Wills, Trusts & Estates Prof Blog

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

Friday, September 13, 2019

Article on Red States, Blue States: Lessons from the State Death Tax Credit and the 'SALT' Deduction.

SaltJeffrey A. Cooper recently published an Article entitled, Red States, Blue States: Lessons from the State Death Tax Credit and the 'SALT' Deduction, Tax Law: Tax Law & Policy eJournal (2019). Provided below is an abstract of the Article. 

Since 1861, every version of the federal income tax has included a deduction for state and local taxes (often referred to by its popular acronym “SALT”). Since this provision, the “SALT deduction,” minimizes the effect of state and local taxes on taxpayers, it offers greater benefits to those living in states that impose the highest tax burden — the high-tax “blue” states. In 2017, the Tax Cuts and Jobs Act marked a major shift in this long-established federal policy toward state taxes. Among its many provisions, the Act capped the SALT deduction at $10,000 per married couple, providing no Federal tax offset for amounts paid in excess of that amount.

In this article, I attempt to address two questions raised by this turn of events. First, how will states respond to this change in federal law? Second, does the capping of the SALT deduction represent a major shift in federal-state relations, an unprecedented attack on blue states, or is it simply politics as usual?

My novel approach to the subject is to consider these questions by exploring the similarities and contrasts between the income tax SALT deduction and the estate tax state death tax credit, which was established in 1924 and repealed in 2001. Viewing the 2017 legislation within this broader historical context more reveals trends and patterns, providing greater insight than would a study of the SALT deduction in isolation.

This approach yields two results. First, analyzing state legislative responses to the 2001 estate tax changes helps to predict how state governments may respond to the 2017 income tax change and thus offers insight into the future evolution of state income tax regimes. Second, placing the 2017 Tax Act in a broader historical context reveals a pattern of federal interference with state tax regimes, yielding lessons about the interdependence of federal and state tax law as well as how a changing political climate can shape tax policy.

September 13, 2019 in Articles, Current Events, Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Thursday, August 29, 2019

Democrats’ Emerging Tax Idea: Look Beyond Income, Target Wealth

CashbundleThe tax system of the United States may experience a serious overall if Democrats win the White House and Congress in the next election. Instead of simply taxing income, Democratic presidential candidates and legislators want to dive into taxing the wealth of the rich in America.

At the end of 2017, U.S. households had $3.8 trillion in unrealized gains in stocks and investment funds, and the majority of the value of estates over $100 million is comprised of those unrealized gains. Much has never been touched by individual income taxes and may never be because capital gains are taxed only when gains are realized through a sale and become income. “The whole tax system is stacked in favor of the tax-avoidance crowd,” said Senator Ron Wyden, who has outlined a plan for annual taxes on unrealized gains. Many of the agendas center on using wealth taxes to finance societal needs, such as expanding health-insurance coverage, combating climate change and aiding low-income households.

Experts across the political spectrum agree income inequality widened in recent decades, and wealth inequality even more. But there does not appear to be a consensus necessarily on what to do about it. Conservatives fear heavily taxing the wealthy will hinder investment and disrupt markets, while liberals believe the lighter tax rate on wealth compared to income is morally wrong and a contributor to wealth gaps between blacks and whites.

See Richard Rubin, Democrats’ Emerging Tax Idea: Look Beyond Income, Target Wealth, Wall Street Journal, August 27, 2019.

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

August 29, 2019 in Current Affairs, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Friday, August 2, 2019

Wealth Transfer Strategies for a Lower Interest Rate Environment

InterestratesInterest rates influence how wealth transfers are valued for tax reporting purposes, so it is important to take them into account with your planning. Here are some strategic ideas that can be taken advantage of during a low rate environment.

