Wills, Trusts & Estates Prof Blog

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.

US Supreme Court sidesteps wealth tax question in closely watched case

The 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.

Supreme Court upholds Trump-era tax provision on offshore earnings

The Supreme Court is currently deliberating a pivotal case that challenges the constitutionality of a tax provision from the 2017 Tax Cuts and Jobs Act, known as the Mandatory Repatriation Tax (MRT). This tax targets the profits of U.S. shareholders from foreign corporations, regardless of whether the earnings were distributed. The case, Moore v. United States, was brought forth by Charles and Kathleen Moore, who argue that the MRT constitutes a property tax rather than an income tax, which would make it unconstitutional under the U.S. Constitution's restrictions on federal property taxes.

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.

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

The 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.

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.