Wills, Trusts & Estates Prof Blog

An Answer to a Tax Problem You Didn't Know You Had

The tax deadline is steadily approaching, but yet the Internal Revenue Service has yet to release guidance on an issue that has occurred for taxpayers because of the recent tax overhaul. The question is how the IRS will tax state-tax refunds given the new $10,000 cap on state and local tax deductions, or SALT.

The truth is that the majority of taxpayers will not have to be anxious about the situation. Michael Graetz, a former Treasury Department official that is now teaching at Columbia University's law school, says that there is a "longstanding legal doctrine means it won't be hard for most taxpayers subject to the SALT cap to minimize taxes on state refunds." This doctrine is known as the Tax Benefit Rule.

Under the doctrine, a "recovery" such as a state-tax refund is not taxable as gross income for the next year if deducting it did not yield a tax break according to Bryan Camp, a professor at Texas Tech University's law school. Because of this, millions of filers should not have to distinguish between types of state-tax deductions for 2018 because the SALT limitation combines them all into one unit.

Camp warns that not all refunds will be nontaxable. This result depends on other deductions and the size of these deductions.

See Laura Sanders, An Answer to a Tax Problem You Didn't Know You Had, Wall Street Journal, March 22, 2o19.

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

Article on Online Tools under RUFADAA: The Next Evolution in Estate Planning or a Flash in the Pan?

Justin H. Brown and Ross E. Bruch recently published an Article entitled, Online Tools under RUFADAA: The Next Evolution in Estate Planning or a Flash in the Pan?, Probate and Property Magazine, Vol. 33 No. 2, March/April 2019. Provided below is an introduction to the Article.

Over the past five years, the estate planning process for digital assets has dramatically transformed. Much of this transformation is the result of the United Law Commission's introduction of the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) in September 2015, which a majority of US states and territories have adopted with some variations. RUFADAA, like its predecessor, UFADAA, was drafted with the intent to unify and clarify states laws with respect to a fiduciary's ability to access an individual's digital assets and electronic communications. However, unlike UFADAA, which presumed a decedent's consent for the decedent's personal representative to access her digital assets, RUFADAA places the burden on the decedent to provide express consent through the decedent's will or another mechanism. Under RUFADAA, an individual may use an "online tool," which is an account-specific feature that an online custodian (e.g., Apple, Google, Yahoo) may offer that enable its users to provide directions for disclosure or nondisclosure of digital assets to a designated person. Online tools are account-specific - in other words, using Google's online tool will not dictate how information held in the decedent's Apple account should be shared. Any assets that are not addressed with an online tool are subject to the terms of a testator's estate planning documents. When digital assets are not addressed by an online tool or an estate planning document, a providers terms of service agreement will dictate access and disclosure of a decedent's digital assets and electronic information.

Article on Estate Planning for Mary Jane and Other Marijuana Users

Gerry W. Beyer and Brooke Dacus recently published an Article entitled, Estate Planning for Mary Jane and Other Marijuana Users, Probate and Property Magazine, Vol. 33 No. 2, March/April 2019. Provided below is the introduction of the Article.

An estate planner is more likely to encounter a client who regularly uses marijuana than a client who needs estate and gift tax planning, given that 55 million Americans are current users. Christopher Ingram, How Many Americans Regularly Use Pot: The Number Is, errr, Higher Than You Think, Wash. Post, April 20, 2018. At least 32 states and the District of Columbia currently exempt qualified users of medicinal marijuana from penalties imposed under state law. Additionally, ten states, Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Washington, and the District of Columbia authorize purely recreational use. See Legal Recreational Marijuana States and DC, ProCon.org (last visited Nov. 11, 2018). Accordingly, practitioners need to be aware of the interface between marijuana and estate planning.

This article provides a discussion of the major issues that arise in this context including: (1) impact of marijuana use on capacity; (2) interpretation of clauses conditioning benefits on the non-use of illegal drugs; (3) life insurance issues; and (4) marijuana-based assets in a decedent's estate or trust.

Article on Intestate Inheritance Rights for Unmarried Committed Partners: Lessons for U.S. Law Reform from the Scottish Experience

E. Gary Spitko recently published an Article entitled, Intestate Inheritance Rights for Unmarried Committed Partners: Lessons for U.S. Law Reform from the Scottish Experience, 103 Iowa L. Rev. 2175 (2018). Provided below is an abstract of the Article.

