Wills, Trusts & Estates Prof Blog

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

Monday, May 10, 2021

Dividends Received by an Employee of a Corporation are Still Part of Net Investment Income

IRSIn Chief Counsel Advice 202118009 the IRS addresses an interesting question: "Whether tax dividends received by a shareholder who is also employed by the C corporation is subject to the net investment income tax, as well as if the answer changes if the corporation is closely held." 

Net Investment Income Under IRC §1411

IRC §1411, which was added to The Affordable Care Act, "imposes a tax on the lesser of the net investment income of a taxpayer or the taxpayer's adjusted gross income in excess of threshold amounts that vary by filing status." 

This "net investment income" includes gross income from dividends apart from those that are the result of the ordinary course of a trade or business. (IRC §1411(c)(1)). 

The situation that is addressed by the IRS is quoted below: 

The Taxpayer is a shareholder in a C corporation. It was determined under examination that the corporation paid Taxpayer’s personal expenses from corporate accounts, and the payments were reclassified as dividend income paid to the Taxpayer by the corporation. The Taxpayer is also an employee of the corporation and is involved in the day-to-day operations of the corporation’s manufacturing trade or business. The facts further indicate that the corporation may be a closely-held corporation within the meaning of § 469(h)(1) as described in § 465(a)(1)(B) (the Taxpayer appears to own a majority of the shares of the corporation). The Taxpayer contends that because the Taxpayer materially participates in the manufacturing trade or business of the corporation as an employee, the dividend income that the Taxpayer received from the corporation is not subject to tax under § 1411, because the dividend income is derived in the ordinary course of a trade or business that is not a passive activity of the Taxpayer within the meaning of § 469

The deeper question is, under IRC §1411(c)(1), if a taxpayer is involved in day to day operations of the corporation whether the dividend income is removed from the investment income category found in (c)(1), or whether the dividends retain their status as investment income, and are outside the scope of the ordinary course of a trade or business. 

According to the IRS, employment does not change the nature of the dividends, meaning they retain their status as part of investment income.

For more information see, Ed Zollars, CPA, Dividends Received by an Employee of a Corporation are Still Part of Net Investment Income, Kaplan Financial Education: Current Federal Tax Developments, May 7, 2021. 

Special thanks to Mark J. Bade (CPA, GCMA, St. Louis, Missouri) for bringing this article to my attention. 

May 10, 2021 in Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0)

Wednesday, April 14, 2021

Client Alert: Are Changes Afoot for Estate and Gift Taxes?

Wealth taxUnder the current administration and "composition of Congress," changes to estate and gift taxes are likely. Senator Bernie Sanders recently proposed tax reform legislation that would "make major changes to the current estate and gift tax rules." 

If the legislation were adopted, there would be a reduction to the estate tax lifetime exemption. Under the proposed legislation, the current exemption ($11.7 million per taxpayer) would drop to $3.5 million, which would not be adjusted for inflation. Further, the gift tax lifetime exemption would be reduced to $1 million. 

Also, "gifts to irrevocable trusts and certain family entities, and gifts of assets subject to prohibitions on sale and those that cannot immediately be liquidated will be subject to a limit of $30,000 per donor annually." 

The rate of the estate tax which would change to a progressive rate and increase from 40 percent to 45 percent for taxable estates between $3.5 million and $10 million, "50 percent for estates between $10 million and $50 million, 55 percent for estates between $50 million and $1 billion, and 65 percent for estates over $1 billion." 

If adopted, the new legislation would affect the usefulness of grantor trusts, GRATs, and family entity discounts. 

The proposed legislation would also greatly affect trusts that are considered to be owned by a grantor for income tax purposes, which would be subject to federal estate tax upon the death of the grantor. Further, distributions from grantor trusts would be considered gifts from the grantor. 

Assuming that the proposed legislation, which would take effect in January 2022, would not be retroactive, taxpayers should consider taking advantage of the current laws so that they do not miss out on them if the proposal passes. 

See Carol A. Sobczak, Client Alert: Are Changes Afoot for Estate and Gift Taxes?, Shumaker, April 9, 2021. 

