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.
We have picked a few sessions from the day that have some interesting topics and issues that may affect our clients.
Placebo Planning by Jeffrey Pennell
The first session of the day dealt with whether a technique is simply a placebo (it does nothing beneficial but it also is not harmful), or worse (it doesn’t do what it is represented to accomplish and it can be detrimental to the client). This concept is true about any transfer that entails acceleration of gift tax, in lieu of estate tax, particularly because step-up in basis at death may be more desirable than any potential wealth transfer tax saving. The speaker focused mainly on the concept of the “Estate Tax Freeze”. If you run the numbers under various alternatives such as electing portability on the first death, maximizing the marital deduction, or accelerating the payment of estate tax on the first death, there doesn’t appear to be any significant tax savings under each plan with a flat estate tax rate (40%).
The presenter also touched on the topic of what may be a good asset to have at death if we see a repeal of the estate tax and a change to a carryover basis regime. In this case, life insurance may be a very good asset class. The appreciation in the policy would be converted to a death benefit paid in cash to the estate or beneficiary. The basis of the cash death benefit would be the full value received and there would be a step up / automatic elimination of the built in appreciation in the policy without use of any potential exemption that may be available.
Getting Gratifying GRAT Results by Carlyn McCaffrey
This session focused on techniques for enhancing the likelihood that a GRAT will produce a positive result at the end of the term, including the use of split-interest and leveraged GRATs. It also explored the possibilities of protecting a GRAT’s positive result from the generation-skipping transfer tax. The presenter discussed the use of short term GRATs to minimize the mortality risk as well as separate GRATs for separate asset classes to maximize the potential for positive returns passing to the beneficiaries.
Retirement Accounts in First and Second Marriages: The Fun Begins by Christopher Hoyt
After summarizing the rules governing required distributions from inherited retirement accounts, the presentation examined the estate planning and income tax challenges of funding a trust with retirement assets, especially a trust for a surviving spouse. It then explored the added challenges of a second marriage and a blended family.
In the discussion of IRA rules, there was a new revenue ruling that should be of interest to some clients. It relates to relieve when a taxpayer misses the date for rolling over an IRA distribution within the 60-day rule. If a person misses the 60-day deadline, he or she is presumed to have a taxable distribution. A taxpayer can apply to the IRS for a waiver, but that requires paying the IRS a $10,000 fee. An important development in 2016 is that the IRS will now permit a taxpayer self-certify to the retirement plan administrator that the delay was caused by any one of eleven reasons. The parties can operate as if the transfer had been a valid rollover.
Under Rev. Proc. 2016-47, 2016-37 I.R.B. 346. The eleven eligible reasons for missing the 60-day deadline are: (1) an error was committed by the financial institution receiving or making the contribution; (2) the check was misplaced and never cashed; (3) the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan; (4) the taxpayer’s principal residence was severely damaged; (5) a member of the taxpayer’s family died; (6) the taxpayer or a member of the taxpayer’s family was seriously ill; (7) the taxpayer was incarcerated; (8) restrictions were imposed by a foreign country; (9) a postal error occurred; (10) the distribution was made on account of an IRS levy and the levy proceeds were returned to the taxpayer; or (11) the retirement plan that made the distribution delayed providing information that the receiving plan or IRA required to complete the rollover, despite the taxpayer’s reasonable efforts to obtain the information.
- Retirement accounts for a spouse; life insurance for children – One arrangement is to leave all retirement assets to the surviving spouse but to purchase life insurance so that there is something from the children from a prior marriage to inherit.
- Divide retirement accounts – spouse & children – Another strategy is to split the retirement assets between the spouse and the children from a prior marriage. Although this can be done fairly easily with IRAs, ERISA will prevent such a splitting of 401(k) accounts unless the spouse executes a qualified consent.
- All retirement accounts for children – Section 401 – need a spouse’s waiver – It will not matter who a married plan participant named as the beneficiary of a QRP account. If the individual was married on the date of death, the surviving spouse is entitled to the entire account balance. The one exception is if the surviving spouse executes a qualified waiver. In that case, the retirement assets will be distributed to the individuals, trusts or estate that were named as the beneficiaries of the account.
