Well it’s Wednesday, January 16, 2019, and Day 3 of the 53nd Annual Heckerling Institute on Estate Planning. Once again, we have been introduced to many creative ideas and planning techniques presented by some of the most prestigious estate & gift tax planners in the country.
Bernard A. Krooks, of the NYC law firm Littman Krooks LLP addressed situations where the estate planning professional encounters a client or beneficiary that faces mental or physical disabilities. It is important that the planner fully understand the client’s situation and needs, both financially and personally, and design and draft all the necessary documents with appropriate powers and flexibility that effectively address and accomplish client’s evolving needs and desires.
Steve R. Akers of Bessemer Trust- Dallas Texas, Samuel A. Donaldson from the Georgia State University College of Law, Amy K. Kanyuk of McDonald & Kanyuk, PLLC- Concord, New Hampshire, and Carlyn S. McCaffrey of McDermott Will & Emery LLP-N.Y., New York served on the Questions and Answers
Panel to answer and comment on some of the numerous questions from the attendees. The following are just some of the many questions, concerns and comments that were addressed during this very informative session:
For individuals, miscellaneous deductions such as tax preparation fees and investment management fees are no longer deductible under the 2017 Tax Act. However, the issuance of Notice 2018-61 does confirm that trusts & estates can continue to deduct expenses incurred for the administration of the trust/estate (including trustee fees, accounting and attorney fees). Investment management fees are not deductible.
On the termination of an estate or trust, the excess of deductions (IRC 642h) over the gross income for the last taxable year was allowed as an itemized deduction (2% AGI limitation) to the beneficiaries succeeding to the property of the estate or trust. Although many practitioners believe that these excess deductions on termination will no longer be deductible under the new law by the beneficiaries, it should be noted that Notice 2018-61 does provide that the IRS and Treasury are studying whether such excess deductions under 642(h)(2) may be deductible.
Since a possibility that excess deductions on termination would be allowed as an income tax deduction, the applicable beneficiary may want to get an extension of time to file his/her income tax return. If guidance is not issued by the extended due date, file the return, pay the tax, and file a protective claim to keep the statue open.
Often irrevocable trusts are intentionally drafted as a grantor trust for income tax purposes. As a grantor trust the grantor is responsible for reporting the trust’s income and paying the income tax on such income. By having the grantor pay the tax, the trust is not depleted by income taxes allowing for greater growth, while at the same time reducing the grantor’s estate free of any additional estate/gift tax. There are additional benefits to consider.
Sometimes circumstances change and the grantor may not want to pay the income tax on income that he will never receive. Therefore, a provision should be included in these trusts giving the trustee the authority to reimburse the grantor for such income taxes. The trust terms may also include a provision that would allow the grantor to “turn off” grantor trust status for income tax purposes. Of course, this must be properly drafted to avoid any potential inclusion in the grantor’s estate.
The inability to choose a family member, friend, of professional as a fiduciary continues to be one of the major reasons/causes for not getting estate planning documents completed. The conference did devote sessions and discussions on fiduciary selections. A corporate or professional trustee is always an option.
Use of Charitable Lead Trusts (“CLTs”) have regained popularity in today’s low interest rate environment. In general, CLTs are designed to provide income payments to qualified charitable organizations for a term of years and/or the lives of one or more individuals. After this term, the trust assets are paid to either the grantor or to one or more noncharitable beneficiaries.
In drafting and administering CLTs it is important that the grantor not be named as trustee and not retain control over the charitable lead payments or of the recipient of these payments (including a private foundation that is “controlled” by the grantor). Such a retained power may cause the transfer to be incomplete for gift tax purposes, resulting in the trust being includible in the grantor’s estate. This problem can be avoided by not retaining the power, having a person other than the grantor serve as trustee, or by providing for an independent special trustee whose sole purpose it is to select charitable income recipients.
As expected a great deal of time was spent on Section 199A. During these discussions, the panel reiterated that the proposed regulations confirm that the multiple trust rules of Section 643(f) apply for purposes of the QBI deduction. These trusts will be aggregated where two or more trusts have substantially the same grantor or grantors, similar terms, substantially the same beneficiary(s), etc. This anti-abuse rule means that trusts formed or funded with a significant purpose of receiving the QBI deduction under Section 199A will not be respected for purposes of Section 199A.
After lunch the attendees had a choice of attending several concurrent “breakout” sessions. One of the sessions that I attended was:
Carlyn S. McCaffrey of McDermott Will & Emery LLP-New York, New York, Linda R. Ravdin of Pasternak & Fidis, P.C.-Bethesda, Maryland, and Scott L. Rubin of Fogel & Rubin-Miami, Florida, addressed the changes in the 2017 Tax Act that should be considered when negotiating a prenuptial and a divorce settlement. The post-divorce treatment of trusts created by one spouse when the other spouse is a beneficiary, and using such trusts as replacements for the repealed alimony deduction and as estate planning devices were explored.
More to come from the Heckerling Conference!
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