Wills, Trusts & Estates Prof Blog

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

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)

Tuesday, May 5, 2020

Leveraging Gifts in a Down Market

TaxcalcWealthy families generally take advantage of down markets during recessions when the tax advantages can be at their highest. 2020 has the unique benefit of having an extremely high federal lifetime estate tax exemption of $11,580,000 for an individual. The law is to sunset in 2025, unless it is extended, so in 2026 it may as well revert to pre-TDCJ amounts. The IRS has clarified that if you gift now, while the exemption is high, it will not count against you when the exemption decreases later.

You can generally make two types of gifts to take advantage of the transfer of wealth in a down market: making gifts equal to the gift tax exemption amount of $15,000 per recipient, making lifetime gifts that utilize all or a portion of your lifetime estate tax exemption amount. In doing such gifting, the property as well as any appreciation of the asset will no longer be considered in your taxable estate.

A word of caution, however: a person who receives the gift will receive your cost basis in it - carryover basis. So if you had purchased the asset low and it had appreciated before you gifted it, when the recipient sells the asset, the capital gains will be found using your purchase price. Alternatively, if you gift an asset at death that the recipient later sells, the capital gains will be calculated at the price it is valued at the time it was gifted to them. This is why investors usually look for assets that have a high cost basis when making a gift, and a low cost basis when keeping assets in their estate.

See Rebecca MacGregor, Leveraging Gifts in a Down Market, Lexology, May 4, 2020.

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

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

Monday, April 20, 2020

Don’t Give Your Adult Kids Your House

HouseGifting a house outright to an adult child or adding them to the property's deed may avoid the hassle of probate, but doing so may bring along its own slew of issues. These problems range from a potentially large tax bill to the house being in danger if the child files for bankruptcy.

Sometimes parents transfer a home to their child to try to qualify for Medicaid, the government program that pays health care and nursing home bills for the indigent. But gifts or transfers made within five years of applying for Medicaid can lead to a penalty period when seniors are disqualified from receiving benefits.

If an adult child is gifted a house through inheritance or a will, they will also get a "step-up in tax basis." Meaning the value of the house upon the conveyance will not be based on the date they acquired it, but rather when the previous owner acquired it. Kenneth Robinson of Rocky River, Ohio had a client that received his mother's house as a gift - against his advice - prior to the mother's death. The mother purchased the house in 1976 for $16,000, but the son acquired the property with a market value of $200,000 with a tax bill of $32,000 because of the $184,000 gain.

However, Section 2036 of the Internal Revenue Code says that if the mother retained a “life interest” in the property, which includes the right to continue living there, the home would remain in her estate rather than be considered a completed gift. There are specific rules for what constitutes a life interest, including the power to determine what happens to the house and liability for its bills. The executor of the person would then file gift tax return on the deceased's behalf to show that the recipient was given a remainder interest, or the right to inherit at the person's death.

See Liz Weston, Don’t Give Your Adult Kids Your House, Nerd Wallet, April 3, 2020.

April 20, 2020 in Current Affairs, Disability Planning - Property Management, Estate Planning - Generally, Gift Tax, Income Tax, Wills | Permalink | Comments (0)

Friday, April 10, 2020

IRS Announces New July 15 Tax Deadline For Expats, Trusts, Estates And Corporations, Includes June 15 Estimated Payments Fix

IrsThe Internal Revenue Service (IRS) recently issued Notice 2020-23 that confirms that all individuals, trusts, estates, corporations and other non-corporate tax filers, including Americans living abroad, get extra time until July 15 to both file and as well as pay federal income taxes. Because of the current COVID-19 pandemic that is currently wrecking havoc on the daily lives of nearly all Americans, the IRS had first only postponed the due date for tax payment, but the filing date for the tax return remained the same at April 15 as of March 18. Two days later, the filing date was also extended.

On March 27 a separate Notice postponed gift and generation-skipping transfer tax deadlines to July 15. But those that were required to make quarterly payments still had their estimated payment deadlines askew: the first quarter deadline of April 15 was pushed back to July 15, but the second quarter deadline was still June 15. Ed Slott of Rockville Centre, New York said “It was the first time in history the 2nd installment was due before the first installment." Now, both of the first and second quarterly payments are due on July 15, third quarter remain due on September 15, and those for fourth quarter are due on January 15, 2021.

See Ashlea Ebeling, IRS Announces New July 15 Tax Deadline For Expats, Trusts, Estates And Corporations, Includes June 15 Estimated Payments Fix, Forbes, April 9, 2020.

