2026 Trust & Estate Planning Insights | Annual Update

So this is notable on a couple of different reasons. The top tax rate stayed at 37% and that is important both for individuals and for trusts as we will talk about later. Miscellaneous deductions were permanently disa allowed under the bill. We might say permanent a few times here and I always like to to point out that permanent is only as permanent as the current Congress determines it to be, but for now at least miscellaneous deductions are permanently disallowed. The bill also introduced a new 0.5% floor on charitable contributions. While not a huge disallowance, it has caused a fair amount of confusion about when it applies and how it applies and the ordering of it being applied, particularly with the point that follows the bill also introduced a replacement or new limitation if you've only been practicing for 10 years like me on itemized deductions. So this replaced a former limitation and now you must reduce your itemized deductions by the lesser of two 30 sevens of either your total itemized deductions or the amount by which your income exceeds the threshold for the 37% tax bracket.

And there's some outstanding questions about that that Chris will go into later on how exactly that applies to trusts as well. There were also some changes to 5 29 plans in terms of when you can use them and how you can use them and how much you can use them. We're also going to assess these new Trump accounts under five 30 CAP A. We've had so many, many questions about these Trump accounts. They are available. You can elect 'em as of the beginning of this year. So people are going to have a lot of questions about those. We will go into those in more detail including some potential issues that occurred during the drafting of the belt in terms of how or whether they qualify for annual exclusion amounts. It also increased the qualified small business stock exclusion. This was $10 million for I think like 33 years and it is now 15 million. So there are some opportunities there in terms of using trusts and with gifting opportunities.

The salt cap deduction, this was for something that seems very small, was one of the biggest issues with the bill in terms of it getting through Congress. If you recall with the TCJA, the state and local tax deduction that taxpayers are able to take if they itemized was limited to $10,000 or $5,000 if they were married, filing separately, the bill increases that deduction cap to $40,000. There's a GI limitations on that. It can be reduced back down to $10,000 if your a GI exceeds those limitations and it is a temporary provision. It's only good until 2029 and 2030 that's going to snap back down permanently to $10,000 in the absence of any congressional changes. And then finally, there were significant changes to opportunity zones and funds. Those were scheduled to sunset at the end of this year and funds that are still in still through 2026, they will still have to recognize their gain at the very end of this year. So we're going to talk about both the changes to the opportunity zones and funds programs, but also kind of about how there might be a little bit of a dead zone for the first half of this year.

So Chris is first going to walk us through some of the opportunities that have occurred with the increase to the estate and gift tax exemption to 15 million.

Chris Ryan: Yep. Thanks Sarah. So first, for taxpayers who expect to owe estate tax upon their death, the planning available for them is really, it's going to be the same as it always has been. It's going to be focused on removing growth from the estate by gifting assets out of the estate during life with a preference towards assets that are expected to appreciate. Most significantly, it's going to be a focus on using at least one spouse's lifetime exemption during life and potentially both spouse's lifetime exemption. There'll be continued annual exclusion gifting, and what the annual exclusion is is it allows each taxpayer to gift up to $19,000 per year to any number of individuals without needing to file a gift tax return or using any lifetime exemption. So a simple example, a single person has three kids, makes $19,000 of annual exclusion gifts to them each year.

Had those gifts been left in the estate and grown at a modest rate of 7% per year, those assets that would've been remaining in the estate would've grown to about $800,000 had they not been gifted out. Just by making those annual exclusion gifts, which may seem insignificant compared to the total size of the estate, we can remove potentially hundreds of thousands of dollars of assets from the estate without using any lifetime exemption. You can double that in the case of a married couple and it only becomes more beneficial if there's more kids or grandkids to make gifts to. We'll continue to see credit shelter trusts which come into play after the death of the first spouse to die. Any remaining exemption available to their estate potentially can be transferred to a trust using up the remaining exemption and shielding that from estate tax upon the surviving spouses estate or the surviving spouse's death.

Any excess can go either outright to spouse or to a trust for their benefit on which Q-tip election can be made thereby getting a marital deduction, deferring the tax until the surviving spouse's death. But what about taxpayers who don't expect to be subject to estate tax? You have this group of people who were planning the last several years for the estate tax exemption to be cut in half, somewhere between seven and seven and a half million. It was increased to 15 million like Sarah said. So what planning opportunities are available for them if they don't expect to own estate tax? The planning is going to shift from estate tax savings to income tax savings and basis planning. Basis planning, meaning assets that are left in the estate of a decedent at the time of their death get a basis adjustment equal to the date of death value generally referred to as the basis step up. If assets appreciate over time, they're worth more when somebody passes their basis is now equal to the fair market value of that asset upon their death, eliminating any capital gains tax owed by the beneficiaries of those assets.

We can also look to if a trustee has the ability to transfer principal from a trust to a beneficiary won't be subject to estate tax, we can include those assets that would've otherwise been excluded from an estate because they're in a trust, pull them back into the beneficiary's estate, qualify for the basis step up as long as there's no estate tax be owed free basis, step up eliminating the capital gains tax and now this is a conversation that's very different depending on the age of someone. It's a conversation that probably wouldn't be had with somebody who's in good health and in their forties or fifties because there's too much risk that the law will change at some point in their life. But it may be worthwhile to have a conversation for someone who's much later in life or in poor health who won't be subject to the estate tax.

