Wills, Trusts & Estates Prof Blog

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

Monday, August 30, 2021

To get the wealthy to pay more tax, first we need to work out why they avoid it

Wealth taxYou do not often hear rich people advocating for paying taxes. John McAfee, who in June was found dead in a Spanish prison from an apparent suicide, was "inarguably the most [colorful] character in the world of antivirus software." 

Mere hours before McAfee's death, the Spanish authorities agreed to extradite him to the US to face tax evasion charges. McAfee was openly against taxation. In 2018 McAfee tweeted, that he had not filed a US tax return in eight years because "taxation is theft" claiming he had already paid "tens of millions already and received jack [expletive] in services."

Abigail Disney, wrote in an article that she was "taught from a young age to protect [her] dynastic wealth." 

The ultra rich often use legal tax-avoidance strategies to limit their federal income tax bills. A report by non-profit ProPublica concluded that legal tax-avoidance strategies allowed the 25 richest Americans to limit their federal income tax bills to $13.6 billion in the five years to 2018 even though their wealth had been boosted by an estimated $401 billion. 

According to Abigail Disney, a big part of the problem is that wealth is not income and tax avoidance is not tax evasion. Legal tax avoidance strategies are just that—legal. Disney also acknowledged that, like Jeff Bezos, the system allows the rich legally to avoid paying tax on huge fortunes that grow every year. 

Some argue that we live in a world in which the rich do not need to practice illegal tax evasion because legal tax avoidance is "so easy and effective." Disney then posed the question: "What motivates people with so much money to try to withhold every last bit of it from the public's reach." 

Alex Rees-Jones, a behavioral economist at Wharton Business School, wrote that "analysis of tax data confirms that tax decision [the desire to pay or avoid] are influenced by loss aversion." In other words, taxpayers engage in strategies that make losses smaller and gains larger. 

From here, Rees-Jones suggested "reframing taxpayer perceptions of what constitutes a gain or a loss." 

The "fix" may be to convince taxpayers that the losses they take as a consequence of tax avoidance are worse than whatever loss they may take if they were to avoid the loopholes. 

See Rhymer Rigby, To get the wealthy to pay more tax, first we need to work out why they avoid it, Financial Times, August 29, 2021. 

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

August 30, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Thursday, July 29, 2021

Impact of President Biden's Tax Plan on Estate Planning

Estate planningThere has been speculation on what President Biden's tax proposal will look like and what effects it will have on estate planning. There is also a question about the likelihood that President Biden's tax plan will be enacted into law. 

The Biden Administration announced the American Families Plan in April 2021, which proposed "significant tax law changes to increase taxes on both corporations and high-net worth individuals and to provide more resources to enhance IRS tax enforcement efforts. 

In May 2021, the United States Department of Treasury issued a report entitled, "General Explanation of the Administration's Fiscal 2022 Revenue Proposals (generally referred to as the Green Book) which included more details on the tax law changes previously proposed in the American Families Plan." The memo provided an overview of the proposed changes of the American Families Plan and the impact those changes may have on estate planning. 

Under the current proposal, "there will be a realization of capital gains to the extent such gains are in excess of a $1 million exclusion per person, upon the transfer of appreciated assets at death or by a gift. . .the proposal would provide various exclusions and exceptions for certain family-owned and operated businesses. 

One thing that was not addressed in the Green Book are changes to the federal estate, gift and generation skipping transfer (GST) tax system, although Biden did propose these changes during his campaign. 

There is a lot of uncertainty surrounding new tax laws, so high-net-worth individuals with estate tax concerns should consider taking advantage heightened exemptions by implementing wealth transfer strategies like the following: 

  • Intentionally Defective Grantor Trust (IDGT)
  • Spousal Lifetime Access Trust (SLAT)
  • Grantor Retained Annuity Trust (GRAT)
  • Charitable Lead Annuity Trust (CLAT)
  • Annual Gifts 
  • And more. 

