Tax and Trusts & Estates

IRS Announces Key Estate and Gift Tax Exemptions for 2018

By Jeffrey K. Eisen

On October 19, IRS issued Revenue Procedure 2017-58, announcing inflation adjustments for 2018 for dozens of important figures across the Internal Revenue Code, including the following two key numbers regarding the estate tax, gift tax and generation-skipping transfer (GST) tax:

1.       Gift Tax Annual Exclusion Increases to $15,000. For gifts made in 2018, the gift tax annual exclusion will be $15,000.  This is the amount an individual can give to as many donees as desired in one year without using any of the donor’s estate and gift tax exemption.  The best way to think about this is that a person can stand on the street corner and give $15,000 to every person who passes by, and the donor will not use any of his or her estate and gift tax exemption.

This also means that a married couple can give each donee up to $30,000 in 2018 without using either spouse’s estate and gift tax exemption amount.

The annual exclusion had been stuck at $14,000 since 2013.  Even though the annual exclusion is indexed for inflation, under the Congressional version of rounding (not the one you learned in elementary school), the annual exclusion does not get rounded up to the nearest $1,000, it only gets rounded down.  Thus, the inflation adjustment must actually push the annual exclusion past the next $1,000, which explains how it can take five years for the annual exclusion to increase. (more…)

The White House Framework for Tax Legislation

White HouseBy David Wheeler Newman

On September 27, the White House released a document called the “Unified Framework for Fixing Our Broken Tax Code,” containing an outline prepared by the administration plus the senior Republican members of the tax-writing committees of Congress. The Framework is far less detailed than previous proposals for structural tax reform, but is instead described as a “template” which the authors intend for Congress to use to prepare actual legislation. This template calls for new tax rates for individuals and businesses and would create a territorial international tax system.  Some key headlines:

Estate Tax.  The Framework calls for a repeal of the estate tax.  In announcing the tax plan, the President said that repeal would overwhelmingly help farmers and small business owners.  However, most farm families are not actually affected by the estate tax, which only applies to estates valued at over $5.49 million.  The nonpartisan Tax Policy Center projects that estate tax of $19.95 billion will arise from Americans dying in 2017, of which about $30 million, or 00.15%, will be paid by the estates of farmers and small business owners.

The Framework would also repeal the generation skipping transfer tax. The proposal is silent on the gift tax. (more…)

New Partnership Audit Regime and Partnership M&A Transactions

business man financial inspector and secretary making report, calculating or checking balance. Internal Revenue Service inspector checking document. Audit concept.By Charles Kolstad and Robin C. Gilden

Background:

Congress has changed the way partnership[1] audits will be conducted in the future. Beginning with tax years starting on or after January 1, 2018, audits will still be done at the partnership level; however unlike current practice where adjustments and additional tax payments are made at the partner level, under the new rules the adjustments and additional tax payments will in many cases now be done at the partnership level with the payments made in the year the tax audit is finalized. The changes were made to make it easier for the IRS to audit partnerships.

The new rules raise a number of unanswered questions in the M&A arena all of which require a significant rethinking of the way partnership M&A transactions are structured and documented. There are likely to be significant differences in the responses to the Open Issues set out below between a transaction involving a LLC, which would survive as a separate legal entity after the acquisition, and a limited partnership which would terminate and not exist as a separate legal entity after the acquisition as it would only have one member. (more…)

Top Six Reasons NOT to Have an Estate Plan

09.17.15 l Blog l imgBy S. Eva Wolf

Tired of bossy blogs telling you to get an estate plan?  Good advice is boring.  Your life is exciting and should have a dramatic ending.  And you can have it.  All you have to do is nothing.  So the next time someone tells you that you need an estate plan, tell them:

  1. Annie is your favorite musical. When your children misbehave you daydream about the day when they will be forced to live in a grubby orphanage and be abused by a cruel, alcoholic supervisor.  And, when your children act like angels, you are comforted by the certainty that in time a billionaire will rescue them from the orphanage, and they will live happily ever after.
  2. You’ve slaved away at a job that you hate for decades to amass great wealth, and no lawyer is going to swindle you out of ten grand (or less) to protect it. If you spent that kind of money on something as practical as an estate plan, you might have to spend a little less on designer handbags or forego a mid-life crisis Maserati in favor of a mid-life crisis Corvette.
  3. Your favorite uncle is Sam. You’re thrilled that he could inherit your assets when you die and use them to fund a manned mission to Mars.
  4. Two words: Terri Schiavo. Your parents and spouse always hated each other, and being in a persistent vegetative state without an advance health care directive will give them an opportunity to work out their differences with the assistance of all three branches of government.
  5. It’s important that your children be wild and carefree. If they inherit your wealth when they turn 18 and blow it all on sports cars, parties, and rehab, you have done your job as a parent.
  6. You are obsessed with Law and Order. Death is your only chance to star in a courtroom drama (unless, of course, you end up in a coma first).  You’re hoping your loved ones will fight over family heirlooms, your secret child will come forward, and a family feud will ensue, lasting hundreds of years – all because of you!

 

IRS Gives Surviving Spouses a Second (or Third) Bite at the Portability Apple

By Jeffrey Eisen

“Portability” is the ability of a surviving spouse to use not only his or her own estate tax exemption, but also some or all of the exemption of the first spouse to die, as long as the first spouse died in 2011 or later.  With the estate tax exemption for 2017 at $5,490,000, this can allow estates of nearly $11,000,000 to escape estate tax. While a full discussion of portability is beyond the scope of this post, suffice it to say that portability can save the day in one or more of these situations: if proper estate planning has not been done, if life insurance, IRAs or retirement plans left to the surviving spouse constitute a very large portion of a couple’s assets, or if a couple’s assets of any type are worth near the value of one exemption but less than both (e.g., $4,500,000 to $10,500,000).

