Wills, Trusts & Estates Prof Blog

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

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)

Was the unanimous SCOTUS wrong in deciding North Carolina Department of Revenue v. Kaestner Family Trust?

On June 21, 2019, the Supreme Court of the United States decided North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust. By a 9-0 margin (7 joining the majority and 2 strong concurring opinions), the court decided that North Carolina cannot tax nonresident trust payments.

In Due Process, State Taxation of Trusts and the Myth of the Powerless Beneficiary: A Response to Bridget Crawford and Michelle Simon, 67 UCLA L. Rev. Disc. (2019), Prof. Carla Spivack (Oxford Research Professor of Law and Director, Certificate in Estate Planning, Oklahoma City University School of Law), takes issue with Bridget Crawford and Michelle Simon’s arguments (the ones that prevailed in the case) in their article The Supreme Court, Due Process and State Income Taxation of Trusts, 67 UCLA L. Rev. Disc. 2 (2019).

Here is a brief excerpt from Prof. Spivack's article:

Taxing the beneficiary in this case is entirely consistent with the basic principle of tax law that a person who controls and receives benefit from income should pay taxes on it. The real question here is whether the beneficiary controlled, and received enough benefits from, her trust income while she lived in North Carolina to pay state income taxes on it. The trustee by definition is barred from enjoying any beneficial interest in the trust property—the only person who may receive beneficial interest is the beneficiary. If and when the beneficiary receives the benefits of trust income, she should pay the corresponding tax in her state of domicile. This is uncontroversially consistent with due process. The trustee here makes ample use of the myth of the powerless beneficiary by trying to direct all eyes to the trust in the question of tax jurisdiction. But the Court need not fall for this sleight of hand.

This brings me to Crawford and Simon’s second major point. They assert that the fact that the beneficiary did not receive distributions from the trust while in North Carolina means the state cannot tax her proportionate share of trust income. I argue that the mere fact that the trustee did not literally write checks to the beneficiary does not mean she failed to benefit from her share of trust income or control it for tax purposes. First, as discussed below, the record shows that her interest in the trust alone, even without distributions, allowed her to benefit from her share of trust income, in ways that should subject her to taxation in the state. Second, the beneficiary requested that the trustee not make distributions to her during the relevant period. Under tax law, her power to decline distributions showed she had control over them, and thus was required to pay income taxes.

June 25, 2019 in Articles, Income Tax, New Cases, Trusts | Permalink | Comments (1)

Thursday, June 20, 2019

Wealthy Clients Leaving High-Tax States May Face Strict Residency Audits

HouseHigh-tax states such as New York and New Jersey have been witnesses to many high-wealth citizens moving out of the state and residing in lower tax states such as Florida, Arizona, and Texas. Anupam Singhal, co-founder of New York-based Monaeo, which offers an app to help defend against residency audits, estimates that "if you are wealthy and move out of state, the chance of being targeted for a state-residency audit is 100%.”

Many of these states that are subject to the wealthy exodus are becoming more aggressive in their residency audits. New York conducts thousands of them each year and, in the process, recouped about $1 billion in taxes between 2010 and 2017 claims Singhal. The chances are higher that a higher-income person will be audited if they have “[b]usiness ties to the former state, amount of time spent in the former state, moving shortly before selling a business or a large amount of stock [and] maintaining a large personal residence in the former state” according to Robert Seltzer, a CPA at Seltzer Business Management in Los Angeles.

It is also on the taxpayer to prove that their residency changed to the other state. Clients can help their cause if they take actions that show a commitment to their new state, such as registering to vote, getting involved in local politics or charities and establishing new banking and investment relationships, says Geoff Christian, managing director at CBIZ MHM in Greenville, South Carolina. Lifestyle changes may also show a different residency, such as where they take their pet to the veterinarian, where their country club membership is, where they spend their anniversary and even the quantity and type of food in their refrigerators," Singhal said.

See Jeff Stimpson, Wealthy Clients Leaving High-Tax States May Face Strict Residency Audits, Financial Advisor, June 17, 2019.