See Jeffrey M. Glogower, Stephen J. Bahr, & Adam W. Randle, Impact of President Biden's Tax Plan on Estate Planning, The National Law Review, July 26, 2021. 

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

July 29, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Sunday, June 13, 2021

Plan to Revive I.R.S. ‘Wealth Squad’ Puts the Richest on Notice

Wealth taxPresident Biden has proposed "adding $80 billion to the Internal Revenue Service budget as well as giving the agency more authority to crack down on tax evasion by high-earners and large corporations." 

The propose additions came before reports were released that indicated how little in taxes the richest Americans paid from 2014 to 2018. In addition to President Biden's proposals, those reports have "intensified interest in the tax code." 

The reports do not necessarily indicate those in the high net worth categories have been engaging in illegal activity in order to pay less in taxes. It is just as likely that high-earners have simply been using the tax code to their advantage.

There are many legal tax strategies that high-earners have used to "minimize their taxes." The tax strategies appear to be exactly what President Biden looks to eliminate. 

In order to deal with this new attention to tax strategies, tax experts have agreed that the wealthy and slightly-less-wealthy should keep better records. 

If President Biden's plan is adopted, "[s]ome of the additional money in his budget would toward reviving an underfunded organization within the I.R.S. called the global high-wealth industry group, which focuses on the complicated tax returns filed by the affluent." 

See Paul Sullivan, Plan to Revive I.R.S. ‘Wealth Squad’ Puts the Richest on Notice, N.Y. Times, June 11, 2021. 

Special thanks to Matthew Bogin, (Esq., Bogin Law) for bringing this article to my attention. 

June 13, 2021 in Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Friday, May 28, 2021

IRS Practice Units

IRS"As part of LB&I's knowledge management efforts, Practice Units are developed through internal collaboration and serve as both job aids and training materials on tax issues. For example, Practice Units provide IRS staff with explanations of general tax concepts as well as information about a specific type of transaction. Practice Units will continue to evolve as the compliance environment changes and new insights and experiences are contributed."

Visit the link below to view the practice units: 

https://www.irs.gov/businesses/corporations/practice-units

Special thanks to Mark J. Bade (CPA, GCMA, St. Louis, Missouri) for bringing this article to my attention. 

 

May 28, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, Income Tax | Permalink | Comments (0)

Monday, May 10, 2021

Dividends Received by an Employee of a Corporation are Still Part of Net Investment Income

IRSIn Chief Counsel Advice 202118009 the IRS addresses an interesting question: "Whether tax dividends received by a shareholder who is also employed by the C corporation is subject to the net investment income tax, as well as if the answer changes if the corporation is closely held." 

Net Investment Income Under IRC §1411

IRC §1411, which was added to The Affordable Care Act, "imposes a tax on the lesser of the net investment income of a taxpayer or the taxpayer's adjusted gross income in excess of threshold amounts that vary by filing status." 

This "net investment income" includes gross income from dividends apart from those that are the result of the ordinary course of a trade or business. (IRC §1411(c)(1)). 

The situation that is addressed by the IRS is quoted below: 

The Taxpayer is a shareholder in a C corporation. It was determined under examination that the corporation paid Taxpayer’s personal expenses from corporate accounts, and the payments were reclassified as dividend income paid to the Taxpayer by the corporation. The Taxpayer is also an employee of the corporation and is involved in the day-to-day operations of the corporation’s manufacturing trade or business. The facts further indicate that the corporation may be a closely-held corporation within the meaning of § 469(h)(1) as described in § 465(a)(1)(B) (the Taxpayer appears to own a majority of the shares of the corporation). The Taxpayer contends that because the Taxpayer materially participates in the manufacturing trade or business of the corporation as an employee, the dividend income that the Taxpayer received from the corporation is not subject to tax under § 1411, because the dividend income is derived in the ordinary course of a trade or business that is not a passive activity of the Taxpayer within the meaning of § 469

The deeper question is, under IRC §1411(c)(1), if a taxpayer is involved in day to day operations of the corporation whether the dividend income is removed from the investment income category found in (c)(1), or whether the dividends retain their status as investment income, and are outside the scope of the ordinary course of a trade or business. 