You can also look to toggling off grantor trust status. So grantor trusts are a very popular estate planning tool because they won, remove assets from the estate of the grantor, the person who's created the trust, but two, the grantor continues to pay the tax and the income that's earned by the trust, which is a benefit because it allows the trust to grow income tax free and the grantor is making those tax payments, reducing his or her estate, thereby allowing the trust to grow income tax free for the beneficiaries, reducing the estate tax upon their death. But if someone's no longer expected to be subject to the estate tax, that's not so much of a benefit so that there's an opportunity to potentially turn off grantor trust status and have that trust taxed as a non-grant or trust, which we'll get into on the next slide. In either case, the deceased spousal on use exemption or DSU planning will continue to be important because we've all heard that the estate exemption is currently $15 million per taxpayer, $30 million per married couple, but we only get to that $30 million per married couple. If an estate tax attorney is filed upon the death of the first spouse showing the exemption that was used during life, what's left upon their death, what transfers over to the spouse, if no estate tax return is filed, no exemption transfers over to the spouse.

Asset protection will always continue to be important even if estate tax isn't a concern. Creditor protection and in any of these estate planning conversations or updates, always check beneficiary designations. If I named someone as a beneficiary of a life insurance policy or a retirement account 10 years ago, is that person still the same person who I want to inherit those assets? All right, so the income tax side, we talked about potentially turning off grantor trust status, converting that trust to a non-grant tour trust non-grant tour trusts pay tax at a much higher rate of income than individuals do. They pay tax at the same 37% maximum rate, but they get there much more quickly. It's only $16,000 of taxable income in 2026 before a trust is subject to the maximum federal rate of 37%. Every dollar earned in excess of 16,000 of ordinary income is taxed at that 37% rate.

But if we have the opportunity to, instead of having the trust pay that tax now that we have a non-grant tour trust, we can shift, we can potentially shift to the income the beneficiaries who may be at a lower rate, the distributions that are made from that non-grant tour trust carry out income to the beneficiary moving the income that would've been taxable to the trust to the beneficiary. Trust gets a deduction, beneficiary pays the tax on the income and those distributions can be done during the calendar year or up to 65 days after year end. So we can make distributions through March 6th, 2026, have them count for the 2025 tax year. So it allows for some time after year end to see how much was earned by the trust. What's the expected income for my beneficiary? Where's my breakeven point? How can I reduce the tax in aggregate overall between the trust and the beneficiary? But it's not just the federal tax side that we have to be concerned with. There's also state tax considerations. If I have a trust that's a resident of Florida and I'm making a distribution to a beneficiary who's a resident of a high tax state, New York, New Jersey, California, I don't want to distribute so much of the income where I'm creating more tax once the state tax is factored in.

Some states like New York and New Jersey also have their own special rules with what are referred to as resident exempt trusts. If I have a New York or New Jersey resident trust that has no trustee, that's a resident of that state, no income that sourced that state and no real property located in that state, it's still a resident trust files a resident income tax term, but it's not subject to income tax in its resident state. In that case, similar to having a Florida trust or other non-tax state trust, I don't want to distribute so much income to a beneficiary where I'm causing more state tax on the beneficiary's tax turn, where in aggregate I'm exceeding what I would have had to pay had it just been taxed to the trust.

Other than income tax considerations we have to consider will the beneficiary be responsible with the distributions they receive? Are they eligible for certain government assistance programs which may be affected by getting a distribution, having more income to report on their personal tax return. So it's not just looking to save income tax between the trust and the beneficiary. With respect to miscellaneous deductions, they're permanently disallowed for both individuals and trusts. The deductions that were once subject to the 2% adjusted gross income floor are done away with. So for individuals, that includes investment management fees, tax prep fees, certain legal fees for trusts, those legal fees and tax prep fees were never subject to the 2% floor. They're still deductible for trusts. Investment management fees were subject to the 2% floor like individuals they're done away with for trusts and you want to time the deductions to the extent that you can that are paid from a trust to defer deductions into a high tax year or to accelerate deductions into a high tax year.

But when you have deductions at the trust level that exceed the income that's earned by the trust, those excess deductions, there's no benefit to them. They don't carry forward the benefits lost except for in the case of a final year trust, if we're terminating a trust tax returns marked final, we have deductions that exceed the income in that final year. Those excess deductions can be passed out to the beneficiaries of the trust, but that's only available in the final year. So if we know that after the tax year end there will be tax prep fees, there might be some legal fees to the extent that we can, we want to accelerate those into the current tax year to take advantage of those and possibly add to that excess deduction passing out to the beneficiaries.

