Publications

IRS Guidance on the 2-Percent of AGI Floor for Trusts and Estates

The Final Regulations under IRC § 67(e) 

September 2014

On May 9, 2014, the IRS issued final regulations under § 1.67-4 that provide guidance on which costs incurred by estates or trusts other than grantor trusts (non-grantor trusts) are subject to the 2-percent of adjusted gross income floor for miscellaneous itemized deductions under Section 67(e) of the Internal Revenue Code (the “2-percent floor”).  Although the IRS has deferred the effective date of these final regulations so that they now apply to taxable years beginning on or after January 1, 2015, it has nevertheless created enormous concern among corporate fiduciaries in particular.  Chief among these concerns is how a fiduciary should go about subdividing (or “unbundling”) a single fiduciary fee that represents a composite of various functions that the fiduciary has performed, including the providing of investment advice (which is generally subject to the 2-percent floor) and managing other aspects of its relationship with beneficiaries including distribution decisions (which is not subject to the 2-percent floor).

To Live and Die in New York 

A Review of the Recent New York Tax Law Changes Affecting Estate Planning and Trusts

 April 2014

On April 1, 2014, Governor Andrew Cuomo signed into law as part of the New York State Executive Budget what might appear at first blush to constitute sweeping changes affecting estate planning and trusts. The new law, however, falls far short of achieving the laudable objective that Governor Cuomo had specified in his State of the State address of keeping wealthy New Yorkers in the Empire State during their golden years. Although the new law does indeed accomplish the important goal of increasing the New York estate tax exemption -- it now stands at $2,062,500 for persons dying between April 1, 2014 and March 31, 2015 and is scheduled to increase over time to match the federal applicable exclusion amount (currently $5,340,000) by 2019 -- there is an effective “cliff” within the new estate tax law that snatches away all of the benefits of the “tax-free zone” by imposing a marginal tax rate substantially in excess of 100% until all of the benefits of the tax-free zone have been undone.

U.S. Estate and Gift Taxation of Nonresident Aliens

March 2014

The United States imposes three distinct transfer taxes on the gratuitous transfer of property:  the estate tax, the gift tax and the generation-skipping transfer tax.  The estate tax applies to transfers at death; the gift tax applies to lifetime transfers; and the generation-skipping transfer tax applies to transfers of property that effectively “skip” a generation, from the transferor to a person or persons at least two generations below that of the transferor.

Will the New York Estate Tax System Be Turned Upside Down? -- Aspects of Governor Cuomo’s Budget Bill That Affect Estate Planning and Trusts

February 2014

The United States imposes three distinct transfer taxes on the gratuitous transfer of property:  the estate tax, the gift tax and the generation-skipping transfer tax.  The estate tax applies to transfers at death; the gift tax applies to lifetime transfers; and the generation-skipping transfer tax applies to transfers of property that effectively “skip” a generation, from the transferor to a person or persons at least two generations below that of the transferor.

 

The U.S. transfer tax regime requires special planning for nonresident aliens who invest in the United States.  The U.S. estate and gift tax rules for individuals look first to whether an individual is a U.S. citizen.  If the individual is not a U.S. citizen, then the next inquiry is whether the individual is a resident of the United States, with residence in the transfer tax context being synonymous with being a U.S. domiciliary.  While U.S. citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, nonresidents (meaning here persons who are neither U.S. citizens nor U.S. domiciliaries) are only subject to the U.S. transfer tax system on property that is situated, or deemed situated in the United States.  In addition, nonresident aliens are generally not subject to U.S. gift tax on the transfer of intangible property (such as U.S. securities) regardless of where the property is situated or deemed situated. Further, nonresidents are only subject to the Federal generation-skipping transfer tax with respect to transfers that are subject to the Federal estate or gift tax.

 

The Estate Planning World Has Been Turned Upside Down By ATRA --A View from the Audience at Heckerling (2014)

February 2014

The recently concluded 48th Annual Heckerling Institute on Estate Planning posed more questions than answers and challenged estate planners to take a fresh look at the role of income tax (and income tax basis) planning in advising our clients.  More than one year has now passed since the paradigm shift in the overall estate planning landscape that was ushered in by the American Taxpayer Relief Act of 2012 (“ATRA”).  Although ATRA instilled some degree of stability in the estate, gift and generation-skipping transfer (“GST”) tax systems through the elimination of sunset provisions to favorable exclusion amounts, tax rates and GST tax rules, the consensus at this year’s Heckerling Institute was that estate planning – particularly for clients in the $ 5 million to $ 10 million range – is much more complex than ever due to the multitude of variables that will have to be considered in a well-structured plan.  Indeed, given that for 2014 up to $ 5,340,000 ($ 10,680,000 for a married couple) can pass free of federal estate tax, the new paradigm requires a case-by-case analysis of the role that income tax planning (and achieving a step-up in basis upon the surviving spouse’s death) now plays in light of our clients’ particular circumstances.  More than ever, the need for flexibility is paramount.

