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Posts Tagged ‘Estate Planning’

Nappi-TedToday’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi.

It was an enjoyable week in Orlando, Florida attending the Heckerling Institute on Estate Planning conference, catching up with old friends as well as making some new ones.

With the uncertainty of estate tax repeal and speculation of its replacement, the week was filled with predictions from all the experts. It will be an interesting year for the tax code and the estate planning profession.

Friday ended with two interesting sessions, the first was a review of when to claim Social Security benefits and a summary of the current rules in this area including the new one related to suspending benefits. Prior to 2016, a spouse could file for benefits and then suspend them. That filing would enable the other spouse to claim spousal benefits. Meanwhile, the suspended benefits would grow by 0.666% per month. After April 29, 2016, using the “file and suspend” method no longer creates a spousal benefit. The right of a spouse to claim spousal benefits depends upon the other spouse actually receiving benefits.

The second session was a review of the basis consistency and information reporting requirements for executors. The basis consistency provisions for property received from a decedent were enacted as Section 2004 of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which extends funding of the “Highway Trust Fund” through October 29, 2015, and which was signed into law July 31, 2015. If the estate is required to file an estate tax return, the executor is required to report valuation information reports to both the recipients (i.e., “each person acquiring any interest in property included in the decedent’s gross estate”) and the IRS. Estates that file returns “for the sole purpose of making an allocation or election respecting the generation-skipping transfer tax” or portability are not subject to reporting requirements. The Form 88971 must be furnished to the recipients no later than 30 days after the return’s due date, including extensions (or 30 days after the return is filed, if earlier). The presenter provided a detailed analysis of proper values to report as well as who are the proper beneficiaries to receive the reporting forms.

If you have any questions or would like to discuss any of the topics covered in our blog posts from any of the five days, please do not hesitate to reach out to one of the Private Client Services partners that attended the conference this week (Hal Terr, Ted Nappi, Al LaRosa, and Don Scheier).

More from Withum’s Private Client Services Team soon!

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Nappi-TedToday’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi.

We have picked a few sessions from the day that have some interesting topics and issues that may affect our clients.

Placebo Planning by Jeffrey Pennell

The first session of the day dealt with whether a technique is simply a placebo (it does nothing beneficial but it also is not harmful), or worse (it doesn’t do what it is represented to accomplish and it can be detrimental to the client). This concept is true about any transfer that entails acceleration of gift tax, in lieu of estate tax, particularly because step-up in basis at death may be more desirable than any potential wealth transfer tax saving. The speaker focused mainly on the concept of the “Estate Tax Freeze”. If you run the numbers under various alternatives such as electing portability on the first death, maximizing the marital deduction, or accelerating the payment of estate tax on the first death, there doesn’t appear to be any significant tax savings under each plan with a flat estate tax rate (40%).

The presenter also touched on the topic of what may be a good asset to have at death if we see a repeal of the estate tax and a change to a carryover basis regime. In this case, life insurance may be a very good asset class. The appreciation in the policy would be converted to a death benefit paid in cash to the estate or beneficiary. The basis of the cash death benefit would be the full value received and there would be a step up / automatic elimination of the built in appreciation in the policy without use of any potential exemption that may be available.

Getting Gratifying GRAT Results by Carlyn McCaffrey

This session focused on techniques for enhancing the likelihood that a GRAT will produce a positive result at the end of the term, including the use of split-interest and leveraged GRATs. It also explored the possibilities of protecting a GRAT’s positive result from the generation-skipping transfer tax. The presenter discussed the use of short term GRATs to minimize the mortality risk as well as separate GRATs for separate asset classes to maximize the potential for positive returns passing to the beneficiaries.

Retirement Accounts in First and Second Marriages: The Fun Begins by Christopher Hoyt

After summarizing the rules governing required distributions from inherited retirement accounts, the presentation examined the estate planning and income tax challenges of funding a trust with retirement assets, especially a trust for a surviving spouse. It then explored the added challenges of a second marriage and a blended family.

