Heckerling Day 2 – 2016

Heckerling Day 2

Today’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi.
Some interesting topics were discussed today, starting with Joshua S. Rubenstein speaking on the top of Heads I Win, Tails You Lose: Advising the Wealthy in Times of Protracted and Unprecedented Political, Economic, Cultural and Scientific Change. This session considered how difficult it has become to do estate planning and wealth preservation for clients when the rules are constantly changing. Tax enforcement changes have led to an over whelming number of new reporting obligations including FATCA. Accesses to information, reasonable expectations of privacy, and changes in the nature of families have added considerable complexity to the client relationship. What can be done?

1. Plan for change.
2. Plan for controversy
3. One size does not fit all – use customized solutions and a variety of vehicles/approaches
4. Where possible, keep it flexible and simple.
5. Where possible, be transparent – avoid surprise.
6. Tax laws and compliance will become more uniform.

Paul S. Lee next spoke about using partnerships in estate planning. ATRA has sprung income tax planning and tax basis management to the forefront of estate planning. Entities taxed as partnerships are the ideal vehicle in this new model. The presentation discussed how partnerships can be used to change the basis of assets, maximize the “step-up”, defer and shift tax items (income and deductions), and transfer wealth in a world of diminishing valuation discounts.
The enactment of ATRA marked the beginning of a “permanent” change in perspective on estate planning for high-net-worth individuals. The large gap between the transfer and income tax rates, which was the mathematical reason for aggressively transferring assets during lifetime, has narrowed considerably, and in some states, there is virtually no difference in the rates. With ATRA’s very generous applicable exclusion provisions, the focus of estate planning will become less about avoiding the transfer taxes and more about avoiding income taxes. The speaker touched upon the use of a concept of “preferred interests” in a partnership which can be used to shift income between partners to maximize both income and transfer taxes. More of this concept will be covered at a later session. A very interesting concept of “basis strip to maximize step-up” and moving tax basis under Section 734 for partnership assets was discussed. This concept can generate significant income tax savings under the right circumstances.
In the afternoon, Robert A. Romanoff spoke on the topic of Don’t Be Afraid of the Dark—Navigating Trusts Through the NIIT. Trustee selection and trust design can dramatically affect the application of the Net Investment Income Tax under section 1411 to trusts. The presentation focused on the application of the NIIT to trusts and reviewed strategies to avoid or minimize imposition of an additional 3.8% tax.
It remains to be seen whether the NIIT will become a permanent feature of our income tax system or merely a surtax that was enacted and repealed within a relatively short period of time. We have encountered temporary tax measures before, such as the one-year repeal of estate tax and imposition of a carryover basis regime in 2010. The speaker indicated that even if the NIIT proves to be a short-lived tax, it would not be prudent or in clients’ best interests for practitioners to wait until after the 2016 elections to consider whether and how to incorporate NIIT planning into the design and administration of trusts.
One of the primary challenges created by the enactment of the NIIT is the tension between techniques that may reduce or eliminate exposure of NIIT and the value of long-term accumulation of wealth in trusts for estate tax minimization. This tension existed prior to 2013 but the enactment of the NIIT has only made the issue more pronounced. How clients respond to this tension will depend both upon their intent behind the creation of a trust and the techniques we create to reduce exposure to NIIT.
From a trust design standpoint, there are issues to consider and changes in drafting may be in order. First, it may be advantageous to consider whether a one-pot discretionary trust could be used to facilitate distributions to beneficiaries who would not be subject to NIIT. Changes in drafting of trusts may also be warranted in order to afford a greater measure of flexibility to a trustee to plan to reduce exposure to NIIT. The selection of a trustee or fiduciary, already a critical issue for any trust, will be an even more important consideration for trusts that are intended to own interests in closely-held businesses given that the imposition of NIIT on business income and covered gain will likely be based on the activity of the trustee. For trusts that are intended to own stock in an S corporation, a decision whether to be taxed as a defective grantor trust, as an ESBT or as a QSST may be driven (at least in some measure) by the consideration of whether one or more of the grantor, trustee or beneficiary is active in the underlying business.
Changes in the administration of existing trusts may also be warranted in view of the very low threshold at which NIIT can be imposed on trusts. Trustees may decide to distribute a greater measure of trust income or even capital gains in order to reduce or eliminate overall exposure to NIIT. That must, of course, be consistent with standards for trust distributions. Trustees must also consider how to allocate trust expenses between net investment income and non-investment income and the impact of those allocations on overall imposition of NIIT. Finally, trustees will need to take a fresh look at the investment of trust assets in light of the NIIT. In certain circumstances, the potential imposition of NIIT on trust income may drive changes in the overall investment mix of assets held by a trust. The enactment of the NIIT has created new wrinkles in the design and administration of trusts. How taxpayers and their advisors respond to the new tax and plan for the future is a work in progress.
Diana S.C. Zeydel finished up the day speaking on the topic of Effective Estate Planning for Diminished Capacity—Can You Really Avoid a Guardianship? The presentation examined the effectiveness of estate planning documents when a client begins to lose capacity. She addressed the questions, “Can all of the client’s personal and financial needs be addressed with proper planning?” and “What are the best practices to ensure that a client’s wishes are fulfilled when the client has become vulnerable?”
Typically, estate planning is undertaken when the client is well, and the possibility of incapacity may seem remote and unlikely to occur. In addition, the subject is unpleasant for the client to contemplate and may be uncomfortable for the estate planning professional to discuss except in general terms. Yet the persons appointed to act in a client’s stead when the client is unable to act personally will have significant powers, and the client will no longer able to protect himself or herself against abuse of those powers.
Planning in anticipation of a client’s diminished capacity or incapacity is challenging. A full discussion of the options and their limitations will assist the client and his or her family in making appropriate decisions. In an egregious case of abuse, or severe family disharmony, a trip to guardianship may be unavoidable. Understanding the process and the estate planner’s ability to help guide the outcome will be key to preserving to the greatest extent possible the client’s wishes.