Wills, Trusts & Estates Prof Blog

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

Sunday, July 7, 2024

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

Screenshot 2024-07-07 at 12.59.48 PMThe 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.

July 7, 2024 in Estate Planning - Generally, Estate Tax, Income Tax | Permalink | Comments (0)

Friday, June 28, 2024

Democrats’ Billionaire Taxes Still Have a (Slight) Chance

CongressThe 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.

June 28, 2024 in Current Affairs, Estate Tax, Income Tax | Permalink | Comments (0)

Saturday, June 22, 2024

US Supreme Court sidesteps wealth tax question in closely watched case

Screenshot 2024-06-22 at 11.33.05 AMThe US Supreme Court avoided ruling on the constitutionality of a wealth tax, disappointing both supporters and opponents. In a 7-2 decision, the court sidestepped the issue in a case involving a couple, the Moores, who contested a $15,000 tax on offshore profits, arguing it was an unconstitutional tax on unrealized gains. The court's narrow ruling, which did not resolve whether income must be "realized" to be taxed, left future wealth tax debates open, with justices expressing varied opinions on the matter.

Justice Brett Kavanaugh, writing for the majority, stated that the court did not need to address the disagreement over the requirement of realization for income taxation in this case. The dissenting justices, Clarence Thomas and Neil Gorsuch, argued that the Constitution only permits taxes on realized income, as per the 16th Amendment. Meanwhile, Justices Amy Coney Barrett and Samuel Alito agreed with the ruling but supported the need for income realization, contrasting with Justice Ketanji Brown Jackson's opinion that realization is not required.

Tax experts and campaigners had closely watched the case, hoping for a definitive ruling that could influence future wealth tax policies. The decision, which avoided challenging other existing taxes on unrealized gains, left both sides partially satisfied. It highlighted the court's cautious approach to potentially sweeping tax law changes, setting the stage for continued legal battles over the constitutionality of taxing unrealized income.

For more information see Stephen Foley "US Supreme Court sidesteps wealth tax question in closely watched case", The Financial Times, June 20, 2024.

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

June 22, 2024 in Current Affairs, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Friday, June 21, 2024

Supreme Court upholds Trump-era tax provision on offshore earnings

The justices are scrutinizing the broader implications of their ruling. A decision against the MRT could significantly impact not only this specific tax but also future legislative efforts to impose wealth taxes on unrealized gains. Both conservative and liberal justices have expressed skepticism about completely dismantling the MRT, yet they also appear wary of granting the government unrestricted power to define and tax income in ways that could open the door to new forms of taxation, including a wealth tax.

The debate has intensified due to the potential financial and policy repercussions. Should the Court strike down the MRT, it could result in substantial tax refunds for major corporations and disrupt current and future tax policies aimed at wealthier Americans. This case has attracted attention from various political and economic groups, emphasizing the high stakes involved in the Court's decision, which could reshape the landscape of U.S. tax law.

Ultimately, the Supreme Court seems to be leaning towards a narrow ruling that would uphold the MRT while avoiding a broader decision that might preempt future wealth tax legislation. This approach aims to balance the need to maintain existing tax frameworks with the caution against overextending federal taxing authority​.

For more information see Ann E. Marimow and Julie Zauzmer Weil "Supreme Court upholds Trump-era tax provision on offshore earnings", The Washington Post, June 20, 2024. 

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

June 21, 2024 in Current Affairs, Income Tax | Permalink | Comments (0)

Tuesday, June 18, 2024

Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships

Screenshot 2024-06-17 at 9.44.26 PMThe U.S. Treasury Department has announced a new plan to close tax loopholes exploited by large partnerships, as part of broader efforts to ensure that wealthy individuals and large corporations pay their fair share of taxes. This initiative follows findings that many IRS audits of large partnerships failed to uncover noncompliance due to the complexity of these business structures. The plan will utilize advanced data analytics and artificial intelligence to better identify high-risk entities for auditing​.

A significant component of the plan involves targeting specific compliance issues, such as scrutinizing the transfer pricing practices of foreign-owned corporations and expanding audits of the largest corporate taxpayers. These measures aim to address sophisticated tax avoidance strategies and ensure accurate reporting of U.S. profits​.

Funding for these efforts comes from the Inflation Reduction Act, which allocates resources to close the tax gap—the difference between taxes owed and taxes paid. The IRS plans to use these funds to enhance enforcement and modernize its technology infrastructure. However, some of the funding was recently reduced following negotiations with Congress.

The initiative also focuses on addressing the substantial portion of the tax gap attributed to unreported business income, particularly income shielded through partnerships. Recent estimates suggest that the tax gap could be as high as $1 trillion annually, underscoring the urgent need for improved tax compliance and enforcement​.

Overall, the Treasury's plan represents a concerted effort to close loopholes and enhance tax compliance among the wealthiest taxpayers and largest partnerships. By leveraging new technologies and enhanced enforcement strategies, the initiative aims to ensure a fairer tax system and reduce the tax gap​.

For more information see Kate Dore "Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships", CNBC, June 17,2024.

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.

