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Annual Trust & Estate Update

Feb 1, 2024

In this webinar, EisnerAmper professionals present key topics covered at the 58th Annual Heckerling Institute on Estate Planning Conference. You'll learn significant developments in estate planning and the opportunities that lie ahead with new and proposed legislation.  

*This content was produced by professionals from EisnerAmper. It was not produced in conjunction with or endorsed by the Heckerling Institute on Estate Planning, and the Heckerling Institute is not responsible for its content.  


Hong Yu: Hello everyone. Thank you for joining us today. Presenting here with me are my colleague Derek Dockendorf and Pamela Dennett. We all attended the 58th Annual Heckerling Institute on Estate Planning Conference last month. If you don't already know, the conference is highly regarded and recognized by estate planners around the country and provides attendees with comprehensive coverage and education on current estate planning issues. It's presented by the nation's leading experts on estate planning. It's a really great event and really our goal here today is to give you an overview of what was discussed at the conference, but also keeping in mind that the conference was five days long. We obviously can't cover everything that was discussed in the 60 minutes that we have, but we can certainly provide highlights and some key takeaways. Just as a quick overview, we're going to talk a little bit about administration and estate planning, and then go into a couple of miscellaneous important topics discussed at the conference, which were the Secure Act and the Corporate Transparency Act.

If we all had to choose one item estate planners have their eye on right now, most of us would probably say it's the lifetime exclusion. We all know that the current lifetime exclusion is at a historical high. It's at $13.61 million in 2024. What does that mean? Well, it means that a person can pass away with $13.61 million today and their estate would not be subject to any estate tax. Of course, there's some considerations like taxable gifts made during lifetime, but it's essentially what that number means. We all remember the doubling of this exclusion was as a result of the Tax Cuts and Jobs Act of 2017. That doubling of the exclusion was to be in effect for eight years.

That eight years is now set to expire here soon. At the end of 2025, that exclusion is going to go back down to pre-Tax Cuts and Jobs Act amounts, which is estimated to be at about seven and a half million dollars of lifetime exclusion. That's a huge drop. Not only does that open up opportunities for planning over the next two years, but if we're talking about a state administration, it's something that all estate that have a decedent, who passes away, survived by a spouse, needs to think about. That's where we get into the discussion of the portability election. This election came up at many discussions at Heckerling simply because the lifetime exclusion is very high, and if the states fail to make this election timely, the benefit could be lost.

Most of us know what portability is, but for those who are not too familiar, it's the ability to transfer a decedent's unused lifetime exclusion to a surviving spouse. That unused exclusion is sometimes referred to as the DSUE or the DSUE, depending on who you ask. Since the lifetime exclusion is extraordinarily high, surviving spouses could benefit in a large way from making this election. How this election works is when a decedent passes away, any unused exclusion can be transferred to the surviving spouses estate, providing the surviving spouse with a cushion to avoid or reduce estate tax at second death. When the second spouse passes away, the estate has both the lifetime exclusion available in the year of the surviving spouse's death plus the amount that was transferred to them under the portability election. How is this election made?

Well, it has to be made on a timely filed estate tax return, and timely filed meant different things at different times. When portability went into effect in 2011 the state had to file by nine months after date of death with a possible nine-month extension if requested. Then in 2017, the IRS extended that due date to two years after death with no extension required. Then the IRS recently issued Rev Proc 2022-34, which extended the due date to five years after death. This is currently the deadline and this extension essentially came about because the states were failing to file by that two year deadline and then requesting 9100 relief by filing a private letter ruling, which is very expensive for the estate and at the same time time-consuming for the IRS to review.

I think we just want to emphasize how absolutely essential it is that all estates with a surviving spouse consider this election. If there's any possibility that a surviving spouse will have a taxable estate and that likelihood is going to increase when the lifetime exclusion drops in 2026 and potentially in the future if the exclusion drops even further or is non-existent. We don't know what the estate tax regime will look like in the future, but we do know that portability is here to stay.

Let's move away from portability, we're going to come back to it a little bit later, but we're going to talk about another state administration issue that was discussed at the conference. In our current environment, we have to consider challenges that executors may have with various difficult assets that may be part of the decedent's estate. Some of those challenging assets that we see today are digital assets. When we think of digital assets, we think of such things as social media accounts, online bank accounts, digital photos and videos. Also, something we're seeing more often in recent years is cryptocurrency. Why is having cryptocurrency in an estate problematic? Well, first of all, if you think about it, the existence of cryptocurrency isn't always apparent. Now it doesn't live in your bank or your wallet. It's not easily accessible.

