Wills, Trusts & Estates Prof Blog

Democrats may rein in big estates without reforming the estate tax

Democrats may limit some strategies used by wealthy Americans to reduce or avoid estate taxes. The list of potential tax reforms connected to the Democrats' $3.5 trillion budget plan include grantor-retained annuity trusts, intentionally defective grantor trusts and non-economic valuation discounts. 

The targeted strategies are often used by multimillionaires and billionaires to "gift appreciated assets to heirs tax-free while reducing the size of their taxable estate. . ." 

In addition to disallowing certain complex trust-planning techniques, Congressional Democrats may also ask the Treasury Department to update regulations to "prevent the abuse of non-economic valuation discounts."

According to Robert Lord, counsel for progressive group Americans for Tax Fairness, "[b]asically you've got this basket of loopholes that collectively can be used to defeat the estate tax at really any level, even billionaires." 

"Interestingly, Democrats don't seem to be weighing reforms to the estate tax itself, such as a higher tax rate or a reduced asset threshold that would subject more estates to federal levies." 

The Democrats' proposed estate-tax reforms "are part of Democrats' broader theme of raising taxes on the wealthy to help fund climate, paid leave, childcare and education measures. . ." 

See Greg Iacurci, Democrats may rein in big estates without reforming the estate tax, CNBC Personal Finance, September 10, 2021. 

Special thanks to Deborah Matthews (Virginia Estate Planning Attorney) for bringing this article to my attention.

Article: Summary of Changes Made By the 2021 Texas Legislature

Gerry W. Beyer recently published an article entitled, Summary of Changes Made By the 2021 Texas Legislature, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article:

This article reviews the highlights of the legislation enacted by the 2021 Texas Legislature relating to the Texas law of intestacy, wills, estate administration, trusts, guardianship, and other estate planning matters.

Statutory Book Released: 2021 Texas Estates & Trust Codes with Commentary

Gerry W. Beyer recently posted his book, 2021 Texas Estates & Trust Codes with Commentary, on the Wills, Trusts, & Estates Law eJournal. Provided below is the abstract of his work:

This document contains the Texas Estates Code and the Texas Trusts Code (and related Property Code provisions) showing all changes made by the Regular Session of the 2021 Texas Legislature. The changes, most of which take effect on September 1, 2021, are shown in red-lined format for easy comparison of the prior and new versions of the statutes. Also included are charts converting Probate Code to Estates Code sections and Estates Code to Probate Code sections.

I have included commentary entitled Statutes in Context to many sections. These annotations provide background information, explanations, and citations to key cases which should assist you in identifying the significance of the statutes and how they operate.

Illinois: Electronic Wills and Remote Witnesses Act

The governor of Illinois has signed into law the "Electronic Wills and Remote Witnesses Act," making it the tenth American state to put into effect legislation for e-wills. The act takes effect immediately (July 26, 2021).  The Illinois act is non-uniform -- it is not based on the Uniform Electronic Wills Act of 2019.

Below is the link to the Act:

Public Act 0167 102nd General Assembly 

Special thanks to Adam J. Hirsch (Professor of Law at the University of San Diego School of Law) for bringing this Act to my attention.

Electronic-Will Legislation -- Good, Bad, or Ugly?

Prof. Adam J. Hirsch (University of San Diego) has recently posted on SSRN an undated version of his extensive article about e-will legislation entitled Models of Electronic-Will Legislation. Here is the abstract of the article:

This Article examines alternative ways lawmakers could structure legislation validating electronic wills. The Article identifies four essential models, each of which is currently reflected in acts or drafts of acts found either in the United States or abroad. These are: (1) acts validating electronic wills that meet formal requirements, (2) acts giving effect only to specialized variants of electronic wills (or none at all), (3) acts allowing electronic wills only when made under emergency conditions, and (4) acts allowing electronic records intended as wills on a case-by-case basis, without establishing formalities for their validation. In the course of the analysis, the Article performs the first-ever empirical survey of popular assumptions concerning the revocation of electronic wills. The Article ultimately concludes that, given the novelty of electronic wills, we are best off if states experiment with alternative legislative models until lawmakers have enough evidence to assess their relative merits. For this reason, the Uniform Electronic Wills Act of 2019 is premature.

Enactment of FUDTA and CPTA Change the Rules on Florida Trusts

On June 29, 2021, Florida enacted the Florida Uniform Directed Trust Act (FUDTA) and the Community Property Trust Act (CPTA). 