According to the IRS, employment does not change the nature of the dividends, meaning they retain their status as part of investment income.

For more information see, Ed Zollars, CPA, Dividends Received by an Employee of a Corporation are Still Part of Net Investment Income, Kaplan Financial Education: Current Federal Tax Developments, May 7, 2021. 

Special thanks to Mark J. Bade (CPA, GCMA, St. Louis, Missouri) for bringing this article to my attention. 

May 10, 2021 in Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Thursday, April 1, 2021

Democrats Weigh Capital Gains Tax Hike For Millionaires At Death

Tax"Senate Democrats are circulating a plan that would trigger tax bills on the assets of the wealthy after they die as the lawmakers seek new sources of revenue to fund trillions of dollars in infrastructure spending and social programs." 

The legislation seeks to end a part of the tax code that allows assets to be passed onto heirs without "immediately generating tax bills." Democrats have long been aiming at these assets to be taxed. Joe Biden's campaign has encouraged the idea. 

Under current tax law, people are able to pass assets to their heirs without transferring capital gains from the property's appreciation, referred to as "stepped up basis at death." Basically, heirs will not have to pay taxes "on any of the gains that accused under the previous owner." 

Under the new plan, taxes would be levied on those assets of the wealthy at death subject to a $1 million exemption. 

According to Chris Van Hollen of Maryland, “The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to the wealthiest heirs every year. . . “It’s time to stop subsidizing massive inheritances for the rich and start investing in everyday Americans.”

This stepped up basis tax provision has become increasingly popular for the Democratic Party, although, under President Barack Obama, the proposal was blocked by Congress. 

With recent changes in the Senate and the House, it'll be interesting to see where the new proposed legislation goes. 

See Laura Davison, Democrats Weigh Capital Gains Tax Hike For Millionaires At Death, Financial Advisor, March 30, 2021. 

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

April 1, 2021 in Current Events, Estate Planning - Generally, Estate Tax, Income Tax, New Legislation | Permalink | Comments (0)

Monday, March 22, 2021

A tax break for retirees is back. Here’s how to use it — and what to avoid

TaxA tax break that disappeared last year has resurfaced in full force this year. This tax break benefits retirees in their 70s and up. These tax breaks are qualified charitable distributions, "which allow individual retirement account holders to divert some of their federally taxable required distributions to charity." The deductions allow IRA holders to make donations and reduce their federally taxable income. 

Qualified charitable deductions rose to fame in 2018 when Donald Trump's 2017 tax law was enforced. 

Now, they may be even more helpful than ever since they have been revived following their disappearance due to the pandemic. More specifically, the Cares Act effectively cancelled required minimum distributions (RMDs). 

Even though you could still use QCDs, their effectiveness was almost completely eliminated due to the cancellation of RMD requirements in 2020. 

Now, retirees can take advantage of these contributions. However, if considering QCDs, you should be careful not to "trip over yourself." You should consult with your estate planning attorney and/or financial advisor to discuss the best way to take advantage of these contributions, or possibly to stay away from them. 

See Allan Sloan, A tax break for retirees is back. Here’s how to use it — and what to avoid., Washington Post, March 18, 2021. 

Special thanks to Naomi Cahn (Justice Anthony M. Kennedy Distinguished Professor of Law; Nancy L. Buc ’69 Research Professor in Democracy and Equity; Director, Family Law Center --  University of Virginia School of Law) for bringing this article to my attention.

