Heckerling 2018: Day 4
Today’s blog post about the Heckerling is written by Withum’s Private Client Services Partner, Alfred La Rosa.
Well it’s Thursday, January 25, 2018 and Day 4 of the 52nd Annual Heckerling Institute on Estate Planning. Once again we have been introduced to a number of creative ideas and planning techniques presented by some of the most prestigious estate & gift tax planners in the country. The presenters continued to address certain revisions of the recent 2017 Tax Act and how such revisions may impact on estate, gift and income tax planning
This morning’s general sessions included the following presentations:
Joshua S. Rubenstein, of the New York City law firm Katten Munchin Rosenman kicked-off the morning with a very intriguing and interesting presentation addressing various tax and non-tax considerations when an individual from a community property jurisdiction has different connections to a common law (i.e. separate) property jurisdiction. This for example, can occur when people from different countries and/or states marry while owning assets in different property jurisdictions (community vs. common), or when family members (including spouses) live in different countries or states with different property jurisdictions.
Robert H. Sitkoff, a renowned professor of law at Harvard Law School addressed the new Uniform Directed Trust Act (“UDTA”), and explored how the Act simplifies drafting and administering directed trusts. In general, the investment, distribution, and management of a trust’s property are the responsibilities of a trustee. When the power to administer a trust belongs exclusively with a trustee, the fiduciary obligations, duties and responsibilities would apply exclusively to that trustee. In a directed trust however, a person other than a trustee has a power over some aspect of trust administration i.e., investment or distribution decisions. Unlike a trustee, a so-called “trust director,” who may also be referred to as a “trust protector” or “trust adviser,” does not necessarily hold title to a trust’s property. The division of authority between a trust director and a trustee raises difficult questions about how to divide fiduciary power, duty, responsibility and liability. The UDTA provides guidance on how to structure a directed trust while safeguarding the beneficiaries.
Michele A.W. McKinnon from the law firm McGuireWoods LLP in Richmond, Virginia addressed the manner in which donors should approach planned giving under the new tax laws, as well as changes affecting the charitable deduction and the impact on giving techniques. The presentation also addressed various charitable gifting techniques including Charitable Remainder Trusts, Charitable Lead Trusts, Private Foundations and Donor Advised Funds, Gift Annuities, using retirement accounts, etc. We explored the reasons why donors make gifts and whether these considerations are likely to be effected by the 2017 Tax Act.
While the 2017 Act preserves the deductibility of charitable contributions, the higher standard deduction means fewer people will itemize their deductions. It is anticipated that the number of taxpayers that will itemize will drop for 30% to 5%. Certain charities are concerned that this will impact on the incentive by “non -itemizers” to give the “smaller gifts” that so many charities rely upon.
In order to get “non-itemizers” over the new standard deduction to itemize, they may want to consider “bunching” the amount of the charitable gifts that they would ordinarily make over a few years into one year. Creating a donor advised fund would be quite useful here to help prevent certain charities from getting and spending all of the “bunched” contribution in the year received. The doubling of the estate and gift tax exclusion amount from $5.6 million to approximately $11.2 million ($22.4 million for married clients) was also addressed, and, whether such increase will erode the incentive to leave the larger bequests to charity. The changes that were made to contribution deductions under the new act have not been to significant.
The following revisions were discussed:
- The increase in the limit on cash contributions from 50% to 60% of adjusted gross income.
- For years, colleges and universities relied on somewhat of an obscure tax rule where a payment to a college or university for the right to buy certain tickets to athletic events (as opposed to the actual ticket themselves) was 80% deductible as a charitable contribution. The Act repeals this 80% charitable deduction. There is a concern that the loss of this incentive could drastically reduce the amount of donations received by colleges and universities tied to seat licenses, which have become a stream of revenue for college athletics.
The Act changes the charitable contribution deduction of an Elective Small Business Trust (“ESBT”), and provides that the rules under IRC Section 170 applicable to individuals should control the deductibility of charitable contributions attributable to the ESBT. Thus, the percentage of contribution base limitations and carry-forward provisions applicable to individuals applies to charitable contributions deemed made by the portion of an ESBT holding S Corp stock. Further, the ESBT should be able to deduct the fair market value of long-term capital gain property gifted in-kind to charity, subject to applicable percentage limitations. The changes for ESBTs are permanent and do not sunset after 2025.Some other interesting facts/statistics were addressed during the presentation, supporting the fact that in many instances taxes are not the main motivator for charitable giving. For many people in the United States philanthropy is important and despite these tax uncertainties impacting their charitable giving, in addition to other economic factors, many people continue to give generously.
