Wills, Trusts & Estates Prof Blog

Why Americans are traveling to Vermont and Oregon to die

There is a growing trend of Americans traveling to Vermont and Oregon to access medical aid in dying, especially after these states removed their residency requirements in 2023. Francine Milano, a 61-year-old from Pennsylvania with terminal ovarian cancer, is highlighted as an example of someone who made multiple trips to Vermont to secure the right to end her life on her own terms. These trips are challenging, involving complex logistics and emotional strain, as patients must meet strict legal requirements, including being physically present in the state for medical assessments and drug administration.

In 2023, at least 26 out-of-state patients died using Vermont's medical aid-in-dying law, and 23 in Oregon. Despite the growing demand, the process remains burdensome, with patients needing to navigate unfamiliar healthcare systems, travel while gravely ill, and find places to stay during the waiting period before they can receive the medication. Advocates argue that these restrictions place an undue burden on already suffering individuals, while opponents, including some religious groups and medical professionals, view assisted dying as immoral or contrary to the role of healthcare.

The article notes that while several states have considered similar legislation, only Delaware passed such a law in the 2023-24 legislative session. The topic remains a contentious issue, with no federal resolution in sight, leaving it to be addressed state by state.

For more information see Debby Waldman "Why Americans are traveling to Vermont and Oregon to die" CBS.com, August 20, 2024.

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

The Supreme Court Blows Up a Popular Small-Business Succession Plan

The U.S. Supreme Court's decision in Connelly v. United States has complicated a common succession strategy used by many small-business owners. Typically, companies purchase life insurance on their owners to fund the repurchase of stock when an owner dies, with the aim of making the insurance payout tax-free and avoiding the burden of funding the repurchase from operating profits. However, the Court ruled against this strategy, causing significant financial repercussions. The estate of the deceased owner in the Connelly case faced an additional $900,000 in estate taxes, highlighting the potential pitfalls of this approach and the need for business owners to stay vigilant about tax and legal issues.

The case of Michael and Thomas Connelly, owners of Crown C Supply, exemplifies the impact of the ruling. After Michael's death, the life insurance payout intended to fund the repurchase of his shares was deemed part of the company's value, thus increasing the estate tax liability. The Supreme Court's unanimous decision, written by Justice Clarence Thomas, overturned previous interpretations that excluded such payouts from a company's value due to offsetting liabilities. Instead, the Court determined that the requirement to repurchase shares did not constitute an ordinary liability but rather provided value to the firm, resulting in a higher estate tax for Michael's estate.

To mitigate the effects of the Connelly decision, business owners should review their buy-sell agreements, ensure proper valuation of their companies, and consider alternative arrangements such as cross-purchase agreements. These alternatives can help avoid inflating the company's value and the deceased owner's estate, though they come with their own challenges, particularly for companies with multiple owners. Professional advice is crucial in navigating these complexities, and while it may be costly and divert attention from business operations, it is essential to prevent unexpected estate-tax burdens.

For more information see Laura Saunders "The Supreme Court Blows Up a Popular Small-Business Succession Plan" The Wall Street Journal, July 12, 2024.

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

Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships

The U.S. Treasury Department has announced a new plan to close tax loopholes exploited by large partnerships, as part of broader efforts to ensure that wealthy individuals and large corporations pay their fair share of taxes. This initiative follows findings that many IRS audits of large partnerships failed to uncover noncompliance due to the complexity of these business structures. The plan will utilize advanced data analytics and artificial intelligence to better identify high-risk entities for auditing​.

A significant component of the plan involves targeting specific compliance issues, such as scrutinizing the transfer pricing practices of foreign-owned corporations and expanding audits of the largest corporate taxpayers. These measures aim to address sophisticated tax avoidance strategies and ensure accurate reporting of U.S. profits​.

Funding for these efforts comes from the Inflation Reduction Act, which allocates resources to close the tax gap—the difference between taxes owed and taxes paid. The IRS plans to use these funds to enhance enforcement and modernize its technology infrastructure. However, some of the funding was recently reduced following negotiations with Congress.

The initiative also focuses on addressing the substantial portion of the tax gap attributed to unreported business income, particularly income shielded through partnerships. Recent estimates suggest that the tax gap could be as high as $1 trillion annually, underscoring the urgent need for improved tax compliance and enforcement​.