  • Grantor Retained Annuity Trusts
    • Income Tax Advantages
      • The IRS does not look at the actual growth of the assets, so any appreciation above the hurdle rate is passed on to trust beneficiaries free of gift and estate taxes.
  • Charitable Lead Annuity Trusts
    • Tax-Free Transfer to Family Members
      • Any investment performance in excess of the hurdle rate passes tax free to the family members at the end of the trust’s term.
    • Minimizing CLAT Gift Tax Costs
      • If not structured right, gift taxes are a possibility, thus a CLAT should be structured to zero out at the end of its term, resulting in little or no gift tax.
  • Intra-Family Lending
    • No Gift Tax Liability
      • Good avenue to assist family members without incurring any gift tax liability.
    • Loan to Trusts that Benefit Family Members
      • If the trust is a grantor trust, the interest payments on the loan will not have an income tax consequence.
  • Selling Property to a Grantor Trust
    • Maximizing Leverages
    • Income Tax Advantages
      • There is no capital gain recognized when the property is sold to the trust, and the interest payments to the grantor are not considered taxable income.
    • Estate Tax Advantages
      • The assets are completely removed from his or her estate if the grantor outlives the terms of the promissory note.
    • Minimizing the Risk of Gift Tax
      • Make sure the assets are professionally appraised.

See Wealth Transfer Strategies for a Lower Interest Rate Environment, Fiduciary Trust, July 29, 2019.

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

August 2, 2019 in Current Affairs, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, Trusts | Permalink | Comments (0)

Article on Intergenerational Equity, Student Loan Debt, and Taxing Rich Dead People

TaxcalcVictoria J. Haneman recently published an Article entitled, Intergenerational Equity, Student Loan Debt, and Taxing Rich Dead People, Wills, Trusts, and Estates Law eJournal (2019). Provided below is an abstract of the Article.

Once upon a time, there was a generation of indentured servants called Millennials. They were beautiful and mysterious and clever and feckless, in the way that all young people can sometimes be. The Millennials had dreams of future careers in which they were near-mystical, all-powerful protectors of the planet, brunching on avocado toast, driving in electric cars, and eradicating golf courses from the earth. Droves of Millennials applied to universities, believing that a diploma was a barrier for entry to advance the careers of which they dreamt. Most were confronted with a conundrum: borrow to subsidize the dream career, with decades of (potentially unaffordable) payments when they were finally employed. The Generation Who Stole the World, commonly referred to as the Baby Boomers, had decided that unlimited access to debt was the most economically sound approach by which to offer equal opportunity in higher education — and the delectable irony of this tale is that the availability of debt caused (or at the very least, accompanied) the skyrocketing of costs. A vicious cycle resulted in an entire generation of educated Millennials having mortgaged their futures, and visibly sagging under the weight of the chains of their debt.

This hyperbolic tale leans into stereotypes for dramatic effect, but is also strikingly accurate in its rendering of higher education financing in the United States. The Boomer gerontocracy inherited the benefits of New Deal policies, with substantial public investment into infrastructure and education, but then gradually shifted the financing of higher education away from grants and towards student loan debt. Millennials have taken on 300% more student loan debt than their parents, with those borrowers between the ages of 25 and 34 each having an average of $42,000 in student loan debt. Student loan debt has more than doubled since 2009 and can no longer be ignored: according to projections in this Article, assuming the same steady rate of growth from 2004 to 2019, outstanding student loan debt will exceed $13.5 trillion within the next twenty years, far outpacing the projected growth of the Gross Domestic Product (GDP) of the United States.

There is a glaring gap in academic literature with regard to the choice to primarily lean upon student loan indebtedness to finance higher education, the unsustainability of such an approach, and the intergenerational equity of shifting debt from this generation to the next. Those crafting public policy have implicitly shirked away from notions of intergenerational sustainability in its management of higher education financing — with the (perhaps unintentional) result that higher education financing is operating on Ponzi principles. Forward-looking higher-education policy must be rooted in notions of intergenerational equity: a society is intergenerationally just when each generation does its best to contribute its fair share towards succeeding generations, avoiding serious harm to future generations, with a consciousness of the needs that may exist in the future. This Article fills a gap by considering the way in which debt is used (and potentially abused) as a common pool resource and that the management of a common pool resource arguably carries with it intergenerational equity obligations. The first in a two part series, this Article proposes a way forward with a creative solution — the repurposing of the gratuitous tax system such that the revenues are earmarked and dedicated to the retooling of higher education finance in the United States.