Current market conditions should favor charitable giving and, in particular tax efficient charitable giving through the use of appreciated property gifts. Continued uncertainty in political and economic landscape may also inhibit charitable giving. Perceived and real cuts in government funding for certain programs and activities may be a motivating factor for some individuals to increase charitable giving as social needs increase.
Farhad Aghdami, the Managing Partner of the Richmond office of Williams Mullen, focused on the income tax and wealth transfer tax planning opportunities (and pitfalls) associated with planning for real estate investors, including a discussion of non-tax considerations and obstacles. The program also explored valuation discount planning, freeze, and leveraging strategies when transferring real estate. The 2017 Tax Act basically doubled the estate and gift tax exclusion amount from $5.6 million to approximately $11.2 million. The GST exemption will also be $11.2 million in 2018, the maximum estate/gift tax rate is 40%, and the Code §1014 basis adjustment (“step-up”) at death is retained. The increase in the exclusion amount is scheduled to sunset after December 31, 2025.
The planning implications of the new tax law are significant. For married clients with assets below $22.4 million, the need to engage in sophisticated estate tax planning is substantially diminished. However, we should be aware of the potential risk of a repeal of current law and a return to the lower exemption amount.
Some of the issues that were addressed:
- The risk of engaging in lifetime gifting is the loss of the basis adjustment (“step-up”) at death which, for real estate investors and developers, can be significant. It was noted that “a gift of a $1 million assets with a zero basis would have to appreciate to approximately $2,470,000 (to a value that is 247% of the current value) in order for the estate tax savings on the future appreciation ($1,469,135 x 40%) to start to offset the loss of basis step-up ($2,469,135 x 23.8% for high bracket taxpayers.). The required appreciation will be even more if state income taxes also apply on the capital gains.
- Clients may want to consider “unwinding” certain lifetime transfers to cause estate tax inclusion to obtain a step-up in basis at death.
- For clients with assets significantly in excess of estate and gift tax exclusion amount, the change in law presents additional planning opportunities and strategies. For example, a husband and wife considering a sale to a grantor trust could fund a trust with a 10% “seed money” gift of $22.4 million and then sell $201.6 million of assets to the trust.
Mr. Aghdami focused on some of the basics of valuing property for estate and gift tax purposes, including the use of fractional interest, minority, and marketability discounts to achieve substantial transfer tax savings. He discussed how the implementation of a proper plan will decrease the risk of the IRS challenging the valuation for gift or estate tax purposes.
Some of the wealth transfer planning techniques that can that work well with real estate were addressed, including: grantor retained annuity trusts, sales to defective grantor trusts (including the use of self-canceling installment notes or private annuities), sale/leasebacks, and personal residence trusts.
After lunch the attendees had a choice of attending a fundamental presentation on the various tax issues when dealing with families who have multi-national members and assets (including U.S. income and transfer tax rules relevant to residents and non-residents, inbound and outbound investments, foreign trusts and their U.S. beneficiaries, and expatriation), or a number of concurrent “breakout” sessions. I attended the following two concurrent sessions:
Trust Asset Protection Through a Tri-Focal Lens Daniel S. Rubin of Moses & Singer LLP, Terrence M. Franklin of Sacks Glazier Franklin & Lodise and Michael M. Gordon of Gordon, Fournaris & Mammarella, addressed the asset protection provided to beneficiaries through trusts from the unique and sometimes conflicting perspectives of (i) the drafting attorney, (ii) the trustees and other fiduciaries administering the trust and (iii) those creditors seeking to reach the trust assets
All Present and Accounted For: Proactively Preparing Fiduciary Accountings to Facilitate Pre- and Post-Mortem Planning and Mitigate Risk Joshua Rubenstein of Katten Muchin Roseman LLP and Scott Ditman of Berdon LLP did a very interesting presentation on the importance of a rendering fiduciary accountings. The world is becoming more litigious, especially in the private client arena. Legal and accounting professionals must work together to make sure that when their clients are serving as trustees and executors, fiduciary accountings are properly prepared on a current basis, that they are issued to the interested parties, and “sign-offs” from beneficiaries are received currently. Not only will this protect fiduciaries and the professionals who represent them from litigation, but fiduciary accountings can also serve other useful and valuable purposes. They can be used to properly calculate annual fiduciary accounting income, trustee commissions, cash flow and liquidity analysis, facilitate pre and post mortem income and estate tax planning, etc.
Thank you for following our recap of the 2018 Heckerling Institute on Estate Planning!