All right, and we have our first polling question. What is the estate and gift tax exemption amount in 2026 You should see on your screen and you'll have 60 seconds to answer I next we'll talk about the 0.5% floor on charitable contributions as well as the reduction of itemized deductions for 2 37, which Sarah referred to I. So to charitable deductions beginning in the tax year 2026, we can only deduct contributions that are made in excess of 0.5% of adjusted gross income. And then on the backend, all of our itemized deductions if applicable, if we're in the 37% bracket, are going to be reduced by two 30 sevens to the extent that we're in excess of the 37% bracket floor as Sarah mentioned. But to get around this new floor and reduction for taxpayers who typically make contributions each year, we can look to bunching those contributions into one year. We can look to say typically I would expect in the next two or three years to make contributions of $50,000 per year, we can accelerate those contributions a hundred thousand or 150,000 into year one, still subject to that floor and reduction, but at least we're only getting hit with it once.

But it's important to know the limitations that there are on contributions. Cash contributions to donor advised funds and public charities from individuals are subject to a limitation of 60% of adjusted gross income contributions of non cash subject to 30% of gross income. Private foundation contributions are an even lower amount. We can only deduct up to 30% of cash contributions and 20% of non-cash that those percentages of adjusted gross income. To the extent that we exceed those a GI limits, those excess contributions can be carried forward up to five years. Again, with respect to individuals, trusts have their own rules where first we have to make sure can the trust even deduct charitable contributions and that's known by looking at the trust agreement. The trust agreement has to allow for contributions to be made to charity in order for the trust to get a deduction. If the trust agreement makes no mention of contributions to charity, no deductions allowed, but if we've determined that a trust can deduct those contributions, trusts aren't subject to the same AGI I limitations, which individuals are trust can deduct up to a hundred percent of the income that's earned for contributions that are made to charity.

On the other side, there's no carryover that's available to individuals for trusts. If a trust contributes to charity in excess of its income, that excess deduction is lost, that charitable contribution is wasted.

Charitable lead trusts or a different type of trust structure that's used in estate planning, but lead trusts are required to pay an annuity out to charity each year and we know what they're required to pay out at the beginning of each year. So if I expect or if I know that a charitable lead trust has to pay out a hundred thousand dollars to charity in the current year and it's treated as a non-grant or charitable lead trust, but I expect to only have $30,000 of taxable income, there's an opportunity there to create $70,000 of more taxable income. If I have a portfolio of appreciated securities, I could sell enough securities to realize a capital gain up to $70,000, creating that extra taxable income, bringing it up to the total charitable contribution that's required, so I'm not wasting that contribution deduction. That same trust can then turn around reacquire, those securities that were just sold at a gain, no income tax is paid because of the charitable contribution, offsetting that gain and the repurchase essentially creates a free step up in basis. I'm holding the same securities, I've just reestablished my basis without paying any income tax.

So we mentioned the taxpayers who are subject to the 2 37 reduction are those who are in the 37% bracket, but that reduction is only applicable to itemized deductions. It's not applicable to above the line deductions like the QBI deduction, the qualified business income deduction. But what about this distribution deduction that we talked about for trusts, trust makes a distribution out to a beneficiary get to deduction. We're not paying the same tax twice tax on the same income twice as the law is currently written. If a trust has say $37,000 of taxable income makes a distribution out to the beneficiary, beneficiary pays tax on that $37,000 of income. But now at this two 37th reduction, which currently seems to apply to this distribution deduction, there will be a double tax on $2,000 of income at the trust level because of that reduction. So I'm hoping, and I would expect that that was a technical correction would be coming, but stay tuned for that Lisa. So

Lisa Herzer: Hello everyone. I'm Lisa Herzer. For those that don't know me, I'm a tax director in our PCS group and I specialize in trust and estate. I am now going to talk about the OB three changes to 5 29 plans as well as the new Trump accounts. Some of the changes made by OB three related to 5 29 plans were to permanently extend the allowance for rollovers to able accounts effective 1 1 26. The amount that may be used to pay for additional expenses beyond tuition for elementary or secondary schools increased from 10,000 to $20,000. And remember that you can contribute five years of annual exclusion amounts and not use any additional exemption if you make that election on a properly filed gift tax return. This allows for increased tax regrowth in that account. Many states also have 5 29 tax incentives. Some that come to mind are New York, South Carolina, and Virginia OB three also established new Trump accounts. These are available to those under the age of 18. It is important to note that an election must be made in order to take advantage of the Trump account. The maximum contribution is $5,000 per year indexed for inflation, and these contributions are not tax deductible. It does not appear that these qualify for the annual exclusion as they are not gifts of a present interest, which is what is required to qualify for the annual exclusion, but we will have to wait and see whether this is corrected. Also.

Sarah Adkisson: And Lisa, if you don't mind, I'm just going to jump in here. One of the things that I've noticed a lot of people have questions about is it's really confusing because the law says right now you can set these accounts up but you can't contribute to them yet. So there's a bit of a timing mismatch with the Trump accounts and that you can go ahead and elect to set them up now, but you can't make any contributions to them until July 4th, 2026.

Lisa Herzer: That is correct.

