Category Archives: Estate Tax

How the 2020 Election Might Impact Federal Gift and Estate Tax Law

There has been a lot of discussion about the impact that the upcoming election might have on federal gift and estate tax law. In light of this, we feel that it would be helpful to provide an update of the current situation and a brief summary of some of the planning opportunities that may be beneficial in the current environment. We also want to highlight the recent passage of the SECURE Act and discuss the impact this new law might have on your estate plan.

The current available estate and gift tax exemption is $11.58 million. Generally speaking, this is the amount that can be transferred during lifetime (by gift) or at death before transfer tax is imposed. Under current law, this exemption amount is tied to the rate of inflation and is therefore likely to gradually increase through 2025. If Congress does not act in the interim, then on January 1, 2026, the estate and gift tax exemption will reduce to $5 million, as indexed for inflation.

The Internal Revenue Service issued final Treasury regulations confirming that taxable gifts made between 2017 and 2026, in excess of the exemption amount available on the date of death, will not be “clawed back” into the gross estate for federal estate tax purposes. In other words, if a taxable gift of $11 million is made this year, and in the year of the transferor’s death the exemption amount is $5 million, the transferor’s estate will not pay transfer tax on the excess $6 million that was gifted when the exemption amount was $11 million. The anti-clawback regulations provide unique tax planning opportunities to lock in the temporary increase in the exemption via gifting prior to its reversion.

Since the upcoming elections may yield a political shift in both the executive and legislative branches, the estate and gift tax exemption might be adjusted prior to January 1, 2026. There is also discussion that such a political shift could lead to the imposition of an additional tax on unrealized appreciation upon the transfer of assets by gift or at death and an increase in both marginal gift and estate tax rates. Obviously, we do not know what the upcoming election holds, and we do not know what legislation might be passed in the coming years. Regardless, it seems prudent for those who potentially might have a taxable estate to monitor the situation and consider whether they wish to avail themselves of any planning opportunities before any possible changes are made.

Given the current situation, most people are drawn to strategies that allow them to make a gift in a manner that will (1) lock in the current $11.58 million exemption amount; (2) remove assets, and the appreciation thereon, from their gross estate; and (3) retain some use of the gifted assets after the gift. Some popular strategies that meet these criteria are as follows:

Spousal Lifetime/Limited Access Trust (SLAT): A SLAT is an irrevocable trust established by someone for the benefit of his or her spouse. The general concept is that the gifted SLAT funds remain available for the spouse (and possibly children) during the spouse’s lifetime. A SLAT is structured so that it does not qualify for the marital deduction; thus it utilizes the transferor spouse’s exemption. During the beneficiary spouse’s lifetime, the beneficiary spouse retains use of the funds. When the beneficiary spouse dies, however, such access is lost, and the trust assets are distributed or held in further trust for designated beneficiaries.

Many people like to maximize this strategy by having both spouses create SLATs for the benefit of each other. This is permitted; however, such SLATs must be carefully structured to include enough differences so as not to be deemed reciprocal trusts.

Grantor Retained Annuity Trust (GRAT): A GRAT is an irrevocable trust that is established for a specific term of years. During the term, the grantor retains the right to receive an annual payment from the trust. The term of the GRAT and the amount of the payment can be modified based on how much of the exemption the grantor wishes to utilize. As long as the assets in the GRAT appreciate greater than the Section 7520 rate (currently only 0.4 percent), then there will be assets that can pass to beneficiaries tax-free at the end of the term. A grantor who wishes to utilize a larger portion of his or her exemption through a GRAT would reduce the size of the annual payment that comes back during the term of the GRAT.

Qualified Personal Residence Trust (QPRT): A QPRT is an irrevocable trust funded with the grantor’s personal residence (or secondary home) in which the grantor retains the right to use the residence for a term of years. Upon the expiration of such term (if the grantor survives the term), the ownership of the property will pass to the remainder beneficiaries, either outright or subject to continuing trust.

