Wills, Trusts & Estates Prof Blog

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.

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.

Client Quick-Hit Alert -- New Year, New Estate & Gift Tax Exemptions

New year = new Estate & Gift Tax exemptions and new estate planning opportunities. For example: 

 

• The federal gift & estate tax exemption has increased from $11.7 million in 2021 to $12.06 million in 2022.
• The New York State estate tax exemption has increased from $5.93 million in 2021 to $6.11 million in 2022.
• The Connecticut state gift & estate tax exemption has increased from $7.1 million in 2021 to $9.1 million in 2022.

As of now, the next big shift in the federal estate & gift tax exemption will be at the end of 2025. At that point, the previously enacted tax cuts are scheduled to expire, resetting the federal gift & estate tax exemption of approximately $5.5 million. 

However, proposed tax laws could decrease the exemption to a lower amount before the scheduled expiration date. 

These new increased exemptions provide tremendous opportunities through the use of effective and efficient estate planning gift strategies such as:

• Dynasty Trusts, which provide generations of protection from creditors' claims, divorce claims, and future federal estate taxes and state estate taxes
• SLATs (Spousal Lifetime Access Trusts), which protect assets from future estate taxes while retaining those assets for use in your generation before such assets pass to children and grandchildren
• GRATs (Grantor Retained Annuity Trusts), which allow gift tax free transfers of assets to the next generation
• ILITs (Irrevocable Life Insurance Trusts), which protect life insurance proceeds from federal estate taxes and state estate taxes
• CLATs (Charitable Lead Annuity Trusts), which provide for both a charitable income tax deduction and a gift tax efficient transfer of assets to the next generation.

See Client Quick-Hit Alert -- New Year, New Estate & Gift Tax Exemptions, Dentons, January 21, 2022. 

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

CLE: Estate Planning With Specialty Assets: Carried Interest, SPACS, and QOZ Funds

On Thursday, January 20, 2022 at from 12:00–1:30 PM Eastern, The American Law Institute (ALI) and The American College of Trust and Estate Counsel (ACTEC) are cosponsoring a CLE entitled, Estate Planning With Specialty Assets: Carried Interest, SPACS, and QOZ Funds. 

Below is more information on the CLE: 

Why You Should Attend

Wealth transfer structures can be complicated and have many moving parts. In recent years, new investment opportunities have emerged with the promise and potential for explosive growth and significant tax benefits. Such specialty assets, including interests in special purpose acquisition companies (SPACs), qualified opportunity zone (QOZ) funds, and private investment funds, are increasingly on clients’ radars as good vehicles for wealth transfer. While these assets can provide unique opportunities for leverage, they also come with nuanced pitfalls and risks within the realms of estate, gift, and income taxation. Join us for this 90 minute webcast to learn how seemingly small variations in different structures can result in quite different solutions. Gain a better understanding of the facts and circumstances of the various options and learn ways to create customized plan structures for each of your clients. 

What You Will Learn

The faculty, all Fellows of The American College of Trust and Estate Counsel and highly-experienced estate and tax planning practitioners, will take a deep dive into the lightly chartered waters of estate planning with specialty assets. They will particularly focus on: 

Carried interests in private investment funds

Various categories of interests in SPACs

Interests in QOZ funds

Preferred partnership structures

 Questions submitted during the program will be answered live by the faculty. All registrants will receive a set of downloadable course materials to accompany the program. 

Who Should Attend

Estate planners and other related professionals, particularly those with wealthy clients, will benefit from this CLE on estate planning with specialty assets offered by ALI CLE and ACTEC. 

Register two or more and SAVE! Register as a group for this program and save up to 35% (click here for more details). Click "Register as a Group" to register at these savings. (Offer valid on new registrations in the same delivery format only; discounts may not be combined.)

 

Annual exclusion to rise to $16,000 in 2022

Due to surging inflation, the IRS announced that the annual exclusion for 2022 will be $16,000, up from the current $15,000.

See Andrew Keshner, IRS releases new standard deductions and tax brackets as inflation soars, MarketWatch (Nov. 10, 2021).

Special thanks to David S. Luber (Florida Probate Attorney) for being the first person to bring this development to my attention.