Sarah Adkisson: Yeah. I've just gotten so many questions from people who are like, well, why can't I contribute? I can set it

Lisa Herzer: Up. Yes. And we have another poll. Poll number three, all of the changes in OB three are permanent, true or a false. Are there any other questions that you wanted to answer Sarah or Chris? While we have this poll open for a couple of seconds?

Sarah Adkisson: We had a couple good questions. I think some of them may have been answered. Are trustee fees still allowed for trust? That was a good one I thought.

Chris Ryan: Yes, yes. Still deductible for non-grant tour trusts.

Chris Ryan: Saw another one. Do you only get a step up in basis by filing an estate tax turn? No, you don't have to file an estate tax turn just to get the step up in basis. The basis is adjusted to date of death value for any asset in the estate, whether an estate tax turn is filed or not.

Lisa Herzer: And I would just add to that, Chris, though, even though an estate tax return isn't filed, you should still perhaps get an appraisal or something that verifies that's what the fair market value was on the date of death.

Sarah Adkisson: We also have a question about the seed money for the Trump accounts. So yes, children who were born between January 1st, 2025 and December 31st, 2028 will receive what is actually the way that it's structured is actually a refundable tax credit of a thousand dollars. If you elect to set up these accounts, the seed money is not expected. Again, no contributions are allowed until July 4th, 2026. So seed money is not expected to start hitting accounts until at the very earliest that date, that July 4th, 2026 date. Lots of nuance with these accounts.

Lisa Herzer: There are. So the next section we're going to talk about and very briefly, is the number of changes that were made to section 1202 qualified small business stock. I'm not going to go into 1202 as it is very complex and oh, sorry, the poll results. That is correct. So we have other webinars that deal only with 1202, but I wanted to make note that the increased cap from 10 million to 15 million makes stacking and non-grant or trusts much more valuable. And if anyone is interested in learning more about 1202, I have put the webinar on the slide. You can go to our website ebury.com and you'll be able to navigate to that and you can watch it on demand. Also, you can reach out to our 1202 experts, Kayla Kvi, Ben Asper or Jeff Kelson for additional information on 1202.

So one of the changes that has gotten a lot of media attention is the increased solve cap. So the maximum salt deduction has increased from 10,000 to 40,000 with a 1% increase each year through 2030 when it is scheduled to drop back to the $10,000 cap. There is a phase out that begins at 500,000 of a GI for single and married taxpayers as well as for trusts. There's opportunity for planning here with non-grant or trust as the significant increase in the salt deduction from that 10,000 to 40,000, which can, if the income does not exceed 500,000, you could take advantage of multiple non-grant or trust to avail yourself of that deduction. But keep in mind that the increased cap is only for five years as of now. PTET remains allowable as well for now.

The last change made by OB three that I'll briefly cover is the changes to the qualified opportunity zones and funds. So QOF and QO Zs like 1202 is really a subject for an entire presentation. OB three expands QoS and keep in mind that for those that participated in the original program, those deferred gains will become taxable on 12 31 26 if not sold prior to that date. Once again, reach out to one of our experts, Michael Han or one of our real estate experts listed on our website if you're interested in learning more about this area. So I will now cover some of the cases discussed at Heckerling. The theme here is that the IRS is looking for low hanging fruit and it is important to not just plan but follow through with that planning by dotting i's and crossing T's.

The four cases I will cover are the estate of Barbara Galley, which deals with loan versus gift characterization, the estate of Billy Roland, which deals with the disallowance of the desu on the second to die spouse's estate tax return due to insufficient information on the estate return that was electing portability. The third one is the estate of Martin Griffin that failed to make a Q-tip election and the loss of the marital deduction and basis StepUp following the spouse's death. The last case is the pierce case and that deals with the tax affected valuation of a business I in the galley case, the tax held that a loan between a mother and son did not result in a taxable gift. In February, 2013, Barbara Galley then aged 79, transferred 2.3 million to her son Steven. They both signed a promissory note under which the balance would be repaid in no more than nine years with interest at a rate of 1.01%, the midterm a FR for February, 2013, Barbara did not file a federal gift tax return reporting this transaction.

And after Steven made three annual payments of interest, Barbara died in 2016. The takeaways from the galley case are the more factors you can put in the loan column versus the gift column, the better chance of success you'll have. Some of those factors are, for instance, life expectancy and loan terms. So in this instance, Barbara was 79 years old when she made the loan to her son. They used a nine year term. Nine years is probably what her life expectancy was at that time. So it makes more sense to use a nine year term as opposed to a 30 year term because you would not have expected her to have lived to the end of that term the intent and the ability to repay another important factor. So did her son have the income necessary to pay the interest that was required and did he have the intent to pay the loan administration?

In this case, Steven made all three payments that were required before she died. He paid exactly what was due. Barbara reported the income on her tax return. Those were all positive factors to indicate that it was actually a loan and not a gift. The other thing to be aware of client communications that contradict the fact that it was a loan. So for instance, let's say the son says, oh, I'm short to cash this month, ma, and this is in an email or a text and she says, don't worry about it, son, you don't have to pay it. That is an indication of a gift as opposed to a loan.