The Obama Administration’s Fiscal Year 2014 Tax Proposals That Pertain to Estate Planning

November 2013

The Obama Administration’s Fiscal Year 2014 tax (“Greenbook”) proposals that pertain to estate planning, which were released in April 2013, have shattered as a mirage any notion of a “permanent” estate and gift tax system little more than three months after Congress’s enactment of so-called “permanent” tax relief in this field. In fact, the proposals have actually created a new urgency for wealthy individuals to engage in transactions with their grantor trusts.

The Fiscal Year 2014 Greenbook proposals come on the heels of the recent transformation that had just occurred in the overall estate planning landscape courtesy of the American Taxpayer Relief Act of 2012 (“ATRA”), which was signed into law by President Obama on January 2, 2013 to avert the tax side of the “fiscal cliff.” For the first time since 2001, ATRA purported to establish some degree of stability in the estate, gift and generation skipping transfer (GST) tax systems through the elimination of sunset provisions to favorable exclusion amounts, tax rates and GST tax rules. This manifested itself as a “permanent” unified $5,000,000 exclusion amount subject to indexing (the indexed amount is $5,250,000 for 2013) for each of the estate, gift and GST tax regimes, with a 40% tax rate to apply to taxable transfers that exceed the applicable exclusion amount. Moreover, ATRA made this exclusion permanently “portable” for estate and gift tax purposes (but not for GST tax purposes) between spouses following the first spouse’s death. Portability, in a nutshell, involves the carryover of the first decedent spouse’s unused applicable exclusion amount to the surviving spouse for estate and gift tax purposes (but not for GST tax purposes) and can be accomplished through the executor’s election on the estate tax return of the first spouse to die.

A View from the Audience at Heckerling (2013)

March 2013

The recently concluded 47th Annual Heckerling Institute on Estate Planning came on the heels of the greatest year for estate planning that we’ve ever known. From the vantage point as a member of the audience, the lingering weariness produced by our industry’s unprecedented client demands over the last several months was supplanted by the challenges posed by the new paradigm that would now govern the road ahead. Indeed, a startling transformation had just occurred in the overall estate planning landscape courtesy of the American Taxpayer Relief Act of 2012 (“ATRA”), which was signed into law by President Obama on January 2, 2013 to avert the tax side of the “fiscal cliff.” For the first time since 2001, we now have some degree of stability in the estate, gift and generation-skipping transfer (GST) tax systems through the elimination of sunset provisions to favorable exclusion amounts, tax rates and GST tax rules. That translates into a “permanent” unified $5,000,000 exclusion amount subject to indexing (the indexed amount is $5,250,000 for 2013) for each of the estate, gift and GST tax regimes, with a 40% tax rate to apply to taxable transfers that exceed the applicable exclusion amount. Moreover, this exclusion is now permanently “portable” for estate and gift tax purposes (but not for GST tax purposes) between spouses following the first spouse’s death. As a consequence of these permanently expanded exclusions and portability, income tax planning (with a particular focus on basis), as well as elder law planning, can now be expected to command a greater degree of attention in estate planning practices.

But as many of the speakers noted, today’s “permanent” transfer tax system will last only until Congress changes the law yet again.

So What Does It Mean To Have a "Permanent" Estate and Gift Tax System Anyway? -- Estate Planning in 2013 and Beyond

January 2013

The American Taxpayer Relief Act of 2012 (“ATRA”) was signed into law by President Obama on January 2, 2013 to avert the tax side of the “fiscal cliff.” For the first time since 2001, ATRA has instilled some degree of stability into the estate, gift and generation-skipping transfer (GST) tax systems by eliminating the application of expiration dates to favorable exclusion amounts and tax rates. The new tax system features a unified $5,000,000 exclusion amount subject to indexing (the indexed amount is $5,250,000 for 2013) for each of the estate, gift and GST tax regimes, with a 40% tax rate for taxable transfers that exceed the applicable exclusion amount. In addition, this exclusion is now permanently “portable” for estate and gift tax purposes (but not for GST tax purposes) between spouses following the first spouse’s death.