How does an executor even know if a decedent owned cryptocurrency? It may be hard to identify. Some suggestions are maybe to look at previously filed tax returns or scan the decedent's office or the decedent's computers and other possible data storage. Then secondly, once an executive knows cryptocurrency exists, how does an executor obtain access and ownership of the cryptocurrency? Because if the executor can't locate the private key, even though they know cryptocurrency exists, they likely can't take ownership of it. Even if the executor can overcome the first two hurdles. One, identifying its existence. Then, two, taking ownership of it, the next hurdle is finding how much it is worth. Valuing cryptocurrency isn't as easy as valuing publicly held stock, right?

There can be multiple exchanges that value cryptocurrency and because they each have different methodologies for valuation, the values can be drastically different depending on which exchange you're looking at. A suggestion that was offered by the presenters was to hire an expert or a professional to help identify, access and value. But, of course, you want to assess the materiality of the cryptocurrency because if we think it's only worth a few thousand dollars, it may not make sense to get a qualified appraisal, but if we think it's potentially worth millions of dollars, then getting a qualified appraisal absolutely makes sense, especially the value isn't easily determinable.

The last issue we have when it comes to cryptocurrency is how to report it on estate tax return, especially in the case where we're unable to take ownership and determine its value. There's several thoughts on that and we're not going to get into it because it's beyond the scope of this presentation, but it's something we should all think about and not ignore. Another digital asset we'll find difficult to value are non-fungible tokens or NFTs. These are digital assets that can be various things such as artwork, photos, videos, even ownership in real estate or an interest in a partnership. Or it could be a right to attend an event. These are difficult to value simply because one is not like the other. Each is very unique. And depending on the value, getting a qualified appraisal likely makes sense as well.

Then the next two assets are problematic in a more legal sense. Guns and marijuana are very tricky assets to administer in the state, simply because the laws are very different in each state and the laws in a particular state may not agree with federal law. Thus, once you've identified those assets, you have to pay close attention to where the assets are located and where the beneficiaries live before making distributions to make sure you're not triggering any legal ramifications for either the estate or its beneficiaries.

Okay, it looks like we're going to go on to our second polling question in which you have 60 seconds to respond, and I'll read it out loud. Jane's spouse passed away in 2024 and his entire exclusion of 13.61 million was ported to Jane. She made no taxable gifts during her lifetime. How much applicable exclusion does Jane have when she dies in 2026 when the lifetime exclusion is 7.5 million? Okay, hopefully this is an easy one if you're paying attention. The options really are the 7.5 million which will likely be the exclusion in 2026. 13.6 million, which is the current exclusion. Both combined, or none of the above. I can't tell how much time is left.

Astrid Garcia: Hi, Hong. I will jump in here. I know that this question is long, so if you don't see the submit button, just make sure to scroll down on your screen, make a selection and hit the submit button to register your answer. We'll give it just a few more seconds because I do know that we have some people answering this questions still. All right, we'll be closing the polling question now. Back to you.

Hong Yu: Okay, sounds great. It looks like most of you got it right. Congratulations. And now I'm going to pass it on to Pam who's going to talk to us about a few recent cases that affect estate planning in a large way.

Pamela Dennett: Thank you, Hong, and thank you everyone for joining us today. Most of you are aware that there's an automatic estate tax lien that applies to all assets included in the decedent's gross estate to make sure the estate taxes are covered. An executor may also have personal liability if distributions are made to beneficiaries that result in not enough assets to cover the estate tax. Beneficiaries also have personal liability for unpaid estate taxes. The Paulson case is the first case to actually extend personal liability to successor trustees who are appointed years after the date of death and to trust beneficiaries who received property well after the date of a decedent's death. The facts in this case, Mr. Paulson died in July 2000 with most of his assets titled in his revocable living trust. This estate did qualify for the estate tax deferral under a Section 6166, which is the deferral available for an estate that has an interest in a closely-held business.

The estate tax was around 4.5 million. Under audit, the IRS assessed an additional 6.7 million of estate tax, which also qualified under 6166 or deferral. The trustee made one estate tax payment seven years after the date of death and some interest payments on the deferred tax and the trustee made some distributions three to six years after the date of death as well to the beneficiaries. Because of some family disputes. The court removed the trustee nine years after the date of death and appointed two successor co-trustees. 15 years after the date of death, the IRS filed an action against the estate and the trust for the balance of the estate tax due, which was over $10 million and sought a judgment against all the trust beneficiaries and successor trustees claiming that they were all personally liable for the unpaid taxes.