In the Roland case, the de suey was disallowed on the spouse's estate tax return as the portability election was deemed invalid due to lack of sufficient information on the original estate tax return. In this case, Faye Roland died on April 8th, 2016, survives by her husband Billy Faye's. Revivable living trust and poor over will provided for several bequests in addition to her spouse billing. Treasury regulation 20 point 2010 dash two A 72 provides for relaxed reporting requirements if a return is filed only to elect portability, this exception is available only if all assets qualify for the charitable or marital deductions. Billy died in January, 2018. The DSU E from Faye was disallowed and the tech court agreed with the IRS that there was no substantial compliance when phase 7 0 6 was filed. So there are relaxed reporting requirements, but only if all assets qualify for the Mari marital or charitable deduction.

In this case, there will be quests to various family members and friends in addition to the spouse, Billy and also a complete and accurate return must be filed and in this instance, so do not take shortcuts to cut costs when filing initial return for portability. I've seen this over and over where people try to cut costs in filing that return, whether it's by hiring an accountant that's not familiar with portability. But in the end, as was the case here with Billy, it wound up that the sui was lost and there were significant tax that had to be paid. And I believe that portability and the sui issues will continue to come into focus now that portability has been around for a while. Oh, another call. What change will most impact you or your clients? A, the QSBS increase, B increase estate and gift tax exclusion changes to 5 29 plans and creation of Trump accounts or the itemized deduction limitations patients.

Sarah Adkisson: So while we're waiting for everyone to answer this question, if Lisa or Chris could talk more about the salt deduction opportunity for trust, we've had a lot of questions about that in the chat, so I think that's probably a really good one for people to learn more about.

Lisa Herzer: So in terms of, what was the question, Sarah?

Sarah Adkisson: Let me find them. A couple of people had questions about eligible, or sorry, when a trust would be eligible to take assault deduction and how that could be used by the taxpayers.

Lisa Herzer: So a trust has always been allowed to take assault deduction. It's just that since 2017 it's been limited to $10,000 as it has been for individual taxpayers. The increase to 40,000 applies to individuals as well as to trusts. So that increase allows for the deduction against other incomes. So for instance, if you had one trust that was allowed a $40,000 deduction against income as opposed to two trusts that now have two $40,000 deductions, that's what makes it more valuable. And I see somebody asked, what does salt stand for? So SALT stands for state and local tax deduction. So that means it could be income taxes, real estate taxes, and other types of state and local taxes that is available as a deduction.

Chris Ryan: Lisa, before you continue, I have a question that I've seen a few times related to the two 37th deduction on the distribution deduction.

As it currently stands, it seems like the distribution deduction available to a trust is subject to that two 37th reduction only because it is not specifically excluded from being subject to it. I would bet that that was an oversight and that a technical correction is probably coming, but as it stands today, yes, that distribution deduction is subject to the two 30 sevens reduction in the example I gave of $37,000 of income at the trust level all distributed out to the beneficiary, beneficiary pays tax and 37,000 of income, the trust would still have $2,000 of taxable income to pay tax on as it currently

Lisa Herzer: Says. Yep. And I just want to add, so that's for 2026, not for 2025 filing. So there is time for that correction to be made and the feeling was that Heckerling from most people that that was going to happen, but you never know. Okay, so the next case that I wanted to talk about the Griffin case and in the Griffin case like Roland, it goes back to errors made on the estate tax return of the first to die spouse. So in Griffin in this case, the executor filed an estate tax return and did not list any property as Q-tip. And for those that before the question comes up, it's qualified terminal interest property. Instead, a regular marital deduction was taken for all property passing to his spouse. The IRS disallowed the deduction section 2056 B disallows a marital deduction where the spouse receives only a terminable interest in property.

A marital deduction is also allowed in the case of Q-tip, but among other requirements, property is Q-tip only. Where the decedent's estate elects to treat the property is Q-tip on the federal estate tax return. So there are three requirements that must be met for a terminable interest property. To qualify as a qualified terminable interest property, the property must pass from the decedent. The surviving spouse must have a qualifying interest income interest in the property for life and the executor of the estate of the first spouse to die must make an affirmative election to treat the property as Q-tip. The making of a Q-tip election is important for both being able to take a marital deduction on the first spouse's estate tax return, but as well as receiving a basis step up when the second spouse dies because it will be includeable in that second spouse's estate.

So here are the poll results. Which change will most impact to you or your clients? It looks like the itemized deduction limitation and the increase in the exclusion are the winners there with I guess the five 20 nines intrepid counts being at the bottom. So the last case is the pierce case which demonstrates the tax effecting of S corp valuation for gift tax purposes. This case also illustrates the importance of a good appraisal Pierce's noteworthy for its handling of tax effecting and cash flows were tax affected to reduce the earnings of the S corp by a hypothetical entity level tax because scorps don't pay any tax. But I think what's important and that it goes to the other cases and like I said the theme there of dieting the i's and crossing the T's, the court noted that the value of an asset on a tax return is an admission against interest by the taxpayer when it conflicts with his subsequent valuation position because in this case he used one appraisal at the time when he submitted the return and then in court there was a different appraisal. And this is a good argument to make to a client who does not want to get a full appraisal unless there is an audit. Using a weak appraisal on the return makes it harder to convince the court to accept a later more detailed appraisal. I think that's the end of my section here. I will turn it over to Rebecca who will talk about some international considerations.