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

April 10, 2020 in Current Affairs, Current Events, Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax, New Legislation | Permalink | Comments (1)

Thursday, March 26, 2020

Article on Wealth Transfer Tax Planning after the Tax Cuts and Jobs Act

TcjaJohn A. Miller and Jeffrey A. Maine recently published an Article entitled, Wealth Transfer Tax Planning after the Tax Cuts and Jobs Act, Wills, Trusts, & Estates Law eJournal (2020). Provided below is the abstract to the Article.

On December 17, 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). Among its many impacts, the TCJA increased the inflation adjusted estate tax basic exclusion amount to $10,000,000 on a temporary basis. This has dramatic implications for many existing and future estate plans, including a major crossover impact on income tax planning. In this article we explain the operation of the federal wealth transfer taxes (the estate tax, the gift tax and the generation skipping transfer tax) in the wake of the TCJA and of the newly issued regulations interpreting the TCJA changes. We also explain the basic tax planning techniques for wealth transmission. The overall design of this article is to bring the reader into the current wealth transfer tax planning picture while providing references to more detailed treatments of particular topics within this broad field.

March 26, 2020 in Articles, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Wednesday, March 25, 2020

Planning Amid Turmoil: 6 Gifting and Tax Strategies for the Current Environment

StockmarketMany investors may seem powerless with the market in such turmoil with heightened volatility and falling interest rates. The truth is that there are still many things one can control in this environment, including opportunities to provide for one's family and others that do not come around very often.

  • Donate to Support Your Communities
    • In 2020, you can deduct up to 60% of your adjusted gross income for gifts made to a public charity, and these deductions can offset normal earnings, such as salaries and bonuses, as well as dividend and interest payments and even capital gains.
  • Help Family Members Ride Out the Storm
    • Under the gift tax annual exclusion, an inidividual can give up to $15,000 in 2020 to each recipient without tax consequences, and for a married couple, the total is $30,000 per recipient.
  • Provide Long-Term Support by Using Your Exemption Amounts
    • Giving away assets that a person expects to appreciate as values recover makes use of their exemption while also shifting that appreciation to the next generation.
  • Use GRATs and CLTs to Make Additional Tax-Free Gifts
    • Grantor Retained Annuity Trusts (GRATs) and Charity Lead Trusts (CLTs) allow a person to pass the appreciation in the value of assets over a hurdle rate set by the IRS to their beneficiaries tax-free. Currently, the IRS hurdle rate is 1.8% and in April, the rate will drop to 1.2%. 
  • Refinance Your Debt and Family Loans
    • With interest rates at rock-bottom levels, it could make sense to refinance existing debt obligations such as a home mortgage and reduce the interest rate on any loans made to family members.
  • Convert Your Traditional IRA to a Roth
    • Since the taxes resulting from a conversion are based on the IRA’s balance at the time of conversion, depressed market prices help reduce the tax liability if an individual decides a ROTH conversion makes sense.

See Bryan Kirk, Planning Amid Turmoil: 6 Gifting and Tax Strategies for the Current Environment, Fiduciary Trust, March 18, 2020.

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

March 25, 2020 in Current Affairs, Estate Planning - Generally, Estate Tax, Gift Tax, Non-Probate Assets, Trusts | Permalink | Comments (0)

Tuesday, March 24, 2020

How to Use Exemption Now: Checklist for Spousal Lifetime Access Trusts (SLATs)

MoneyspouseUnder current law, the gift, estate, and generation skipping transfer tax (GST) exemption is $11,580,000, and double that amount for married couples. There are numerous reasons to utilize some or all of that amount now, especially since the exemption is temporary - it is set to lower back to pre-TCJA amounts in 2026. If there is a shift in administration in Washington before that, it could lower sooner.

Setting up trusts can be beneficial for using the tax exemption now and for protecting assets for future generations. But it may be prudent to place the property in a trust that benefit not only your children but also name yourself as a beneficiary so that you not completely cut off from the funds should the need arise for them. If you are married, you can set up a trust that names your spouse as a beneficiary. That way your spouse can access assets transferred as a beneficiary and you do not lose the ability to benefit from the wealth you accumulated. These trusts are sometimes called Spousal Lifetime Access Trusts or “SLATs.”

For those that are not married, the alternative is a domestic asset protection trust, or DAPT. 19 states allow these self-settle trusts, and generally people from those states agree that the trusts serve their intended purpose. If you create this type of trust in a non-DAPT state, be aware of that in many jurisdictions, a self-settled trust is void as to the settlor's creditors.

See Martin Shenkman, How to Use Exemption Now: Checklist for Spousal Lifetime Access Trusts (SLATs), Forbes, March 22, 2020.

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

March 24, 2020 in Current Affairs, Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax, New Legislation, Trusts | Permalink | Comments (0)