In the discussion of IRA rules, there was a new revenue ruling that should be of interest to some clients. It relates to relieve when a taxpayer misses the date for rolling over an IRA distribution within the 60-day rule. If a person misses the 60-day deadline, he or she is presumed to have a taxable distribution. A taxpayer can apply to the IRS for a waiver, but that requires paying the IRS a $10,000 fee. An important development in 2016 is that the IRS will now permit a taxpayer self-certify to the retirement plan administrator that the delay was caused by any one of eleven reasons. The parties can operate as if the transfer had been a valid rollover.

Under Rev. Proc. 2016-47, 2016-37 I.R.B. 346. The eleven eligible reasons for missing the 60-day deadline are: (1) an error was committed by the financial institution receiving or making the contribution; (2) the check was misplaced and never cashed; (3) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan; (4) the taxpayer’s principal residence was severely damaged; (5) a member of the taxpayer’s family died; (6) the taxpayer or a member of the taxpayer’s family was seriously ill; (7) the taxpayer was incarcerated; (8) restrictions were imposed by a foreign country; (9) a postal error occurred; (10) the distribution was made on account of an IRS levy and the levy proceeds were returned to the taxpayer; or (11) the retirement plan that made the distribution delayed providing information that the receiving plan or IRA required to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information.

Some planning options discussed:

  1. Retirement accounts for spouse; life insurance for children – One arrangement is to leave all retirement assets to the surviving spouse, but to purchase life insurance so that there is something from the children from a prior marriage to inherit.
  2. Divide retirement accounts – spouse & children – Another strategy is to split the retirement assets between the spouse and the children from a prior marriage. Although this can be done fairly easily with IRAs, ERISA will prevent such a splitting of 401(k) accounts unless the spouse executes a qualified consent.
  3. All retirement accounts for children – Section 401 – need spouse’s waiver – It will not matter who a married plan participant named as the beneficiary of a QRP account. If the individual was married on the date of death, the surviving spouse is entitled to the entire account balance. The one exception is if the surviving spouse executes a qualified waiver. In that case the retirement assets will be distributed to the individuals, trusts or estate that were named as the beneficiaries of the account.
  4. Two-generation CRT for spouse and children from prior marriage – A significant challenge exists when there is a sequence of beneficiaries of a retirement plan account (e.g., “to A for life, then to B for life”). The stretch IRA regulations require distributions to be made from an IRA or a QRP account over a time period that does not extend beyond the life expectancy of the oldest beneficiary. The IRA will likely be depleted when the oldest beneficiary dies. Whereas an IRA cannot make distributions over the lifetimes of the younger beneficiaries, a charitable remainder trust (“CRT”) can.

A charitable remainder trust pays distributions to individuals over their lifetimes (or for a term of years), and then terminates with a distribution to one or more charities. Like an IRA, a CRT pays no income tax. Thus there will be no income tax liability when an IRA is completely liquidated after a person’s death with a single distribution to a CRT. Unlike an IRA, the term of a CRT can last until the last of the multiple beneficiaries dies, which will usually be the youngest beneficiary. This may be beneficial if Congress eliminates the ability to have a stretch IRA.

Warming Up to Preferred Partnership Freezes— Multiple Planning Applications with This Versatile Technique by Todd Angkatavich

This presentation focused on the ways to use Section 2701 compliant preferred partnerships to enhance planning. The presenter discussed ways to combine preferred partnerships with GRATs, QTIPs, GSTT exempt trusts, carried interest transfer planning and more.

In its most basic form, a preferred “freeze” partnership (“Freeze Partnership”) is a type of entity that provides one partner, typically a Senior Family Member, with a fixed stream of cash flow in the form of a preferred interest, while providing another partner with the future growth in the form of common interests in a transfer-tax-efficient manner. Preferred Partnerships are often referred to as “Freeze Partnerships” because they effectively contain or “freeze” the future growth of the preferred interest to the fixed rate preferred return plus its right to receive back its preferred capital upon liquidation (known as the “liquidation preference”) before the common partners. The preferred interests do not, however, participate in the upside growth of the partnership in excess of the preferred coupon and liquidation preference, as all that additional future appreciation inures to the benefit of the common “growth” class of partnership interests, typically held by the younger generation or trusts for their benefit.