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

April 14, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Gift Tax, New Legislation | Permalink | Comments (0)

Friday, April 2, 2021

U.S. Senate Introduces Legislation for Higher Taxes on Wealth

Wealth taxOn March 25, 2021, Senator Bernie Sanders introduced the For the 99.5 Percent Act (the 99.5 percent Act). The Act looks to modify the estate, gift, and generation-skipping transfer tax. 

If accepted, the Act would "reduce the estate tax exemption, set the gift tax exemption at an amount lower than the estate tax exemption, and increase tax rates on large gifts and estates, effectively returning the gift and estate tax rules to the law in effect in 2009, but with higher rates." The changes would apply to transfers occurring after December 31, 2021. 

Other changes under the Act include: 

  • The estate tax exemption amount would be reduced to $3.5 Million per individual ($7 Million for married couples), with no adjustment for changes in the cost of living. Under current law, the estate tax exemption amount is $11.7 Million per individual ($23.4 Million for married couples), adjusted annually for changes in the cost of living. However, the current exemption amount is scheduled to be reduced by 50% after December 31, 2025. 
  • The amount of the exemption available to shelter lifetime transfers from gift tax would be reduced to $1 Million per individual ($2 Million for married couples), with no adjustment for changes in the cost of living. The portion of the $1 Million exemption used during an individual’s lifetime to shelter lifetime gifts from gift tax would reduce the amount of the $3.5 Million exemption available to shelter transfers at the individual’s death from estate tax. Under current law, the gift tax exemption is the same as the estate tax exemption (and will also be reduced by 50% after December 31, 2025), and any amount not used during an individual’s lifetime is available to shelter transfers at death from estate tax. 
  • The estate tax rate would increase using a progressive tax rate based upon the value of the decedent’s estate:
    • There would be no tax on the first $3.5 Million of the estate.
    • There would be a 45% tax on the estate in excess of $3.5 Million up to $10 Million.
    • There would be a 50% tax on the estate in excess of $10 Million up to $50 Million.
    • There would be a 55% tax on the estate in excess of $50 Million up to $1 Billion.
    • There would be a 65% tax on the estate in excess of $1 Billion.

See U.S. Senate Introduces Legislation for Higher Taxes on Wealth, Greenberg Glusker, March 26, 2021. 

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

April 2, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, Generation-Skipping Transfer Tax, Gift Tax, New Legislation | Permalink | Comments (0)

Thursday, April 1, 2021

Democrats Weigh Capital Gains Tax Hike For Millionaires At Death

Tax"Senate Democrats are circulating a plan that would trigger tax bills on the assets of the wealthy after they die as the lawmakers seek new sources of revenue to fund trillions of dollars in infrastructure spending and social programs." 

The legislation seeks to end a part of the tax code that allows assets to be passed onto heirs without "immediately generating tax bills." Democrats have long been aiming at these assets to be taxed. Joe Biden's campaign has encouraged the idea. 

Under current tax law, people are able to pass assets to their heirs without transferring capital gains from the property's appreciation, referred to as "stepped up basis at death." Basically, heirs will not have to pay taxes "on any of the gains that accused under the previous owner." 

Under the new plan, taxes would be levied on those assets of the wealthy at death subject to a $1 million exemption. 

According to Chris Van Hollen of Maryland, “The stepped-up basis loophole is one of the biggest tax breaks on the books, providing an unfair advantage to the wealthiest heirs every year. . . “It’s time to stop subsidizing massive inheritances for the rich and start investing in everyday Americans.”

This stepped up basis tax provision has become increasingly popular for the Democratic Party, although, under President Barack Obama, the proposal was blocked by Congress. 

With recent changes in the Senate and the House, it'll be interesting to see where the new proposed legislation goes. 

See Laura Davison, Democrats Weigh Capital Gains Tax Hike For Millionaires At Death, Financial Advisor, March 30, 2021. 

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

April 1, 2021 in Current Events, Estate Planning - Generally, Estate Tax, Income Tax, New Legislation | Permalink | Comments (0)

Thursday, March 25, 2021

Legislation Introduced to Repeal Federal Estate Tax

TaxLegislation has been introduced by lawmakers that would repeal the federal estate tax, also known known as the death tax. 