The establishment of a QPRT will be deemed a taxable gift of the remainder interest to the trust beneficiaries. The value of the taxable gift will be the overall fair market value of the transferred property reduced by the value of the retained interest (i.e., the term of years selected). This allows the grantor to transfer the full value of the residence using only the exemption equal to the value of the remainder interest. After the term of the QPRT ends, the grantor may lease the property back from the remainder beneficiaries for fair market value.

The federal income tax consequences of the aforementioned trusts should also be considered. Each of the trusts, at least for a period of time, is structured as a “grantor trust,” which means that the grantor is taxed on all the income earned by the trust during such time period. This may be beneficial because the income taxes paid by the grantor serve as an additional transfer of wealth to the beneficiaries, free of transfer tax. Another important income tax consequence is that when a gift is made during life, the recipient of the gift receives a “transferred basis” in the asset. This means that the recipient of the gifted asset has the same basis in the asset that the transferor held. Alternatively, if an asset is transferred upon death, the recipient’s basis would be adjusted to the asset’s fair market value, which is generally more desirable for income tax purposes. Therefore, the specific assets utilized for any gifting strategy must be carefully considered.

This is not an exhaustive list of options. For example, those who do not care to retain any interest in the gifted assets can continue to utilize outright gifting directly to a beneficiary or to a trust for the benefit of one or more beneficiaries. The gifted assets could consist of closely held business interests, which might qualify for a valuation discount. If you have previously loaned money to a beneficiary, you might consider forgiving the note and thereby triggering a gift. Some clients are also looking to refinance existing loans at lower current applicable rates. You should speak with your estate planning attorney to determine which techniques are appropriate for you. There are a multitude of options, depending on your intent, family structure, asset holdings, and market outlook.

The SECURE Act and Its Impact

In addition to the possible changes to the transfer tax rules, the recent passage of the SECURE Act has caused a major change in how many retirement plans can be administered and distributed following the account owner’s death. Many of such plans are now subject to a 10-year payout requirement after the death of the account owner. Previously, such accounts could generally be paid out over the life expectancy of the named beneficiary. For many plans, this change will result in an acceleration of the income tax liability following the account owner’s death. Therefore, we also suggest that you review your retirement accounts and the named beneficiaries of such accounts to ensure that the treatment of such assets after your death is consistent with your intent.

If you would like to review the options available in further detail, or if you simply feel that it may be beneficial to review your estate plan in light of the SECURE Act or our uncertain political and estate tax environment, please feel free to contact us. We will be happy to help you protect your intent and preserve your estate for you and your family. 

IRS Extends Postponement of Deadline for Gift and Generation-Skipping Transfer Tax Filing and Payment, But Maintains Estate Tax Deadlines

On March 13, 2020, the President issued an emergency declaration instructing the Secretary of Treasury to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency (defined as “Affected Taxpayers”).

On March 27, 2020, the IRS issued an advanced notice of Notice 2020-20 which provides additional relief from Notice 2020-18 to taxpayers who have United States Gift and Generation-Skipping Transfer Tax Returns (Form 709) and payments due on April 15, 2020 by including such taxpayers in the definition of Affected Taxpayer. The April 15, 2020 deadline is postponed to July 15, 2020. The three-month relief provided under Notice 2020-20 to an Affected Taxpayer is automatic, and therefore, there is no requirement to file an Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift Generation-Skipping Transfer Tax (Form 8892) to obtain the benefit of the filing and payment postponement deadline of July 15, 2020. However, the Affected Taxpayer must file a Form 8892 by July 15, 2020 to obtain an extension to file Form 709 until October 15, 2020. Nevertheless, any Federal gift and generation-skipping transfer tax payments will still be due on July 15, 2020.

Accordingly, the period beginning on April 15, 2020 and ending on July 15, 2020 will be disregarded in the calculation of any interest, penalty, or addition to tax for failure to file a Form 709 or to pay Federal gift and generation-skipping transfer taxes shown on the respective Form 709. Interest, penalties, and additions to tax with respect to such postponed Form 709 and payments will begin to accrue on July 16, 2020.