Rebeccah Fontaine: Hi everyone, I'm Rebecca Fontaine. I'm a senior manager in the international tax group with a focus on individuals and trusts. It's a little bit too much material for us to go into a lot of depth on these issues. So I'm just going to do some top level things including a couple of comments of things that were concerns at Heckerling and then if anyone wants any more information on this, you can reach out to me through Eisner ER's website and we can talk more about any of these concerns. So I know that Chris talked a lot about trusts at the beginning. One key thing that I want to bring up is the rules for domestic trusts, including the way income is reported, the expenses that you get, the way that you can deduct things that only relates to domestic trusts. So if you have a foreign trust, which I will go over what a foreign trust is in just a second, you just need to know that a foreign trust, all bets are off.

None of those rules really apply when it comes to a foreign trust. It's a trust that is essentially we call it the court test. It's a trust that either the US does not have jurisdictional rights over the administration of the trust or a non-US person has control over substantial decisions of the trust. So if you have a non-US trustee or if you have a trust that was set up in say Malta, and I'm just going to use Malta as an example for the rest of the presentation, you have a foreign trust. If you have a foreign trust with a US grantor, you have a whole separate set of issues. All of the income still goes to the US grantor, but you have special reporting requirements with frankly a lot of penalties and I know that Lisa mentioned low hanging fruit. These trusts are pretty much the lowest hanging fruit for the IRS.

The penalties on these are up to 35% of the value of the trust automatically. So you can imagine that if you get a notice in the mail for 35% of the entire trusts value, that's pretty alarming, right? So we have to be very careful with how these trusts are treated and with what kind of assets we put into it, how we do the reporting and things like that. If you have a US beneficiary of a foreign trust, so say it was a multi person who set up your multi trusts, but you have a US person who receives distributions from the trust, that's a different reporting issue. So the income is not sourced to the United States until a distribution is made and then you have to worry about your trust accounting income, whether or not things are being picked up properly by the beneficiary. If you're getting foreign tax credits, there's a whole host of just separate concerns for us beneficiary, the side of the trust really matters as well.

If you have a trust with a US grantor and a US beneficiary, but you're still in a foreign country, you're still under all of these reporting requirements. Now I keep referring to reporting requirements. I'm talking about the tax forms themselves. So you could have with a foreign trust, you could have four different types of tax returns that you need to file. You would need to potentially file a form 35 20 A that's a form for a foreign trust for the US grantor and that's kind of the equivalent of a foreign 10 41. You could also have a form 35 20, which would be for the beneficiary or for the US owner of a foreign trust. You don't necessarily have to be the US grantor of the foreign trust to be the US owner. It can be attributed to you through a whole bunch of other rules, both the 35 20 and the 35 20 A.

Those are where the 35% penalty come in. These happen to be my favorite forms. So if you have questions on them, please reach out. I'm more than happy to go over these with anyone who's curious. You could also need to file a 10 41 if you have a trust that might be cied in a foreign country but for some reason is pulled into the same US tax rules that a domestic trust would be pulled under. Or you could also file a form 10 40 NR if you have a foreign trust with no US grant or no US beneficiary, but it owns assets in the US and you could also end up having a trust that needs to file multiple of these forms. Now the 10 41 and the 10 40 NR don't have the penalty concerns that the 35 20 and the 35 20 A have, but you still want to make sure you're doing all of your reporting correctly.

Now for the US grantor, their concerns are really the same as a US grantor of a domestic trust. Once you step outside of filing the form 35 20 A, you're still picking up all of your income, you're still taking your deductions if you're paying tax in local jurisdiction for any reason. Essentially we get to disregard the trust once you file your form 35 20 A. So as far as a US grantor goes, it's about the same concerns as a US domestic trust. If you're a US beneficiary of a foreign trust, that's where you really have to start to worry as a beneficiary of a foreign trust. You can be treated as the US owner even though you don't actually have any sort of control over the trust under some of the rules and the six 70 series under the internal revenue code. If anyone needs some great bedtime rating, maybe try those, but you might have, the trust might be attributed to you as US owner even though you're just the beneficiary and there's actually a presumption that you are a US owner as a beneficiary that you have to overcome with the IRS.

They're not especially generous when it comes to these rules. So if you're treated as an owner, you have to worry about what kind of income inclusion you'll have. A lot of times you end up with a distribution that's treated as what's called an accumulated distribution, which means you end up paying tax on a distribution that you received in the current year that's treated as if it was received in the prior year. That's one you didn't have the cash in the prior year, but two, they IRS will assess a penalty and interest on the tax that's imputed to the prior years. And this could be just because of the way the trust is administered, but this could also just be due to it not being reported properly in the US in prior years. So that's something to be really cognizant of. If you have any clients or you yourself are a beneficiary of a foreign trust, you need to be very careful about how the trust income is accounted for.