August 2, 2019 in Articles, Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Wednesday, July 24, 2019

Let the 'Zombie' Tax Extenders Die, Groups Urge Congress

TaxcalcOpponents to a package of tax extender bills approved by the House Ways & Means Committee on June 20 let their voices be heard this past week on Capitol Hill at a panel hosted by the Committee for a Responsible Federal Budget. The extender bills include H.R. 3298, The Child Care Quality and Access Act of 2019; H.R. 3299, The Promoting Respect for Individuals’ Dignity and Equality (PRIDE) Act of 2019; H.R. 3300, The Economic Mobility Act of 2019; H.R. 3301, The Taxpayer Certainty and Disaster Tax Relief Act of 2019.

The extender bills have been nicknamed "zombie bills" because they had previously expired within the last two years and proponents of them want to revive them from the grave. The Committee for a Responsible Federal Budget estimates that the extenders package would add $150 billion to the debt over 10 years with interest, and $710 billion over 10 years if the temporary policies were permanently extended due to only one of the bills being offset. That singular offset is in HR 3301, which would reverse the 2017 tax law’s estate tax exemption increase three years earlier than scheduled.

See Melanie Waddell, Let the 'Zombie' Tax Extenders Die, Groups Urge Congress, Think Advisor, July 22, 2019.

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

July 24, 2019 in Current Affairs, Estate Administration, Estate Planning - Generally, Estate Tax, Income Tax, New Legislation | Permalink | Comments (0)

Sunday, July 7, 2019

Article on No Orchard, No Capital Gain

OrchardCalvin H. Johnson recently published an Article entitled, No Orchard, No Capital Gain, Tax Law: Tax Law & Policy eJournal (2019). Provided below is an abstract of the Article.

As a matter of principle, capital gain is the gain from invested capital or basis. If the taxpayer has no basis in something of value it sells, there is no capital gain.

The principle that capital gain is gain from capital is embedded in the ordinary English language meaning of “capital gain,” which reflects the long history of the English property system going back into feudal tenures. Property purchased by expenses charged to the income interest remains part of the income interest and does not become capital gain reserved for the next heir.

Moreover, the combination of deduction of inputs into a transaction and preferential capital gain rates for the output is a mismatch that creates an inappropriate negative tax or subsidy. The subsidy does not “clearly reflect income.”

Finally, preferential rates for capital gain provide relief from what Irving Fisher called a double tax on capital, but if there is no capital, there is no double tax and thus no capital gain. This means that, like compensation, the sale of a contract to perform future services, of body parts, of self-developed goodwill, or of an income interest are ordinary assets, not capital.

While capital gain has a principled meaning, there are cases that do not conform to the principles. The recent Tax Court Memorandum Decision, Greenteam Materials Recovery Facility PN v. Commissioner, treated the sale of a contract in which the taxpayer had no basis as if it were a capital asset. Compensation for services and self-developed goodwill are also sometimes treated as capital assets, which is a violation of the principled meaning of capital gain.

July 7, 2019 in Articles, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Saturday, June 29, 2019

Canadian Trust Subject to US Tax

CanadaIf a trust that is created and operated in Canada suddenly has an American beneficiary due to them moving to the states, a practitioner should understand the requirements for the American side of reporting.

Not only should the trust distribution be filed on a form 1040, U.S. Individual Income Tax Return, but also the beneficiary must also file a form 3520, Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, as well as form 8938, Statement of Specified Foreign Financial Assets, which may have specialized valuation rules. The reporting requirements do not stop there. If the beneficiary receives as a distribution equal to more than 50% of the trust's income, they must file FinCEN form 114, Report of Foreign Bank and Financial Accounts.

There is also individual state income tax reporting to consider. Many states impose a state-level income tax on trusts, and the rules vary widely from state to state. New York only taxes trust income if the trust was created by a New Yorker or the trust makes its income from within the state. California, on the other hand, will attempt to tax any trust income that any resident of their state receives. To makes this even more complicated, a Canadian practitioner should also consider estate tax issues and whether the trust falls above the exemptions amount, both at the federal level and the individual state level (if applicable).

See Catherine B. Eberl, Canadian Trust Subject to US Tax, Canadian Tax Highlights, Volume 27, Number 6, June 2019.