The lower court held in favor of the successor co-trustee and said, "They're not liable because they were not in possession of the estate property at the time of Mr. Paulson's death." The Ninth Circuit reversed this decision asserting that trust beneficiaries and co-trustees are in fact personally liable for the unpaid taxes because section 6324 (a)(2) imposes personal liability for unpaid estate taxes on persons who received property on or after the date of the deceased death.

The court further ruled that the amount of the liability cannot exceed the value of the property at the time the beneficiary received it or at the time the successor trustee the control of it. The taxpayers filed for review with the Supreme Court on August 23rd, 2023 and the response date has actually been extended into 2024. More to follow there. Prior cases going back over 70 years applied personal liability for estate tax only to persons who were or became trustee at the date of the decedent's death or to beneficiaries who receive property at the date of death. Now, successors trustees need to be cautious when accepting a role if it's been many years after a decedent's death, or they could be held personally liable if there's unpaid estate tax. More to come on this case as the Supreme Court will comment.

One of my favorite all time speakers, Mr. Steve Akers, reminded us that discounts are not only important in estate planning, but they can have significant impact during estate administration when assets are distributed to fund bequest such as marital and charitable bequest. For example, if an estate contains an entity and it passes outright to a surviving spouse, there may not be minority interest discounts taken when their surviving spouse passes away and the estate subject to estate tax. However, if the estate plan is structured to distribute part of that entity to a QTIP marital trust and part of it outright to a surviving spouse, minority interest discounts may be considered. The IRS has ruled that fractional interest of the same entity do not need to be aggregated, in this case, for estate tax purposes. That could result in lower estate tax.

The Chenowith case reminds us that control premiums also need to be considered. In Chenowith, 51% of stock in a closely-held business left to a surviving spouse was entitled to a control premium and that actually increases the marital deductions. That's a good thing. However, this could work against the taxpayer when funding a marital bequest. The IRS has taken the position in a few technical advice memoranda that valuation discounts need to be considered when calculating and funding a marital bequest. In one particular, the decedent owned 100% of stock of a closely-held business, so no discounts for minority interests were taken for estate tax purposes. 51% was left to a trust for the son, while 49% was left to a QTIP marital trust. The IRS held the stock passing to the QTIP trust should include a minority interest discount on funding which would result in the marital deduction being reduced, even though the decedent had a controlling interest.

The Disanto case is the first case to hold that minority interest discounts must be considered for purposes of determining the marital deduction. This also can apply to the calculation of the charitable deduction. In the estate of Warne, Mrs. Warne owned 100% of one LLC, which she left 75% of to a private foundation and 25% to a church. The estate took a charitable deduction equal to the undiscounted value of the LLC for estate tax purposes. The court concluded that the charitable deduction actually needed to be reduced to reflect the value that passed to each charity, which included a minority interest. Discounts need to be considered after death in the state administration as well.

Okay, this case, Connelly versus the United States was discussed quite a bit at Heckerling. In this case, two brothers own stock in a closely-held family business and they had entered into a buy-sell agreement that gave the surviving brother the right to purchase the shares from the deceased brother's estate. They had life insurance policies in place to purchase these shares. The lower court ruled on a couple point. One point was that the death benefit from the life insurance policy of $3 million, which was owned by the company, had to be included when determining the value of the decedent's stock for estate tax purposes without an offsetting liability for the company's obligation to redeem the shares.

The estate tax value had to be increased by the life insurance death benefit. The Eighth Circuit affirmed the lower court's decision and the estate filed for review with the Supreme Court on August 16th, 2023. Some commentators are suggesting rather than use a redemption arrangement with life insurance where the life insurance is owned by the entity to redeem the shares, consider using a cross purchase agreement with a separate insurance LLC. This could be a little more complicated, a little more costly, but it could avoid some of these issues that are coming up in Connelly. More to follow on this one after the Supreme Court reviews it. Now I want to turn it over to my colleague Derek to discuss the SECURE Act.

Derek Dockendorf: Perfect. Thank you, Pam. Natalie Cho, one of the premier experts on income and estate planning related to retirement benefits, presented a session at Heckerling related to the SECURE Act, the IRS proposed regulations, the clarity that they provide, but also the questions that still remain. As we know, the SECURE Act and SECURE 2.0 eliminated for most beneficiaries, the ability to utilize the stretch-IRA provisions that we become so accustomed to and implemented a new 10-year maximum withdrawal window. But first, for us to be able to determine the appropriate distribution, we got to answer the following questions. One, did the participant die before or after December 31st, 2019? Right? If they died before December 31st, 2019, they fall underneath the old pre-SECURE Act rules, the stretch-IRA rules, to determine if beneficiaries are of minimum distribution requirements, and those beneficiaries continue to draw their required minimum distributions as they did previously. Right?