No U.S. state affords intestate inheritance rights to the unmarried and unregistered committed partners of a decedent. This omission has become more and more problematic in recent years as cohabitation rates in the United States has risen and marriage rates have decline. Indeed, the phenomenon of increasing cohabitation rates and declining marriage rates is observed across the developed word. Unlike in the United States, however, a significant number of foreign jurisdictions have reformed their law to afford intestate inheritance rights to a decedent's surviving unmarried committed partner.

This Article looks to Scottish law to inform consideration of how U.S. states might best reform their intestacy statutes so as to provide intestate inheritance rights to a surviving unmarried committed partner. Examination of Scottish law should provide especially fruitful for U.S. law reformers. The relevant Scottish statutory provisions have been in effect since 2006 and have been extensively critiqued by Scottish courts, academics, and practitioners. Indeed, the Scottish Law Commission ("SLC"), whose recommendations led to adoption of the current scheme, has called for repeal of these intestacy provisions, and has offered a replacement scheme. Moreover, Scottish succession law and U.S. succession law share significant norms valuing certainty and preferring fixed entitlements and limited judicial discretion.

The Article evaluates the Scottish statute with respect to three major issues of principle that should be at the center of U.S, reform discussions: fulfillment of purpose, implications for certainty and administrative convenience, and implications for marriage. The Article similarly evaluates the SLC's proposal to replace the current statute. Finally, the Article reflects upon the Scottish statute and the SLC proposal in considering which element of Scottish law a U.S. state might profitably borrow or should reject in an effort to craft a more inclusive approach to the intestate inheritance rights of unmarried committed partners consistent with the principles of U.S. succession law. The jumping off point for this discussion is this author's previously published proposal for a model statute that implements an accrual/multi-factor approach to intestate inheritance rights for unmarried committed partners. After describing the significant features of this proposal, the Article considers how one might evolve the proposed accrual/multi-factor approach to incorporate the lessons learned from the Scottish experience.

Article on Family Protection in the Law of Succession: The Policy Puzzle

Richard Storrow recently published an Article entitled, Family Protection in the Law of Succession: The Policy Puzzle, Wills, Trusts, & Estates Law eJournal (2018). Provided below is an abstract of the Article.

To promote the protection of families, succession law diminishes the power of testation in a variety of ways that shield surviving spouses and children from disinheritance. The article conducts a survey of the law in fifty states, five main territories, and the District of Columbia and uncovers a remarkable diversity of family-protection provisions. Less apparent than the substance of the provisions themselves are the policies behind them. In a comprehensive study, this article concludes that family-protection provisions seek to prevent decedents from using their testamentary freedom in ways that impoverish those who are dependent upon them or that work unfairness against family members who have contributed in important ways to the accumulation of their wealth. In addition to these concerns is a notable ambivalence about the extent to which family protection statutes should undercut the expectations of those who have been promised a share of a decedent’s estate.

For Tax-Exempt Employers: 403(b) Retirement Plan Compliance Opportunity

Tax-exempt employers have until March 31, 2020 - the “Remedial Amendment Period” (RAP) - to retro-actively self-correct compliance issues with their 403(b) plan documents. Though this date may seem a long ways away, the process to correct the document requires significant time.

• What compliance issues can I fix?
  • Employers can fix compliance issues both in their 403(b) plan documents and in separate documents that are referenced in the plan document. RAP does not apply to issues than cannot be fixed by amending the document.
• Who is eligible?
  • Those that adopted a written plan document by December 31, 2009 that was intended to comply with 403(b) requirements, regardless if their plan is subject to ERISA or not.
• What are the benefits?
  • An employer who fails to correct issues under RAP can lose their tax-exempt status, be able to correct the violations only under the IRS’ Voluntary Correction Program (VCP), which expends more time and money to correct compliance issues.
• What do I do?
  • A tax-exempt employer can either adopt a 403(b) prototype plan document pre-approved by the IRS by March 31, 2020, or amend their plan by the end of RAP.

For more information, review the IRS website.

See For Tax-Exempt Employers: 403(b) Retirement Plan Compliance Opportunity, Medical Lawyer Spot, March 9, 2019.

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

All Levels of Upper Wealth Feeling Acute SALT Cap Pain

Taxpayers 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.

Four Chinese Tycoons Just Transferred $17 Billion To Trusts

China is having their wealthy scrambling to avoid the nation's alternate tax regime, pushing them to protect their fortunes from the higher rates. Four major tycoons from China transferred $17 billion of their assets to trusts last year.

In a filing in Hong Kong on January 12, billionaire Sun Hongbin, chairman of real-estate developer Sunac China Holdings Ltd., disclosed that he had transferred the majority of his stake to South Dakota Trust Company. In 2017, Sun's fortune more than tripled, and the transfer on December 31st was to the sound of $4.5 billion. Sun and his family members are beneficiaries of the trust.

