Wills, Trusts & Estates Prof Blog

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

Saturday, March 23, 2019

An Answer to a Tax Problem You Didn't Know You Had

TaxesThe tax deadline is steadily approaching, but yet the Internal Revenue Service has yet to release guidance on an issue that has occurred for taxpayers because of the recent tax overhaul. The question is how the IRS will tax state-tax refunds given the new $10,000 cap on state and local tax deductions, or SALT.

The truth is that the majority of taxpayers will not have to be anxious about the situation. Michael Graetz, a former Treasury Department official that is now teaching at Columbia University's law school, says that there is a "longstanding legal doctrine means it won't be hard for most taxpayers subject to the SALT cap to minimize taxes on state refunds." This doctrine is known as the Tax Benefit Rule.

Under the doctrine, a "recovery" such as a state-tax refund is not taxable as gross income for the next year if deducting it did not yield a tax break according to Bryan Camp, a professor at Texas Tech University's law school. Because of this, millions of filers should not have to distinguish between types of state-tax deductions for 2018 because the SALT limitation combines them all into one unit.

Camp warns that not all refunds will be nontaxable. This result depends on other deductions and the size of these deductions.

See Laura Sanders, An Answer to a Tax Problem You Didn't Know You Had, Wall Street Journal, March 22, 2o19.

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

March 23, 2019 in Current Affairs, Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Sunday, March 17, 2019

High Court Should Affirm Kaestner State Trust Tax Case

CourtroomNorth Carolina’s Supreme Court held that the state cannot tax the income of a trust created and administered outside of North Carolina, even though the trust’s beneficiaries reside in North Carolina in Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue. Now, the nation's higher court has agreed to hear the case.

The lower court founded its decision on two premises: that a trust is a separate entity from the beneficiaries - much like a corporation, and that the trust such as the one in the case lacked the required minimum contacts constitutionally required to be subject to taxation by the state. South Dakota v. Wayfair may have modified the minimum contacts requirement under the Commerce Clause, the due process analysis from Quill Corp. v. North Dakota remained the same. Because the state supreme court applied the proper analysis, the Supreme Court of the United States should affirm the decision.

“Purposeful availment” for minimum contact purposes pertains to the trust’s governance and the administration of its assets, not to trust communications with beneficiaries. Just because the beneficiaries reside in North Carolina does not give the state enough contact with the trust to tax the trust itself.

See Edward Zelinsky, High Court Should Affirm Kaestner State Trust Tax Case, Tax 360, March 5, 2019.

March 17, 2019 in Current Affairs, Current Events, Estate Administration, Estate Planning - Generally, Income Tax, New Cases, Non-Probate Assets, Trusts | Permalink | Comments (0)

Tuesday, March 12, 2019

For Tax-Exempt Employers: 403(b) Retirement Plan Compliance Opportunity

TaxexemptTax-exempt employers have until March 31, 2020 - the “Remedial Amendment Period” (RAP) - to retro-actively self-correct compliance issues with their 403(b) plan documents. Though this date may seem a long ways away, the process to correct the document requires significant time.

  • What compliance issues can I fix?
    • Employers can fix compliance issues both in their 403(b) plan documents and in separate documents that are referenced in the plan document. RAP does not apply to issues than cannot be fixed by amending the document.
  • Who is eligible?
    • Those that adopted a written plan document by December 31, 2009 that was intended to comply with 403(b) requirements, regardless if their plan is subject to ERISA or not.
  • What are the benefits?
    • An employer who fails to correct issues under RAP can lose their tax-exempt status, be able to correct the violations only under the IRS’ Voluntary Correction Program (VCP), which expends more time and money to correct compliance issues.
  • What do I do?
    • A tax-exempt employer can either adopt a 403(b) prototype plan document pre-approved by the IRS by March 31, 2020, or amend their plan by the end of RAP.

For more information, review the IRS website.

See For Tax-Exempt Employers: 403(b) Retirement Plan Compliance Opportunity, Medical Lawyer Spot, March 9, 2019.

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

March 12, 2019 in Current Affairs, Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Monday, March 11, 2019

How U.S. Tax Rules Apply to Inheritances and Gifts from Abroad

GiftAs Americans become more global within this modern society, they are asking estate planners questions about properties outside of the country's borders. One of the popular questions is whether an inheritance or gift from abroad will be taxed if brought into the United States. Usually, bequests are not subject to the income tax, and transfers by gift of property not situated in the U.S. from foreign nationals not domiciled in America are not subject to U.S. gift taxes. But depending on the circumstances, certain laws may still apply.

