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«Aggregated Summary of Reports Provided by ABA-PTL and ACTEC-Prac List serves 2015 Heckerling Estate Planning INSTITUTE Edited, Aggregation of On-Site ...»

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He stated we actually live in the second American republic. The first, governed by the Articles of Confederation, didn’t have power to tax or power to regulate trade. Our Constitution lists six purposes of our country, including promoting the general welfare. He believes that the dead have no need of welfare nor do billionaires but we are taking from the many to give to the very rich few and it will destroy the country if we don’t stop it.

Mr. Johnston believes we need to focus on underlying principles. Our tax system should motivate, encourage, and reward productive investment and discourage unproductive investment.

Discounts came in for a great deal of criticism. They can allow people to escape tax on hard to value or fractionalized assets while earnings and readily marketable securities are subject to full tax. He thinks estate planners are aiders and abettors in fraud and cheating through promoting discounts.

In the Constitution, we have given Congress essentially an unlimited power to tax. We didn’t want oppression by those in power of those out of power so it requires taxes to be imposed uniformly. An export tax was banned to get the southern states to ratify the Constitution.

The Modern Optimal Savings Tax (MOST) Mr. Johnston proposes a new system that will reflect today’s economy. Mr. Johnston stated that his proposal is a work in process and welcomes comments on it. He calls it the” honest tax.” Many of his ideas run contrary to current conservative thoughts on taxation.

His proposal uses an account he calls a Lifetime Investment Account (LIA). The purpose of the plan is to encourage investment in productive assets, not unproductive assets. Only productive assets can be held in a LIA. In return, you get total freedom to move economic assets from one to another without tax.

The features of LIAs would include:

· Trusteed investment accounts;

· Rigorous set of fiduciary obligations on the trustee;

· An absolute prohibition on loans from LIAs;

· Unlimited deposits and withdrawals, with withdrawals subject to tax to the extent of gains;

· Full protection from creditors; and · Deposits and withdrawals must be made in cash.

The fiduciary would be responsible for ensuring that transactions in any investment other than publicly traded securities is done at arms-length prices. Personal use property, including personal homes, could not be owned in a LIA, nor could collectibles. The fiduciary would be trained, licensed, and bonded. A condition of fiduciary service would be agreeing that they will be subject to severe civil and criminal penalties for misconduct.

At an individual’s death, his/her LIA would be liquidated and any gain subject to tax, unless there was a surviving spouse. A surviving spouse would become the temporary owner of the deceased spouse’s LIA. At the surviving spouse’s death, both LIAs would be liquidated and taxes paid on the gains, even if the surviving spouse had remarried.

Mr. Johnston admitted it looks like a big tax break for the rich. In return for giving up their lifetime exemption, except for withdrawals, no longer have to worry about tax impact of economic decisions. One of the big benefits is that it eliminates the lock-in effect.

He concluded by saying that he doesn’t want any of his descendants to pick up history textbook that begins “the U.S. was...” and goes on to describe the downfall of the U.S.

Comments for Mr. Johnston about the MOST plan may be sent to him at dcjohn01@syr.edu.

10:55 - 12:35 Question and Answer Panel Dennis I. Belcher, Samuel A. Donaldson, Carlyn S. McCaffrey Reporter: Kimon Karas Esq.

This session included the panelists addressing a number of questions presented by Institute attendees including some follow up on the topics addressed by the same panel in the Recent Developments Session on Monday afternoon. Here are the significant highlights.

The presenters commenced their presentation responding to a question from young practitioners asking what sources or materials should one refer to in order to keep current with updates and developments. Sources cited included among other, Tax Notes, Leimberg List Serv, Checkpoint, BNA Daily Tax Report, Trusts and Estates and Estate Planning periodicals, ABA RPTE Section, state bar associations, Tax Prof and Trust Prof Blogs, as well as participating in or forming study groups within local community of attorneys, accountants, financial planners, and trust officers.

