Wills, Trusts & Estates Prof Blog

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

Friday, November 6, 2020

Estate Planning Strategies: IRS Applicable Federal and 7520 Interest Rates Lowered

Estate planningThe Internal Revenue Service (IRS) published interest rates every month that taxpayers use to "determine the interest to be charged in income tax and estate planning strategies." 

These published rates are referred to as Applicable Federal Rates and "depend on the length of the term of a promissory note, the number of times interest is paid each year (i.e., monthly, quarterly, or annually) and the interest paid by the U.S. Treasury on its obligations. Also, the IRS publishes a rate under Section 7520 of the Internal Revenue Code. This rate is used for actuarial calculations. "The 7520 Rate equals 120% of the federal mid-term rate rounded to the nearest two-tenths of a percent." 

Due to Covid-19, banks have lowered interest and rates and bond yields have reduced dramatically, drawing close to historic lows. These reductions affect the Applicable Federal Rates and the 7520 rate. 

"For instance, the annual rate for November 2020 (compounded annually) applied to short-term obligations (1-3 years) is 0.13%, the mid-term rate (4-9 years) is 0.39% and the long-term rate (over nine years) is 1.17%. The 7520 Rate which is used to make actuarial calculations for several estate planning techniques is 0.4% for November transactions." 

The use of the lower interest rate results in a lower cash flow return to the lender, meaning more cash growth in the trust.

Grantor Retained Annuity/Unitrust Trusts and Charitable Lead Trusts all benefit from these low-interest rates. However, other trusts like, Qualified Personal Residence Trusts, do not share the same positive relationship with low-interest rates. 

Unfortunately, the low-interest rates will not last forever, so no is a great time to consider taking advantage of the low rates and implementing estate planning strategies that will allow you to do so.

See Christopher R. Gray, Estate Planning Strategies: IRS Applicable Federal and 7520 Interest Rates Lowered, The National Law Review, November 2, 2020. 

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

November 6, 2020 in Current Events, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, Trusts | Permalink | Comments (0)

Saturday, October 31, 2020

Article on Restraining Live Hand Control of Inheritance

Mark Glover recently published an article entitled, Restraining Live Hand Control of Inheritance, Wills, Trusts, & Estates Law ejournal (2020). Provided below is the abstract to the Article. 

Inheritance law generally defers to the donor’s decisions regarding what property should be distributed to which donees. Because these decisions are carried out after the donor’s death, the law’s deference to the donor has become known as “dead hand control.” But just as the inheritance process is guided by the decisions of the dead, it is also influenced by the choices of the living. When the donor names a donee in their estate plan, the donee must decide whether to accept or reject the gift. If the donee accepts the gift, the property becomes theirs, but if the donee rejects the gift, the property is distributed to an alternate donee. Thus, inheritance law grants control not only to the dead hand of the donor but also to the live hand of the donee. This latter deference to the donee has become known as “live hand control.”

Although the law grants the donee broad freedom to accept or reject inheritances, it restrains the donee’s ability to reject a gift under some scenarios, and it restrains their ability to accept a gift under others. Legal scholars have devoted considerable attention to the study of each type of live hand restraint, but they typically have focused on one type or the other without exploring possible connections between the two. To fill this analytical void, this Article will bring together the law’s restraints of acceptance and rejection and seek to develop a unifying theoretical framework that can guide policymakers in deciding when and how to restrain the donee’s discretion to accept or reject a gift.

Specifically, this Article will argue that the law’s live hand restraints, whether of rejection or acceptance, are primarily founded upon the concern that the donee’s decisions to accept or reject a gift will impose costs on others that the donee likely does not take into account when making their decisions. In these situations, deference to the donee might not be socially beneficial, and, consequently, the law restricts their decision-making ability. Ultimately, informed by the insights gleaned from a comparative analysis of the two types of live hand restraints, this Article will explore specific reform proposals that can increase the social welfare generated by the inheritance process.

 

October 31, 2020 in Articles, Current Events, Estate Administration, Estate Planning - Generally, Gift Tax, Trusts, Wills | Permalink | Comments (0)

Friday, October 30, 2020

Federal Estate Tax Exemption Is Set to Expire – Are You Prepared?

EstateplanningAs the presidential election draws closer, so does the threat to the historically high estate tax exemptions. Due to the Tax Cuts and Jobs Act (TCJA) the lifetime gift, estate, and generation-skipping tax exemptions doubled the exemption, raising it to $11.58 million (adjusted for inflation) in 2020. Which is the highest it has ever been. 

Unfortunately, this high exemption will not last forever, and could be gone sooner rather than later. Therefore, it may be a good idea for you to take advantage of the exemption, or encourage clients to do so. 

As of now, the exemption rates are not set to sunset until the beginning of 2026, but the exemptions could sunset much sooner, especially if Joe Biden is elected. 

