Tax and Trusts & Estates

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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Estate Planning – When the Only Certainty is Unpredictability

By Allan B. Cutrow and Jeffrey K. Eisen

 

Donald Trump is now the President, and both chambers of Congress are under Republican control. Thus, we appear to be poised for potentially substantial changes in the estate tax, gift tax, generation-skipping transfer tax, and income tax laws. However, as with all other aspects of political life in America today, it is impossible to predict at this time what ultimate changes will materialize. The only clear thing is the lack of clarity.

  1. Is the Estate Tax History? First, there is the perpetual Republican promise, supported by the President, of “repealing” the estate tax. Last time the estate tax was “repealed” (in 2001), it really meant eight years of gradually increased exemptions and gradually decreased rates, followed by one year of repeal (2010), followed by the return of the estate tax with even greater exemptions and lower rates, which is where we are today. Will this happen again? Will the estate tax just disappear retroactive to 1/1/17 or perhaps on 1/1/18? Will deficit hawks decide that even the relatively tiny revenue generated by the estate tax is worth keeping to avoid a political fight with Democrats? (more…)

Understanding UPMIFA: Important Endowment Concepts

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 (at 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.

UPMIFA contains rules and standards for their application across three broad areas of importance to charitable organizations, members of their fiduciary boards, and their advisers, if those organizations hold restricted funds including endowment. This post focuses on endowment, and future posts will address UPMIFA rules for the delegation of management and investment functions, and for the release or modification of restrictions contained in gift instruments. (more…)

iWill or iWon’t

By Allan Cutrow and Emily Evitt

digital safety concept padlock in electronic environment

Photo credit: iStock.com/the-lightwriter

Ever wondered what will happen to your Facebook page when you die? The California Legislature has recently weighed in. Effective as of January 1, 2017, California will have its first law to specifically address the handling of your “digital assets” after your death. The Revised Fiduciary Access to Digital Assets Act will determine who, if anyone, can access your digital assets, such as social media accounts, online gaming accounts and music accounts after your death. Under the new law, the custodian of digital assets – such as Facebook, Google, or Apple – must provide a fiduciary access to a deceased individual’s digital assets as the decedent previously directed. The Act sets up a three-tiered approach, which works as follows: (more…)

Proposed IRS Regulations Could End Most Valuation Discounts for Family Entities

By Allan Cutrow, Jeffrey Eisen and S. Eva Wolf

On August 2, 2016, the Treasury Department issued proposed regulations under Section 2704 of the Internal Revenue Code. The proposed regulations, if adopted in their current form, essentially will eliminate all minority discounts or lack of control discounts and lack of marketability discounts for transfers between family members of interests in family-controlled businesses.

The proposed regulations accomplish this result in complex ways. But here are some points to consider as you decide whether to act quickly.

  1. The regulations are “proposed.” This means that they are not currently in effect. The Internal Revenue Service has scheduled a public hearing on the regulations in Washington, DC on December 1, 2016. They take effect when the IRS announces that they are “final.” Thus, these regulations could take effect shortly after the hearing, sometime in 2017, years from now, or never (in theory). The IRS may change the regulations in meaningful ways before adopting them as final. (more…)

Important New Guidance on Charitable Remainder Annuity Trusts

 

By David Wheeler Newman

The Internal Revenue Service has issued important new guidance that can allow a charitable remainder annuity trust (CRAT) to qualify under Internal Revenue Code section 664 in a low-interest environment.

Background

Section 664 confers substantial tax benefits on charitable remainder trusts that meet its requirements. These are irrevocable trusts that during their term distribute a formula amount to one or more non-charitable beneficiaries, with the remainder distributed to charity upon termination of the trusts. There are two allowable formulas. A charitable remainder unitrust (CRUT) distributes a fixed percentage of the value of trust assets determined every year. There are some allowable variations for CRUT distributions, but in general this means that distributions from a CRUT can go up or down from year to year, depending on increases or decreases in the value of trust assets. While CRUTs are by far the more popular of the two main varieties, some clients and donors prefer the CRAT, which distributes the same amount every year during its term, which is fixed at the time the trust is created and which must be at least 5% of the value of assets contributed to the trust. (more…)

4 Things Beneficiaries Who Receive IRS Form 8971’s Schedule A Must Know

By Jacey L. Hayes

When someone inherits assets, he or she is supposed to have a tax basis in the inherited asset for income tax purposes equal to the “fair market value” of the inherited asset at the date of death. The IRS is concerned that it is losing billions of dollars due to improper basis reporting for inherited assets: that is, the executor reports the assets on the estate tax return at one value, and then when those same assets are later sold, exchanged, or transferred by the beneficiary, the beneficiary reports the basis at a higher value. To tackle this concern, all estates which file an estate tax return after July 31, 2015, also must now file, within 30 days after filing the estate tax return, new IRS Form 8971, and provide a Schedule A to each beneficiary. A beneficiary’s Schedule A must also be given to the beneficiary within the same time frame. (Note that for all estate tax returns filed between August 1, 2015 and May 31, 2016, the due date of Form 8971 was postponed to June 30, 2016, leading to a flood of recent filings.) (more…)