The panelists addressed a question regarding a QTIP trust with marketable securities creating a FLP to be funded

with marketable securities. The considerations to be considered include:

1. Does the governing document/state law grant fiduciary authority to do so,

2. Reason-business purpose.

3. Fiduciary duties owed to beneficiaries restricting beneficiaries’ ultimate access to funds by reason of agreement’s restrictions.

4. Section 2519 should not be a concern citing FSA 199920016.

Next the panelists discussed a QTIP with an FLP that as a result of tax law changes wants to position the trust for a basis step up. Consider amending governing document to remove restrictions that depress value.

A question related on the obligation/duty to file a portability election in a second spouse situation where child (not child of surviving spouse) is fiduciary and estate otherwise has no filing obligation, where estate value is under filing threshold. Panelists concurred there is no duty to file an estate tax return to elect portability; however if spouse offers to pay costs, expenses may want to consider. Does filing return expose estate to issues that it would not otherwise be subject to if there is otherwise no obligation to file by filing, i.e. prior gifts? Executor must weigh duties and who the beneficiaries are.





A question was posed does not addressing asset protection planning in an estate planning matter expose professional to professional liability. Probably not but it depends upon the custom in the community; may have an obligation at least to address asset protection with a client who may be a high risk occupation, endeavor, and if the practitioner does not engage in asset protection planning to at least refer or co-counsel with one who does. Best practice is to address in engagement letter.

A question was posed regarding allocation of trustee’s fees in a QSST, where general rule is trustee’s fees allocated ½ to income and ½ to principal when all distribution to QSST is income. Consider power to adjust.

In response to a question on gift tax adequate disclosure, disclosing a transaction on Form 1040, i.e. sale to grantor trust is not adequate disclosure for gift tax purposes. Adequate disclosure must be made on Form 709.

Next the panelists discussed a recent New York Times article regarding families creating private art museums for art collection in facilities on family compound. Questions arise what is charitable purpose-what extent is it open and available to the public-a fact question and must be aware of self-dealing issues.

Next a question was posed where child has right to acquire father’s 50% interest in partnership for $50K with a value of $4M. Section 2703 would not respect the $50K value for estate tax purposes although son has a state contract right to purchase for $50K. Further question is what is value for spouse’s elective share right. Not clear although elective share statutes do not reference federal estate tax values.

Next panelists discussed Section 67(e) unbundling. Corporate fiduciaries are studying issue based on an informal survey conducted by the panelists of corporate fiduciaries attending the Institute. One suggested in a trust situation 40% of fees would not be subject to limitation and in an estate situation 80% of fee would not be subject to the limitation.

In addressing a question regarding a late filed 706 to elect portability 706 at second spouse’s death when 706 not filed in first spouse’s estate, panelists agreed based on Section 2056 regulations as long as this return was first filed return it should be acceptable.

A question was raised regarding a QTIP trust that has exploded in value between time of spouse’s first death where surviving spouse and remainder beneficiaries want funds to pass to charity and trust does not grant surviving spouse a power of appointment. Consider state law modification, children can give remainder interest to charity, or decant into a trust where surviving spouse is granted a power of appointment.

The panelists addressed two situations regarding late elections. One related to portability if person failed to satisfy 12/31/14 relief provision under the Rev. Proc. Consider Section 9100 relief if facts fit within requirements. An additional fact situation was posited where husband and wife file 709 and elect split gift. Based on an oversight there was a failure to allocated GST on a GST transfer made by transferor spouse. Now husband unknowingly has used part of GST exemption because of the automatic allocation rules. A proper situation to request 9100 relief.

2:00 - 5:20 FUNDAMENTALS PROGRAM #2 Robert S. Keebler, Jeremiah W. Doyle, IV This easy to understand session will discuss the core concepts of the income taxation of estates and trusts including planning ideas and the “dirty dozen” things estate planners need to know. A lifetime of knowledge taught in 3 hours!

Reporter: Carol A. Sobczak This reporter requested this Fundamental Session for her own edification, but entered the session with trepidation, having glanced at the nearly 200 pages of materials. Her fears soon subsided, however, as the session was presented in an organized, logical manner, covering the fundamentals in an interesting and comprehensive way.