Another concern for beneficiaries can be foreign tax credits. This can be a real issue, especially when it comes to something like perhaps an Israeli trust where it would be considered a resident trust in Israel, but the beneficiaries resident of the US Israel will treat the trust as being their domestic trust. The I rest treats trust as being our domestic trust and you end up not getting a foreign tax credit even though you're paying tax to the same jurisdiction on the same income twice. This really becomes a problem when it comes to foreign tax credits on capital gains, but that's another thing that can be a big issue that you need to pay attention to. In general, the foreign tax credit rules for the beneficiaries are the same for any other type of income, which is you calculate it based off of the foreign income to the worldwide income and you take that ratio.

Now if you have a non-resident beneficiary of a foreign trust, you might be wondering why does the IRS care about that? Well, as I said, you have a presumption of being a US owner of the trust of your beneficiary. The IRS also will force you to prove non-resident and if you have a non-resident beneficiary of a trust with US assets, so even though the trust is foreign, the assets are the US assets and they're being paid out to a foreign beneficiary, that can also end up with additional tax implications that nobody is looking for except for perhaps the IRS. So those are all just, and again, I'm going top level, I know we're short on time, but those are just some concerns for the beneficiaries. One other thing I want to flag with foreign trusts is the gift filings. So that's also on a form 35 20.

If you receive a gift from a foreign trust or you put a gift in a foreign trust that requires 35 20 filing as well, giving a gift to a domestic trust from a foreign trust. So if you decant it or if you're moving assets around doing some advanced estate planning, that's also an issue. And one of the things that was really touched on a lot in Heckerling was trying to do global planning for foreign assets. And so one of the things I touched on a lot was foreign trusts and a lot of the concerns with 'em with how setting them up can be difficult. The treatment of the beneficiaries can be difficult, but one thing that really gets missed a lot is the gift reporting for the foreign trust. Not only do you have to report gifts from a foreign trust to a US person or from a foreign person to a US trust, you also as a US grantor have to do your 7 0 9 gift tax filing and this does come out of your $15 million exemption that Chris was talking about earlier. You can't set up a foreign trust and think that because it's outside of the United States, there's actually no gift tax implication. That's not true. The IRS treats trust just like they're individuals the same as they treat humans and funding a foreign trust is still potentially a taxable transaction just like it would be if you were funding a domestic trust.

I'm going to move to the next slide, but we may come back to some of these topics. So the other issue was talked about a lot at Heckerling with relation to global wealth planning is estate planning. So trust planning is all well and good. You're doing it while you're alive. You can plan ahead for all of these issues, but then once the person who owns the assets passes, all bets are off. So if you have a foreign estate or a domestic state, that's a really important thing to consider. Only US people have that $15 million exemption that Chris kept referring to earlier. non-US people do not have that exemption. And so when we refer to US people versus non-US people in an estate context, we're talking about where the estate itself is not the citizenship of the decedent. So a US citizen can still have a non-US estate.

What it really depends on whether or not you have a US estate versus a non-US estate is it's a facts and circumstances test around domicile. So it doesn't matter where your citizenship is, you could have a green card, you could have a visa where it depends is where you've lived for the last 10 or 15 years. And I refer to this when I'm talking about domicile. My favorite way to put it for people is called the teddy bear test. So where does your teddy bear sleep at night? If your teddy bear has been living in Malta with you for the last 15 years and you haven't been back to the US and neither has your teddy bear, then you probably have a foreign estate. Now why do we care if you have a domestic estate versus a foreign estate? Right? Well, we care because of taxes just like everything else.

It comes down to the money. If you have a foreign estate, only your US citus assets are reportable under the US estate tax regime. So all of your non-US assets aren't subject to estate tax in the United States. If you have a domestic estate though, so if you've been bringing your teddy bear back with you and he's been camping out in say, New York for the last six years, then all of your worldwide assets, regardless of where they're held and how they're held as long as they're attributable to you, will be subject to US estate tax. If you're a non-resident alien, so you have no contact with the United States whatsoever, you only have a US estate or domestic estate as I've been calling it. If you have US citus assets. So if you have no contacts with the United States and you just happen to have a couple pieces of real estate here, only that real estate is going to be subject to the US estate tax.

Now what to file is always the big question. There's a 7 0 6, which is a gift tax or an estate tax return. There's a 7 0 6 na, which is the estate tax return for non-resident aliens. And then there's also the 35 20, which I will come back to forever. The 7 0 6 is what you file for the US citizen with the domestic estate you file a 7 0 6 NA for either a US citizen or a non-resident alien with the foreign estate or the US CI assets. And so you're wondering what's the 35 20 doing up here? Now I said that it was a gift tax return and trust return. Well, the 35 20 does it all because the 35 20 is also used by beneficiaries of estates to report any sort of inheritance that they get. So if you happen to receive, you have an outgoing Malta who left you some assets, he didn't have a US estate, he's free of US tax reporting on his estate, you still have to file a 35 20 as the recipient reporting that you inherited that.