The proposed legislation is called the Death Tax Repeal Act of 2021 and currently has the support of close to 150 lawmakers in both houses of Congress. 

According to Zippy Duvall, President of American Farm Bureau Federation (AFBF), “Farmers and ranchers already face unpredictable challenges beyond our control yet persevere to protect our nation’s supply of food, fiber and renewable fuel. The tax code should encourage farm business growth, not add to uncertainty.”

Duvall also stated, “[e]liminating the estate tax removes another barrier to entry for sons and daughters or other beginning farmers to carry-on our agricultural legacy and make farming more accessible to all.”

Through research and analysis, the AFBF has found that federal estate taxes threaten more than 74,000 farms around the nation. Due to the increase in the transition of farmland that is projected to occur over the next 20 years, ag groups are "concerned about how estate taxes are going to impact the future of the farm economy," and for good reason. 

The Death Tax Repeal Act of 2021 could remove limitations on farmlands and would almost definitely create some comfort for ag groups. 

See Brian German, Legislation Introduced to Repeal Federal Estate Tax, Ag Net West, March 15 2021. 

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

March 25, 2021 in Estate Administration, Estate Planning - Generally, Estate Tax, New Legislation | Permalink | Comments (0)

Wednesday, March 24, 2021

Spain passes law allowing euthanasia

Estate planningSpain recently passed a law that will legalize euthanasia. Spain is the fourth country in Europe to allow people to end their own life in some circumstances. 

The law was just recently approved by Spain's lower house of parliament. The House of Parliament had support from centre and left-wing parties. 

The law is expected to take effect and June and allows "adults with 'serious and incurable' diseases that cause 'unbearable suffering' to choose to end their lives." 

Prior to this new law, a person could be sentenced to jail for up to 10 years for assisted suicide. 

While right-to-die campaigners were happy about the new law, conservatives and religious groups are not happy. 

As of now, Belgium, Lexumbour, the Netherlands, Canada, and Colombia are the only other countries that have legalized euthanasia. 

See Spain passes law allowing euthanasia, BBC, March 18, 2021. 

Special thanks to Lewis Saret (Attorney, Washington, D.C.) for bringing this article to my attention.  

March 24, 2021 in Estate Administration, Estate Planning - Generally, New Legislation | Permalink | Comments (0)

Tuesday, March 23, 2021

New Texas Bill Would Provide Release Relief To Trustees Who Deliver Adequate Accountings Without A Timely Objection By The Beneficiary

Estate planningA new bill has been submitted that would "provide a trustee relief for transactions described in an accounting where a beneficiary fails to timely object to the accounting and there is no fraud, intentional misrepresentation, or material omission." 

The bill provides: 

Sec. 113.153. BENEFICIARY’S APPROVAL OF ACCOUNTING. (a) This section does not apply to a trust that is under judicial supervision. (b) If a beneficiary does not object to a trustee’s accounting before the 180th day after the date a copy of the accounting has been delivered to the last known address of the beneficiary: (1) the beneficiary is considered to have approved the accounting; and (2) absent fraud, intentional misrepresentation, or material omission, the trustee is released from liability relating to all matters in the accounting.

If this bill were passed, it would take effect on September 1, 2021 and would apply to accountings delivered on or after the effective date. 

If this new bill is passed, there would likely be constitutional challenges addressing constitutional limitations to the statute as well as public policy arguments. 

However, the new bill is similar to a provision in the Uniform Trust Code, which has already been upheld as constitutional. 

It will be interesting to see the path and effect of this proposed bill. 

See David Fowler Johnson, New Texas Bill Would Provide Release Relief To Trustees Who Deliver Adequate Accountings Without A Timely Objection By The Beneficiary, Winstead: Texas Fiduciary Litigator, March 15, 2021. 

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

March 23, 2021 in Estate Administration, Estate Planning - Generally, New Legislation, Trusts | Permalink | Comments (0)

Thursday, March 11, 2021

Oregon could become second state to allow human composting

BodycompostingOregon is known for being environmental friendly and implementing plans that have a positive impact on the environment, like recycling. 

