Levine, and the arrangement expressly gave the power to terminate only to the trust’s investment committee. Thus, neither IRC Section 2036(a)(2)—the general “catch-all” statute for estate assets—nor Section 2038—the “claw-back” provision for certain estate assets transferred before death—do not require inclusion of the policies’ cash-surrender values because Levine did not have any right, whether by herself or in conjunction with anyone else, to terminate the policies.
• As such, and as of her death, Levine possessed a receivable created by the split-dollar life insurance, which was the right to receive the greater of premiums paid or the cash surrender values of the policies when they are terminated.
• Contrary to the Commissioner’s position, the transaction was not merely a scheme to reduce Levine’s potential estate-tax liability and there was a legitimate business purpose. There was nothing behind the “transaction’s façade” that would suggest that appearance of the express written terms of agreement and arrangement do not “match reality.”
• Pursuant to applicable state law, the trust’s investment committee—albeit one person—owed fiduciary duties to the trust and beneficiaries other than Levine, Levine’s daughter, and son-in-law, and the evidence illustrated that the written agreements afforded Levine no power to alter, amend, revoke or terminate the irrevocable trust such that its assets should be included in Levine’s estate pursuant to Sections 2036(a)(2) or 2038.
• The only asset from the split-dollar arrangement that Levine’s revocable trust owned at the time of her death was the split-dollar receivable.

Key Points of Law:

• Irrevocable life-insurance trusts are typically used as a vehicle to own life-insurance policies to reduce gift and estate taxes. If done properly, a life-insurance trust can take a policy out of its settlor’s estate and allow the proceeds to flow to beneficiaries tax free. Split-dollar life-insurance trusts are a tool to remove death benefits from a settlor’s taxable estate—or at least defer payment of any tax owed.
• Split-dollar arrangements entered into or materially modified after September 17, 2003 are governed by Reg. § 1.61-22. A split-dollar life-insurance arrangement between an owner and a non-owner of a life-insurance contract in which: (i) either party to the arrangement pays, directly or indirectly, all or a portion of the premiums; (ii) a party making the premium payments is entitled to recover all or a portion of those premium payments, and repayment is to be made from or secured by the insurance proceeds; and (iii) the arrangement is not part of a group-term life insurance plan (other than one providing permanent benefits). Id. § 1.61-22(b)(1)-(1)(iii).
• Gifts of valuable property for which the donor receives less valuable property in return are called “bargain sales.” The value of gifts made in bargain sales is usually measured as the difference between the fair market value of what is given and what is received. However, the Treasury Regulations provide a different measure of value when split-dollar life insurance is involved. See Reg. § 1.61-22(d)(2).
• There are two different and mutually exclusive regulatory regimes applicable to split-dollar insurance trusts—called the “economic benefit regime” and the “loan regime”—and that govern the income- and gift-tax consequences of split-dollar arrangements. These two regimes determine who “owns” the life insurance policy that is part of the arrangement. The general rule is that the person named as the owner is the owner. Non-owners are any person other than the owner who has a direct or indirect interest in the contract. However, if the only right or economic benefit provided to the donee under a split-dollar life-insurance arrangement is an interest in current life-insurance protection, then the donor is treated as the owner of the contract. This is the economic-benefit regime.
• Where a split-dollar life insurance trust meets the requirements of Treas. Reg. § 1.61-22 the IRS and the courts must look to the default rules of the Code’s estate-tax provisions to figure out how to account for the effect of the split-dollar arrangement on the gross value of the particular estate.
• The Code defines a taxable estate as the value of a decedent’s gross estate minus applicable deductions. See 26 U.S.C. § 2051. Section 2033 provides that a decedent’s gross estate includes the value of any property that a decedent had an interest in at the time of her death. Sections 2034 through 2045 identify what other property to include in an estate.
• For example, Section 2036(a) is a catchall designed to prevent a taxpayer from avoiding estate tax simply by transferring assets before the taxpayer’s death. Pursuant to the related Treasury Regulations, “[a]n interest or right is treated as having been retained or reserved if at the time of the transfer there was an understanding, express or implied, that the interest or right would later be conferred.” Treas. Reg. § 20.2036-1(c)(1)(i). Similarly, Section 2038 allows for a “claw-back” into a decedent’s estate the value of property that was transferred in which the decedent retained an interest or right—either alone or in conjunction with another—to alter, amend, revoke, or terminate the transferee’s enjoyment of the transferred property.
• Both sections 2036 and 2038 include an exception for transfers that are “a bona fide sale for an adequate and full consideration in money or money’s worth.” 26 U.S.C. § 2036(a), §2038(a)(1).

 

See Tax Court in Brief: Estate of Levine v. Commissioner | Split-Dollar Life Insurance and Estate Planning, Freeman Law: Tax Court in Brief (2022). 

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