When it comes to marital deductions, I know that Chris touched on the spousal exemptions for us people. Now, if you are a US person and you are married to a non-US person, there is no unlimited marital gifting. You cannot give or leave assets to your spouse tax-free. It's limited to $60,000. Actually, I think it's $150,000. If it's your spouse, it's $60,000 otherwise. So if you're a US person and you're married to a resident of Malta, then you don't get to give them all of your assets upon death. You have to pay a state tax on them or do some sort of advanced planning in life, but then you'll be using up your exemption. If you're a non-US person, you don't even get to look at portability. There is none. The exemptions between spouses for non-US people doesn't exist. So if you're a non-US person and you're non-US spouse is inheriting all of your assets, you're going to be paying estate tax on your US assets no matter what. If it comes to gifting to children, so nons spousal heirs, so you're giving it to, you have a son who lives somewhere that's not in the United States, that's where you get a $60,000 exemption and that's it. So there's a really big difference between getting a $60,000 exemption and a $15 million exemption and the difference goes directly into the IRS's pocket at an average rate of 40%.

There's ways around this, and as we've been saying at the conference, which Heckerling is an estate planning conference, there's a lot of ways to plan around it. You obviously trusts are a big way to do it. A lot of ways that people deal with non-US assets is through a corporation setting up a non-US corporation or even a US corporation to hold the assets so that the assets aren't triggered upon death with any sort of transfer, things like that. How to do it really depends on what each individual client's specific circumstances are. Sometimes you'll want to set up a US trust that will convert to a foreign trust. Sometimes you'll want a foreign trust that will convert to a US trust, but you do have to pay close attention to make sure that the conversion of the trust itself is not taxable, which it can be.

Sometimes there are estate tax treaties that will come into place. So sometimes even if you're not a US estate, if you have a foreign estate, you'll still get to call in some of the estate tax treaties instead. I know just for example, we have a treaty with Germany that allows you to take a rata portion of the $15 million for your US assets. So you would essentially calculate under the treaty what your US assets are in relation to your worldwide assets and you get that percentage of the estate exemption. We don't have as many estate tax treaties as we do income tax treaties. We only have about 30 of them. And the terms of them all vary wildly. It's not like in the income tax treaties where a lot of them are based off of model treaties. Each one tends to be very specific because each country has very different estate tax rules.

And the last thing I want to touch on, there's a lot of questions in the chat that I want to make sure I can get to because I know I'm talking fast is inheritance tax. So inheritance tax, there is no federal inheritance tax in the United States, which sounds amazing, right? You can take everything tax free, you just do your disclosures. Well, the issue is since we have no inheritance tax in the United States, other countries do have inheritance tax. So for example, in Italy they have a pretty heavy inheritance tax. If you inherit assets that are subject to the Italian inheritance tax, there's no offsetting credit here in the United States. You can't take the credit from your Italian inheritance tax against the US estate tax. The two just don't offset at all. So that can end up being a pretty heavy tax burden if someone passes away without any sort of advanced estate planning. So my end point for this before I'm going to tap on to three different questions, is plan ahead and know where your teddy bear is sleeping because the international issues, I know I only did two quick slides on it. The international issues can be very, very complicated and you can end up paying twice as much tax as you really need to.

So one of a couple of the questions that I've had have been about the 35 20 and when it needs to be filed. So a 35 20 needs to be filed, or by an EE specifically is the questions. If you're inheriting from a foreign person, you file the 35 20. So a 35 20 only has to be filed by a US person or a US trust as any sort of US taxpayer essentially. So if you're a non-resident alien and you inherit from a non-resident alien, you don't have a 35 20 filing requirement. If you are a non-resident alien and you inherit USS property from a non-resident alien, you still don't have a 35 20 filing requirement. You're completely outside of the United States tax regime. If you're a US person and you inherit anything from a foreign person, that's when the 35 20 filing requirement comes into play. And again, there's no tax that is due where the 35 20, it's only a disclosure form. So this is one of the forms that it gets missed a lot because there's no tax to pick up and it's a 35% penalty. So if your US person inherits from a foreign uncle or something like that and doesn't do this form, the penalty is 35% of whatever that inheritance is that wasn't disclosed.

Let's see, there's a question about the estate tax exemption being limited to $60,000 for a US citizen. So the exemption is placed on the decedent. So the $60,000 is placed on the person who passes away. It doesn't really matter where the air is, it matters where the assets are and what the residency of the individual who passes away is. So if you have a non-US decedent who has US sinus property, it doesn't matter who inherits it, the US estate tax is imposed only on the estate itself regardless of where the child or whoever it is lives. I'm going to pause for a second because I know there's a lot of other questions and I don't want to hug the last 20 minutes. So we're over time. A couple of minutes. I'm going to hand this back to Astrid and I'm going to try and answer some of the questions in the chat via message.

^{Transcribed by Rev.com AI}