With Great Power Comes Great Liability: Helping Trustees Avoid Pitfalls in Common Transactions by Lauren Wolven

Trustees are often asked to engage in loans to related parties or beneficiaries and other transactions with related trusts, closely-held assets and real estate. For a trustee who is not careful, even a seemingly simple act like making a loan to a beneficiary can lead to liability. This session explored methods to reduce fiduciary risk in common trust transactions.

When dealing with loans, there are a few basic guidelines for making loans to beneficiaries that, if they are followed, should protect any trustee. Of course, real life and trust purposes may make deviating from these guidelines perfectly sensible in certain circumstances. Before a trustee decides to move forward with a loan, it should consider whether it falls outside these guidelines and, if so, whether it can justify that deviation.

  • The loan would be considered prudent if it were being made to a third party.
  • With the loan in the trust portfolio, the duty to the beneficiaries is property balanced with the duty to make prudent investments.
  • If the loan would not necessarily be a prudent loan made in the everyday course of business, and if the trust instrument does not expressly authorize the “imprudent” loan, the other beneficiaries have consented in writing to the transaction in a document that also releases the trustee from liability for making the loan.

In states that allow virtual representation agreements, it is possible to get beneficiaries with current and remainder interests to sign off on the trustee’s actions either by approving of the action itself or by clarifying language in the trust that would allow the trustee to take such action. The documentation of beneficiary approval should contain a release of the trustee for engaging in the transaction. If one or more necessary parties to the approval is unwilling to release the trustee, then that is a signal to the trustee that it should reconsider its willingness to make the loan. In fact, that red flag is precisely the circumstance that should cause a trustee with authority to make a distribution to the beneficiary to revisit whether making a loan really is the best course of action.

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HalTerr-12-09Today’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Hal Terr.

After the ball drops in Times Square on New Year’s Eve and New Year’s resolutions are made, many estate planning professionals finalize their travel plans to Orlando during the second week of January.   No, it is not to see Mickey and Minnie Mouse at Disney World or check out the latest ride at Universal Studios – it is to attend the University of Miami’s 51st Annual Hecklering Institute on Estate Planning, the largest Continuing Legal Education conference in the country. Over 3,000 attorneys, accountants, trust officers and other financial advisors gather for a week in Orlando, Florida to listen to the top speakers in estate planning.

The conference kicked off with a panel discussion on recent developments by Dennis Belcher, Ronald Aucutt and John Porter.   In addition, Catherine Hughes from the IRS joined the panel this year.   I have to give Catherine Hughes a lot of credit for presenting in front of this crowd and did a great job discussing the issues when the IRS has to implement the legislation passed by Congress or executive orders from the executive branch.   The two topics of primary interest during this session were the proposed regulations under IRC 2704 relating to valuation discounts and the possible future repeal of the estate tax.

According to Catherine Hughes, over 10,000 comments were received by the IRS in response to the proposed regulations under IRC 2704.   According to Catherine Hughes, it was not the intention of the IRS to eliminate all minority discounts with these regulations.   Although many of the abuses of valuation discounts were with non-operating entities funded with marketable securities, these regulations do not distinguish between operating and non-operating entities.   These regulations created a new group of disregarded restrictions to be ignored to calculate discounts, such as restrictions to limit an individual’s right of liquidation.   In addition, for a non-family interest to be considered in valuations of family-controlled entities the interest should be significant to the family, significant to the non-family holder and the interest should be a long-term interest of the non-family holder, more than three years.   Catherine Hughes stated that given the numerous amounts of the comments that the regulations will not become effective by January 20th, President-elect Trump’s inauguration.