June 18, 2024 in Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Thursday, June 6, 2024

Article: The Nation's Transfer Tax Regime and the Tax Gap

Jay A. Soled (Rutgers University) recently published, The Nation's Transfer Tax Regime and the Tax Gap, 2024. Provided below is an Abstract:

For over a century, the nation’s transfer tax regime, comprised of the gift, estate, and generation-skipping transfer taxes, has played a pivotal role in curbing inherited wealth while simultaneously raising much-needed revenue. But for a variety of reasons, a sizable number of taxpayers are derelict in fulfilling their transfer tax obligations. This analysis explores the reasons for this phenomenon and the reforms that Congress should consider instituting to curb this behavior.

June 6, 2024 in Articles, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Friday, January 20, 2023

Income Tax Symposium

Friday, May 6, 2022

A Matter of High Interest: How a Quiet Change to an Actuarial Assumption Turbocharges the Life Insurance Tax Shelter

Andrew Granato recently authored an article entitled, A Matter of High Interest: How a Quiet Change to an Actuarial Assumption Turbocharges the Life Insurance Tax Shelter , Draft of Connecticut Insurance Law Journal, Forthcoming (2022). Provided below is the abstract to the Article:

Draft: America’s lengthy income tax code and financial regulations are notoriously full of special treatment for the politically favored. Academics and policymakers argue the relative merits of different approaches to tax and regulatory policy – given the complexity of economic life, should the law attempt to be highly tailored and specific? Or does the exacting approach risk getting lost in the weeds? This Article will showcase the limits of a highly technical approach to policy with the first analysis of an almost completely unnoticed sea change in life insurance tax law, one that engorges a tax shelter at a moment of great attention to laws that enable the wealthiest members of society to face lower effective tax rates than their secretaries.

Life insurance has received extremely favorable federal tax treatment since the inception of the federal income tax. In the 1980s, in response to an increasing wave of policies smuggling traditional investment products into products calling themselves life insurance, Congress formalized a mathematical definition of life insurance policies directly into the Internal Revenue Code (§ 7702). § 7702, a fully realized actuarial simulation, placed quantifiable limits on the degree to which policyholders could treat a life insurance policy like an investment (such as a mutual fund) rather than as insurance protection.

For decades, the provision was left alone; however, buried in the 2020 COVID-19 omnibus relief bill, Congress included – with essentially no public debate– a change to a key actuarial assumption of the § 7702 test. The result, though heavily obscured by layers of mathematics, was that § 7702 was made substantially more permissive, giving policyholders much greater leeway to use life insurance policies as conduits for tax-exempt wealth accumulation, rather than mere protection of beneficiaries in the event of the worst. After over thirty years of near-total absence of analysis of Congress’ life insurance definition in the legal literature, this paper resurrects the history, purpose, and structural limitations of § 7702 and the hyper-technical approach to tax policy it embodies. It further provides the first exhaustive analysis of the new world of life insurance after the stealth § 7702 amendment, one in which swathes of the industry are preparing to – as the Democratic Party eyes loophole crackdowns on the wealthy – leverage their extraordinary tax advantage into a new role at the center of high-end tax avoidance.

May 6, 2022 in Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Friday, April 22, 2022

ACTEC Shares Useful Resources

ACTEC 2022 Pocket Tax Tables  (helpful resource for professionals)

The ACTEC Pocket Tax Tables guide is a handy resource available for download as a pdf, online and mobile devices, and as a printed booklet. Content includes tables for Income Tax; Social Security; Estate and Gift Tax; Generation-Skipping Transfer Tax; Treasury Unisex Actuarial Table Examples; Inflation-Adjusted Numbers; Life Expectancy Tables; Qualified Plans, including SECURE Act details; Interest Rates; and Charitable Deduction.

ACTEC Trust and Estate Talk  (podcast series for professionals)

The Future of Digital Assets and the Dollar  Estate planning and family law attorneys share what to be aware of and some pitfalls when drafting premarital agreements and prenups.

Capital Letter No. 56: The Administration’s Fiscal Year 2023 Budget Proposals 

ACTEC Fellow Ronald D. Aucutt offers commentary regarding the Treasury Department's "General Explanations of the Administration's Fiscal Year 2023 Revenue Proposals" and how it provides a few new and a lot of previously presented ideas.

ACTEC Trust and Estate Talk  (podcast series for professionals)

California Tax Trap and Residency for Trusts - Words of caution for trust fiduciaries, beneficiaries and residents; CA has liberal definitions of who is considered a resident and subjected to tax on trusts.  

April 22, 2022 in Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Monday, April 18, 2022

14 States That Won't Tax Your Pension

Estate planningSome states have pension exclusion with limitations based on age and/or income. Most states tax "at least a portion of income from private sector defined benefit plans." However, there are 14 states that don't tax pension income at all, despite your age or how much money you have. 

Below is a list of the 14 states that don't tax pension income: 

  • Alabama
  • Alaska 
  • Florida 
  • Hawaii
  • Illinois 
  • Mississippi
  • Nevada
  • New Hampshire 
  • Pennsylvania 
  • South Dakota
  • Tennessee
  • Texas
  • Washington 
  • Wyoming 

See Rocky Mengle, 14 States That Won't Tax Your Pension, Kiplinger, April 6, 2022. 

Special thanks to David S. Luber (Florida Probate Attorney) for bringing this article to my attention.

April 18, 2022 in Estate Planning - Generally, Income Tax | Permalink | Comments (0)