Each January, thousands of estate planners come together in Orlando, Florida, for the Annual Heckerling Institute on Estate Planning conference.
Heckerling is the leading conference for estate planning teams, including attorneys, trust officers, accountants, elder law specialists and wealth management professionals.
Withum’s Private Client Services & Business Valuation Teams are proud to participate and support this program as an annual gold sponsor.
Below are some of the highlights from the four day conference which was filled with cutting edge and important information to assist our clients through the estate planning process.
Day One at the 54th Annual Heckerling Institute on Estate Planning kicked off with a morning discussion on the “Magic of Grantor Trusts” followed by an information-packed afternoon covering current legislation, litigation, and rulings.
The session on grantor trusts provided the following insights:
- A carefully constructed Delaware incomplete gift non-grantor income trust can be used to give up enough control over assets to not be a grantor trust, but not enough to be a gift. This allows the trust to enjoy an exclusion from certain state income taxes (however, not New York).
- The Code treats certain third parties as owners of trust assets for income tax purposes. Section 678 treats beneficiaries who have the power to vest income or corpus to themselves, as the owner of the trust, which results in current taxation of income to them. This can be used as a planning tool. Section 679 is a tax trap that could create grantor trust when a U.S. person creates a foreign trust that has a U.S. beneficiary
- Various grantor trust type provisions create either income inclusion to grantor, estate tax inclusion, or both and can be used for planning:
- A near death grantor can swap high basis assets with low basis assets in a grantor trust to get a basis step up on death without an increase in estate tax.
- While a tax reimbursement provision in a grantor trust can be used to allow a grantor to be reimbursed for taxes they incur on trust income, care should be taken to observe the rules of Rev Rule 2004-6,4 which controls the potential estate tax inclusion of certain assets. A mandate to reimburse should be avoided.
- Installment sale of assets to a grantor trust is treated as “a tax nothing” but can be used to effectively remove post transfer appreciation of the asset from estate taxes.
The afternoon provided insights into various regulatory updates. The most interesting were:
- Final regulations under Section 199A will allow a trust to use the 65-day rule distributions to manage taxable income to a level that would qualify a trust for the 20% deduction on non-qualified Specified Service Trade or Business Income.
- Final regulations on Qualified Opportunity Zones expands the list of transactions that would accelerate the inclusion of income deferred into a QOF beyond the statutory “sale or exchange” transactions. Income inclusion would now result when a QOF is gifted, but transfers on death (including distributions to beneficiaries) will not.
- The IRS announced in late 2019 that it intends to examine many conservation easement transactions, particularly the ones marketed through promotors .
The second day at Heckerling included various sessions on numerous topics. Some of the more interesting and enlightening technical points covered include:
- Jonathan Blattmachr described the unique use of trusts to reduce state income taxes of a married couple living in separate states. The spouse in the high-tax state could gift their intangible income producing assets to their spouse in the low-income state. After a reasonable period of time, the spouse contributes these assets to a QTIP trust, which is treated as a grantor trust. While the income will now be taxed to the lower-tax state resident spouse, the distributions will go to the spouse residing in the high-tax state.
- Nancy Henderson discussed the transfer of assets to family entities where the transferor retains certain powers over the assets. A power or right to control the enjoyment or possession of income could result in an estate tax inclusion regardless of whether or not the power is actually exercised. Properly drafted fiduciary powers can mitigate these problems.
- Craig Reaves discussed special needs trusts and described the differences between self-settled and third party settled trusts. While both trusts are designed as supplements to needs-based government aid, there are differences in formation and required conditions in each.
- The self-settled trust will not qualify for asset protection unless the trust is specifically drawn for a beneficiary who is under the age of 65, will limit distributions, and will provide for repayment of any Medicaid benefits out of remaining assets after the death of the beneficiary.
- The third party settled trust does not have an age limit and does not require repaying of Medicaid benefits.
- Carol Cantrell made several key points related to S-Corporations in the estate and trust arena including:
- In two 2019 Tax Court cases, the concept of discounting the value of an S-Corp to reflect the taxes paid by individuals has been approved.
- While the grantor will normally be taxed on S-Corp income owned by the trust, a QSST election by that grantor trust will shift the taxation to the trust beneficiary.
- While a grantor trust can still be an eligible S-Corp owner for two years following the death of grantor, care should be taken to make sure that either a QSST or ESBT election is made or the shares are distributed. Failure to do so will result in an ineligible shareholder and S status termination.
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The third day at Heckerling was mostly dedicated to tax planning with grantor and non-grantor trusts.
Beyond the basics of grantor trusts being disregarded entities and non-grantor trusts being separate taxpayers, each type presents many differing opportunities to combine trust tax rules with other portions of the Internal Revenue Code to really make the most of tax planning.
Non-Grantor Trust Planning and Ideas Include:
- Acquiring a residence in a trust could allow the beneficiary to live there rent free without any tax consequences.
