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JEST stands for joint estate step-up trust and is a variation of the tax-basis revocable trust from TAM 9308002. In a JEST each spouse has a separate share of the trust and the power to terminate the trust during their lives and retain their separate shares. The first spouse to die has a testamentary power of appointment over the entire trust. On the death of the first spouse to die, the assets of such spouse’s share first fund a credit shelter for surviving spouse and descendants and if necessary a marital trust for surviving spouse. If the deceased spouse’s share is less than the applicable exclusion, then the credit shelter trust is bifurcated and the assets subject to the general power are held in trust for the descendants and not the surviving spouse. The full value of the trust should be included in the estate of the first spouse to die because of 2041 general power and 2038 retained interest.Alaska and Tennessee have statutory trusts that allow spouses to opt in to community property status for assets and get the benefit of the double basis adjustment like community property states. The statutes require the trust situs to be in AK or TN, respectively, the property may be located anywhere, but real property will need to be converted to tangible property (put in a LLC) in order for its situs to be in another state.
2:00 - 2:10 Introductory Remarks Tina Portuondo, Director, Heckerling Institute Patricia D. White, Dean, University of Miami School of Law 2:10 - 5:15 Recent Developments 2014 Dennis I. Belcher, Samuel A. Donaldson, Carlyn S. McCaffrey Reporter: Bruce A. Tannahill Esq.
The Faculty for this session consisted of Dennis Belcher of McGuire Woods, Richmond, VA; Professor Samuel Donaldson of Georgia State University College of Law, Atlanta; and Carlyn McCaffrey of McDermott Will & Emery in New York This session alone was worth the cost of attendance, not only for the information provided by the panelists but for the humor the panelists, especially Prof. Donaldson, used in their discussion. A heavy rainstorm was heard during much of the presentation, offering additional opportunities for levity during the program.
Mr. Belcher began the program by thanking the authors who contributed the materials and Ron Aucutt who edited them. He said that this has been an interesting year and the panel’s objective is to put the developments into perspective.
He noted that estate planning practice has changed significantly over the last 14 years. 2001 brought the gradual increase of the gift and estate tax exemption to $3.5 million in 2009, followed by the 2010 choice of a one-year repeal or a $5 million exemption. In 2011-12, we had the concern that the exemption could go back to $1million and the 2012 end-of-year planning rush.
The 2012 American Tax Relief Act brought us estate tax stability for the first time in many years but it changed the estate planning practice. Ten years ago, clients would call Mr. Belcher and say they were concerned about estate tax law changes. Congressional action and tax laws would drive people to attorneys for estate planning.
In the future, he said that tax changes may not drive clients to us. We will need to be more proactive because clients will need our services but not as likely to seek us out. Estate tax concerns still affect the top 0.2% have estate tax needs. Wealth is being created at the top so these clients still need help minimizing estate taxes. For them and the remaining 99.8%, assistance is needed to pass assets as they want.
For clients who need estate tax planning, it is no longer sufficient just to make gifts to irrevocable trusts. We also need to deal with income tax rules. A zero basis asset given away must appreciate 250% to offset the loss of stepped-up basis. Assets will almost certainly be sold.
If a client says their children won’t sell assets, get it acknowledged by client in writing because the children may have different plans.
Mr. Belcher concluded his introductory remarks by saying that he hopes the program helps you better advise clients and proactively help them.
Federal Tax Developments Prof. Donaldson began by noting that ATRA is like any other tax legislation –it included extenders that expired at end of 2013. He used the example of the above the line deduction for teachers’ classroom expenses as a provision that is a feel-good provision that has minimal revenue impact. There is no policy reason for not making it permanent. Legislators don’t want to make it permanent because then they cannot take credit for extending.
On December 19th, the Tax Increase Prevention Act (TIP) Act was signed by the President. The provisions are only effective until the end of 2014, which means we are back in the same position as we were a year ago. Prof.
Donaldson said that a carton of milk bought that day was good longer than the TIP Act.
One provision included in the TIP Act is the qualified charitable distribution. This allows clients over 70 ½ to have up to $100,000 of their IRA paid directly to a charity. It is not included in income and no charitable deduction is followed for it. It is an important tool in our quiver because the charitable deduction may not offset RMDs included in income due to the limitations on charitable deductions and Pease phase-out of itemized deductions.
The TIP Act also included the ABLE Act of 2014. It enacted section 529A, which is like a section 529 plan for individuals with disabilities. Under a qualified ABLE program, accounts can be established for individual receiving Supplemental Security Income and Medicaid or eligible to receive it, based on a disability that began before age 26. There is a maximum $14,000 annual contribution, which grows tax-deferred. To the extent distributions are used for qualified expenses, they are not included in anyone’s income. There is a broad definition of qualified disability expenses. Amounts in ABLE account don’t count as resources up to $100,000. The excess is considered a resource for SSI purposes but not for Medicaid purposes. Prof. Donaldson thinks it will be a nice additional benefit we can bring to the table for our clients who have family members with special needs.
Legislative Developments to Watch For
Prof. Donaldson noted that Congress is firmly under control of Republicans. He doesn’t think we’ll see dramatic tax reform since Republicans can’t override a presidential veto. On the other hand, the President’s proposals have as good a chance of passing as the professor’s would.
Mr. Belcher agreed on the prospects of estate tax legislation but noted there is a better chance than last year due to Republican control, moving from nominal to better than nominal.
There are at least two potential vehicles that could be used to attempt to force estate tax reform. First up is the February deadline of February to the Department of Homeland Security. The debt ceiling will need to be increased in late spring or early summer.
The panel then reviewed some of the estate and gift tax proposals included in his 2015 budget proposals, released
in 2014. These include:
· Modification of the GST treatment for Health and Education Exclusion Trusts.
