Wills, Trusts & Estates Prof Blog

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

Wednesday, August 5, 2020

Higher Taxes Are Coming —Here's How to Prepare

TaxThe COVID-19 pandemic has produced a lot of uncertainty around our economy. Most of us have been worried about when we will be able to return to a normal work life or when our kids will be able to go back to school. For some of us, our lives have completely changed.

There is one thing that not everyone has been worried about: Taxes. It is likely that there will be an increase in taxes in the upcoming year. However, the good news is that unlike the many other issues we are uncertain about, we may actually have some control over this one. 

There are certain steps that we can take to mitigate the effects of future tax increases. 

As far as estate planning strategies, here are a few things you can do to prepare for an increase in taxes. 

  • Plan to gift exemption amounts
  • Take gains before your death 

Income Tax Strategies:

  • Accelerate income recognition by:
    • Converting your traditional IRA's to Roth IRA's
    • Selling appreciated assets now to fund your future spending needs
    • Intentionally taking gains in your revocable grantor trusts
    • Opting not to defer income into your deferred compensation plan
  • Defer deductions
  • Structure your investments to reduce taxes by:
    • Using lower tax realizing investments such as index funds
    • Investing inside life insurance policies

Devising tax planning strategies is a great way to plan ahead for an increase in taxes. Moving forward, this is a must to avoid harsh consequences from a tax increase. 

See John Jennings, Higher Taxes Are Coming – Here’s How To Prepare, Forbes, July 28, 2020. 

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

August 5, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, Trusts | Permalink | Comments (0)

Tuesday, August 4, 2020

The Magic Hour For GRATs

GratIt has been tough to find many positives during the COVID-19 pandemic, however, Grantor Retained Annuity Trusts (GRATs) are one of them. GRATs allow donors to transfer income-producing assets into a trust and out of his or her estate, which will lower or eliminate an estate tax upon death of the grantor. 

Although the donor has to pay gift tax or use gift tax/estate tax exemption on the transferred property when the trust is created, the transferred property will appreciate at a rate that will eventually exceed the interest rate used to compute the value of the gift. 

The IRS sets the interest rate in Section 7520. You should check here to find the interest, which fluctuates on a monthly basis. The lower the rate, the greater the chance for tax savings. 

The reason why GRATs are a positive during the pandemic, is that the interest rates are currently very low, making the GRAT a perfect tool for saving. 

There are two main types of GRATs: a zeroed-out Gray and a non-zeroed-out GRAT. 

So, if you are interested in acquiring a GRAT, you should do some research to learn which one is best for you and your family. 

See, Lia Momtsios, The Magic Hour For GRATs, Mitchell, Silberberg, & Knupp, L.L.P., July 28, 2020.

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

August 4, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Saturday, July 4, 2020

Inside the intentionally defective grantor trust

UnknownThe art of estate planning is affected by a multitude of variables that change over time. The currently low-interest-rate environment and the imminent return of a lower estate tax exemption are among the factors shaping estate planning today. 

According to Jere Doyle, senior VP at BNY Mellon Wealth Management, a sale to an intentionally defective grantor trust is one vehicle which works well to transfer wealth in the current low-interest-rate economy. The effect of an IDGT is to freeze assets for estate tax purposes but not for income purposes. 

A typical power retained in an IDGT is the swap power, Doyle observed. "Thats the ability of the grantor to go into the trust and pull out assets, and substitute assets he owns on the outside that are of the same value. That causes income of the trust to be taxed back to the grantor. That’s one of the things that people are using now because the interest rate is so low. You’re lending money to the trust at a low interest rate. The grantor has no interest income to report, there’s no tax on the sale, and when interest income comes back there’s no income tax on that.”

This is particularly favorable for people who own a business to get appreciation out of their estate, Doyle noted. 

However, the regular GRAT, or grantor retained annuity trust, might be a better choice for someone with publicly traded stock that they anticipate will appreciate. Further, the spousal lifetime access trust (SLAT) allow the making of sizable gifts to use up part of the gift tax exemption. 

There are a few vehicles you can use to take advantage of the lower estate tax exemptions, but you should consider your options and be cautious before making a decision. 