Foreign nationals who are green card holders are generally considered domiciled in the United States and as such are defined as lawful permanent residents. Residents and citizens are covered by one aspect of the estate and gift tax laws, and national without a green card may be considered domiciled for tax purposes. Transfers by foreign nationals not domiciled in the United States are covered by a different estate tax structure that imposes taxes on transfers of certain property situated in the United States.

If the decedent who bequeaths the asset is neither a U.S. citizen nor a foreign national domiciled in the United States, no U.S. estate tax is imposed on the transfer. There is also no tax resulting from the death transfer upon the beneficiary's receipt of a bequest. The United States also does not impose an income tax on inheritances brought into the country.

The United States has gift tax treaties which may eliminate the U.S. gift tax on certain transfers that are otherwise subject to gift taxes under the Code. An exemption from gift tax under a treaty is made on a gift tax return.

See How U.S. Tax Rules Apply to Inheritances and Gifts from Abroad, Find Law.com.

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

March 11, 2019 in Current Affairs, Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax, Travel, Wills | Permalink | Comments (0)

Opinion: The 10 Commandments of Retirement

RetirementEveryone's personal level of comfort during their retirement may be different. When it comes to saving an adequate amount, you need to focus on what you want. Here are 10 "commandments" to get to a sufficiently comfortable retirement.

  1. Acknowledge if your preretirement lifestyle is easy to maintain or not, because if you are not ready, it could take a sharp decline.
  2. Remember that Social Security is designed to replace no more than 40% of preretirement income - thus, do not depend on it more than it was meant to be.
  3. Create a financial and estate plan for your dependent loved ones that are likely to outlive you.
  4. Think about the nonfinancial aspects of retirement, such as hobbies, relocation, and those fun vacations you constantly put off. They all take money!
  5. Pay attention to communications and deadlines from your employer, Social Security, Medicare, personal advisers and others, as what you do not know can definitely hurt you.
  6. Put retirement goals FIRST, in front of other short or semi-long term goals.
  7. Save as much as possible as soon as possible now because you can always reduce your savings rate later.
  8. Be ahead of the game with taxes - invest in Roth accounts and municipal bond mutual funds.
  9. Health care should be a primary focus for retirement savings, even if you are fortunate enough to not have any expenditures beyond prescriptions.
  10. Invest in ways that will provide a steady income stream in retirement, as a stable flow will relieve excess stress in your twilight years.

See Richard Quinn, Opinion: The 10 Commandments of Retirement, Market Watch, March 9, 2019.

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

March 11, 2019 in Current Affairs, Disability Planning - Health Care, Elder Law, Estate Administration, Estate Planning - Generally, Income Tax, Wills | Permalink | Comments (0)

Thursday, March 7, 2019

Simple Estate Planning Choices can have a Big Impact

IRASarah Brenner, director of retirement education for Ed Slott and Company, lays out some simple choices to make that can make an estate plan more efficient. The beneficiary designation form of IRAs is a document that can be overlooked by many clients as well as advisors that can lead to irreparable damage to a person's retirement as well as estate. “A beneficiary form is like a piece of paper: It’s free to fill out and people don’t take it seriously. That’s a huge problem. The beneficiary form is what determines how the retirement assets will pass to the next generation.”

  • A Costly Mistake
    • Incomplete, lost or poorly completed beneficiary forms can lead to loss in cash flow for the surviving spouse or next generation.
  • Beware of Bad Advice
    • “If you think something will be easy, don’t just delegate it down,” said Jeremy Rodriguez, an IRA analyst with Ed Slott & Company. A sole beneficiary can be liable for income tax rather than estate tax when it comes to taking a full distributed from an inherited IRA and then distributing it to those left out of a beneficiary designation form.
  • When Rulings and Regulators Clash
    • State courts may rule one way while the IRS rules another. In the end, the IRS is not governed by state court decisions. IRA assets are not subject to community property rules under the tax code.
  • What Makes a Designated Beneficiary
    • Andy Ives, another IRA Analyst with Slott & Co, explains that a beneficiary can be any person or entity, a designated beneficiary must be a living, breathing (natural) person.
  • IRA Beneficiary Choices
    • There are three categories of beneficiary choices for an IRA: spouses, charities, and non-spouses. 
  • Non-spouse Beneficiaries
    • Only a natural person named on a beneficiary form is eligible to use the stretch IRA strategy, with one exception—if a “see-through” trust is named as beneficiary. However, using a trust as a beneficiary can be complicated and may involve more costs than it is worth.

See Christopher Robbins, Simple Estate Planning Choices can have a Big Impact, Financial Advisor, March 4, 2019.

