Wills, Trusts & Estates Prof Blog

Oscar nominees will receive gift bags worth nearly $140,000—but they could come with a hefty tax bill

The 94th Academy Awards this Sunday will host a slew of Hollywood A-listers hoping to walk out with an Oscar Statuette. 25 of the nominees will also receive a gift bag worth over $137,000. 

The gift bag is given to the five nominees in each of the four acting categories and nominees for "Best Director." The gift bag includes a collection of expensive items, including gold-infused olive oil and even up to $10,000 worth of plastic surgery. 

Unfortunately, if the gift bag is accepted by the nominees, they will also be accepting a "hefty tax burden." The tax must be applied because the gift bags are not technically "gifts" that were given "solely out of affection, respect or similar impulses for the recipients. . ." 

According to Eric Bronnenkant, head of Tax at Betterment, it comes down to intent. With the gift bag, the intent of providing these gift bags is to influence behavior and get celebrities to use a certain product or go on a specific vacation. 

Thus, the value of the gifts is calculated as income on the recipients' taxes. 

See Nicolas Vega, Oscar nominees will receive gift bags worth nearly $140,000—but they could come with a hefty tax bill, CNBC, March 27, 2022. 

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

Trusts as Eligible Shareholders of an S Corporation

It is a common estate planning practice for small business owners to transfer ownership of their business interests into their revocable living trusts. These transfers can be made during the business owner's lifetime or with a "transfer on death" (TOD) designation. 

This estate planning technique has many benefits, a major one being the avoidance of probate of the business interest at death, but only if the terms of the trust provide the necessary protections, AKA ensuring the trust is an eligible shareholder of an S corporation. 

The are certain factors to consider in these instances. So long as the business owner is living, "his or her revocable trust is treated as a 'grantor trust' for income tax purposes, and as such, is an eligible S corporation shareholder." Upon the death of the business owner, the trust will remain an eligible shareholder for a period of two years. After the two year period, the trust will be required to distribute stock outright to an eligible shareholder, unless the stock is to remain in the trust, in which case the trust must qualify as a qualified subchapter S trust (QSST) or an electing small business trust (ESBT). 

In order for the trust to qualify as a QSST, the trust "must require that all of the net income be distributed to a single beneficiary." To qualify as an ESBT, "the Trustee may have discretion to accumulate income, and there may be multiple beneficiaries."

For more information on the tax benefits of QSST and ESBT trusts: 

See Rebecca C. Bowen, Trusts as Eligible Shareholders of an S Corporation, Thompson McMullan P.C.: Commentary, March 17, 2022. 

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

Planning: 2022 Planning Guide

Below is information about a 2022 planning guide put together by the Advanced Planning Group. 

Indeed, the bulk of 2021 was spent under the specter of seemingly inevitable changes: in May of 2021, the Administration released its wish list of tax proposals, then the House released a draft bill in September that proposed serious changes—some even retroactive—to income tax, capital gains, and corporate tax rates, as well as wide-ranging changes to the estate and gift tax regime, retirement planning, and international corporate taxation. Yet, despite the House passing legislation in November to make significant tax changes, we are now into 2022 without any changes to the tax landscape passed into law, other than some moderate inflation adjustments. This doesn’t mean that tax changes are not still possible sometime this year.

 

The purpose of this guide is to summarize some key aspects of tax laws affecting ultra-high net worth (UHNW) individuals and families and is organized into three sections:

 

– Income tax planning

– Retirement planning, and

– Estate planning.

 

The first of these sections deals primarily with income tax planning and lists updated figures for applicable rates and brackets, as well as a discussion of key concepts in income tax planning. The second section discusses retirement planning, including an outline of the tax rules for IRAs, Roth IRAs, and required minimum distribution rules, before concluding with a discussion of Social Security and Medicare benefits.

 

Finally, the section on estate planning outlines key concepts and changes to the gift and estate taxes in 2022.

See Planning: 2022 Planning Guide, UBS (2022). 

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

He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income. (The IRS did not succeed)

The IRS went after Konstantin Anikeev, an experimental physicist, after he exploited the difference between unlimited 5% rewards and lower fees on gift cards and money orders, a concept Anikeev learned about from personal-finance websites. 

Anikeev used American Express cards, the government's view that credit-card rewards aren't income, and his own willingness to spend time buying gift cards and money orders. Anikeev stated, "If one has a theory, one can test it experimentally. Some are easier to test. . .[o]thers require a Large Hadron Collider or something like that. But this one was a bit more accessible." 

Mr. Anikeev's $6.4 million in credit-card charges led to an Internal Revenue Service audit "and a finding that he and his wife had more than $310,000 in income that should have been taxed." 