But when it comes to taxes, nothing is truly “permanent,” because Congress possesses the ability at moment’s notice to revamp the system yet again the next time it needs a revenue raiser. This is of particular concern to wealthy individuals and their advisors.

Estate Planning Opportunities During 2012 Before the Clock Strikes 2013 - Use It or Lose It?

April 2012

The year 2012 provides a huge opportunity for estate planning for wealthy individuals that may be lost forever when the clock strikes January 1, 2013.

On Dec. 17, 2010, President Obama signed into law “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“TRA 2010”). TRA 2010 ushered in sweeping changes to the Federal estate, gift and generation-skipping transfer (“GST”) tax systems. Among other things, TRA 2010 unified the estate, gift and GST lifetime exemption amounts at $5 million for the years 2011 and 2012, with this amount to be indexed in 2012 – the 2012 indexed amount is $5,120,000. TRA 2010 also established a maximum tax rate of 35%. It moreover ushered in the portability of lifetime exemption amounts between spouses for estate and gift tax (but not GST tax) purposes for the years 2011 and 2012.

The critical point here is that TRA 2010 is essentially a “two-year patch” that will expire on December 31, 2012. This means that unless Congress takes further action, then come January 1, 2013 the tax laws that existed back in 2001 – including the $1 million Federal estate, gift and GST tax exemptions, and the 55% top estate, gift and GST tax rates – will come roaring back into effect.

Because it is impossible to predict when Congress will act and what form such legislation may take, the year 2012 presents a unique opportunity for estate planning that may be lost forever once the clock strikes January 1, 2013.

U.S. Estate and Gift Taxation of Nonresident Aliens

January 2012

The U.S. transfer tax regime requires special planning for nonresident aliens who invest in the United States. The U.S. estate and gift tax rules for individuals look first to whether an individual is a U.S. citizen. If the individual is not a U.S. citizen, then the next inquiry is whether the individual is a resident of the United States, with residence in the transfer tax context being synonymous with being a U.S. domiciliary. While U.S. citizens and residents are subject to worldwide estate and gift taxation on their gratuitous transfers, nonresidents (meaning here persons who are neither U.S. citizens nor U.S. domiciliaries) are only subject to the U.S. transfer tax system on property that is situated, or deemed situated in the United States. In addition, nonresident aliens are generally not subject to U.S. gift tax on the transfer of intangible property (such as U.S. securities) regardless of where the property is situated or deemed situated. Further, nonresidents are only subject to the Federal generation-skipping transfer tax with respect to transfers to a person or persons that effectively “skip” a generation where such transfers have been subject to the Federal estate or gift tax.

What Estate Planners and Their Clients Should Know About The Tax Relief Act of 2010

Tax Stringer, March 2011

On December 17, 2010, President Obama signed into law “The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” (“TRA 2010”). The new tax law caught most estate planners by surprise with its sweeping changes to the federal estate, gift and generation-skipping transfer tax systems. Among other things, TRA 2010 retroactively restored the estate and generation-skipping transfer (GST) tax systems as of January 1, 2010 (although subject to an “opt out” for 2010 decedents for purposes of the estate tax). It also unified the estate, gift and GST lifetime exemption amounts at $5 million (with this amount to be indexed from 2010 beginning in 2012), although the lifetime gift tax exemption amount was maintained at $1 million in 2010 before being raised to $5 million in 2011. TRA 2010 also establishes a maximum tax rate of 35%, with the notable exception that GSTs occurring during 2010 are instead subject to a zero percent tax rate. It moreover ushers in the portability of lifetime exemption amounts between spouses for estate and gift tax (but not GST tax) purposes. TRA 2010 is scheduled to expire on December 31, 2012, so it may effectively be regarded as a temporary patch.

A View from the Audience at Heckerling

Trusts and Estates (Online Version), February 2011

The recently concluded 45th Annual Heckerling Institute on Estate Planning had a vibe unlike any other. The overarching dynamic, of course, was the massive changes to the estate, gift and generation-skipping transfer tax landscape brought about by The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (“TRA 2010”), which President Obama signed into law on December 17, 2010. The techniques in the estate planner’s toolbox all of a sudden require reexamination with the increased gift, estate tax and generation-skipping transfer (GST) tax exemptions unified at $5 million with a 35% maximum tax rate beginning in 2011, and the introduction of portability of lifetime exemption amounts between spouses for estate and gift tax (but not GST tax) purposes. And for those who may have thought that 2010 had already been confined to the history books, TRA 2010 retroactively restored the estate and GST tax systems as of January 1, 2010 (although subject to an “opt out” for 2010 decedents for purposes of the estate tax), and established a maximum tax rate of 35%, with the notable exception that GSTs occurring during 2010 are instead subject to a zero percent tax rate. But alas, permanence is not to be found in the new law, as it is scheduled to sunset after December 31, 2012, so what were the principal themes that dominated the 2011 Heckerling conference?