Overall, the Treasury's plan represents a concerted effort to close loopholes and enhance tax compliance among the wealthiest taxpayers and largest partnerships. By leveraging new technologies and enhanced enforcement strategies, the initiative aims to ensure a fairer tax system and reduce the tax gap​.

For more information see Kate Dore "Treasury, IRS unveil plan to close ‘major tax loophole’ used by large partnerships", CNBC, June 17,2024.

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

Uniform Laws Update - Conflict of Laws in Trusts and Estates

The Uniform Laws Update in Probate & Property highlights the evolving landscape of estate planning, which has shifted from primarily local to encompassing multiple jurisdictions due to increased mobility, changing wealth structures, and evolving state laws. With families relocating frequently and wealth being more fluid, estate plans often need to consider laws from various states. Moreover, the emergence of trust-friendly legislation in certain states has led to the strategic selection of trust jurisdictions, adding complexity to the choice of governing laws. Consequently, conflicts of laws have become more common, as litigators seek favorable forums for resolving disputes involving trusts with connections to multiple states.

Section 107 of the Uniform Trust Code delineates guidelines for resolving conflicts within trust matters, emphasizing that the determination of a trust's terms relies on the law of the designated jurisdiction, unless contrary to a strong public policy of the jurisdiction most relevant to the matter or in the absence of such designation, the law of the jurisdiction with the most significant relationship to the issue prevails. However, phrases like "strong public policy" remain ambiguous, leaving courts to interpret these terms. Meanwhile, the Restatement (Second) of Conflict of Laws offers more defined rules, though its antiquated framework fails to address modern complexities, such as the rise of trusts governed by laws from distant jurisdictions. This complexity extends beyond trusts to the realm of wills and probate procedures, prompting initiatives like the drafting of the Restatement (Third) of Conflict of Laws by the American Law Institute (ALI) and the Uniform Law Commission's (ULC) creation of a new uniform act on conflict of laws in trusts and estates. Collaboration between ALI and ULC aims to synchronize efforts and ensure coherence in legal outcomes, which is crucial given the significant assets held in trusts and the extensive time estate planners invest in navigating jurisdictional laws.

David Lieberman, a partner at Levin Schreder & Cary in Chicago, serves as the ABA Advisor for the project, facilitating communication between the drafting committee and American Bar Association (ABA) members. The drafting committee prioritizes respecting donors' autonomy in selecting governing laws while endeavoring to simplify conflict laws by minimizing distinctions between types of property and trusts and streamlining the application of laws in construction and interpretation matters. Nonetheless, the complexity of the subject necessitates thorough deliberation, with both ALI and ULC welcoming stakeholder input as they strive to produce comprehensive and impactful legal frameworks that address the intricacies of today's legal landscape effectively.

For more information see Benjamin Orzeske “Uniform Laws Update - Conflict of Laws in Trusts and Estates”, American Bar Association Probate & Property, May/June 2024.

Tokyo Prepares to Introduce Same-Sex Partnerships Next Year

According to the Governor of Japan's Capital, Yuriko Koike, Tokyo plans to introduce same-sex partnerships in April. The introduction of same-sex partnerships will be a "significant shift for the country's biggest population center." 

Koike stated:

 [f]rom the point of view of advancing understanding of sexual diversity, as well as reducing the problems faced by those involved, we will lay out basic principles for introducing a same-sex partnership system in the next fiscal year. . .

According to opinion surveys, the public is largely in favor of equal marriage rights, "but the long-ruling and conservative Liberal Democratic Party has shown little enthusiasm for change." As of now, Japan is the only Group of Seven country not to recognize same-sex marriage.

 See Isabel Reynolds, Tokyo Prepares to Introduce Same-Sex Partnerships Next Year, Bloomberg, December 7, 2021. 

Special thanks to David S. Luber (Florida Probate Attorney) 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.

Future Returns: How Proposed Tax Changes Could Affect Art Collectors

The U.S. $3.5 trillion budget reconciliation bill before the U.S. Congress could greatly impact wealthy individuals who collect art. That being said, art collectors should keep their eye on the bill as changes within the legislation "could have big consequences for how they manage their collections." 