For a participant who died after December 31st, 2019, the beneficiaries and their successor beneficiaries of those IRAs are subject to the new rules under SECURE which means for most beneficiaries that stretch-IRA provision has been eliminated. After we've determined the date of death, the next step is did the participant die before or after their required beginning date? This is the age that they're required to start taking distributions from their IRA. For the longest time, this was set at age seven and a half. It was the only age that we needed to be aware of, and once a beneficiary reached age seven and a half, they had to begin taking their required distributions.

Well, thanks to SECURE and SECURE 2.0, they continued to move that required beginning date further down the road, right? SECURE moved the required beginning date from age seven and a half to age 72 and SECURE 2.0 continued to move that further down the road, increasing the age to 73, and then eventually out to age 75 for those IRA owners who die after 1960. You can see right there that timeline summary table in the middle of the slide deck. It's an easy great source to go back to if you are an IRA owner. Understanding what is your required beginning date and when must you start taking distributions from that applicable IRA. Not only did SECURE limit the ability of the beneficiaries to utilize the stretch-IRA options, it also ushered in a new class and category of beneficiary, the eligible designated beneficiary or EDB, right?

These EDBs are the only beneficiaries who are eligible to utilize the stretch-IRA provisions and can then take distributions beyond the 10-year withdrawal period for a certain point in time. These new EDBs include the participant's spouse, the participant's minor child, and the proposed regulations provide clarity around minor and define that age as 21, right? A child older than the age of 21 would no longer qualify as a minor. It's important to note that this is the participant's minor child. If an IRA is going to a grandchild or a niece or nephew and they're a minor at the time of that IRA owner's passing, they would not qualify underneath and be considered an eligible designated beneficiary. The next category is any disabled or chronically ill individual or an individual who is not more than 10 years younger than the participants. All of these classifications to help determine the applicable distribution period are determined as of the participant's date of death.

If a beneficiary were to be classified as an EDB after the participant's death. Unfortunately that doesn't matter and it won't allow the beneficiary to stretch that IRA beyond the 10-year withdrawal window, right? For instance, if a beneficiary were to become disabled a year after participants passing, we're not allowed to go back and classify them as an eligible designated beneficiary. And anyone who doesn't qualify as an eligible designated beneficiary for the most part are subject to the maximum 10-year withdrawal window, if not a more accelerated timeline, right? Natalie's got some great charts that were part of her materials that were included that highlighted when it is applicable, when you might be able to use your life expectancy or when you have to use the life expectancy of somebody else that might accelerate that IRA withdrawal quicker than that 10-year window.

There we go. Beyond an individual, a trust is obviously not an individual. The IRS created rules around which if the decedent named the trust as beneficiary, you can see through the trust and treat the trust beneficiaries as if they'd been named directly as beneficiaries on the beneficiary designation forms. Then you can look at those individuals and that IRA will be deemed to have designated beneficiaries, which might help to draw out the IRA distribution periods, right? Once it's been determined that a trust is a see-through trust, the trust agreement then directs the trustee to either require mandatory distributions by the trustee of the annual retirement income out to the beneficiaries of the trust, right? That's considered a conduit trust or the trust agreement can provide the trustee with discretion to distribute those annual retirement distributions to the beneficiary or retain them and accumulate them inside the trust. Right?

Once it qualifies as a see-through trust, we then need to determine is it a conduit where it passes the IRA distribution through? Or is it an accumulation trust where the trustee has the discretion to hang on to those distributions? When determining which beneficiaries could and should be counted and considered as designated beneficiaries, there's a four-step process that a trust has to go through to determine which beneficiaries need to be counted and which ones are discarded or disregarded. This four-step processes is beyond the scope and timeline that we have for this webinar today. But just to note, Natalie does have a great summary of this four-step process that was part of her written materials from the Heckerling presentation.

When the SECURE and SECURE 2.0 came in and implemented this new 10-year withdrawal window, there was confusion around whether beneficiaries needed to take annual distributions from the retirement account in years one through nine, or if the beneficiary could wait until the final year, year 10, and completely liquidate the entire IRA account balance. The initial thought and rationale behind this was that the 10-year rule would function similar to the old 5-year rule that we had with the pre-SECURE ACT guidelines. Things changed when the IRS issued their proposed regulations, which set the standard that for most beneficiaries of an inherited IRA, there'll be some required annual distributions in years one through nine with the full account balance needing to be withdrawn by 12-31 of the 10th year, right? Based on the proposed regulations, there were several beneficiaries who had RMD requirements in calendar years 2021, 2022, and 2023 that were not taken, right?