Ms. McCaffrey says that the change is not needed because current law already provides the proposed treatment or the IRS already has adequate tools to combat any abuse.
· Simplify gift tax exclusion for annual gifts administration.
The Administration doesn’t like the current gift tax exclusion because gifts are made to people who never get anything from the trust. Gifts are also difficult to monitor. What the proposal means isn’t clear. The best guess is it would limit the annual exclusion to outright gifts or single beneficiary trusts, except for $50,000.
It has little chance of being passed.
State death taxes Maryland and Rhode Island increased their exemptions while Minnesota retroactively repealed its gift tax.
Ms. McCaffrey noted that New York is expensive place to die. Until last year, the exemption was $1,000,000. A new law gradually increases it to federal level in 2019 but with a phase-out that eliminates the entire exemption between 100% and 105% of the exemption. Estates above 105% of the exemption receive, no benefit from exemption. At certain levels, individuals pay 200% of the amount in excess of exemption. In addition, gifts within three years of death are added back to the estate, even by non-resident decedents who made gifts of New York situs property while a resident of New York.
IRS and Treasury Matters
The Treasury priority guidance plan for Gifts and Estates and Trusts has one new item: Guidance on Rev. Proc.
2001-38, which provides relief for unnecessary QTIP elections. Prof. Donaldson emphasized that this Rev. Proc. is a relief provision. With portability, people now use QTIP trusts to get a stepped-up basis. The concern raised by some is that the IRS could say a QTIP election wasn’t necessary since there is no taxable estate. He said that Treasury on board with modest estates doing QTIP elections and that they will not be ignored. Because temporary regulations cannot last more than three years, the temporary regulations on portability need to be made final or new temporary regulations issued. He doesn’t expect significant changes. Other items have been on the list for a while and will be there next year.
Mr. Belcher noted that the IRS budget cut in current budget. The number of lawyers has dropped. Eric Corwin of Treasury has said that he wouldn't be surprised if regulation projects PLRs, and other guidance take longer.
Valuation Matters The panel reviewed several valuation matters.
· Estate of Richmond v. Commissioner: The appraisal was never finalized by the accountant. There was a significant built-in capital gain. The Tax Court allowed 15% discount for it, based, on the Court’s own time value of money analysis, assuming the gain would be realized over time · Estate of Gustino v. Commissioner: A Ninth Circuit decision filed December 5, 2014 reversed the Tax Court.
The Tax Court said that even though decedent owned 41% interest and couldn't liquidate, there was a 25% chance a hypothetical buyer could find another partner to agree. The Ninth Circuit said it was clear error to assign a 25% probability of everything happening that needed to happen to liquidate.
· Estate of Elkins v. Commissioner: The client owned fractional interests in art. IRS said no discount allowed based on an appraiser who said that there was no market for fractional interest. The Fifth Circuit said the estate’s valuation discount would control because the IRS presented no evidence as to the valuation discount and the estate had three expert appraisers supporting the discounts. The result was an aggregate discount of about 67%.
Ms. McCaffrey said that the opinion isn’t precedent for 70-80% discount for fractional interest in art. You need good evidence for discount. If the heirs want to sell art, a valuation discount may be counterproductive due to the loss of stepped-up basis. As the rain picked up, Prof. Donaldson noted that it rained harder when discussing cases where the IRS loses.
· PLRs 201431017, 201441001: Alternate valuation requires an election on the estate tax return. It must be made within one year of the due date including extensions. In the first ruling, the failure to make the election was corrected within one year after original the due date and the IRS ruled that section 9100 relief available. In the second ruling, it was not corrected within one year and the IRS rule that no section 9100 relief was available.
Constitutionality of State Rules Against Perpetuities
Professor Robert Sitkoff and Stephen Horowitz wrote an article for Vanderbilt Law School, arguing that the statutory modifications to the common law rule against perpetuities in Arizona, Nevada, North Carolina, Texas and Wyoming violate those states’ constitutional prohibitions against perpetuities. They further argue that states that do not allow perpetual trusts may not recognize perpetual trusts established by their residents in other states. The article was picked up by New York Times on December 5.
Leimberg Information Services published a rebuttal by Steve Oshins on December 22. Jonathan Blattmachr also weighed in. The original law review article and the responses are available on the Heckerling web site at http://www.law.miami.edu/heckerling/supplemental_materials.phphttp://www.law.miami.edu/heckerling/suppl emental_materials.php.
Mr. Belcher doesn’t agree with the Sitkoff/Horowitz article’s conclusion that it recognizing the perpetual trust would violate public policy. He does worry about a bankruptcy trustee going after a trust where the beneficiary is the bankrupt. Ms. McCaffrey stated that whether the grantor’s state would recognize the trust may not be relevant because that state’s court couldn't reach the trust assets. Prof. Donaldson said it becomes more of a trade-off and risk analysis.
Estate of Sanders v. Commissioner involved what is adequate disclosure to start the running of the statute of limitations for gift tax returns. The donor had filed gift tax returns 1999-2008 and the IRS assessed gift taxes in
2012. The taxpayer moved for summary judgment due to the statute of limitations having run. The IRS said there was not adequate disclosure and the Tax Court denied summary judgment because there was a genuine dispute as to whether there was adequate disclosure. It was noted that there are two types of adequate disclosure: one for gift taxes, one for chapter 14. A disclosure checklist developed by Stephanie Loomis-Price is available at http://www.americanbar.org/content/dam/aba/events/real_property_trust_estate/heckerling/2014/adequate_di sclosure_checklist.authcheckdam.pdfhttp://www.americanbar.org/content/dam/aba/events/real_property_trust_ estate/heckerling/2014/adequate_disclosure_checklist.authcheckdam.pdf.