According to Monica Heslington, head of the art and collectibles advisory team at Goldman Sachs Family Office, those who own art and collectibles do not typically view their treasures in the same way as investments in stocks and bonds, but want to "display their paintings, and keep driving their sports cars. . ." Heslington added that "it's a lot easier to get clients to plan with financial assets than it is with art and items that are important to them. . ." 

Currently, sales of art and collectibles are subject to a 28% long-term federal capital gains tax rate.

Typically, the supply of art on the secondary market is driven by death, divorce, and bankruptcy, but people also sell art when they want to upgrade their collection or when their taste in art changes. 

Despite whatever reasons there are to buy, sell, or collect art, it is important for wealthy collectors to pay close attention to possible changes in legislation, as failing to do so could result in dire consequences. 

See Abby Schultz, Future Returns: How Proposed Tax Changes Could Affect Art Collectors, Barrons, October 5, 2021. 

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

Article: How Soon Is Now: Estate of Moore & The Unraveling of Deathbed Estate Planning

Beckett Cantley and Geoffrey Dietrich recently published an article entitled, How Soon Is Now: Estate of Moore & The Unraveling of Deathbed Estate Planning, Wills, Trusts, & Estates Law ejournal (2021). Provided below is the abstract to the Article:

On April 7, 2020 the U.S. Tax Court ruled in Estate of Moore v. Commissioner, T.C. Memo. 2020-40, that certain deathbed transfers should be includible in the decedent’s estate for United States Federal Estate Tax (“estate tax”) purposes. The court applied Internal Revenue Code (“I.R.C.”) § 2036 to the transfers due to the decedent’s continued interests in the transferred property. The Tax Court stated that I.R.C. § 2036 creates “a general rule that brings back all property that a decedent transfers before he dies, subject to two exceptions.” The first exception is for bona fide sales for full and adequate consideration. The second exception is for “any property that [the decedent] transferred in which he did not keep a right to possession, enjoyment, or rights to the issue of the transferred property.” The Tax Court stated that the first exception depends on the transferor’s motivations, and that the decedent’s actions made it clear there was no bona fide sale. As a result, the Tax Court determined that I.R.C. § 2036(a)(1) applied to the transfer.

Estate of Moore is the latest in a line of cases in which taxpayers made deathbed transfers close to the date of death and the IRS successfully argued that the transferred property is includible in the decedent’s gross estate. In Estate of Bongard v. Commissioner, 124 T.C. 95 (2005), the Tax Court created a three-part test to determine whether I.R.C. § 2036 pulls property back into a decedent’s estate. In Estate of Strangi v. Commissioner, T.C. Memo. 2003-145, aff’d 417 F.3d 468 (5th Cir. 2005), the Tax Court provided additional guidance for how the court interprets I.R.C. § 2036(a)(1). In Estate of Nancy H. Powell v. Commissioner, 148 T.C. No. 18 (2017), the court builds on the rationale established by Strangi, but ultimately invokes I.R.C. § 2036(a)(2) to include the transferred assets in decedent’s gross estate. This article: (1) provides an overview of deathbed transfers case law; (2) describes typical such deathbed transfers; (3) outlines the I.R.C. § 2036 statute; (4) discusses the main seminal cases in the area of deathbed transfers, including Estate of Bongard, Estate of Strangi, Estate of Powell, and Estate of Moore; (5) synthesizes the case law on I.R.C. § 2036 and analyzers policy considerations regarding such law; and (6) concludes with a summary of the article’s findings.

Final regulations establish a user fee for estate tax closing letters

The IRS issued final regulations instituting a user fee of $67 for the Service to issue an estate tax closing letter. 

Other than the adoption of the final regulations, there were no significant changes to the proposed regulations issued in late December 2020.

An estate tax closing letter informs its authorized recipient of the IRS's acceptance of the estate tax return (generally, Form 706, United States Estate (and Generation-Skipping Transfer Tax Return) and provides some return information, such as the amounts of the net estate tax, any state death tax credit or deduction, and any generation-skipping transfer tax for which the estate is liable. 

The new user fee will apply to "requests for estate tax closing letters received by the IRS on or after the date 30 days after publication of the final regulations in the Federal Register. 

(Publication occurred on September 28, 2021). 

See Paul Bonner, Final regulations establish a user fee for estate tax closing letters, Journal of Accountancy, September 27, 2021. 

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

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.