The catch is that if the deceased spouse’s assets are worth less than his or her exemption amount, the deceased spouse’s executor has to file a federal estate tax return (Form 706) for the deceased spouse to “claim” the deceased spouse’s unused exemption and thus invoke “portability.”   This is the direct opposite of the normal rule that if a decedent’s estate is worth less than the estate tax exemption amount (after taking lifetime gifts into account), no estate tax return filing is necessary.  But if the deceased spouse’s executor does not file a timely estate tax return for the deceased spouse (nine months after the date of death, or an additional six months thereafter if a request for an extension was properly filed by the nine month deadline), the ability to use portability is permanently lost. (more…)

California State Board of Equalization Gutted

By Jeffrey D. Davine

The Taxpayer Transparency and Fairness Act of 2017

Established by the California Constitution in 1879, the California State Board of Equalization (the “BOE”) has been the agency charged with administering most of the taxes imposed by California.  In addition, the BOE was the tribunal whose function was to decide taxpayer appeals of decisions by the California Franchise Tax Board (the “FTB”) concerning income tax matters.  All of this is about to change with the passage of AB 102.  AB 102, which is named the “Taxpayer Transparency and Fairness Act of 2017” (the “Act”), was signed into law by Governor Brown on June 27th.  The Act effectively cuts the legs out from underneath the BOE.

Background

In March of this year, the California Department of Finance issued a derisive report asserting that the BOE misallocated tax revenues, used BOE employees to assist elected BOE members with political activities, and attempted to improperly affect BOE audits.  In response, and at the urging of the Governor, the Act was passed by the California Legislature. (more…)

Can Charitable Remainder Trusts Avoid the Self-Dealing Rules?

By David Wheeler Newman

A pillar of the conventional wisdom of planning with charitable remainder trusts (CRTs) is that these very flexible split-interest trusts are subject to the private foundation excise tax on self-dealing transactions.  But a recent IRS ruling has shaken that pillar and questioned the conventional wisdom.

Some (but not all) of the private foundation excise taxes apply to CRTs pursuant to Internal Revenue Code section 4947(a)(2), which provides that in the case of a trust which is not exempt under Code section 501(a) (i.e. a tax-exempt organization), not all of the unexpired interests which are devoted to one or more charitable purposes (i.e. a split-interest trust like a CRT) and which has amounts in trust for which a charitable deduction was allowed, Code section 4941 (excise tax on self-dealing) shall apply as if such trust were a private foundation.

In Private Letter Ruling 201713003, the grantor established a charitable remainder unitrust, but did not claim a charitable income tax deduction under section 170.  The IRS ruled that because no charitable deduction was allowed, section 4947(a)(2) does not apply and the CRT is therefore not subject to any private foundation excise taxes, including self-dealing.

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Is the Border Tax Crossing the Line?

By Susan Kohn Ross and Jeffrey D. Davine

It is far too early to discern the extent of any change to the relationship between the U.S. and Mexico in the face of the oft-repeated insistence of the Trump campaign to “renegotiate” NAFTA, a promise that was reiterated once Mr. Trump was sworn into office. Following a prickly meeting last month between President Trump and Mexican President Enrique Peña Nieto, accounts from Mexico report the government as having started consultations with its business community, a process described as taking 90 days. The results of those consultations and how they might impact any further discussions with the U.S. remain to be seen. Similarly, President Trump and Canadian Prime Minister Justin Trudeau also met last month, but under somewhat more cordial circumstances. Again, next steps with Canada remain an open question. However, the overarching theme is the oft-repeated promise from the Trump Administration that a border tax will be imposed.  While nothing concrete has been proposed to date, how such a border tax might work has understandably caused varying levels of concern among American companies. Given there is nothing concrete to examine, in this Alert, we seek to provide a brief explanation of the concepts being bandied about. (more…)

Understanding UPMIFA: Delegation of Management and Investment of Endowment Funds

By David Wheeler Newman

The Uniform Prudent Management of Institutional Funds Act (UPMIFA or the Act) was adopted in 2006 by the National Conference of Commissioners on Uniform State Laws, as the successor to the Uniform Management of Institutional Funds Act (UMIFA), and has (on 1/1/2017) been enacted in every state except Pennsylvania. UPMIFA provides guidance and authority to charitable organizations concerning the management and investment of charitable funds and for endowment spending.

prior post focused on UPMIFA rules for endowments held by charitable organizations, including standards for determining the annual spending from those funds, while this post will address UPMIFA rules for the delegation of management and investment functions.

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Data Breaches: An Employer’s Duty to Protect Employees’ Personal Information

By Aaron Wais

Recently, there has been much discussion about the Superior Court of Pennsylvania’s ruling in Dittman v. UPMC, which affirmed a lower court’s order dismissing an employee class action against their employer over a data breach.  While this was a significant victory for employers, non-Pennsylvania employers should temper their enthusiasm.  As one recent federal court decision in California makes clear, the reasoning of Dittman may not extend far beyond, if at all, the borders of Pennsylvania.  Moreover, regardless of their outcomes, both cases also reinforce the need for employers to maintain legally compliant, written policies for safeguarding private information and responding to data breaches.

In Dittman, a data breach resulted in the theft of the personal information (e.g., names, birth dates, social security numbers, banking information) of approximately 62,000 UMPC current and former employees.  The information was used to file fraudulent tax returns and steal tax refunds from certain employees.

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