Wills, Trusts & Estates Prof Blog

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

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)

Wednesday, February 27, 2019

United States Supreme Court to Consider Whether States May Tax Trusts Based on Residence of Beneficiary

TrusttaxThe numerous changes in the tax law has caused many to alter their planning schemes, especially when it comes to those that have to pay state income taxes. Eleven states also currently tax trust beneficiaries based on their state of domicile. A number of practitioners believe that this policy violates the Due Process Clause of the United States Constitution, and the Supreme Court has decided to settle the issue.

In North Carolina Department of Revenue, Petitioner v. The Kimberley Rice Kaestner 1992 Family Trust, the state's Supreme Court held that the trust “did not have sufficient minimum contacts with the State of North Carolina to satisfy due process requirements….” Therefore, the state could not tax the trust solely because of the residency status of the beneficiary.

The facts of the case may make the decision of the Court quite narrow. The trust was not required to make distributions to its beneficiaries and in fact did not make distributions to the beneficiaries residing in North Carolina during the years at issue. The trustees were not located in North Carolina, the trust records were not kept in North Carolina and the trust’s financial advisors and assets were also outside of North Carolina.

See Margot Summers Edwards, United States Supreme Court to Consider Whether States May Tax Trusts Based on Residence of Beneficiary, Lexology, February 25, 2019.

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

February 27, 2019 in Current Affairs, Current Events, Estate Administration, Estate Planning - Generally, Income Tax, New Cases, Trusts | Permalink | Comments (0)

Monday, February 25, 2019

Tax the Rich? Here’s How to Do It (Sensibly)

TaxcalcPoliticians on both sides of the aisle agree that the tax system is in dire need of repair. The argument is how to do it so that it is equitable and fair. Some want to fix it so that it generates more revenue; others want to use it as a tool to decrease the wealth inequality. Are those appropriate goals? Is there any surprise that the public distrusts taxes so much?

Democratic presidential candidates are suggesting numerous ways to increase the tax rates of the wealthy. Other Democrats are proposing headline grabbing ideas, such as Ms. Ocasio-Cortez’s Green New Deal. But there may be other ways to patch up the system without completely tearing it down.

High net-worth Americans legally skirt the estate tax, even before the exemption increase brought by the Tax Cuts and Jobs Act. One major avenue is by passing much of their riches to their heirs without paying taxes on capital gains - ever. According to the Center on Budget and Policy Priorities this accounts for “as much as about 55 percent for estates worth more than $100 million,” using this stepped-up basis. Closing this loophole would raise more than $650 billion over a decade, estimates the Congressional Budget Committee. 

Capital gains are taxed much less than income taxes. Warren Buffett says his secretary pays a higher tax rate than he does as the rate for capital gains top out at 20%, while a person making a $40,000 salary would be taxed at 22%. 

See Andrew Ross Sorkin, Tax the Rich? Here’s How to Do It (Sensibly), New York Times, February 25, 2019.

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

February 25, 2019 in Current Affairs, Estate Administration, Estate Planning - Generally, Estate Tax, Income Tax, New Legislation | Permalink | Comments (1)

Friday, February 15, 2019

Article on The Killing of Community Property

TtulawKaren S Gerstner recently published an Article entitled, The Killing of Community Property, 11 Tex. Tech Est. Plan. Com. Prop. L.J. 1 (2018). Provided below is the first paragraph of the introduction of the Article.

The primary purpose of this article is to educate individuals who are unfamiliar with community property law and to explain why certain actions taken by Congress, federal courts, and the Internal Revenue Service (the "IRS") have amounted to the killing of community property. A secondary purpose of this article is to encourage Congress, and particular the members of Congress from community property states, to consider passing legislation (i) to amend the Employee Retirement Income Security Act of 1974 ("ERISA") to recognize the community property ownership interest of the spouses of employees and retirees who have accumulated qualified employee benefit plans ("qualified plans") while living in a community property state and to allow those spouses to dispose of their ownership interest in those qualified plans if their spouses die prior to the employee or retiree, to the maximum extent possible in view of both federal administrative goals and state law property ownership goals, and (ii) to clarify or modify section 408(g) of the Internal Revenue Code so that it does not abrogate the community property ownership of Individual Retirement Accounts ("IRAs") accumulated by married persons living in community property states, except to the extend absolutely necessary to achieve federal income tax goals.

February 15, 2019 in Articles, Current Affairs, Estate Administration, Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)