Wills, Trusts & Estates Prof Blog

IRS Workforce Could Be Slashed By Half, Reports Say

The Trump administration is planning to cut the IRS workforce in half by laying off employees, encouraging early retirements, and not replacing those who leave. In February, about 6,700 newer employees were laid off, and more cuts are expected after tax season ends on April 15. Billionaire Elon Musk, who is in charge of cutting government costs, is helping lead the effort. The administration is also planning to send some IRS workers to help with immigration enforcement instead.

Experts worry that cutting so many IRS employees will make it harder for people to get help with their taxes. With fewer workers, it could take longer to get refunds, fix tax issues, or reach a representative. Former IRS leaders warned that cutting staff could make it easier for people to cheat on their taxes while making things harder for honest taxpayers. They also said making such big changes during tax season could cause major problems.

On top of all this, the IRS doesn’t currently have a permanent leader. Several people have stepped in as acting commissioner, but no one has been officially confirmed for the job. President Trump has nominated former congressman Billy Long, but the Senate hasn’t scheduled a vote yet. Without strong leadership and with so many job cuts, many worry that the IRS won’t be able to do its job properly in the near future.

For more information see Jason Bramwell, "IRS Workforce Could Be Slashed By Half, Reports Say," CPA Practice Advisor, March 5, 2025. 

Article: The Tie-Breaker Rule in Inheritance Tax Treaties: The Asymmetry of Taxing Rights by Migrants

Mari Takahashi (Independent) recently published, The Tie-Breaker Rule in Inheritance Tax Treaties: The Asymmetry of Taxing Rights by Migrants, 2024. Provided below is an Abstract:

There are more than 3,000 income tax treaties in the world, but fewer than 100 inheritance tax treaties. Why is the number of inheritance tax treaties so low compared to income tax treaties? This article attempts to answer this question by analysing the tie-breaker rule of inheritance tax treaties.

Article: Integration of Taxes on Inheritances, Estates and Gifts into the OECD Model Tax Convention on Income and on Capital: The Curious Case of Special Provisions - Part 1

Jan Karol Szczepański (Independent) recently published, Integration of Taxes on Inheritances, Estates and Gifts into the OECD Model Tax Convention on Income and on Capital: The Curious Case of Special Provisions - Part 1, 2024. Provided below is an Abstract: 

Part 1 of this article considers the interaction between the special provisions in the OECD Model Tax Convention on Income and on Capital, and the conceptual foundations of taxes on inheritances, estates and gifts.

The Giant Trump-Era Gift Tax Exemption Expires Next Year. Why Private Fund Managers Better Take Note

Private equity and venture capital managers need to carefully plan their gifting strategies before the current elevated gift and estate tax exemption expires at the end of 2025. Currently, individuals can gift up to $13.6 million tax-free, and couples up to $27.2 million. After the exemption expires, it will revert to around $7 million per person. If fund managers mishandle the gifting of carried interest—profits from investment funds—they could inadvertently trigger large, unplanned tax liabilities.

A key issue for fund managers is complying with Section 2701 of the U.S. tax code, which requires that both carried interest and capital interest be transferred proportionately when gifting carried interest. If this rule is ignored, the entire fund interest could be deemed transferred, potentially leading to unintended consequences. The “vertical slice” technique allows managers to avoid this by gifting a proportionate amount of both interests. For example, gifting 10% of carried interest requires also gifting 10% of capital interest.

With the tax exemption set to expire soon, there is uncertainty about whether Congress will extend the higher limits or let them revert to lower levels. Republicans generally favor maintaining the current exemption, while Democrats support allowing it to decrease. Given the lengthy process of firming up valuations, addressing family goals, and drafting documents, managers are encouraged to act swiftly to avoid last-minute complications.

For more information see Karen Hube "The Giant Trump-Era Gift Tax Exemption Expires Next Year. Why Private Fund Managers Better Take Note" The Barrons, October 1, 2024.

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

1 big thing: The promise of ethical investing

Axios, a news service that has an investing newsletter, created an article on the trends with ethical investing, oil prices and car sharing.

Ethical Investing's Promise: Investing in companies that rank highly on moral criteria could yield strong financial returns. Just Capital surveys Americans to rank companies based on values like fair worker treatment and job creation, rather than environmental concerns alone. Companies such as Hewlett-Packard Enterprise and Bank of America, which ranked highly, saw a 131% return between 2018 and 2024, slightly outperforming the S&P 500. A long/short investment strategy — buying top-ranked companies and shorting the lowest-ranked ones — could offer attractive risk-adjusted returns.