According to Bilzin Sumberg: 

Florida will now have a more robust law whereby “trust directors” can be granted powers in a Florida governed law trust to direct the trustee as to certain management functions of such trust. With the CPTA, Florida has become the fourth state to enact Community Property Trust legislation to enable married couples living in non-community property states such as Florida to have the ability to take advantage of a full stepped-up income tax basis upon the death of either spouse. Both of the Acts will be effective July 1, 2021.

See Jennifer J. Wioncek & Osvaldo Garcia, Enactment of FUDTA and CPTA Change the Rules on Florida Trusts, Bilzin Sumberg, July 1, 2021. 

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

Minnesota farmer concerned tax proposals could fundamentally change structure of family farms

Kirby Hettver, a fifth-generation farmer from DeGraff, Minnesota, expressed concerns about proposed changes to the estate tax. Hettver believes that the proposed changes could "fundamentally change the way family farms are structured. 

Hettver stated, “Obviously we don’t want to make any decisions without knowing a little more about what exactly they are going to end up with.”

President Biden's proposed changes, which include elimination of the stepped-up basis, will affect a lot of families, farm families included. The elimination of stepped-up basis would cause "inherited assets, like land, to be taxed upon the previous owner's death, and lower the estate tax threshold from $11.7 million to $500,000.

Hettver further stated, “In order for us to maintain (the farm) and pass it onto the sixth generation, based on the new policies if we need to make changes we’ll have to figure out what rules we’re playing by and play by them.”

See Mark Dorenkamp, Minnesota farmer concerned tax proposals could fundamentally change structure of family farms, Brownfield Ag News, June 25, 2021. 

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

Article: IRS Guidance About the SECURE Act's Beneficiary Provisions Requires Revision

Albert Feuer recently published an article entitled, IRS Guidance About the SECURE Act's Beneficiary Provisions Requires Revision, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article.

The IRS has presented its first and only guidance about how the SECURE Act changed the Required Minimum Distribution (RMD) Rules. This was done in a detailed IRS guide for preparing 2020 returns, and an IRS FAQ web site that referenced the guide that had been released a day earlier. The SECURE Act limited the set of individual beneficiaries permitted to use their own life expectancy to stretch out the benefit distributions after the death of participant. Non-favored individual beneficiaries became subject to a 10-year rule similar to the 5-year rule upon which it is based. The 5-year rule does not require any benefit distributions before the end of the 5-year period, but requires distribution on or before the final day of the period. The 5-year rule is applicable to an estate or trust not treated as a pass-through entity when the participant died before attaining the participant’s required beginning date.

The IRS correctly treats the 10-year rule as replacing a disfavored individual beneficiary’s ability to use the beneficiary’s life expectancy to determine annual RMDs. The return guidance incorrectly describes the 10-year rule as requiring annual distributions in each year following the participant’s death even though the 5-year rule has no such requirement. Furthermore, if the participant dies after attaining the participant’s required beginning date, the IRS guidance prevents a disfavored individual beneficiary from continuing to use the participant’s life expectancy to determine annual minimum required distributions. The IRS does this even though such continuation would result in no further stretch-out of the benefit distributions, and an estate or trust not treated as a pass-through entity may so use the participant’s life expectancy. These limitations are not consistent with the stated purpose of the SECURE Act RMD provisions, the long-standing IRS regulations interpreting the RMD rules, or the amended RMD statute as a whole. Moreover, they may be readily avoided by well-advised participants.

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

President 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. 

Texas Legislature Extends The Rule Against Perpetuities To 300 Years For Trusts

The Texas Legislature has just passed a bill that extends the rule against perpetuities to 300 years for trusts. The Bill will take affect on September 1, 2021. 

The Bill (HB 654) was sent to the governor from the Legislature on May 20, 2021, but he has not yet signed the bill into law. Unless the governor vetoes the bill, it will become law after 10 days. 

Under the Texas Constitution: "Perpetuities and monopolies are contrary to the genius if a free government, and shall never be allowed. . . ." According to ConocoPhillips Co. v. Koopmann "[a] perpetuity is a restriction on the power of alienation that lasts longer than a prescribed period." 

The rule against perpetuities is not so simple to understand. The rule against perpetuities considers invalid any will or trust that "attempts to create any estate or future interest which by any possibility may not become vested within a life or lives in being at the time of the testator's death and twenty-one years thereafter, and when necessary the period of gestation.

This rule applies to wills and non-charitable trusts. 

Due to the recent amendment to Texas Trust Code Section 112.036, the interest in a trust must vest, if at all "not later than 300 years after the effective date of the trust, if the effective date of the trust is on or after September 1, 2021. 

See David Fowler Johnson, Texas Legislature Extends The Rule Against Perpetuities To 300 Years For Trusts, Winstead: Texas Fiduciary Litigator, May 27, 2021. 

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