Please note that neither Notice 2020-18 nor Notice 2020-20 postponed the due date for filing United States Estate (and Generation-Skipping Transfer) Tax Returns (Form 706).

Alyssa L. Shook
ashook@williamsparker.com
(941) 536-2029

For additional updates related to COVID-19, please visit our resources page

Welcome the New Year With Our Updated Tax Reform Review

On December 22, 2017, President Trump signed into law the most important rewrite of the US tax code in decades. The federal law, which is entitled “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution of the budget for the fiscal year 2018” (the Act), has no other name, as its short title, the Tax Cuts and Jobs Act, was stricken from the bill shortly before being signed.

We have prepared a summary of the Act as a non-exhaustive discussion of key changes to the tax code. We will continue to analyze the Act and will post updates and recommend planning strategies on this blog.

For more information regarding the Act, please see our previous related blog posts linked below:

On behalf of everyone at Williams Parker, we hope you and your family have a healthy and happy 2018.

Please note this post was co-authored by Elizabeth Diaz, Colton Castro, and Nicholas Gard. 

Elizabeth P. Diaz
ediaz@williamsparker.com
941-329-6631

Colton F. Castro
ccastro@williamsparker.com
(941) 329-6608

Nicholas A. Gard
ngard@williamsparker.com
(941) 552-2563

Planning to Live Beyond 2025? How You Can Still Enjoy Estate Tax Reform’s Sunset Special

The just-enacted Tax Cuts and Jobs Act doubles the federal estate, gift, and generation-skipping transfer lifetime tax exemptions through 2025. The exemptions revert to their pre-Act levels on January 1, 2026. Ignoring inflation adjustments, the combined exemptions for a married couple will then fall from over $22 million to $11 million. At the 40% Federal transfer tax rate, a 2026 sunset will increase a married couple’s estate tax by $4.4 million.

Do you want to avoid $4.4 million of estate tax, even if you plan to celebrate the 2026 New Year amongst the living?

A married couple can permanently harvest the increased exemptions by gifting assets with value up to the full $22 million exemption amount before 2026. If you gift into a generation-skipping trust, the exempted assets can pass through many generations free of transfer tax. With valuation discounts for lack of control and lack of marketability still fully available, family business assets are particularly attractive for gifting.

A taxpayer can not use the increased exemption until he or she first make gifts exhausting his or her pre-Act exemption. An individual does not create an additional tax benefit until he or she first gifts about $5.5 million worth of property. A couple does not capture the full additional benefit until they give away property worth over $22 million.

These ordering rules create an obstacle for many, who can not afford to give away that much property. Married taxpayers in that situation may consider funding “Spousal Lifetime Access Trusts.” Each spouse gifts assets to a trust for the other spouse, leaving the gifted assets available to the beneficiary spouse for his or her lifetime. When the beneficiary spouse dies, the remaining trust assets pass to children or other beneficiaries free of estate tax. Persons who created such trusts shortly before 2013, when another legislative sunset almost reduced the lifetime exemptions, can fund their existing trusts with additional gifts.

Many families will wait until 2026 is closer before taking action. Families with sufficient wealth to afford substantial gifting, who also expect estate tax liability even with the increased exemptions, should consider gifting sooner, to remove appreciation in the gifted assets before 2026 from their future taxable estates.

For more information regarding the Tax Cuts and Jobs Act, follow these links:

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

IRS Sees the Light and Withdraws §2704 Proposed Regulations

The Treasury Department’s issuance of proposed regulations under Code Section 2704 were met with significant criticism and confusion. The §2704 proposed regulations were intended to provide the IRS with an additional sword to reduce and in some cases eliminate valuation discounts on family-controlled business entities.