- Two-generation CRT for spouse and children from a prior marriage – A significant challenge exists when there is a sequence of beneficiaries of a retirement plan account (e.g., “to A for life, then to B for life”). The stretch IRA regulations require distributions to be made from an IRA or a QRP account over a time period that does not extend beyond the life expectancy of the oldest beneficiary. The IRA will likely be depleted when the oldest beneficiary dies. Whereas an IRA cannot make distributions over the lifetimes of the younger beneficiaries, a charitable remainder trust (“CRT”) can.
A charitable remainder trust pays distributions to individuals over their lifetimes (or for a term of years), and then terminates with distribution to one or more charities. Like an IRA, a CRT pays no income tax. Thus there will be no income tax liability when an IRA is completely liquidated after a person’s death with a single distribution to a CRT. Unlike an IRA, the term of a CRT can last until the last of the multiple beneficiaries dies, which will usually be the youngest beneficiary. This may be beneficial if Congress eliminates the ability to have a stretch IRA.
Warming Up to Preferred Partnership Freezes— Multiple Planning Applications with This Versatile Technique by Todd Angkatavich
This presentation focused on the ways to use Section 2701 compliant preferred partnerships to enhance planning. The presenter discussed ways to combine preferred partnerships with GRATs, QTIPs, GSTT exempt trusts, carried interest transfer planning and more.
In its most basic form, a preferred “freeze” partnership (“Freeze Partnership”) is a type of entity that provides one partner, typically a Senior Family Member, with a fixed stream of cash flow in the form of a preferred interest, while providing another partner with the future growth in the form of common interests in a transfer-tax-efficient manner. Preferred Partnerships are often referred to as “Freeze Partnerships” because they effectively contain or “freeze” the future growth of the preferred interest to the fixed-rate preferred return plus its right to receive back its preferred capital upon liquidation (known as the “liquidation preference”) before the common partners. The preferred interests do not, however, participate in the upside growth of the partnership in excess of the preferred coupon and liquidation preference, as all that additional future appreciation inures to the benefit of the common “growth” class of partnership interests, typically held by the younger generation or trusts for their benefit.
With Great Power Comes Great Liability: Helping Trustees Avoid Pitfalls in Common Transactions by Lauren Wolven
Trustees are often asked to engage in loans to related parties or beneficiaries and other transactions with related trusts, closely-held assets and real estate. For a trustee who is not careful, even a seemingly simple act like making a loan to a beneficiary can lead to liability. This session explored methods to reduce fiduciary risk in common trust transactions.
When dealing with loans, there are a few basic guidelines for making loans to beneficiaries that, if they are followed, should protect any trustee. Of course, real-life and trust purposes may make deviating from these guidelines perfectly sensible in certain circumstances. Before a trustee decides to move forward with a loan, it should consider whether it falls outside these guidelines and, if so, whether it can justify that deviation.
- The loan would be considered prudent if it were being made to a third party.
- With the loan in the trust portfolio, the duty to the beneficiaries is property balanced with the duty to make prudent investments.
- If the loan would not necessarily be a prudent loan made in the everyday course of business, and if the trust instrument does not expressly authorize the “imprudent” loan, the other beneficiaries have consented in writing to the transaction in a document that also releases the trustee from liability for making the loan.
In states that allow virtual representation agreements, it is possible to get beneficiaries with current and remainder interests to sign off on the trustee’s actions either by approving of the action itself or by clarifying language in the trust that would allow the trustee to take such action. The documentation of beneficiary approval should contain a release of the trustee for engaging in the transaction. If one or more necessary parties to the approval are unwilling to release the trustee, then that is a signal to the trustee that it should reconsider its willingness to make the loan. In fact, that red flag is precisely the circumstance that should cause a trustee with authority to make a distribution to the beneficiary to revisit whether making a loan really is the best course of action.