- Acquiring a partial interest in a residence could allow multiple $10,000 real estate tax deductions.
- Distributions of income can be used to manage trust and beneficiary tax brackets, as well as the 199A deductions.
- Stock eligible for the Qualified Small Business Stock exclusion could be gifted to a trust to create multiple $10 million gain limitations.
- By putting trust investment property into an S-Corp and making an ESBT election, tax would be paid by the trust. Distributions to the beneficiary would not be taxed. This is useful when the trust is in a low state tax state and the beneficiary is in a high one.
- An interest in a flow though business can be placed in a trust for the children of the business owner and continue to be active under passive activity rules, if the trustee is a trusted employee of the underlying activity. Court cases have held that the employee’s hours worked as an employee count towards trustee material participation testing.
- Charitable deductions for a trust are limited to the gross income of a trust and only allowed if the trust document provides for them. If a trust is holding low-basis, highly-appreciated assets, the grantor of the trust can buy the asset from the trust for an unsecured note. This creates a partial grantor trust to the extent of the note so the sale is not a taxable event. Now the grantor can make the charitable contribution personally and get a deduction for the fair-market value of the property.
- If a Beneficiary Owned Trust is a New York trust, any beneficiary owned income distributed to a non-New York beneficiary would not be taxed to the trust in New York since the income is grantor income, not trust income.
- Selling an appreciated asset to a spousal grantor trust can effectively freeze the future appreciation out of the grantor’s estate. By doing so with an interest free term loan, whose present value equals the fair market value of the asset, this can be accomplished without triggering below market interest issues.
- Borrowing from a grantor trust can be used to reduce estate taxes since interest paid to the trust is not taxable but the grantor’s assets subject to estate tax are reduced each time interest is paid to the trust .
The fourth day was a mix of technical instruction and soft-skill discussions, along with an update on the new SECURE Act. Highlights of the day include:
- The day opened with a discussion on the SECURE Act, which was enacted in December 2019 and provides the following adjustments to retirement benefits, all effective in 2020:
- The stretch IRA for designated beneficiary was eliminated, except in unique areas, by changing life expectancy withdrawal period to 10 years, except for five specific types of beneficiaries — a surviving spouse, a minor child, a disabled or chronically ill participant, or a beneficiary whose age is within 10 years of decedent. The death of first beneficiary will require the next beneficiary to use the new 10 year rule. The 10 year rule doesn’t require annual distributions, just the requirement that 100% be distributed by the tenth year.
- Estate as beneficiary still only gets a five year distribution period.
- Required Minimum Distributions now do not need to begin until the April 1st following the year the beneficiary turns 72.
- IRA contributions can now be made regardless of age.
- A charitable exclusion of $100K for direct transfer of IRA distribution to charities is reduced by the amount of post 70 ½ year deduction for IRA contributions.
- New retirement plans can now be set up by extended due date of return.
- The tax credit for retirement plans set up by small employers has been significantly increased.
- Quick takeaways on the new distribution rules include:
- If the IRA owner is in a lower tax bracket than his expected beneficiaries (which is especially likely to be the case if the “beneficiary” is going to be a trust that accumulates the IRA distributions), the IRA owner could consider doing Roth conversions during his lifetime, since he can thus absorb the tax hit at a lower rate than will apply to his future beneficiaries.
- An issue requiring immediate attention— IRAs left to grandchildren will no longer qualify for extended life expectancy distribution. Instead, consider a spousal benefit conduit trust which will get spouse life expectancy followed by the 10 year payout on her death.
- In discussing tax planning to avoid or reduce the Generation Skipping Tax in non-exempt GST Trusts, it was suggested that consideration be given to making distributions to non-skip beneficiaries for their use either to make charitable contributions or recontributing to Exempt Trust.
- Thomas C. Rogerson discussed family governance issues including the importance of family meetings to discuss the meanings of wealth as opposed to one-on-one with children for their issues. This process can improve the chances of family wealth making it to future generations.
- Martin M. Shenkman discussed tax consequences of Powers of Appointment, pointing out an inconsistency between inclusion of assets in an estate and the ability to use the deferred tax payment mechanism. Section 2041 declares that in one’s estate the value of assets subject to a Power of Appointment held at the time of his death, but Section 6166 (installment payment of tax) measures qualification for deferred payments based on assets held at the moment before death.
- In addition, a Special Power of Appointment could be used to decant assets with income sourced to a high tax state out of the trust and into a trust in a low tax state, thereby saving state income taxes.
- Robert S. Keebler reviewed the Section 199A deduction related to fiduciary taxation. He pointed out that non-grantor trusts, incomplete gift trusts and ESBTs are entitled to compute and potentially benefit from the 199A deduction. By managing distributions, the 199A deduction can be retained by the trust or passed to the beneficiaries. Charitable Remainder Trusts are not eligible to use the 199A deduction but distributions to the taxable trust beneficiary will be allocated their proportionate share of all 199A items to use in their own return.
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