Buy-Sell Agreements and Their Role in Business Succession Planning

American Bar Association, 2011

The death, disability, or retirement of a controlling owner in a family-controlling business can wreak havoc on the entity that the owner may have spent a lifetime building from scratch. If not adequately planned for, such events can lead to the forced sale of the business out of family hands to an unrelated third party.

The Top 10 Estate and Tax Planning Ideas Before The End of 2010

Tax Stringer, December 2010

The number of days that remain until the calendar rings in 2011 is now dwindling to a precious few. With each passing day, the estate and tax planning opportunities that are unique to the calendar reading 2010, or which could be swiftly eliminated by Congressional action or other changes in circumstances, become more and more in focus. Accordingly, with apologies to David Letterman (and with the sequence below not intended to connote any particular internal ranking), I have compiled the following "Top 10 List" of estate and tax planning ideas before the end of 2010.

Death and Taxes: What Might Benjamin Franklin Say About Them Today

Tax Stringer, October 2010

Benjamin Franklin said, “in this world nothing can be said to be certain, except death and taxes.” With the federal estate tax repealed for 2010 and no new estate tax legislation or other “patch” currently in place, estate planners and taxpayers have found themselves navigating a brave new world in which Benjamin Franklin’s notion of certainty has been eradicated—at least when it comes to estate taxes. But, alas, Benjamin Franklin’s world may be only temporarily upturned. Indeed, if Congress fails to enact any estate tax legislation before the end of the year, we will have the federal estate tax—and the generation-skipping transfer tax—laws that existed in 2001 return on Jan. 1, 2011.

Successor Trustee Liability: What You Must Know Before Accepting a Fiduciary Appointment

Trusts & Estates, March 2010

The fiduciary field can be a bit of a minefield. The article offers practical preventatives and solutions ranging from exculpatory and indemnification clauses to decanting and alternative dispute resolution procedures.

Play Ball! Estate Planning for Professional Athletes

Trusts & Estates, June 2009

Pro athletes create their wealth in an extremely short period of time and they accomplish this feat while very young. This means an extreme emphasis must be placed on preserving and protecting wealth that athletes accumulate while in their 20s and 30s.

Estate Planning Strategies for Private Equity Fund Managers

Estate Planning, Nov 2007

The high growth potential of the carried interests that a private equity fund manager holds through the fund's general partner makes these interests ideal for wealth transfer planning. This article analyzes the best planning techniques for carried interests.

Special Concerns in FLP Planning Where Both Spouses are Living

Estate Planning, January 2007

If a family limited partnership is established when both spouses are living, there is a risk that a large portion of the couple's estate tax liability may be accelerated to the first spouse's death. This article suggests possible remedies for this dilemma.

Practical Strategies for Funding a Child's College Education

Estate Planning, June 2006

There are a variety of techniques for funding a child's education, including different types of trusts, UTMA custodianships, Section 529 college savings plans, and the Section 2503(e) gift tax exclusion for the direct payment of tuition.

Changing Values: Resolving the Mismatch of Estate Inclusion Value and Deduction Value

Estate Planning, July 2008

The changing value problem for family limited partnership interests should not be overlooked, given its real potential to produce substantial estate tax liability upon the first spouse’s death—even in the case of a well-structured and well administered FLP that is not subject to Section 2036 of the Internal Revenue Code.

Knight’s Decided. Now What?

Trusts and Estates, March 2008

The US Supreme Court’s decision in Knight v. Commissioner appears to resolve a controversy that has been raging since the early 1990s, concerning whether a trust’s investment advisory fees are subject to the two percent of adjusted gross income floor. But Knight leaves open a good many questions, including how the IRS will finalize its proposed regulations under IRC Section 67(e) concerning the applicability of the two percent floor to costs that are paid or incurred by trusts and estates.

Practitioners Weigh In On 2 Percent Floor Debate

Trusts and Estates, July 2008

ACTEC breaks ranks on a key issue by supporting a mandatory unbundling requirement for fiduciary fees and commissions.