Why Oil Prices Are Dropping: Oil prices are falling due to weak economic data from China, improved Libyan oil production, and the end of the U.S. summer driving season. This decline could push gasoline prices below $3 per gallon, offering some political relief during inflation concerns in the U.S.

Turo's Strategy for Growth: Turo, a car-sharing platform similar to Airbnb for cars, is partnering with Uber to grow its business. The car-sharing industry has struggled, but Turo hopes the partnership will help it expand. Starting in 2025, Turo will list cars on Uber Rent in several countries, aiming to capture a larger share of the market despite past failures by competitors.

For more information see Felix Salmon and Emily Peck "1 big thing: The promise of ethical investing" Axiosmarkets.com, September 5, 2024.

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

Article: Wealth Taxes Under the Constitution: An Originalist Analysis

David M. Schizer (Columbia University - Law School) and Steven G. Calabresi (Northwestern University - Pritzker School of Law) recently published, Wealth Taxes Under the Constitution: An Originalist Analysis, 2024. Provided below is an Abstract:

A federal wealth tax is high on the wish list of progressive icons like Elizabeth Warren and Bernie Sanders, but is it constitutional? This Article shows that it is a "direct tax," which must be apportioned among the states. This means that the percentage of revenue collected in each state must match its percentage of the population. For instance, if two states each have three percent of the population, each must provide three percent of the revenue from a wealth tax. This leads to an unappealing outcome: if one state is less wealthy, it needs a higher tax rate to supply its share. To rescue wealth taxes from apportionment, distinguished commentators have offered a range of theories. For example, some treat apportionment as a mistake, while others dismiss it as a protection for the shameful institution of slavery.

But these commentators do not give the Framers enough credit. The taxing power was too important for them to be sloppy or to focus only on the institution of slavery. In our view, the taxing power reflects the same influences as the rest of the Constitution. Like the new government’s other features, the taxing power was supposed to be effective but limited. The Framers wanted to solve the fundamental problem under the Articles of Confederation (insufficient revenue), without recreating the fundamental problem under imperial rule (taxation without representation). Specifically, they sought to discourage what we call “fiscal raids,” in which states join forces to enact national taxes that mostly burden other states. As Professors Ackerman and Amar have shown, this risk could arise with an unapportioned tax on enslaved persons, since it would have been collected mainly in the South. But we show that the same was true of other region-specific practices, such as tobacco plantations and undeveloped land in the South, as well as ships, timber, farms, and manufacturing in the North. Apportionment was supposed to protect all these region-specific assets from fiscal raids.

In pursuing these various goals, what did the Framers mean by a “direct tax”? They considered a tax “direct” if it applied to taxpayers themselves, instead of to their transactions. A direct tax could be triggered merely by residing in the jurisdiction or owning property. In contrast, taxes on transactions—including on imports (“imposts”) and on domestic production and consumption (“excises”)—did not have to be apportioned. Admittedly, some courts and commentators have offered the narrower interpretation that “direct” is limited to head taxes and real estate taxes. But at ratifying conventions, John Marshall, Oliver Ellsworth, and other Framers offered a broader definition, which included livestock, business assets, and other personal property. Dicta in an early case, Hylton v. United States offered the narrower interpretation (head and land taxes), but the holding can be reconciled plausibly (although not perfectly) with our interpretation, while most other Supreme Court cases on the Direct Tax Clause align with our reading.

The complicated way Social Security is taxed can catch people by surprise

Middle-income retirees face a significant tax issue known as the "Social Security tax torpedo," where distributions from retirement accounts can unexpectedly increase the taxable portion of their Social Security benefits. This can result in steep marginal tax rates, especially when combined with the "capital gains bump zone," where additional income pushes more capital gains into higher tax brackets.

To avoid these tax pitfalls, retirees are advised to strategically plan their withdrawals before claiming Social Security, such as by converting traditional IRAs to Roth IRAs during lower tax years. This approach can help minimize the impact of the tax torpedo and ensure a more favorable tax outcome in retirement.

However, navigating these tax complexities is challenging, and many retirees may not realize they are paying more in taxes than necessary. Understanding the intricacies of the tax code and planning accordingly can make a significant difference in preserving retirement income.

For more information see Peter Coy "The complicated way Social Security is taxed can catch people by surprise" The New York Times, August 9, 2024.

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

The low-tax countries wooing the world’s wealthy

Europe's super-rich are increasingly relocating due to changes in tax regimes and political uncertainties. The UK's recent decision to abolish its "non-dom" tax regime, which allowed wealthy foreigners to avoid taxes on overseas income, has prompted a significant exodus of millionaires. Similar patterns are seen in France, Norway, and other European countries where political instability or tax reforms are driving the wealthy to seek more favorable conditions elsewhere.