The materials included three well-written outlines: (i) Income Taxation of Trusts and Estates; (ii) The ABCs of IRD;

and (iii) Grantor Trusts. The presentation, while it could not cover all of the materials, focused on the basics.

Mr. Keebler began by stating that the world of fiduciary taxation is becoming more important to estate planning professionals as fewer taxpayers need to be worried about the estate tax, while fiduciary income tax rates can be as high as 39.6% (at only $12,300 of income) plus the 3.8% tax on net investment income. When you add state income taxes, you could have a 50% rate. The basic concern is not to have a trust or estate pay income tax, but rather to have it flow through to the beneficiaries, whose rates and tax thresholds are lower.

Both presenters shared the stage for the remainder of the presentation, and this reporter will not differentiate between them in this summary.

General Rules. The income taxation of trusts and estates is governed by Subchapter J of the Code (§ 641 et seq.). An estate or trust is a separate taxable entity. Generally, the taxable income is computed in the same manner as for individuals (§ 641(b)) with some exceptions., A fiduciary may elect a fiscal year for an estate. A trust may use a fiscal year if it elects §645 treatment. The income of a trust or estate is taxed either to the entity or to the beneficiary. The exemptions are different ($600/$300/$100); there are different rules for charitable deductions; and depreciation deductions are allocated between the entity and the beneficiary.

Administrative expenses may be deducted on either the estate tax return (706) or fiduciary income tax return (1041). An executor fee may be split between the 706 and the 1041.

Administration expenses include attorney and accountant fees, executor commissions, filing fees, surety bonds premiums, appraisals, etc. The fiduciary may elect to take the expenses on the 706 or the 1041, and the expenses are generally not subject to the 2% floor. The general rule is to claim expenses on the return with the highest tax rate, which more often these days is the income tax return.

Any deductions attributable to tax exempt income are non-deductible. If a trust or estate has tax exempt income, a portion of the trustee or executor fee will be non-deductible.

Types of Trusts. There are three types of trusts for income tax purposes: (i) simple trusts; (ii) complex trusts; and (iii) grantor trusts, and the rules are different for each.

A simple trust is required to distribute its accounting income annually, cannot make any principal distributions or distributions to charity.

A grantor trust is one where the grantor or beneficiary has one or more “powers” described in §§ 673-678, resulting in all income, expenses, and credits “flowing through” and taxed to the grantor or beneficiary regardless of whether any distributions are made. The rules of Subchapter J do not apply to grantor trusts, and they were not discussed in this presentation.

A complex trust is any trust other than a simple or grantor trust.

Definitions of Income. There are several very important concepts when dealing with the income taxation of trusts and estates that differ from income taxation of individuals. The first is “trust accounting income” (TAI), defined by the governing instrument or, if silent, state law (such as the Uniform Principal and Income Act or unitrust provisions). TAI governs the amount of distributions to beneficiaries and the allocation of receipts and disbursement between accounting income and principal. TAI does not include capital gains, subject to several exceptions.

“Taxable income” (TI) of an estate or trust is computed the same as for an individual, except the exemptions are different ($600 for an estate, $300 for a simple trust, and $100 for all others); there are different rules for charitable deductions; depreciation deductions are allocated between the entity and the beneficiary; and administration expenses are generally not subject to the 2% floor.

If income is accumulated in the trust or estate and not “deemed” distributed, it is taxed to the trust or estate rather than the beneficiary. If income is distributed, the trust or estate gets a deduction for the amount of the distribution, but it is limited to “distributable net income” (DNI) (discussed below). The beneficiary accounts for income actually distributed (or deemed distributed) to the beneficiary, limited to DNI.

“Distributable net income (DNI) is the heart of the income taxation of trusts and estates. It governs the amount of an estate’s or trust’s distribution deduction and the amount a beneficiary accounts for on his own return, and the character of that income.



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