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

June 20, 2019 in Current Affairs, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Wednesday, June 19, 2019

Insight on Estate Planning: Do you know when an FBAR Must be Filed

IrsThe IRS has been stepping up enforcement of foreign account reporting requirements, and therefore knowing when and what to report is vital. Either if you have a financial interest in or signature authority over a foreign financial accounts with an aggregate value exceeding $10,000 at any time during the calendar year, you must file FinCEN Form 114, “Report of Foreign Bank and Financial Accounts” (FBAR).

What is a foreign financial account? It is any financial account that is located outside of the United States, regardless of the nationality of the financial institution. Meaning that if the account is maintained by an American bank but within a branch outside of the country, it is a foreign financial account.

Anytime you designate another person to act on your behalf or transfer interests in your foreign financial account to other people or entities, you may trigger additional FBAR reporting obligations. If you own or control foreign financial accounts, consult your estate planning advisor to discuss your FBAR and other reporting obligations and their potential impact on your estate plan

See Joseph Marion, III & David Riedel, Insight on Estate Planning - June/July 2019: Do you know when an FBAR Must be Filed, Page 5, June 13, 2019.

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

June 19, 2019 in Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax, Travel, Trusts, Wills | Permalink | Comments (0)

Wednesday, June 12, 2019

Article on Bankruptcy Fiduciary Duties in the World of Claims Trading

FiduciarydutyJohn A. E. Pottow recently published an Article entitled, Bankruptcy Fiduciary Duties in the World of Claims Trading, 13 Brook. J. Corp. Fin. & Com. L. 87-98 (2018). Provided below is an abstract of the Article.

In earlier work, I explored the role of fiduciary duties in the bankruptcy trustee's administration of a debtor's estate, noting the absence of any explicit demarcation of those duties in the Bankruptcy Code. In this piece, I report the highlights of that analysis and see to what extent (if any) fiduciary duties can inform policy prescriptions for the issue of bankruptcy claims trading, colorfully referred to by some as the world of "bankruptcy M&A." My initial take is pessimistic. Fiduciary duties, at least as traditionally conceived in bankruptcy, are unlikely to provide much help. But there is still a source of optimism. Namely, the structural and procedural institutions of the Bankruptcy Code and court system may, through a transparent, court-supervised litigation process, achieve many of the same conflict-checking functions with which fiduciary duty law concerns itself.

June 12, 2019 in Articles, Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax | Permalink | Comments (0)

Saturday, June 8, 2019

Texas Statutes Now Allow a Court To Modify or Reform an Unambiguous Will

WilltestamentTexas courts have historically relied on the testator's intent on whether a will is ambiguous or not, and whether or not to present extrinsic evidence contrary to the will's instructions. If a court found that will was unambiguous, outside evidence could not be brought in by any party.

However, in 2015, the Texas Legislature created several provisions that allow a court to look at extrinsic evidence to modify the otherwise unambiguous terms of a will upon certain circumstances under Texas Estates Code § 255.451. First and foremost, only a personal representative (such as an administrator or executor of the estate) can petition a court to modify an unambiguous will. Also, the court will only allow the modification under three different circumstances: 1) it “is necessary or appropriate to prevent waste or impairment of the estate’s administration," 2) the modification “is necessary or appropriate to achieve the testator’s tax objectives or to qualify a distributee for government benefits and is not contrary to the testator’s intent,” and 3) the modification “is necessary to correct a scrivener’s error in the terms of the will, even if unambiguous, to conform with the testator’s intent.” A scrivener’s error, or mistake by the attorney writing the will, does not include a mistake of law or fact by the testator.

Overall, the court's goal is to support the testator's original intent and follow their wishes. Even if that means altering what is physically written down on the piece of paper.

See David Fowler Johnson, Texas Statutes Now Allow a Court To Modify or Reform an Unambiguous Will, Texas Fiduciary Litigator, June 6, 2019.

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

June 8, 2019 in Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax, New Legislation, Wills | Permalink | Comments (0)