For 2016 gift tax returns, for those individuals who made gifts after the date of the proposed regulations that are subject to valuation discounts preparers making disclosures of the transactions may consider disclosing that the valuation does not consider the impact of the proposed Section 2704 regulations, in light of the fact that the regulations do not apply to transfers made before the regulations are finalized.  To start the three year statute of limitations for gift tax returns adequate disclosure must include “[a] statement describing any position taken that is contrary to any proposed, temporary or final Treasury regulations or revenue rulings published at the time of the transfer”.

The discussion then moved to predictions and possibilities of the proposed regulations.   Recently there has been proposed legislation, both in the House of Representative and Senate, not to have the regulations become final.   As one of the panel members noted, tax law is in danger when a member of Congress can cite the Code Section by name.   In addition, the proposed regulations were instituted under the direction of the Treasury Department of President Obama which the incoming President Trump has stated he plans to remove those executive orders burdensome to business.   However, if these regulations do not become final then the valuations rules will still have the prior uncertainty of these rules based on case law history.

The conversation then turned to the prospect of the repeal of the estate tax law.   As Dennis Belcher stated, things are never as good or as bad as it seems.   Both the President-elect Trump and Republican Congressional blueprint propose to repeal the estate and generation skipping tax.   However, both proposals are silent to the gift tax, which is seen as the backstop to protect the integrity of the income tax.  In connection with the repeal of the estate tax, President-elect Trump’s proposal calls for the elimination of step-up in basis for estates over $10 million where this is not mentioned in the Congressional proposal.

It is expected that there will be some tax reform enacted this year since the Republicans now control Congress and the executive branch.   However, given that the Republicans do not have a 60 vote majority in the Senate; it is likely that any tax reform legislation will need to be passed as part of a Budget Reconciliation bill.   While the estate tax only applies to .2% of the population of the U.S. and provides less than 2% of the revenue of the budget, President-elect Trump’s proposal of repeal of the Affordable Care Act, increased infrastructure spending and immigration reform are all significant expenditures to the budget which will need revenue to pay for.   Estate tax repeal was part of the 2001 tax law which sunset in 2010 and was only effective in 2010.   When the 2001 tax act was passed, there was an expectation of future budget surpluses.   This is not the current environment today where there are projected deficits each year in the near future.   It is unknown where estate taxes repeal ranks in order of importance to the President-elect and Congress when considering business tax reform, international tax reform and repatriation of money overseas and individual tax reform.   Also to be considered is the optics of the estate tax repeal when the President and proposed members of his cabinet are billionaires whose families will benefit significantly of estate tax repeal.   As Ronald Aucutt noted, the repeal of the estate tax would require political capital that may be needed to be used elsewhere to pass tax reform.  The Republicans will want to try to have some Democratic votes on the tax reform legislation as not to have the same appearance when the Democrats had no Republican votes when the Affordable Care Act was enacted.  To have the votes of the Democrats, will estate tax repeal be excluded from the tax reform legislation? We will need to wait and see.

Estate tax repeal is tied to the basis of assets at the death of the individual.   If step-up in basis is eliminated for all estates, will that create a death tax to be imposed on significantly more individuals then the current estate tax?   A portion of President-elect Trump’s constituency were the old Regan Democrats in the Rust Belt that felt that the political environment in Washington was not in their best interest and contributed to the income inequality in the country.   How will these voters feel with the estate tax repeal to benefit only the very wealthy and actually create a new death tax if there is no step-up in basis?

So then what should individuals do in preparing their estate plans?  It is expected that the Republicans would want to pass tax reform legislation before the August recess.   As such, most individuals should wait and see if estate tax repeal is included in the tax reform legislation.   Estate documents should be drafted to be as flexible as possible, including marital “QTIP” trusts that will or will not be elected depending on the estate tax law at the time of the individuals passing.   If individuals want to make transfers to shift appreciation from their estate, these individuals should only consider those estate freeze techniques that do not trigger a gift tax such as GRATs or sales to Defective Grantor Trusts.   These transfers should include formula clauses to prevent the imposition of a gift tax in case of a challenge to the valuation of the transfer.

Well that’s all for today!  More commentary to come from the other Withum Estate Tax Partners attending the conference, stay tuned.

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