See Roger Russel, Inside the intentionally defective grantor trust, Accounting Today, June 30, 2020. 

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

July 4, 2020 in Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Friday, July 3, 2020

Is Now the Time to Use Your Lifetime Exemption?

_2018_11_money-boxMany clients are asking about how to plan in light of possible changes to the federal estate tax law. In response to current events and the impact on state and federal budgets, it is very possible that the federal estate tax exemption could be reduced from the current amount of &11.58 million per person. 

Given the uncertainty surrounding estate taxes and gains, planning for income taxes will be a concern and states may be adding or increasing state income taxes as a result of budgetary shortfalls. 

One strategy that emerges from these concerns is the importance of lifetime gifts to children or other family members, in order to use some or all of the federal estate tax exemption during lifetime. 

One advantage to making a large gift now is that the appreciation will not be taxed in your federal estate and will be shifted to the recipients. Also, if you live in Oregon or Washington, your estate will not pay those states' estate tax on those gifts. If you are able to make a gift larger than what the federal exemption may be in the future, a larger gift may provide these advantages.

If you are worried about the federal exemption being lowered, the Treasury Department and the IRS have confirmed that there will be no "clawback" for gifts made under the increased estate and gift tax exclusion put in place by the Tax Cuts and Jobs Act of 2017.

One thing you should think about before making a large gift is the amount of assets to retain in order to maintain your lifestyle, which may affect which types of assets you give away. Another thing to consider is asset basis and built in capital gain as the recipient of your gift will take on your basis and may pay capital gains tax if the assets are subsequently sold. Therefore, the best assets to give are cash, assets in high basis, or assets that your recipient is very unlikely to sell. 

See Susan B. Bock, Wendy S. Goffe, & Emily V. Karr, Is Now the Time to Use Your Lifetime Exemption?, Stoel Rives LLP, June 30, 2020.

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

July 3, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Thursday, June 25, 2020

Opportunities Abound for Wealth Transfer

UnknownDue to COVID-19, it has been a rough year for investments. Further, the first-quarter pullback in the stock market created continued volatility which has added insult to portfolios. 

However, the gloomy climate has opened up some rare opportunities in another area of wealth planning: wealth transfer. The low interest rates and reduced asset prices combined with the ultrahigh estate tax exemption that was enacted under the Tax Cuts and Jobs Act in 2018 create a perfect storm for maximizing the amount you can pass to beneficiaries while avoiding or minimizing a tax hit.

“If you’ve been wanting to transfer a bunch of securities or interest in your company or real estate, well, now’s the time to do it,” says Bryan Kirk, director of financial and estate planning at Fiduciary Trust International.

For those worried about estate tax, you can push more assets out of your estate under the exemption when values are low, Kirk says, adding that large assets are typically transferred to a generic irrevocable trust to ensure they’re managed properly and protected from creditors or spendthrift heirs.

Further, even families who aren’t concerned with the estate tax can benefit from low-value asset transfers. One way to do this is a grantor retained annuity trust (GRAT), which returns the value of the assets to you when the trust expires but leaves appreciation to your beneficiaries.You transfer assets to a GRAT and receive an annuity payment over the trust’s term that’s equal to the amount you put in, plus appreciation up to an IRS interest rate. At the end of the trust’s term, any appreciation over the IRS rate—called the 7520 rate—goes to heirs.

See Karen Hube, Opportunities Abound for Wealth Transfer, Barron's, June 18, 2020. 

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

June 25, 2020 in Current Events, Estate Planning - Generally, Generation-Skipping Transfer Tax, Gift Tax | Permalink | Comments (0)

Friday, June 5, 2020

Is it Time to "Use it or Lose it?"

Tax-exemption-image-e1516143026899Due to COVID-19, we will likely see significant statutory changes to the federal estate, gift, and generation-skipping transfer tax exemptions. 

"The United States Congress and the Federal Reserve have been taking unprecedented steps to shore up our economy – massive stimulus packages have already made their way into law, and more appear to be coming down the pike."