Chairwoman Wu Yajun, one of China’s richest women, made a similar move, as well as the minds behind food distributors Dali Foods Group Co. and Zhou Hei Ya International Holdings Co. The companies cited succession planning as the purpose of the transfers.

China's new tax law also does not spell out whether offshore trust assets are taxable, says Oscar Lie, chief executive officer at Noah International Holdings Ltd. But other tax shelter trusts may be available and more straightforward, so families are attempting to dodge the majority of the damage by a major tax overhaul. The change is being driven by China's huge debt load and a slowing economy. 

See Venus Feng and Blake Schmidt, Four Chinese Tycoons Just Transferred $17 Billion To Trusts, Bloomberg, January 15, 2019.

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

Are You Giving Your Heirs an Unanticipated Tax Bill?

The changes brought by the 2017 Tax Act made it so that many clients did not have to worry about the estate tax as the exemption was dramatically increased. However, if an estate plan remains in place that directs assets to a credit shelter trust, unnecessary capital gains tax may be owed. The reason is that the income tax basis of the assets held in a the trust is not stepped up in value at the death of the second spouse because the assets are not included in that spouse’s estate.

The challenge  is to move assets out of the credit shelter trust and into the survivor’s estate to obtain the income tax-saving step-up when the survivor dies. Even though originally credit shelter trusts are irrevocable, many states have acknowledged changed circumstances that make some trusts impractical, outdated or exposed to unanticipated taxation. New state laws are here to help that.

Terminating a non-charitable irrevocable can be accomplished without court approval, so long as there is consent of the trustee and all beneficiaries, and provided the termination is not inconsistent with a material purpose of the trust. As the purpose was to reduce taxes, terminating would align with that goal. Modifying and decanting the trust may also be avenues to pursue. Decanting a trust means that the trustee directs the trust property to a new trust that contains different terms from the original trust but provide the same protections.

See Nancy S. Hearne, Are You Giving Your Heirs an Unanticipated Tax Bill?, Saul.com, March 1, 2019.

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

Article on I Knew Him as my Daughter: The Impact of Gender Changes on Sex-Based Benefits From Class Gifts

Megan McIntyre recently published an Article entitled, I Knew Him as my Daughter: The Impact of Gender Changes on Sex-Based Benefits From Class Gifts, 11 Tex. Tech Est. Plan. Com. Prop. L.J. 191-212 (2018). Provided below is the introduction to the Article.

From Hollywood to hometowns, through public media and private conversations, a new wave of information surrounding gender identity and gender equality has brought attention to the unique legal issue transgender individuals face. Transgender individuals are emerging from the margins of out society to challenge traditional cultural norms and the legal institutions that support them. While some critics note that since 2014 we have reached a "transgender tipping points," there is no questions that transgender equality represents a new frontier in the American civil rights movement. As social activists continue to come forward and inspire change, it is important for lawyers to familiarize themselves with the distinct battles this misunderstood minority faces to netter protect their rights and fight against potential discrimination.

This comment examines the shortfall of rights and remedies available to transgender individuals by looking through the lens of a simple estate plan that creates a sex or gender-based class gift. When a testator creates a class gift based on birth, biology, or boy versus girl, concerns about a potential beneficiary's legal gender becomes increasingly relevant. This issue highlights the need to grant wider legal recognition to the transgender community by implementing a system that will give individuals more freedom to choose and to change their legal gender identities.

Section II.A provides background material including definitions and brief explanations of relevant terminology. Following the introduction of terminology, Part III examines the current legal climate relating to transgender rights, including the status of transgender spouses and the ability for transgender individuals to update their gender identities on legal documents. Part IV illustrates the approaches courts use to construe wills to ascertain the testator's intent when parts of the will are ambiguous. Using Part III and Part IV's framework, Part V will apply the general rules of will construction in a context in which the legal gender of an individual is uncertain.

Finally, Part VI of this comment proposes legislation that will bring more certainty to transgender individuals facing the kind of dilemma Jason Benner experienced. This section will identify useful drafting tools that lawyers can use to dispose of the need for courts to determine whether the testator intended the individual to be a beneficiary post gender transformation. Additionally, this section will address the need for states to amend estate statutes to specifically provide guidelines for courts to use in situations in which a change in a beneficiary's gender conflicts with the testator's characterization of the individual in his or her will. Courts should adopt a policy to defer to an individual's social transition to grant relief to transgender individuals who are not immediately identifiable in a will.