A few things you could do in preparation for the estate tax exemption sunset include: 

  • Consider Gifting Away Assets to Reduce Estate Taxes While You Still Can 
  • Take Advantage of Lower Valuations and Low Interest Rates
  • Consider Acting Now to Avoid the Last-Minute Rush 

See Chuck Cavanaugh, Federal Estate Tax Exemption Is Set to Expire – Are You Prepared?, Kiplinger, October 14, 2020. 

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

October 30, 2020 in Current Affairs, Current Events, Estate Administration, Estate Planning - Generally, Gift Tax, New Legislation | Permalink | Comments (0)

Legal Considerations of Living Together in a Multi-Generational Home

HouseDue to COVID-19, many people have had to balance working remotely with caring for their children. That being said, many are using their homes as an office and a school, while also maintaining it as a home. 

The difficulty balancing, remote learning and homework, virtual meetings and work calls, and shopping, cooking and cleaning has created more housework. It is no surprise that wear and tear and stress levels have increased. 

Many are considering moving in with their parents or children are needing to consider the legal implications of doing so. When living with multiple generations, new considerations come into play. These considerations include,  "the burdens and the benefits of raising and teaching the children together, dividing the chores, maintaining the home, and pooling their finances together during this time of uncertainty."

Below are a  few initial questions that you should discuss with your family when considering living in a multigenerational home: 

  • Who is contributing to the purchase price?
  • Is it a gift, advance on inheritance, loan, or will they hold an ownership interest equal to their capital contribution? 
  • How do you equalize your estate to the remainder of your family?
  • What happens if a couple gets divorced?
  • Who has the right to reside in the home and how will the ownership be divided?
  • What happens if a parent must later reside in a nursing home for care?
  • Do they have sufficient assets in their name to pay for nursing care or will Medicaid look to his or her ownership interest in the home for payment?
  • If one of the owners dies, who receives his or her interest in the home?

With all of the uncertainty surrounding us, these questions are very important, and the answers even moreso. 

See Rebecca MacGregor, Legal Considerations of Living Together in a Multi-Generational Home, Bowditch & Dewey, Estate, Financial & Tax Planning Group, October 13, 2020. 

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

October 30, 2020 in Current Events, Death Event Planning, Disability Planning - Health Care, Disability Planning - Property Management, Elder Law, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Guardianship, Trusts, Wills | Permalink | Comments (0)

Tuesday, October 27, 2020

IRS announced 2021 inflation-adjusted rates

IrsIn Rev. Proc. 2020-45, the IRS announced the 2021 inflation adjusted rates including:

The gift and estate tax exclusion increased to $11.7 million for deaths in 2021 (up from $11.58 million for deaths in 2020).

The annual gift tax exclusion remains the same at $15,000.

Note that these amounts could change if Democrats win the White House and both Houses of Congress. Candidate Biden is on record stating that the estate tax exclusion should be limited $3.5 million per person and the gift tax exclusion should be separated from the estate tax exclusion and reduced to $1,000,000.

 

October 27, 2020 in Current Events, Estate Tax, Gift Tax | Permalink | Comments (0)

Potential Estate Planning Implications of 2020 Election Results

EstateplanningAs the presidential election approaches, there has been a lot of discussion surrounding the potential tax law changes. Although nothing is for certain, there are many things that certainly could happen, especially if Joe Biden is elected president and the Democrats gain the majority of both the Senate and the House. 

Potential Tax Law Changes include:

  • Lower Transfer Tax Exemptions
  • Higher Transfer Tax Rates
  • No Income Tax Basis Adjustment at Death
  • Taxation of Capital Gains at Ordinary Income Tax Rates
  • Elimination of Other Popular Estate Planning Tools

 

As the potential tax changes loom about, there are few Year-End Planning Considerations that you should take into account before it is too late:

  • Use "bonus" Exemptions Before They Expire
  • Use Popular Planning Tools Before They Are Eliminated
  • Take Advantage of Low Interest Rates and Depressed Asset Values 
  • Build In Potential Access to Transferred Funds
  • Consider Accelerating Capital Gains
  • Do Not Wait Until December 31st 

As everyone' situation is unique, some of these considerations may not be worthy of your consideration, but it is always better to consider potential options before the options no longer exist. 

See Potential Estate Planning Implications of 2020 Election Results, Winstead PC, October 19, 2020. 

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

October 27, 2020 in Current Events, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, Trusts, Wills | Permalink | Comments (0)

Friday, October 16, 2020

Final regs. outline trust and estate expenses still deductible under TCJA

The IRS issued final regulations "clarifying that certain expenses incurred by, and certain excess deductions upon the termination of, an estate or non grantor trust are not affected by the suspension of miscellaneous itemized deductions for tax years 2018 through 2025." 

Section 67(g), known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, disallows itemized deductions for any tax year beginning after December 31, 2017, and before January 1, 2026. Prior to the TCJA, itemized deductions were allowed so long as their aggregate amount exceeded 2% of adjusted gross income. 

Section 67(e) discusses the computation of the adjusted gross income in regard to an estate or trust and exceptions that may arise in the computations. 