Market observes are backing these strategies as a way to help businesses and families make it through the coronavirus pandemic. However, as the continued pandemic affects the market-volatility, legal and tax observers have a recurring thing: "At some point, taxpayers will have to replenish the government's piggy bank."

The Tax Cuts and Jobs Act of 2017 (the "TCJA") increased the unified federal estate, gift, and generation-skipping transfer tax exemption to $10 million per person with an annual inflationary adjustment. In 2020, an individual can transfer – by lifetime gift, transfer at death, or a combination of the two – a total of $11.58 million to non-spouses without incurring these transfer taxes. However, the heightened exemption amounts are set to "sunset" on January 1, 2026, in which the $5 million baseline exemption will be back in effect. 

Given the stimulus spending and the current political climate, many are wondering how long the exemption high-water-mark can last. Thus, it may be more imperative now than ever before for individuals facing potential estate tax liabilities to find a way to use this massive exemption amount while it is still available.

See Jennifer Boyer, Is it Time to "Use it or Lose it?", Ward and Smith, P.A., June 3, 2020.

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

June 5, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax | Permalink | Comments (0)

Saturday, May 23, 2020

Wealth Transfer Planning Opportunities in the Current Environment

UnknownThe current COVID-19 crisis and has created significant wealth transfer opportunities for those high net worth families who are subject to the Federal estate and gift tax. The Federal exemption, which is the amount of assets that every individual can transfer during life or death without paying an estate or gift tax is $11.58 million for 2020. Given the current low interest rates, there are a variety of wealth transfer opportunities available to those who want to pass assets down to future generations with little to no tax cost. 

Grantor Retained Annuity Trust (GRAT)

One of the wealth transfer opportunities is the GRAT, which is an irrevocable trust to which an individual transfers assets one exchange for an annuity payable over a specified term. When the term expires, the remaining assets of the GRAT pass onto the grantor's beneficiaries or trusts for their benefit. The GRAT is an effective way to take advantage of the low rates that have resulted from these uncertain times.

Sales to Intentionally Defective Grantor Trust (IDGT)

For owners of closely held businesses or real estate interests, sales to IDGT for the benefit of family members is another great opportunity. The goal of this transaction id to transfer the future income and appreciation of the asset to the next generation at a reduced gift tax cost. 

Loans to Family Members

Another simple and effective way to take advantage of the times in a ways that benefits and assists the next generation is through intra-family loans. Loans to family members must bear interest at a rate at least equal to the AFR; but given the historically low rates, borrowing costs are reduced. 

In sum, these wealth transfer opportunities are not mutually exclusive and can be considered in tandem in order to achieve a significant amount of wealth transfer. 

See Wealth Transfer Planning Opportunities in the Current Environment, csglaw.com, May 20, 2020. 

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

May 23, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Wednesday, May 20, 2020

IRS Issues FAQs Regarding COVID-19 Relief for Estate and Gift Tax Filings

FAQOn April 23, 2020, the IRS issued FAQs regarding "COVID-19 Relief for Estate and Gift" in response to issues raised by the extension of time granted to taxpayers to fulfill their estate, gift, and generation-skipping transfer (GST) tax obligations. The FAQs includes these topics:

(1) Form 706 Due Dates 

If a Form 706 and payment of an estate tax are due on May 15, 2020, the return and payment are now due on July 15, 2020. However, Notice 2020-23 does not postpone payment of a tax that was due before April 1, 2020, interest will accrue from the date payment was due until the date the payment is made. 

Also, if the time to file for a six-month extension to Form 706 expires between April 1, 2020 and July 15, 2020, the extension request can be filed on or before July 15, 2020; however, the six-month extension will be calculated from the original due date. Under section 2032(d), an estate has one year after the due date to file Form 706 to make an alternate valuation election under section 2032(a). 

(2) Allocation of GST Exemption

Any GST election or allocation made in regard to a 2019 transfer on a Form 709 due between April 1, 2020 and July 15, 2020, is timely if on a Form 709 filed on or before July 15, 2020. There is no relief available for a late allocation of GST exemption. 