The IRS came to the rescue with notices 2022-53 and 2023-54, which provide relief from the penalty/excise tax on any missed RMDs. The RMD penalty relief doesn't apply to all inherited IRA beneficiaries, right? The relief essentially only applies to beneficiaries who inherit an IRA from a participant or a beneficiary who died in 2020, 2021, or 2022. It's important to note that the RMDs for those years that should have been taken in 21, 22 and 23 actually don't need to be taken, right? If the beneficiary missed taking that RMD, they don't have to make up for it, right? That RMD stays inside that account and is just considered part of future RMD requirements that need to start here in calendar year 2024.

Traditionally, to request relief from this excise tax, the taxpayer had to file Form 5329 to request relief from the IRS. For those beneficiaries who were granted automatic relief under these two notices, Form 5329 does not need to be prepared or filed. Also, prior to notice 2023-54, the penalty on missed RMDs was 50% of the missed RMD, right? Pretty hefty penalty. Notice 2023-54 actually reduced that penalty down to 25% instead of 50%. Next here we've got our third polling question. What are the different types of trust that can be named as beneficiary of a retirement plan?

Naming a trust as a beneficiary of a retirement plan was always a moving part, even pre-SECURE Act. Right? Now that we have SECURE and the proposed regulations from the IRS, it even continues to muddy those waters a bit more, right? If you're planning or if we have a decedent or an IRA owner who's looking to set up or create a trust for their heirs and they have retirement benefits, they need to consider, do they still want to name that trust as a beneficiary of their IRA or is there a better route, a better direction to go to avoid some of these limitations or the tricky rules that come with that? It's just something to keep in mind there. We'll give everyone a few more seconds here to respond to this poll.

Astrid Garcia: Thank you, Derek. Just a reminder to everyone, please select an answer and hit the submit button to register your answer. We'll give it a few more seconds before we close the polling question.

Derek Dockendorf: Actually, just a few more seconds there for everyone?

Astrid Garcia: Yeah, the polling question is within the slide widget, so if you could see the slides, you could see the polling questions. You need to make your selection directly on the slide widget. Just select your answer and hit the submit button to register your answer. All right, we'll be closing now. Thank you.

Derek Dockendorf: All right, I'm going to turn it back to Pam and let her continue on the presentation.

Pamela Dennett: Okay, thanks Derek. The common theme we heard at Heckerling is estate planning in uncertain times and making sure there's flexibility in the estate plan for the uncertain times, which actually requires a lot of creativity. We don't have enough time to go through everything here, but this is a good list of things to consider when thinking about estate planning. A lot of factors that need to go into estate planning. We've been mentioning the estate tax exemption and the use it or lose it concept, and we just want to emphasize that one more time with an example. Assume you have a married couple with $30 million and they've given away 14 million already to trusts. In 2024, that would leave a lifetime exemption for each of them of 6,610,000. Let's assume they don't do anything else and the current law expires at the end of 2025.

How much exemption do they have left? They have zero left under the current law, the way it's written. Some of our clients are thinking that using the exemption, they'll still have some left. No, it's a use it or lose it. That's what we have been saying. Just want to clarify that. Also, if a surviving spouse does elect portability to transfer the deceased unused exemption to them, Hong discussed the portability election earlier, that amount that's transferred to the surviving spouse remains intact. It does not go away at the end of 2025. Again, another reason to consider portability because it really could increase the amount of lifetime exemption available. Okay, it's hard to talk about using the exemption without mentioning the Spousal Lifetime Access Trust. This is a concept that has been talked about for years. We feel like most of you probably have heard of it. We don't have time to go through all the details of it, but want to point out, if you go back and look at the slides, the provisions that attorneys are are using to ensure the SLATs are non-reciprocal are listed.

You may want to go back and look at those because those are really important. Also, one thing to remind everyone is when you're looking at how much exemption does the client have left or do I have left? It's so important to go back and look at a prior gift tax return because a lot of times the gift tax exemption left will be different than the generation skipping exemption that's left. I saw this recently when I had a client that wanted to use up every bit of their gift exemption, so they gifted everything they could all the way up to the last dollar into a trust and they wanted to allocate generation skipping exemption.

Well, it turns out the generation skipping exemption that was remaining was less than the gift exemption. Then they ended up with a trust that was partially exempt from GST and partially non-exempt and an unhappy client. Also, on the flip side, the gift exemption could end up being less than the GST exemption, and if you maxed out the GST exemption in that case, you would actually have a taxable gift. Again, another unhappy client. Go back and look at the gift tax returns is the point. If you're going to max it out, make sure you know how much is left. I'm going to turn this back over to Derek to talk about another case.