After thousands of comments were received and a public hearing was held where numerous taxpayer advocacy groups, business advisors, and valuation experts provided their concerns, the IRS finally blinked. On October 20, 2017, the IRS published a withdrawal notice of proposed rulemaking, which removes the potential for these proposed regulations to be finalized. The elimination of the proposed regulations is fantastic news for all family-controlled business owners that would be subject to estate and gift taxes. More information regarding the withdrawal is available at federalregister.gov.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
(941) 536-2042

2704 Regulations Explained: Proposed Rules Are Set to Further Expand Value Differences between Family-Controlled Entities and Other Companies

The IRS is focused on reducing valuation discounts associated with transfers of interests in family-controlled businesses, but this focus will result in family members being deemed to receive a different value than non-family members.  This also means that an appraiser will be required to establish two different values based on ignoring certain restrictions for family members, while taking those same restrictions into consideration for non-family members.

Consider, for example, a trust that provides that 50 percent of a decedent’s family-controlled business interest will go to charity and the remaining 50 percent will go to family members.  The IRS will be expecting that the interest being conveyed to the family members to result in a higher value when compared to the same percentage interest being conveyed to charity.  This ultimately means that the interest conveyed to family will result in higher estate taxes and the interest conveyed to charity will result in a smaller charitable deduction for estate tax purposes.  The end result is the IRS receives more estate tax from the estate even though the same restrictions apply to all members (both the family members and charity).

This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.

View previous posts:

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042

What Do Estate Tax Laws in Other Countries Tell Us About the Presidential Candidates’ Proposals?

Under current law, the federal government imposes a 40% estate tax to the extent an individual’s estate exceeds a $5.45 million exemption. Republican presidential nominee Donald Trump advocates eliminating the tax. Democratic presidential nominee Hillary Clinton previously previously proposed reducing the exemption to $3.5 million and increasing the tax rate to 45%. Last week, she further proposed increasing the tax rate to 50% to the extent an estate exceeds $10 million, 55% to the extent an estate exceeds $50 million, and 65% to the extent an estate exceeds $500 million.

According to a 2015 Tax Foundation study, the current top 40% federal estate tax rate was the fourth highest amongst the 34 countries in the Organization for Economic Cooperation and Development (OECD) at that time. Japan had the highest top rate, 55%. Spain had the next highest rate behind the U.S., 34%. Chile rounded out the top 10, at 25%. 15 countries imposed no estate tax.

Adopting the Clinton proposal would make the U.S. top estate tax rate 10% higher than any other OECD country’s top rate. Even if we ignore the 65% rate applicable only to estates over $500 million, a 55% top rate would tie the U.S. with Japan for the highest rate. Even a 50% top rate would tie the U.S. with South Korea for the second-highest rate.

What does this tell us? The candidates’ proposals are at the opposite extremes of worldwide estate tax policies. While neither proposal seems likely to pass into law, the divergence underscores the tax policy polarization between the candidates.  Rather than “fitting in,” each pushes our nation’s tax policy to an extreme.

There is also a question whether adoption of either policy would serve the proposing candidate well as President.  How would Mr. Trump’s disgruntled blue collar supporters react to estate tax repeal?  One also can wonder whether Ms. Clinton’s proposal would motivate more of the wealthiest Americans to surrender their citizenship and move capital out of the U.S., not a result she relishes.

Here is a link to the Tax Foundation estate tax study: http://taxfoundation.org/article/estate-and-inheritance-taxes-around-world

Here are links to recent media coverage regarding the candidates’ estate tax proposals: http://www.wsj.com/articles/hillary-clinton-proposes-65-tax-on-largest-estates-1474559914

http://www.latimes.com/nation/politics/trailguide/la-na-trailguide-updates-1474577545-htmlstory.html

http://www.forbes.com/sites/robertwood/2016/09/23/hillary-clintons-65-estate-tax-or-donald-trumps-repeal/#450664385bf7

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

2704 Regulations Explained: Proposed Rules Negating Gift and Estate Tax Valuation Discounts May Ensnare Your Vacation Home Too

As mentioned in several recent posts, the proposed regulations under Code Section 2704 are aimed at reducing valuation discounts associated with transfers of interests in family-controlled businesses.  So that the proposed regulations capture certain entities that may be disregarded for federal income tax purposes, such as single-member limited liability companies, the definition of a family controlled entity under the regulations casts a wide net.  In fact, this net is so expansive that it has the ability to reach certain business arrangements that are significantly different from the typical family business.

