Heckerling 2018: Day 1
Today’s blog post about the Heckerling Institute on Estate Planning is written by Withum’s Private Client Services Partner and Practice Co-Leader, Hal Terr.
Greetings from the University of Miami’s 52nd Annual Hecklering Institute on Estate Planning, the largest continuing legal education conference in the country. The largest crowd of attorneys, accountants, trust officers and other financial advisors gather for a week in Orlando, Florida to listen to the top speakers in estate planning.
The conference kicked off with a panel discussion on recent developments by Carol Harrington, Steve Akers and Jeffrey Pennell. The group started with a tribute to long-time speaker, Dennis Belcher, who passed away this past spring. Dennis was one of the conference’s most popular speakers and a long-time member of the Institute’s Advisory Committee.
The panel started with the primary topic discussed at last year’s conference, the proposed regulations under IRC Section 2704 which were to limit valuation discounts for lack of marketability and control. With the new administration’s executive order to review all significant tax regulations that either impose an undue financial burden or add undue complexity of the Federal tax laws. Under this review in the fall the IRS withdrawn the proposed regulations under 2704. With IRS needing to focus on regulations with the 2018 Tax Act it is unlikely these regulations under 2704 will be proposed in the future.
The next topic discussed were the Consistent Basis Rules regarding basis consistency between estate and the beneficiary receiving property from the decedent. Some unnecessarily harsh requirements under these rules include the following:
- A requirement to provide estate tax values to beneficiaries 30 days after the estate tax return is filed, possibly long before the executor can know which beneficiaries will receive which assets, necessitating a wasteful, confusing, and divisive report of all assets the beneficiary might ever receive;
- A requirement that successive transferors furnish those estate tax values to recipients of gifts and other transferees in carryover basis transactions, apparently in perpetuity
The proposed regulations under IRC Section 1014(f) were to be finalized by January 31, 2017 but were not. With the new administration’s executive order to review all significate tax regulations, hopefully these harsh requirements will fall under the concept burden reducing and the IRS will provide some workarounds to these burdens.
A majority of the attendees of the conference were in attendance to hear the panel’s thoughts on the impact to estate tax planning due to the recent 2018 Tax Act. The estate, gift and GST exemption was increased to $10 million indexed with inflation, resulting in an estate exemption of $11.18 million for 2018, $22.36 million for a married couple. The annual increases in the exemption will be increased by chained CPI, which presumably will result in smaller increases in the exemption in the future.
As with the other individual proposals under the 2018 Tax Act, the increase in the estate, gift and GST exemption sunset at the end of 2025. As Marty McFly drove the DeLorean in Back to the Future, estate planners have been through this before when at the end of 2012 the $5 million exemption was to go back to $1 million. The same planning in the past applies to the new law. Many more clients will not be subject to a federal estate where planning will move from estate tax minimization to more focus on income tax basis planning. With the increased estate exemption there is a higher importance on portability that would allow for a step-up in basis at both spouses passing as opposed to credit shelter planning that allows for only one step up.
Flexibility in estate documents become more important given the possible changes in the estate exemption in the future. A more favored approach among many estate planners is the use of QTIP (“Marital”) Trusts versus Disclaimer Trusts. Disclaimer Trusts are subject many impediments to successful planning. The surviving spouse may choose not to disclaim and not take advantage of the first spouse’s estate exemption, receive benefits of the assets before disclaiming or be incapacitated at the death of the first spouse. Benefits of a flexible QTIP approach are as follows:
- The executor has up to 15 months to decide whether to make the QTIP election and over what portion of the trust.
- The QTIP election could be made by a formula, thus providing a “savings clause” to assure that no estate tax would be paid at the first spouse’s death (if his or her assets are over the new $10 million basic exclusion amount – or $5 million exclusion amount after the increased exclusion amount has sunset).
- If the QTIP election is made, the executor could make the “reverse-QTIP” election and allocate the decedent’s GST exemption to the trust.
- If the state recognizes a “state only QTIP election,” having assets in the QTIP trust may make the planning easier to fully utilize the first spouse’s exclusion amount without paying any state estate taxes at the first spouse’s death.
- Any unelected portion could pass to a standard bypass trust under a “Clayton” provision.
With the possibility of sunset, as in 2013, the concerns over clawback of utilization of the increased exemption reemerge. The 2018 Tax Act amends §2001(g) to add a new §2001(g)(2) directing the Treasury to prescribe regulations as may be necessary or appropriate to address any difference in the basic exclusion amount at the time of a gift and at the time of death. This is to deal with the possibility of a “clawback” – i.e., a prior gift that was covered by the gift tax exclusion at the time of the gift might result in estate tax if the estate tax basic exclusion amount has decreased by the time of donor’s death, thus resulting in a “clawback” of the gift for estate tax purposes. The panel believes new regulations will be proposed so that clawback would not apply. The decedent’s estate should get a credit at the estate tax rate and exemption in effect at the decedent’s death which may allow the estate to be entitled to a gift tax credit for more than the actual gift tax incurred by the decedent was alive. Even if clawback was to occur, gifts of the increased exemption may make sense as the future appreciation is removed from the client’s estate.
The remainder of the day’s discussion was the impact of the income tax provisions of the 2018 Tax Act to estates and trusts. As with individuals, trusts and estates deduction for state income and real estate taxes will be limited to $10,000. Unlike individuals, accounting and attorney fees would be deductible on fiduciary income tax returns but investment management fees would not. With the elimination of miscellaneous itemized deductions for individual, when an estate or trust terminates the excess deductions on termination could be lost. As such, fiduciaries will need to better plan the timing of payment of administration expenses against the income realized so not to lose the benefit of these deductions.
Well that’s all for today! More commentary to come from the other Withum Private Client Service Tax Partners attending the conference.
Stay tuned!