Derek Dockendorf: Perfect. Thank you, Pam. Yeah, this was a bad outcome for the taxpayer and his spouse. The result of this memo was essentially additional capital gain being assessed and taxed to the taxpayers and the disallowance of their charitable contribution. Don't have the full time to go through this scope of some of the key takeaways that were there. The taxpayer and his wife wanted to contribute some of their closely-held family stock to a donor-advised fund. The donor-advised fund that actually didn't receive the stock certificates and didn't know how many ultimate shares they were going to receive until two days before the sale of this business closed. Right. And another key point, something else to keep in mind where the charitable deduction was disallowed is the donor had the ability to interact or received a quote from a national accounting firm to appraise the shares that they wanted to donate to that donor-advised fund, right?

Instead of going ahead and getting that qualified appraiser, they decided to use the free appraisal that the investment bank was offering to try to cut a few corners there. That ended up actually being a big mistake for them at the end of the day. The court held that the taxpayer needed to recognize gain on the sale of the shares contributed to the donor-advised fund because the donor quotes, "Must bear at least some risk at the time of contribution that the sale will not close." As they work through the closing sale documents, every time that the donor-advised fund was listed in how many shares of the closely-held company was going to own, that line was always left blank. Since the taxpayer waited to complete the transfer until essentially everything, all the i's and t's were dotted and crossed, the court held that the taxpayer bore no risk of loss.

The taxpayer was responsible for recognizing the capital gain on the sale of the shares that were transferred to the donor-advised fund, right? The taxpayer ended up picking up more income that they were expecting. They're thinking, "Okay, well, I still have my charitable contribution." Not so much. Right? There are two requirements under IRC 170 that must be satisfied to receive the charitable income tax deduction. One is, there must be contemporaneous written acknowledgement of the shares that were transferred and donated by the charitable organization. They need to acknowledge the receipt, give that letter to the donor, and there must be a qualified appraisal or some sort of substantiation to verify the gift that was being contributed. The court confirmed there was contemporaneous written acknowledgement, they satisfied that, but the qualified appraisal standard was not satisfied. As we mentioned, they decided to use the shortcut route, didn't necessarily want to incur the cost to get that qualified appraisal.

There were several deficiencies in the appraisal that was used by the taxpayer, which included but was not limited to the incorrect date of the gift, premature date of appraisal. The valuation was not signed by the appraiser and the appraiser's qualifications were missing and the appraiser was also underqualified. If you're looking at entering in a similar transaction, make sure you're thinking about all of the pieces that go along with substantiating that gift so you can confirm your income tax deduction because this is an area that the IRS is continuing to look at and is poking holes around. Pam, I'm going to ping-pong it back to you here.

Pamela Dennett: Right. There was a chief counsel advice that the IRS put out in early January 2023, and this confirms what Derek is saying too. In this case, the taxpayer had donated $5,000... Well, actually the IRS is saying that if a taxpayer wants to use cryptocurrency to donate to a charity and they donate $5,000 or more of cryptocurrency to a charity, they are required to attach a qualified appraisal to their income tax return to support it. The IRS is saying they're not going to rely on the cryptocurrency exchange value. When a taxpayer is making a contribution to a charity, a publicly traded stock, and if it's $5,000 or more, they don't have to attach an appraisal. But the IRS is saying, "If it's cryptocurrency, you're going to have to find a company to do a qualified appraisal and attach it to the income tax return." This is just another example of the IRS looking at charitable contribution deductions and there's a lot of scrutiny around them, and also cryptocurrency. They're definitely focused more on cryptocurrency.

Okay, now we're at the next polling question question, which hopefully isn't too difficult. The Super Bowl, which will be held on February 11th, 2024, which city will the Super Bowl be held at? Dallas, Los Angeles, Las Vegas, or Miami? Most of you probably already know the San Francisco 49ers and the Kansas City Chiefs are in the Super Bowl. They were both in the Super Bowl in 2020 and the Kansas City Chiefs won. It should be a good game. We know that Usher is the halftime show and we also know that Reba McEntire is singing the national anthem. Those are my Super Bowl facts. We should-

Derek Dockendorf: Pam, I think Taylor Swift would be able to make it. My girls are pretty excited about that. They'll be looking for her in the stands.

Pamela Dennett: Yeah, she should have just done the halftime show.

Derek Dockendorf: That would've been a good combo deal, right? Yeah.

Pamela Dennett: That would've been... All right. We should be getting close to the end of this one.

Astrid Garcia: Yes. We'll be closing the polling question soon. Please make sure you've hit the submit button to register your answer.