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

June 29, 2019 in Articles, Current Affairs, Estate Administration, Estate Tax, Income Tax, Travel, Trusts | Permalink | Comments (0)

Friday, June 28, 2019

Is Imposing a Wealth Tax a Good Idea?

MoneyRecently, a group of wealthy Americans wrote a letter to the President saying that they should be taxed according to Senator Elizabeth Warren tax plan. That is, 2% on assets over $50 million and an additional 1 cent on the dollar for assets over $1 billion. Not only do they claim that that the proceeds from the tax will go to well-needed programs, but that the majority of Americans are for a tax for the extremely wealthy.

These types of calls to action are not new, especially when the country is nearing an election. But it is possible that this letter was more partisan than it claimed, as it appeared to cry out more to the Democratic presidential hopefuls than the current establishment. But would it better to tax the ultra-wealthy such a minute amount than just allow them to donate to their heart's content into the private sector, or even to the Federal Bureau of Fiscal Service? The Service said last year that the average donation was $2.69 million, while the federal government received $3.38 trillion from taxes during the 2018 fiscal year.

Would a wealth tax change the economic behaviors of the extremely wealthy? Would they stop donating to their pet causes because that money is already being taken out? We will have to see.

See Steven Chung, Is Imposing a Wealth Tax a Good Idea?, Above the Law, June 26, 2019.

Special thanks to Carissa Peterson (Hrbacek Law Firm, Sugar Land, Texas) for bringing this article to my attention.

June 28, 2019 in Current Affairs, Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Wednesday, June 26, 2019

Kaestner Trust — Supreme Court Guidance for State Trust Income Taxation

TrustsSteve R. Akers and Ronald D. Aucutt recently issued a summary of the unanimous Supreme Court decision of North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust. Provided below is the introduction to the summary.

North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, 588 U.S. __ (June 21, 2019) is the U.S. Supreme Court’s first opinion addressing the constitutionality of state taxation of the undistributed income of trusts in almost a century. In a 9-0 opinion, the Court upheld lower court findings that North Carolina’s income tax imposed on the Kaestner Trust over a specific 4-year period violated the Due Process Clause where the beneficiaries received no income in those tax years, had no right to demand income in those years, and could not count on ever receiving income from the trust.

States employ a variety of factors (or combination of factors) in determining whether the state can tax the undistributed income of trusts, such as the residency of the settlors, trustees, beneficiaries, or where the trust administration occurs. The opinion provides minimal guidance as to the constitutionality of those various systems (or the North Carolina beneficiary-based system under other facts), but reiterates and applies traditional concepts that due process concerns the “fundamental fairness” of government activity and requires “minimum contacts” under a flexible inquiry focusing on the reasonableness of the government’s action.

See Steve R. Akers & Ronald D. Aucutt, Kaestner Trust — Supreme Court Guidance for State Trust Income Taxation, BessemerTrust.com, June 24, 2019.

Special thanks to Scott M. Deke for bringing this article to my attention.

June 26, 2019 in Articles, Current Events, Estate Administration, Estate Planning - Generally, Income Tax, New Cases, Trusts | Permalink | Comments (1)

Tuesday, June 25, 2019

Article on More Losses, More Problems: Excess Business Loss Rules

BusinesslossLibin Zhang recently published an Article entitled, More Losses, More Problems: Excess Business Loss Rules, Tax Law: Tax Law & Policy eJournal (2019). Provided below is an abstract of the Article.

The Tax Cuts and Jobs Act enacted new section 461(l), which generally limits an individual’s deductions for some business losses. For a tax provision that is expected to raise $150 billion of federal revenue over 10 years (more than global intangible low-taxed income (GILTI) or the base erosion and antiabuse tax (BEAT)), the loss limitation has not received much attention from commentators or Treasury.

This article discusses some issues with the limitation, including whether it applies to wages and (ironically) losses on the disposition of business property, its interaction with the section 199A passthrough business income deduction, and special considerations for trusts and estates.

June 25, 2019 in Articles, Current Affairs, Estate Planning - Generally, Income Tax | Permalink | Comments (0)