March 22, 2021 in Estate Administration, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Thursday, March 11, 2021

Aretha Franklin’s Estate Signs Tentative Deal Over Back Taxes Owed

ArethaSince Aretha Franklin's death in 2018, there has been a looming debt ganging over her estate. After three years, Franklin's estate is moving toward an agreement with the Internal Revenue Service (IRS) to repay this debt which is comprised of "thousands and thousands of [dollars] in federal revenue taxes that the singer owed throughout her life. . ." 

The settlement requires the estate to put aside 45% of all income it receives to repay the tax responsibility that Franklin accrued from 2010 to 2017. Also, $800,000 is to be paid to the IRS within 5 days of the deal's approval. 

A document submitted in court on February 19, states that the IRS has declared that the state owes $7.8 million, but apparently, this determination did not include about $3 million that the estate alleged it paid at the end of 2018. 

Under the deal, 40% of the estate's revenues will be put toward ongoing taxes and funds to Franklin's heirs. This 40% will be generated by music royalties and licensing and is allowed to be held in escrow. 

If a deal is reached, the estate will have room to breathe and bring in revenue. 

The worth of Franklin's estate has not been fully determined but it has been estimated to be around $80 million. 

There were also multiple wills found, which has lead to a stark divide between Franklin's alleged heirs as members of Franklin's family have been battling to prove which documents should be probated. 

See Ben Sisario, Aretha Franklin’s Estate Signs Tentative Deal Over Back Taxes Owed, N.Y. Times, March 2, 2021. 

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

March 11, 2021 in Current Events, Estate Administration, Estate Planning - Generally, Income Tax, Music, New Cases, Wills | Permalink | Comments (0)

Tuesday, March 9, 2021

Sen. Elizabeth Warren introduces "ultra-millionaire" wealth tax bill

TaxSenator Elizabeth Warren introduced a bill in the senate that looks to impose a new tax on the assets of "America's wealthiest individuals." 

This plan is very similar to a proposal that was the a big talking point of Warren's campaign when she ran for president in 2020. Warren's want of a tax increase on millionaires and billionaires in the U.S. is not new. 

The plan would place a 2% tax on those with a net worth between $50 million and $1 billion. Anyone with a net worth over $1 billion would be subject to a 3% tax. Anyone with a networth below $50 million would be safe from the tax. 

According to the tax bill's sponsors, the tax would raise $2.75 trillion in tax revenue over a ten-year period. 

Warren claimed, "The ultra-rich and powerful have rigged the rules in their favor so much that the top 0.1% pay a lower effective tax rate than the bottom 99%, and billionaire wealth is 40% higher than before the COVID crisis began."  Warren also stated, "A wealth tax is popular among voters on both sides for good reason: because they understand the system is rigged to benefit the wealthy and large corporations."

See Ursula Perano, Sen. Elizabeth Warren introduces "ultra-millionaire" wealth tax bill, Axios, March 1, 2021. 

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

March 9, 2021 in Current Events, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Wednesday, February 24, 2021

IRS Rolls Out Online Option For Submitting Authorization Forms

TaxThe Internal Revenue Service (IRS) has released a new online option that will allow tax professionals to electronically submit authorization forms. 

The two forms covered under the new option are "Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization. These forms allow taxpayers to authorize the IRS to disclose their tax information to third parties, such as, tax professionals." 

The Form 2848 allows taxpayers to authorize eligible individuals to speak to the IRS on their behalf and also allows that person to receive related confidential tax information. 

The Form 8821 isn't as useful because it only allows the appointed representative to inspect or receive confidential information verbally or in writing "for the type of tax and the years or periods you list on the form." This form does not allow anyone to speak on your behalf. 

You can use the new options by creating a Secure Access Account and is fairly simple and quick to set up. 

See Kelly Phillips Erb, IRS Rolls Out Online Option For Submitting Authorization Forms, Forbes, January 25, 2021. 

Special thanks to Mark J. Bade (CPA, GCMA, St. Louis, Missouri) for bringing this article to my attention. 

February 24, 2021 in Current Events, Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)