Pamela Dennett: Now Vegas had a lot of good events with the F1 race and the Super Bowl and the new sphere. Is that what it is? All right.

Astrid Garcia: All right. We can continue with the presentation

Hong Yu: We're going to shift gears just a little bit here and talk about some typical estate planning techniques to either use the marital deduction at death or to use the decedent's lifetime exclusion by funding a bypass trust. The biggest challenges we face when it comes to estate planning is not knowing what the estate will be worth at death. What type of assets will be held in the estate? What the tax laws will be? And what the age and health of the surviving spouse will be? The best thing we can do is really understand what some of those methods are and then to add flexibility to the estate plan to prepare for any uncertainty.

Then in addition with portability being permanent, it also adds another layer of flexibility and uncertainty at the same time. We have three main ways the trust can dictate how a decedent's estate is distributed at first death, and the first being everything going outright to the surviving spouse. Secondly, funding a QTIP trust or funding a bypass trust. Each of these methods have many benefits and downsides, but with our time constraint, I'm just going to point out just some of the ones that we want to pay close attention to.

Okay, in these next two slides, we're going to identify some ways to use the marital deduction. The first is to have all of the assets pass out outright to the surviving spouse or the surviving spouse's trust. This approach requires us making the portability election ideally, which includes not only filing an estate tax return, but it also comes along with some of the risks and downsides that are associated with portability. One thing to remember is that portability is allowed for federal purposes. It's a federal concept and most states that have estate tax do not recognize portability. Then that means that the decedent's state estate exclusion, if not used before death, is lost.

Then also if the surviving spouse remarries and the second spouse dies first, the entire DSUE that was transferred to the surviving spouse is lost as well. And secondly, the marital deduction can also be used by making the QTIP election and funding a QTIP trust. One thing to point out under this approach, we can make a reverse QTIP election and the trust could be GST exempt by utilizing the decedent's remaining GST exemption, which otherwise would be lost. However, assets in this trust and any future appreciation are included in the surviving spouse's estate and can cause the estate to pay estate tax.

In addition, a QTIP election can be made on an estate tax return and luckily the deadline to make this election is fairly lax as compared to the deadline to make the portability election. The rule is that the election just has to be made on the last tax return that was filed, including extensions. If there was no estate tax filed timely, then the election just has to be made on the first return to be filed after the due date.

Lastly, we'll talk about the funding of a bypass trust to use the remaining lifetime exclusion of the decedent. Assets in this trust in any future appreciation are not includable in the surviving spouse's estate, which could be a good thing if the surviving spouse already has a taxable estate. However, the assets don't benefit from a step-up in basis. If the surviving spouse's assets are valued below the applicable lifetime exclusion, then it loses out on a free step-up in basis. One of the things that the Heckerling speakers did point out is that step-up in basis may not be important if the assets in the bypass trust are assets that are going to be sold before the surviving spouse's death, since it would've naturally received a step-up in basis from the sale and would've paid tax on the gain already.

Then we talk about state lifetime exclusion. The bypass trust minimally should be funded with the estate lifetime exclusion amount, especially if that estate doesn't allow portability. Then lastly, funding the bypass trust also allows the estate to use the maximum GST exemption from the decedent because we have to remember that portability doesn't apply to GST. Any unused GST exemption is not portable to the surviving spouse. As mentioned before, it's really hard to know what the right answer is. Why not let the trustee or the surviving spouse decide when the first spouse dies? Maybe we won't have the right answer then either, but at least we'll have more information and likely make a better decision.

The trust can accomplish providing more flexibility in a couple ways. One is the disclaimer approach. This is having a disclaimer provision in the trust agreement that allows the surviving spouse to disclaim some of the decedent's estate. Then what happens is the disclaim portion can either go to a bypass trust or trust for the benefit of the kids and grandkids or can even go outright to the kids and grandkids. Those assets would be sheltered from estate tax at second death. There could be some risks with the disclaimer approach, right? Because the provision only allows nine months from date of death to disclaim and the surviving spouse may not be aware of the deadline or even have the capacity to disclaim. There's also a chance that the surviving spouse is unwilling to give up control of the assets and refuse to disclaim even though it may make sense from an estate planning perspective.

Then the other way to provide flexibility is to have a QTIPable trust with a claim provision, which essentially allows the executor, preferably not the surviving spouse to decide how much of the estate to fund in the QTIP trust and how much to fund in the bypass trust. Selection just has to be made on an estate tax return. The executor has 15 months to decide. The nine months deadline plus the six-month extension. Okay, now I'm going to hand it over to Pam, again, and she's going to talk to us about yet another important development.