(3) Miscellaneous Items: Qualified Disclaimers and Refunds 

Regarding qualified disclaimers, if the period of time to make a qualified disclaimer expires on or after April 1, 2020, and before July 15, 2020, then a taxpayer has until July 15, 2020 to make a qualified disclaimer; however the disclaimer must be timely and valid under state law.

See Christopher Lau & Henry Leibowitz, IRS Issues FAQs Regarding COVID-19 Relief for Estate and Gift Tax Filiings, Proskauer, May 19, 2020.

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

May 20, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0)

Sunday, May 17, 2020

Rich In U.S. Grab Historic Chance to Pass on Wealth Tax-Free

D11ecf8ca05440346f845c1e6d44d38e_this-isometric-graph-paper-is-available-with-various-graph-down-_880-920Due to the coronavirus pandemic, rich Americans are taking advantage of the opportunity to transfer money to their children and grandchildren tax free. The diving interest rates and volatile equity markets have fostered a once-in-a-lifetime opportunity for wealthy Americans that is keeping their wealth advisors busy. 

The key interest rates set by the IRS for estate-planning purposes are at an all time low. The simplest way for wealthy Americans to take advantage of the low rates is to loan cash or other assets to family members. Heirs can borrow millions of dollars, then invest the money and profit from any upside. Also, beneficiaries can lock in these low rates for years and possibly even decades. 

David Stein, a partner on the private client and tax team at Withersworldwide, said many people are taking out longer-term loans and choosing the preference to pay a little but more in interest to guarantee a historically low rate for decades. The falling rates enhance sophisticated estate-planning strategies, especially those that rely on loans to trusts. The advantage to taking advantage of these strategies is that they do not eat into any of the U.S.'s estate and gift tax exemption. 

An example of one of these sophisticated strategies is the grantor retained annuity trust (GRAT), which allows beneficiaries to profit from any future investment gains with no risk of losing money so long as the returns are not higher than the IRS-required interest rate. 

It has never been easier to transfer assets to heirs without using up as much of the tax-exemption. Now is a better time than ever to give!

See Ben Steverman, Rich In U.S. Grab Historic Chance to Pass on Wealth Tax-FreeBloomberg, May 1, 2020. 

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

May 17, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax | Permalink | Comments (0)

Friday, May 15, 2020

To File or Not to File? A Gift Tax Return Doesn't Always Have to Be Filed

Gift-Tax-bigstockDue to the generous $11.58 million lifetime gift tax exemption for 2020, fewer people are subject to federal gift taxes and many are wondering if they still need to file a gift tax return. Well, if your wealth is within the exemption amount, the answer is no. However, there are a few exceptions where it is necessary and even beneficial to file a "United States Gift (and Generation-Skipping Transfer) Tax Return." (Form 709). 

It is assumed that all transfers of property by gift are taxable, but there are exceptions. Examples of these nontaxable transfers that do not need to be reputed are:

  • Gifts of present interests within the annual exclusion amount
    •    Amount currently at $15,000 per donee
  • Direct payments of qualifying medical or educational expenses on behalf of an individual
  • Deductible charitable gifts
  • Gift to one's U.S.-citizen spouse, either outright or to a trust that meets certain requirements
  • Gifts to one's noncitizen spouse within a special annual exclusion amount

If any of your gifts fall under these exceptions there is no need to file a gift tax return. The gifts will most likely be considered taxable in the instances that they do not. If you are making gifts throughout the year, always be cognizant of whether you will be required to file Form 709. Gifting future interests, spousal gifts, gift splitting, or 529 plans may cause you to need to file Form 709. 

Further, even if you are not required to file Form 709, it may be beneficial to file voluntarily. In particular, if you make any annual exclusion gifts of difficult-to-value assets, for example, interests in a closely held business, you should file Form 709. 

To conclude, making gifts is a great way to benefit both your estate and your loved ones. It is also very important to contract your estate planning advisor to help you in determining whether you need to file a gift tax return.

See To File or Not to File? A Gift Tax Return Doesn't Always Have to Be FiledInsight on Estate Planning, May 12, 2020. 

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

May 15, 2020 in Estate Administration, Estate Planning - Generally, Gift Tax | Permalink | Comments (0)