Judge Joseph Goeke affirmed the IRS practice, which says that credit-card rewards are usually nontaxable income. For example, buying a sweater for $100 and getting a 5% reward is really a $95 purchase, as opposed to $5 of income. However, the judge did offer the IRS avenues for tougher enforcement. 

Anikeev took the government to court and received a split ruling from Judge Goeke, who ruled that rewards earned on purchases of Visa gift cards aren't taxable because the cards are products. Anikeev even brought a tub of gift cards to court as a demonstration, and according to his lawyer, Jeffrey Sklarz, "[The government] sort of picked a fight with the wrong person. . .They should have picked someone who was a hot mess."

See Richard Rubin, He Got $300,000 From Credit-Card Rewards. The IRS Said It Was Taxable Income., Wall Street Journal, March 7, 2021. 

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

CLE: Estate Planning With Specialty Assets: Carried Interest, SPACS, and QOZ Funds

On Thursday, January 20, 2022 at from 12:00–1:30 PM Eastern, The American Law Institute (ALI) and The American College of Trust and Estate Counsel (ACTEC) are cosponsoring a CLE entitled, Estate Planning With Specialty Assets: Carried Interest, SPACS, and QOZ Funds. 

Below is more information on the CLE: 

Why You Should Attend

Wealth transfer structures can be complicated and have many moving parts. In recent years, new investment opportunities have emerged with the promise and potential for explosive growth and significant tax benefits. Such specialty assets, including interests in special purpose acquisition companies (SPACs), qualified opportunity zone (QOZ) funds, and private investment funds, are increasingly on clients’ radars as good vehicles for wealth transfer. While these assets can provide unique opportunities for leverage, they also come with nuanced pitfalls and risks within the realms of estate, gift, and income taxation. Join us for this 90 minute webcast to learn how seemingly small variations in different structures can result in quite different solutions. Gain a better understanding of the facts and circumstances of the various options and learn ways to create customized plan structures for each of your clients. 

What You Will Learn

The faculty, all Fellows of The American College of Trust and Estate Counsel and highly-experienced estate and tax planning practitioners, will take a deep dive into the lightly chartered waters of estate planning with specialty assets. They will particularly focus on: 

Carried interests in private investment funds

Various categories of interests in SPACs

Interests in QOZ funds

Preferred partnership structures

 Questions submitted during the program will be answered live by the faculty. All registrants will receive a set of downloadable course materials to accompany the program. 

Who Should Attend

Estate planners and other related professionals, particularly those with wealthy clients, will benefit from this CLE on estate planning with specialty assets offered by ALI CLE and ACTEC. 

Register two or more and SAVE! Register as a group for this program and save up to 35% (click here for more details). Click "Register as a Group" to register at these savings. (Offer valid on new registrations in the same delivery format only; discounts may not be combined.)

 

Tax Tactic Of The Ultra-Wealthy: Split The Masterpiece In Two

Beautiful, timeless art pieces are not only a source of pride and joy for billionaires art lovers—they are also a great way to get a tax break. 

Lawyers for the ultra-wealthy say that "they're increasingly getting requests from art collectors to find strategies to shield their wealth from the Internal Revenue Service. The solution: giving away just a fraction of their ownership." 

With the use of fractional donations, the ultra-wealthy can get a tax benefit "tied to surging art values without donating a painting outright." Under this strategy, the art piece will go back and forth between the donor and the museum and the owner will receive an income-tax deduction "based on the fair market value. . ." 

According to John Mezzanotte, managing partner in the Greenwich, Connecticut, office of accounting and tax-advisory firm Marcum, "If you're dividing time between two places, you won't even miss the art."

Fractional donations of art pieces is another example of another creative strategy that the ultra-rich are using to obtain tax benefits and avoid the proposed tax levies on high earners. 

See Heather Perlberg, Tax Tactic Of The Ultra-Wealthy: Split The Masterpiece In Two, Financial Advisor Magazine, November 2, 2021. 

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

TAX PROPOSALS IN THE NEW “BUILD BACK BETTER” FRAMEWORK

"The White House released a new framework for the build back better plan, followed by a preliminary draft of the Bill from the house rules committee." 

Included in the proposal is a spending and tax plan. The specifics of the plan are complicated and involve "rapidly evolving, Congressional dynamics." 

The House Rules Committee text did not include provisions for tax changes like lowering of gift and estate tax exemption amounts; limitations on grantor trusts; increased corporate, income and capital gain tax rates; and provisions related to IRAs and Roth IRAs. Also notably left out was the "Billionaire Income Tax." 