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

March 7, 2019 in Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax, Non-Probate Assets, Trusts, Wills | Permalink | Comments (0)

Amicus Brief filed with Supreme Court

ActecAn amicus brief in The North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust was filed on March 1, 2019, with the Supreme Court by ACTEC. This is an important case dealing with the ability of a state to tax the income of an irrevocable nongrantor trust. The College took no position in the case, but instead, as noted in the brief, the brief was filed to:

“assist the Court in understanding the history and practice of state fiduciary income taxation as applied to accumulated income in nongrantor trusts and the complexities of such statutes in the context of the multi-state contacts common in today’s mobile society.”

Oral argument in Kaestner is set for April 16.

Special thank to Suzy Shaw for bringing this article to my attention.

March 7, 2019 in Current Events, Estate Planning - Generally, Income Tax, New Cases, Trusts | Permalink | Comments (1)

Wednesday, March 6, 2019

Article on The Fraud Triangle and Tax Evasion

TriLeandra Lederman recently published an Article entitled, The Fraud Triangle and Tax Evasion, Tax Law: Tax Law & Policy eJournal (2019). Provided below is an abstract of the Article.

The “fraud triangle” is the preeminent framework for analyzing fraud in the accounting literature. It is a theory of why some people commit fraud, developed out of studies of individuals, including inmates convicted of criminal trust violations. The three components of the fraud triangle are generally considered to be (1) an incentive or pressure (usually financial), (2) opportunity, and (3) rationalization.

There is a separate, extensive legal literature on tax compliance and evasion. Yet the fraud triangle is largely absent from this legal literature, although tax evasion is a type of fraud. This article rectifies that oversight, analyzing how the fraud triangle—and its expanded version, the “fraud diamond”—can inform the legal literature on tax compliance. The article argues that the fraud triangle can provide a frame that brings together distinct tax compliance theories discussed in the legal literature, the traditional economic (deterrence) model and behavioral theories focusing on such things as social norms or tax morale.

March 6, 2019 in Articles, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Tuesday, March 5, 2019

All Levels of Upper Wealth Feeling Acute SALT Cap Pain

SaltTaxpayers in high-tax states such as New York, California, and New Jersey are flinching from the pinch of the $10,000 cap on deductions for state and local taxes, or SALT. Many legislators are attempting to repeal the cap as citizens in those states are now limited on how much they can write off.

The belief for those that are critics of the cap is that it is meant to punish those in high-tax states and the President has stated that he is willing to talk about altering the cap. The likelihood of him actually changing it may be low, however, because the SALT cap pays for much of the tax cuts of [reform], according to Barry Horowitz, partner and team leader of state and local tax in the New York office of accounting firm Withum Smith+Brown.

Even the upper-middle class has felt the pain, both in states with high property taxes such as Texas and high income tax states like New Jersey and California. Susan Carlisle, a CPA in Los Angeles say that the SALT will “will soon impact the real estate markets in those states as people realize that their expensive homes are now a whole lot less affordable than they have been." Conversations dealing with leaving the high-tax states for states with lower-tax states are becoming more and more commonplace.

Critics of repeal claim it would result in reduced federal revenue and benefit the wealthiest income earners; others say that the deduction was a major source of tax fairness for high-taxed states.

See Jeff Stimpson, All Levels of Upper Wealth Feeling Acute SALT Cap Pain, Financial Advisor, February 25, 2019.

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

March 5, 2019 in Current Affairs, Current Events, Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Thursday, February 28, 2019

Imagine Canada Becoming a Tax Haven for Americans

CanadaDemocrats are eyeing the presidency with an abundance of candidates for the next election, and if they are successful, it appears that the well-off will be paying more in taxes. Though the type of taxes that will be increased is not yet settled, the idea is getting wide-spread approval across the country among the nation's other income brackets.

Avoidance efforts are sure to increase, and the possibility of the most invasive method may seem more and more promising - leaving the country. France had a tax similar to the proposed tax by Representative Alexandria Ocasio-Cortez, but even more extreme. While Ocasio-Cortez wants to place a 70% tax rate on those that make more than $10 million a year, France imposed a "supertax" of 75% rate for citizens making more than 1 million euros per year. The tax only lasted for two years, and during that time many prominent, wealthy individuals moved to Belgium, and French corporations did not attract senior managers.

The potential tax increase in America may not produce a similar exodus of millionaires, because quite simply, America is not France. We have many important epicenters of the technology industry, the finance industry and others. And unlike Europe, there is not an abundance of thriving countries nearby. If the wealthy do decide to leave, their only option may be Canada, where the majority of the population speaks English and the top income rate is 33%: despite some Americans thinking Canada is a quasi-socialist economy thanks to its single-payer health-care system, it’s not actually a high-tax country.

See Noah Smith, Imagine Canada Becoming a Tax Haven for Americans, Financial Advisor, February 13, 2019.

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

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