Consider, for example, three siblings who own a vacation home as tenants-in-common.  Assume that the siblings have executed a co-tenancy agreement that restricts each tenant’s ability to partition and sell their interest (as many of these agreements do).  If this arrangement constitutes a controlled entity under the proposed regulations, then the regulations would apply to this co-tenancy arrangement in generally the same manner that they would apply to an active trade or business.  Should the proposed regulations apply, if a co-tenant transfers his or her interest in the vacation home (either during life or at death), the value of this interest for transfer tax purposes may be computed without regard to the restriction on partition in the co-tenancy agreement and, in turn, any valuation discounts that this restriction may warrant.  In this event, the application of the proposed regulations may result in a higher gift or estate tax value associated with this transfer.

This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.

View previous posts:

Douglas J. Elmore
delmore@williamsparker.com
(941) 329-6637

2704 Regulations Explained: Winners and Losers of Proposed §2704 Regulations, Is the IRS a Loser?

The recently issued proposed regulations under Code Section 2704 are specifically targeted at substantially reducing valuation discounts associated with family-controlled businesses.  The clear losers are the families that have taxable estates. These families will likely pay additional estate and gift tax once the §2704 regulations are finalized. In order to reduce the impact that will occur when the regulations are finalized, families that have taxable estates should review their existing plans to determine whether planning now could save them substantially later.

The IRS is likely to win in the long run, but the increased estate and gift tax revenue will be offset to an extent by a reduction in income tax.  In addition, courts have been reluctant to go along with the IRS’s past attempts to substantially change the value of a family-controlled business. Accordingly, if the IRS finalizes the regulations without substantial changes, we can expect multiple challenges to be forthcoming from taxpayers, which could further reduce what the IRS likely perceives as a significant revenue booster.

The clear winners are the family business owners that do not have taxable estates ($5.45MM on an individual basis and $10.9MM for a married couple) because the proposed regulations should allow their family to receive a larger step up in the income tax basis of the business, and in some cases the business’ assets, when they pass away.

This post is part of a series of blog posts addressing the proposed 2704 regulations and the parties that should be reviewing their plans as a result.

View previous posts:

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042

2704 Regulations Explained: Why is the IRS Targeting Valuation Discounts on Family Controlled Entities?

The simple answer is that the IRS believes that valuation discounts taken on family controlled entities are falsely high, which results in lower transfer tax revenue to the Treasury.  With the foregoing in mind, it is important to understand how the IRS, courts, and taxpayers value a business interest under current law for estate and gift tax purposes.  The general rule for a valuation is to determine the price at which property would change hands between a willing buyer and a willing seller, both of whom have reasonable knowledge of the facts and neither of whom is compelled to complete the transaction.

The courts and the IRS have recognized that discounts should be allowed where the property transferred is a minority interest in an entity that cannot force or compel the entity to act (“lack of control”) and where there is a limited market for the property (“lack of marketability”).  Taxpayers and their planners began to take advantage of this knowledge by adjusting their entity’s governing documents to increase the discounts available when transferring interests to family members.  In 1990, Congress enacted Code Sections 2701 through 2704, known as Chapter 14, to quell what was seen by some as aggressive, and in some cases abusive, uses of these discounts to reduce transfer tax values especially when many of the restrictions imposed had limited or no significant substantive effect because the family had the ability to fully control the entity and eliminate the restrictions at its will.  Since Chapter 14 became effective, the IRS has slowly seen Chapter 14’s impact dwindle due to court decisions and changes in state law.  As a result, the Treasury began seeking legislative changes to Chapter 14; however, these changes were not getting traction in Congress after several years.  The proposed regulations are Treasury’s response to the inaction of Congress and an attempt to substantially reduce discounts that the Treasury believes to be an estate and gift tax planning fiction.

Over the next several weeks we will be providing a series of blog posts addressing the proposed regulations and a synopsis of the parties that should be reviewing their plans as a result of the regulations.

Thomas J. McLaughlin
tmclaughlin@williamsparker.com
941-536-2042