The IRS and Treasury recognized that excess deductions may consist of "(1) deductions allowable in arriving at AGI; (2) non-miscellaneous itemized deductions; and (3) miscellaneous itemized deductions."

Section 67(g) only suspends the third type of deduction. "Consequently, the proposed and final regulations provide rules for trustees to determine for a terminating estate or trust the character and amount of each deduction type and, therefore, their respective allocations to, and applicable limitations upon, the succeeding beneficiaries.:

See Paul Bonner, Final regs. outline trust and estate expenses still deductible under TCJA, The Tax Adviser, September 22, 2020. 

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

October 16, 2020 in Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, New Legislation, Trusts | Permalink | Comments (0)

T&E TALK: The Pros and Cons of Lifetime Gifts

Estate 12.02.32 PMThe federal gift and estate tax exemption are at a record high of $11.58 million per individual, set to roll back to $5 million (adjusted for inflation) in 2026 and depending on this year's election, it could roll back even sooner. 

It may be time to take advantage of the current exemption, but first it may be helpful to consider some pros and cons of lifetime gifts. 

Pros:

One major advantage of lifetime gifts is that gifting can reduce your estate tax bill. "A current gift of property likely to increase in value during your lifetime not only removes the property from your estate but also removes all post-gift appreciation..."

Another advantage is the use of two lifetime "gift-tax free" transfers that will not use up your gift tax exemption. The first one, the federal annual exclusion gift, will allow you to make tax-free gifts each year to any number of individuals up to a certain amount. Those numbers for 2020 are $15,000 per recipient. The second transfer allows you to make direct payments of tuition or medical expenses for another individual. 

There are also number of non-tax benefits of lifetime gifts. For example, gifting property will allow the beneficiary of your gift to enjoy gifted property upon receipt of the gift. 

Cons:

One obvious disadvantage of lifetime gifts is that you will lose control over any assets that you give away. There are certain ways to structure a gift that will allow you access to gifted property (using a trust to gift to your spouse) just in case you need access to the funds. 

Another disadvantage may arise with gifts of appreciated property. If the gift depreciates or fails to to produce a "sufficient spot-gift investment return" there would be a disadvantage to making the gift. 

State laws can also hinder the normal advantages to making gifts. 

See Ada Clapp, J.D., T&E TALK: The Pros and Cons of Lifetime Gifts, Berdon L.L.P., September 29, 2020. 

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

October 16, 2020 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Trusts | Permalink | Comments (0)

Thursday, October 15, 2020

Complexity Of Inheritance Tax Rules Leaves Families Exposed

RegulationUnfortunately, inheritance tax laws and their governing rules are complex and difficult for the general public to understand. This leads to investigations into estates; investigations that the owners of those estates eventually must pay for.

The most common gift to "go wrong" are gifted properties due to the lack of understanding and skillset in the area of administration of estates. With the fluctuations of house prices and stock markets, people often get caught up in the figures and the result is a failed gift. 

One solution to this problem is to ensure that the person advising you and your estate is a professional. The knowledge of a qualified person will endure that the estate is handled correctly. 

It is also important to have a professional executor, instead of a family member, which people often use to save money. One advantage to using a professional is that they can act impartially when dealing with potential disputes between family members following the grantors death. These advantages also provide the logical reasoning behind using a professional trustee. 

In sum, by using professionals to handle your estate and carry out your wishes, your estate plan is far less likely to fail and will make you more comfortable in the end. 

See Charlotte Ponder, Complexity Of Inheritance Tax Rules Leaves Families Exposed, Today's Wills & Probate (UK), October 1, 2020. 

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

October 15, 2020 in Death Event Planning, Estate Administration, Estate Planning - Generally, Gift Tax, Trusts, Wills | Permalink | Comments (0)

Tuesday, October 13, 2020

Biden tax hike plan causes wealthy Americans to panic over estate planning strategies

EstateAs the Presidential Election approaches, wealthy Americans are updating their estate plans. There is a strong concern that a Joe Biden victory "could upend current tax law." 

The Tax Cuts and Jobs Act raised the exemption amount to $11.58 million for individuals and $23.16 million for married couples. However, Biden's proposal would undo this change and would lower the exemption amount before its planned demise on December 31, 2020. "Biden would also do away with step-up in basis, which means unrealized capital gains would be taxed at death."

Understandably, wealthy Americans are concerned with this threat as they would not be able to move assets as easily without triggering the tax. These concerns are pushing wealthy Americans to take advantage of the current tax rates and exemption amounts related to gifts and other transfers. 

Geoffrey Weinstein, special counsel in the Tax, Trusts & Estates Department of Cole Schotz stated, "If Biden were to win the election, a change in tax policy could be retroactive to the beginning of 2021, which is why some individuals are seeking to have these changes in place by year’s end." 

It may be time for you to take a look at your estate plan or if you are a professional, to alert your clients about the chances of the imminent doom that tax law faces. 

See Brittany De Lea,  Biden tax hike plan causes wealthy Americans to panic over estate planning strategies, Fox News, October 12, 2020.

October 13, 2020 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0)