Pamela Dennett: Thanks, Hong. The IRS issued chief counsel advice at the end of December 2023, and this has caused a lot of buzz and was talked about quite a bit at Heckerling and is still being discussed. It's regarding income tax reimbursements to the grantor from a grantor trust. In fact, Ron Aucutt just prepared about 15 pages of content in an ACTEC Capital Letter No. 61 that I saw was released on January 19. If you want a good content there, you can look that up. In this chief counsel advice, it involves an irrevocable grantor trust created for a child. Nothing in the trust discussed anything about reimbursements of income tax to the grantor. The trust was judicially modified to include a new provision that authorized an independent trustee to reimburse the grantor for income tax, and the beneficiaries consented to the modification. The IRS said that the consent by the beneficiaries to the modification or the fact that they did not object to the modification was, in fact, a gift from the beneficiaries back to the grantor.

Because of the modification or without the modification, the trustee would not have the ability to distribute any income or principle to the grantor. Now that the trustee can distribute income or principle to the grantor, that actually deprives the beneficiary of it, so that is considered a gift. The chief council advice doesn't say how to value this gift. It doesn't say when is this gift. How do you value it? Is it the entire value of the trust assets? That seems a little too extreme. Again, there's no guidance. Do you report the gift when the reimbursement is actually made back to the grantor and is that the amount of the gift? We just don't know. Then who are the beneficiaries making the gift when you have multiple beneficiaries? How you allocate this gift from these beneficiaries? And what if some of them are minors? Miners can't make a gift.

We just don't know. What does this mean? What is the IRS trying to say for modifications of trust in general? Practitioners have been modifying trust through decanting for years, and this brings up what are they thinking. And clearly the IRS does not like the provision to reimburse the grantor for income taxes. The problem with this chief council advice is that we're not given all the facts. We don't know why the IRS is addressing this issue or if they plan to litigate and absent any case that is litigated, we may never know. This will continue to be discussed. Again, you can look up Ron Aucutt's paper, which is outstanding on this and has more detail. We are getting close to the top of the hour. I think at this point just to make sure we get in all of the polling questions, we should go ahead and advance to the last polling question. I'm going to turn it over to Derek to make a few comments on it. Go ahead, Derek.

Derek Dockendorf: Perfect. Thank you. Pam. Yeah, the fifth polling question here is the Corporate Transparency Act is effective in which year? This is obviously a very top of mind topic and was talked about quite a bit at Heckerling. There's been a lot of news that's been about it that as of January 1st, 2024, FinCEN, the Financial Crimes Enforcement Network is requiring certain information about certain reporting companies to be submitted to them. They just have this database of all this information to help understand what's going on and they anticipate there's going to be roughly 32 and a half million reports that are going to be filed. If you look at the slide that we have there that highlights the Corporate Transparency Act, there's a link to a great article that we have on our website that really lays out everything that you need to think about with what's a reporting company? Who's a beneficial owner?

If you aren't familiar with it, please go there. Take a look and get a few notes on that so you can make sure that if there are any reporting requirements that you do have that you're accomplishing those, because if you don't or you're filing false or not updating the right information, there can be some pretty stiff penalties that come along with that. Please go to that article and understand what's going on in there. Then lastly, with the last couple of seconds before we have some closing comments, there were a couple of slides on just some SECURE Act planning ideas. These are planning ideas for the IRA participant owner during their lifetime. Don't forget about the qualified charitable distribution, which is a great tool that's there that once an IRA owner reaches age 70 and a half, they can transfer directly from their IRA up to $100,000 each year to the charity of their choice, and that's $100,000 per taxpayer.

A married couple could have up to $200,000 a year go directly to a charity of choice. As the RMD age continues to be kicked further and further down the road, don't forget about looking at Roth IRA conversions, right? If you're looking to retire or you have a client that's retiring in their early to mid-60s and they don't have to take their RMD till age 75, that could be a great opportunity over that 10-year window to think about doing Roth conversions, taking advantage of your low income tax years, providing another diversification pot from a cashflow perspective for that IRA owner during retirements. There's a lot of things that we can do and take a look at while the IRA owner is still alive to make sure that we're setting that asset up to be as successful as possible as it's being transferred to beneficiaries and successive beneficiaries down the road. All right.

Pamela Dennett: All right.

Derek Dockendorf: Pam, I'll kick it back to you.

Pamela Dennett: Yeah, we should have the results of the polling question and we're at the top of the hour. Unfortunately, we're not going to have time to go through the questions. We do appreciate the questions and thank you all very much for joining and we all hope you have a great day.

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