Blogging from Heckerling 2018: Post Three

Recent Developments 2017

The 52nd annual Heckerling Institute on Estate Planning included a “recent development” panel consisting of Carol Harrington (McDermott Will & Emery LLP), Jeffrey Pennell (Emory University School of Law) and Steve Akers (Bessemer Trust); Carlyn McCaffrey (McDermott Will & Emery LLP) joined the discussion on the Tax Cuts and Jobs Act of 2017.  The panel discussed legislative developments as well as cases and rulings, and then finished up with a discussion of the 2017 Tax Cuts and Jobs Act.  Below are some of the highlights.

The panel started off by mentioning that the IRC Sec. 2704 proposed regulations have been withdrawn.  The Treasury and IRS now believe they are unworkable and the panel doesn’t think there will be another iteration of them.   The panel then touched on the Treasury-IRS priority plan for the 12 months beginning July 1, 2017 that was released on October 20, 2017.  Carol Harrington discussed that the plan includes addressing the regulations under IRC Secs. 1014(f) and 6035, namely the basis consistency rules that apply to estates and their beneficiaries.  She indicated that it seemed unfair to require: (i) that estate tax values of estate assets be provided to beneficiaries 30 days after an estate tax return is filed, possibly long before it is known what will actually be distributed to each beneficiary, (ii) successive transferors to furnish that information to successor transferees, and (iii) a zero basis for certain after-discovered or otherwise omitted estate property.  Other priority plan items that were mentioned include: (1) final regulations under IRC Sec. 2642(g) describing the circumstances and procedures under which an extension of time will be granted to allocate GST exemption; (2) partnership audit rules; (3) basis of grantor trust assets at death; (4) final regulations under IRC Sec.  2032(a) addressing post-mortem restrictions on estate assets and their impact on alternate value; and (5) anti-Graegin regulations designed to deny a current interest deduction for the entire interest amount that will be paid on a Graegin loan and instead permit the deduction based on the discounted present value of that interest.

Next, the panel took us for an excursion through recent cases and rulings which are too numerous to discuss here.  However, here are two items that I found of particular interest.  One was Letter Ruling 201633021 that approved one trust being treated as the grantor of another trust pursuant to IRC Sec. 678(a).  Trust 1 had the power to withdraw the income of Trust 2, which was defined to include interest, dividends and capital gains.  Steve Akers pointed out that this provided a planning opportunity whereby the beneficiary of a testamentary trust with a power to withdraw all of the trust income, including capital gains, could be deemed the owner of the trust for income tax purposes.  Steve Akers referred to this trust as a beneficiary deemed owner trust (“BDOT”) and compared it to a beneficiary defective inheritor’s trust (“BDIT”) with a third-party owner where the trust is grantor with respect to the beneficiary because of a Crummey power.  Potential technical concerns that don’t exist with the BDOT exist with the BDIT, specifically with respect to the potential lapse of a hanging Crummey power.  The second item of interest was the reversal of the District Court decision in Green by the 10th Circuit Court of Appeals (Green v. U.S.),  which held that a trust’s charitable donation of  appreciated property  that was purchased with trust income entitled the trust to an income tax deduction equal to its cost basis rather than its fair market value.

The panel concluded with a discussion of the Tax Cuts and Jobs Act of 2017.  Front and center, of course, was the doubling of the gift and estate tax exclusion, even though the exact amount is not known because the exclusion is indexed for inflation using a new chained CPI.  It has been suggested that the indexed amount is $11.18 million but the IRS has not issued the inflation adjusted number yet.  Most commentators believe that if the exclusion reverts back in 2026 to the pre-Tax Act amount, there won’t be a clawback — meaning that the increased exclusion amount that was gifted during life won’t be taxed at the donor’s death if the estate tax exclusion should be less. Even if there should be a clawback, Carlyn McCaffrey recommended that clients make gifts using the increased exclusion to remove income and appreciation from a client’s estate.  The $60,000 exclusion available to nonresident aliens was not increased.  In light of the increased exclusion, Steve Akers made the following recommendations for using the increased exclusion: (1) cushioning for any large gifts where the value could be challenged on audit; (2) forgiving outstanding loans; (2) equalizing children; (3) gifting to save state estate taxes; (4) split dollar rollout; (5) additional gifts to an intentional defective grantor trust if it is thinly capitalized to avoid an IRC Sec. 2036 issue, (7) creation of multiple non-grantor trusts to increase the availability of the state and local tax deduction now subject to a $10,000 limitation and leverage the qualified business income threshold; and (8) gifting to parents with unused gift/estate exclusion to obtain step-up in basis on those assets at parents’ deaths. Keep in mind that in order to take advantage of the increased gift/estate tax exclusion, a client has to use his current $5+ million exclusion first.  

The panel concluded with a discussion of how the new tax law affects the income taxation of trusts and estates.  Specifically, any 2% miscellaneous itemized deductions are no longer deductible.  Excess deductions that pass out in the final year of a trust/estate are 2% miscellaneous itemized deductions that won’t be deductible by the recipient (even if some of those deductions are not 2% miscellaneous itemized deductions on the trust/estate’s income tax return).  The IRD deduction is still permitted and trusts and estates won’t lose their personal exemptions which are very small anyways.  Finally, Carlyn McCaffrey discussed the changes made with respect to electing small business trusts that now allow them to have nonresident aliens as potential current beneficiaries and permit them to make charitable contributions pursuant to the income tax rules applicable individuals under IRC Sec. 170, rather than the trust/estate charitable contribution rules under IRC Sec. 642(c). 

 Blogging from Heckerling 2018

Karen L. Goldberg in the Private Wealth Advisory Group leads the trust and estate practice in the New York office. Karen specializes in estate planning for closely held business owners, senior corporate executives and other high net worth individuals.

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