It is quite possible that Oregon takes these commitments to the next level. State lawmakers are considering a bill that, if passed, would allow human composting as an alternative to traditional burial or cremation. 

"House bill 2574, sponsored by representatives Pam Marsh and Brian L. Clem, would allow bodies to be disposed of by alternative processes, including natural organic reduction — colloquially known as human composting. It also clarifies rules surrounding alkaline hydrolysis, known as aqua cremation, and extends other funeral industry privileges and responsibilities to include reduction." 

As of Monday, close to 100 people submitted written testimony in favor of the bill, with most of them citing environmental reasons. Apparently, composting is more resourceful as it uses less energy than cremation and traditional burials "involve harsh chemicals and take up land." 

If the bills is passed, Oregon will be the second state to allow human composting (Washington being the first). 

See Hannah Ray Lambert, Oregon could become second state to allow human composting, KOIN, March 2, 2021. 

 

March 11, 2021 in Current Events, Death Event Planning, Estate Planning - Generally, New Legislation | Permalink | Comments (0)

Wednesday, March 10, 2021

Mom Liked Me Better, and She Will Prove It: Pre-Mortem Validation—Permanent Solution or Fad?

ValidationAlthough much has changed, given the pandemic, recently election, and other things, will and trust contests are still a common occurrence. These contests often are brought by a child who feels they were treated differently than their siblings or other beneficiaries. A child may bring suit even if they were estranged from their deceased parent, even if it were for years before their parent's death. 

A child may contest the will based on allegations of lack of capacity and undue influence, which typically has the effect of tying the estate up for years and the build up of attorney fees and court costs—not to mention the detriment to family relationships. 

The sad truth is that the most important person in the matter, the decedent, will not be their to testify to their intent and wishes. In turn, the court will have to rely on testimony from witnesses and experts who very well may not know what was going on in the decedent's head when executing the will. Further, even if some of them do know, they may not tell the truth or be believed. 

One possible solution to avoid all of the litigation is Pre-Mortem Validation. Pre-Mortem Validation allows the maker of the estate planning document to to validate said document during their lifetime. So far, nine states have enacted legislation to allow Pre-Mortem Validation procedures, so that the voice of the most important person is heard. The list of states are provided below: 

  • Alaska, Arkansas, Delaware, North Carolina, New Hampshire, North Dakota, Nevada, Ohio, and South Dakota. 

Although the states may differ in their standards and the requirements for Pre-Mortem Validation, they all have implemented the statutory procedure for a similar purpose. 

See Michael Sneeringer et al., Mom Liked Me Better, and She Will Prove It: Pre-Mortem Validation—Permanent Solution or Fad? , American Bar Association: Probate & Property, March/April 2021.

March 10, 2021 in Estate Administration, Estate Planning - Generally, New Legislation, Trusts, Wills | Permalink | Comments (0)

Saturday, March 6, 2021

Article: Legislating Supported Decision-Making

Nina A. Kohn recently published an article entitled, Legislating Supported Decision-Making, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article. Estate planning

Supported decision-making is a process by which individuals who might otherwise be unable to make their own decisions do so with help from others. It has the potential to transform the lives of individuals with cognitive and intellectual disabilities by enabling them to function as legal actors, and not merely legal subjects. Fueled by this promise, by mounting concerns about guardianship, and by rhetoric surrounding the Convention on the Rights of Persons with Disabilities, states are rapidly adopting statutes that purport to enable and promote supported decision-making and advance the rights of persons with disabilities. This article shows how these statutes typically do neither. Rather, the statutes limit the rights of individuals with disabilities and place them at increased risk of exploitation. The article further shows that the wide gap between the concept of supported decision-making and its actual implementation in state legislation is the result of a confluence of political agendas, but that an alternative, person-centered approach is essential if supported decision-making is actually to empower individuals with disabilities. Finally, it outlines five concrete legislative approaches states could adopt—separately or in combination—to encourage supported decision-making that will actually advance the rights of persons with disabilities and reduce restrictive guardianships.

March 6, 2021 in Articles, Disability Planning - Health Care, Disability Planning - Property Management, Estate Planning - Generally, Guardianship, New Legislation | Permalink | Comments (0)