Draft provisions that were included were: 

• A 15% minimum tax on corporations with more than $1 billion in profits, 1% surcharge on corporate stock buybacks for public companies, and 15% global minimum tax
• An income surtax applying a 5% percent rate on modified adjusted gross income (AGI) over $10 million, and an additional 3% on modified AGI above $25 million. The income surtax thresholds are lower for trusts, applying a 5% surtax on modified AGI over $200,000, and an additional 3% surtax on modified AGI over $500,000
• An expansion of the 3.8% net investment income (NII) tax to business profits for material participants making over $400,000, joint filers over $500,000 and all trust and estates (regardless of income levels)
• Limitation of the qualified small business stock exclusion to 50% for most sales of QSBS after September 13, 2021
• Limitations on excess business losses of noncorporate taxpayers, including a no-carryover of disallowed losses

See TAX PROPOSALS IN THE NEW “BUILD BACK BETTER” FRAMEWORK, Wealth: Northern Trust, October 28, 2021. 

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

As Second Homes Get Far More Use, the Question Is: Where Do You Live?

Of course, owning one home comes with its challenges. But the challenges may mount even higher when owners split their time equally between two or more properties. In these cases, owners face tax, legal, financial, and personal challenges. 

The Rounds family have recently faced these challenges since they have began to spend an extensive amount of time at their second home in the Teton Vally region on the Wyoming/Idaho border. 

Mr. Rounds and his wife closed on a $2.5 million house in Idaho, and although the family planned on splitting their time equally between their home on the East Coast and the new home, they have already spent six months in the new home. 

The family has had to figure out how to "ship cars halfway across the country, find a second pediatrician for their 11-mont-old-daughter, and get their three Maltese dogs back and forth between the two homes." These challenges are not typically encountered by people who only spend weekends and the occasional vacation week at a second home. 

This "co-primary home" lifestyle has been the norm for the ultra-rich. But due to the pandemic, working remotely has become more of the norm and has made the co-primary home lifestyle a more realistic lifestyle choice for second-home owners who are less wealthy.

For those thinking about the lifestyle, it is important to consider the tax, financial, legal, and personal challenges that may come along with it.

See E.B. Solomont, As Second Homes Get Far More Use, the Question Is: Where Do You Live? , The Wall Street Journal, October 14, 2021.

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

Article: Incentivizing Wills Through Tax

Margaret Ryznar recently published an article entitled, Incentivizing Wills Through Tax, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article.

There have been recent calls to loosen will formalities in order to allow more people to execute wills, the importance of which has been highlighted by the COVID-19 pandemic. The reduction of necessary will formalities can be successful in expanding the use of wills, as can potential tax incentives for creation of wills, such as a tax credit. However, there are numerous advantages to using tax to initiate change, as considered in this Article.

Article: The U.S. Supreme Court In Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income

Beckett Cantley and Geoffrey Dietrich recently published an article entitled, The U.S. Supreme Court In Kaestner: Deciphering the Constitutionally Required Minimum Contacts Necessary for State Taxation of Trust Income, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article.

As far back as 1929, several states have sought to broaden their tax base by expanding taxation to out-of-state trusts that have in-state beneficiaries, even when the beneficiaries possess only a contingent interest in the trust’s assets. On June 21, 2019, the U.S. Supreme Court confronted the constitutionality of this trust tax practice in North Carolina Dep’t of Revenue v. Kimberley Rice Kaestner 1992 Family Trust (“Kaestner Trust”). In Kaestner Trust, the Supreme Court issued a narrow decision in favor of the Trust, basing its opinion on a compilation of landmark constitutional law and civil procedure cases. Specifically, the Court ruled that the domicile of a contingent beneficiary on its own does not constitute sufficient “minimum contacts” between a trust and a jurisdiction for tax purposes, and thus the North Carolina statute violated the Due Process Clause of the U.S. Constitution.

Every jurisdiction has its own method of defining the minimum contacts necessary to bring a trust into its taxation orbit. In light of the Court’s decision, other state statutes that impose a fiduciary income tax based on weak connections may face constitutional scrutiny in the near future, including tax regimes containing “throwback” rules, “one-dollar” rules, and testamentary trust residency standards that rely indefinitely on the domicile of a testator. The main purpose of this article is to understand the Kaestner Trust decision, discuss how the impacted states have adjusted, and identify any statutes peripheral to the case that may face constitutional inquiry in the future.

The introduction to this article provides the foundation for understanding state trust taxation regimes and frames the controversy of multi-state taxation. Part II explains the facts within Kaestner Trust and analysis used by the Supreme Court in rendering the North Carolina statute unconstitutional. It also discusses how the North Carolina trust statute has been impacted. Part III identifies the other states, besides North Carolina, directly impacted by the Kaestner Trust decision and how these states have responded to the case. Part IV analyzes how the decision might promote further inquiry into the constitutionality of statutes that lie on the margins of Kaestner Trust. Finally, the article considers estate planning and trust drafting opportunities created by the case and concludes by briefly summarizing the significance of Kaestner Trust.