Countries like Switzerland, Italy, and Monaco are becoming popular destinations due to their attractive tax regimes, but these privileges are under growing political scrutiny, leading some nations to tighten or modify their offerings. The global competition to attract millionaires has intensified, with newer players like Dubai and Singapore joining traditional havens.

The migration of the wealthy has broader implications, such as potential impacts on local economies and the risk of political backlash. There are concerns about the sustainability of such tax regimes amid rising populism and global efforts to standardize tax rules. This trend reflects significant shifts in the global economic landscape, with tax considerations being a key factor in relocation decisions.

For more information see Emma Agyemang "The low-tax countries wooing the world’s wealthy" The Financial Times, August 11, 2024. 

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

Transferring Ownership of Appreciated Stocks to Your Parents Could Limit Your Tax Hit

The strategy known as "upstream planning" is gaining popularity among wealthy individuals seeking to mitigate taxes on appreciated assets. Instead of transferring these assets to their children, they transfer them to their parents. This approach allows the assets to be absorbed into the parents' wealth, avoiding capital gains taxes through a step-up in cost basis upon inheritance. Pamela Lucina, chief fiduciary officer at Northern Trust in Chicago, highlights the importance of ensuring that this strategy aligns with individual circumstances due to its benefits and potential drawbacks. Key considerations include the size of both generations' estates and whether they have utilized their estate and gift tax exemptions.

The current estate and gift tax exemption is at a record-high of $13.1 million per person or $26.2 million per couple. However, this exemption is set to decrease to around $7 million at the end of next year unless Congress intervenes. This creates a sense of urgency for those considering upstream appreciated gifts. The strategy works best when the parents' estate is smaller than the children's and they haven't used their exemption. Risks include potential estate-tax burdens for parents once the exemption drops and the possibility of creditors claiming the assets if the parents are in debt. Additionally, gifting assets outright means losing control over them, with the risk of parents bequeathing them to someone else.

Health and timing are critical factors in upstream planning. If parents die within a year of receiving the appreciated assets, the step-up in cost basis is lost. The strategy was successfully implemented by one of Lucina's clients, an only child with a strong relationship with their parents. Publicly traded securities are the most common assets transferred due to their market-established value. However, transferring real estate is less common because of existing tax benefits for primary residences. To mitigate risks, using a trust can ensure assets are more likely to be returned to the original giver, though they may still be subject to the parents' creditors. Lucina underscores the importance of open communication in optimizing family wealth through estate planning.

For more information see Karen Hube "Transferring Ownership of Appreciated Stocks to Your Parents Could Limit Your Tax Hit", Penta, July 2, 2024.

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

Democrats’ Billionaire Taxes Still Have a (Slight) Chance

The Supreme Court has left a very narrow legal path open for the billionaire taxes that are central to the Democrats' economic agenda. In a recent international-tax case related to the 2017 tax law, the court avoided ruling on whether the 16th Amendment mandates that income taxes apply only to realized income. Instead, the court upheld a tax on U.S. shareholders’ portion of a foreign company’s earnings based on Congress’s power to attribute an entity’s realized income to its owners. Justice Brett Kavanaugh, writing for the majority, noted that the issue of realization was not resolved, leaving the door open for future legal challenges.

Democrats, aiming to address wealth inequality and seeking new revenue sources, hope to tax billionaires on the appreciation of their stock values even if those assets are not sold. The court's limited ruling provides a glimmer of hope for progressives, but four justices explicitly ruled out such taxes, and the majority acknowledged unresolved questions. Any new legislation would face significant hurdles, including whether it can pass Congress and survive legal scrutiny over taxing unrealized income. Conservative groups, like the Buckeye Institute, argue that there are significant legal constraints that would prevent the application of a wealth tax.

The current composition of the Supreme Court presents a formidable obstacle for advocates of taxing unrealized gains. Four justices—Barrett, Alito, Thomas, and Gorsuch—have expressed that the 16th Amendment requires realization. Meanwhile, Justice Ketanji Brown Jackson contends that the amendment does not mandate such a requirement. This split puts proponents in a difficult position, as they must convince both Kavanaugh and Chief Justice Roberts, in addition to the three most liberal justices, to uphold any novel tax concept. Despite past legislative failures, Democrats, including President Biden and Senator Ron Wyden, continue to push for taxing unrealized gains, viewing the current system as flawed. They propose various measures to address political and administrative challenges, aiming to close loopholes and ensure that the wealthiest individuals contribute their fair share.

For more information see Richard Rubin "Democrats’ Billionaire Taxes Still Have a (Slight) Chance", The Wall Street Journal, June 22, 2024.

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