On Monday, January 13, 2020, Turney P. Berry, Steve R. Akers and Carol A. Harrington kicked off the 54th annual Heckerling conference and presented a wealth of information on the recent developments in 2019 on trusts and estates and tax issues. The highlights below distill the three hour presentation, identify 19 of the important 2019 topics discussed, and summarize briefly the panel's key takeaways on these topics:
- Secure Act. The panel initiated the discussion with a brief summary of the Secure Act, which was passed in December. Among the changes, the Act affects the ability to stretch payments for retirement plans. While some number crunching will be needed, the panel suggested that Roth conversions, charitable remainder trusts, and planning for siblings close in age may be some planning options to achieve some pre-Act stretch benefit.
- GST Tax/Bluebook. The wording of the effective date provision in the 2017 Tax Act created technical issues as to whether an individual could allocate increased GST exemption to transfers that were made before 2018. The bluebook clarified that GST exemption can be allocated to pre-2018 transfers.
- Sanders’ “For the 99.8 Percent Act.” The panel discussed that while this is far from law, they have received many calls from their clients and contacts on the proposed tax plans of presidential candidates such as Sanders and Warren. Sanders' plan is more definite and would make major changes to the transfer tax system, including lowering exemption and increasing estate tax rates.
Administrative Follow-Up of the 2017 Tax Act
- Qualified Business Income. The final regulations on Section 199A provide definitional, computational, and anti-avoidance guidance helpful in determining the 20% deduction for qualified business income. There were also issued regulations under Section 643(f) to prevent taxpayers from manipulating the Section 199A deduction by the use of multiple non-grantor trusts.
- Qualified Opportunity Zone. The IRS issued final regulations on Section 1400Z to provide clarity to investors and practitioners. Of note, while gifts are generally inclusion events, a gift is not treated as an inclusion event for a gift by a taxpayer to a grantor trust of which the taxpayer is the deemed owner. Death is also not an inclusion event.
- Anti-Clawback. The final regulations on "clawback" related to the increased exemption were issued in November. The panel stressed that we really have a window of opportunity now to use the increased exemption. Consider gifting now for couples with over $7 million or single individuals with over $3.5 million, in the event exemption levels may fall post-election. The regulations make clear that the deceased spouse's unused exemption will be locked in. As a parallel, considering GST exemption, the panel believes that GST exemption already allocated would be locked in even if GST amount correspondingly reduces with the estate and gift tax exemption.
Federal Transfer Tax Developments
- PLRs on Inclusion in the Gross Estate. Private Letter Ruling 201845006 ruled that modifying a trust document to fill a vacancy in the role of an independent trustee with the power to create or alter a general power of appointment will not give rise to gift or estate taxes. Private Letter Rulings 201920001 through 201920003 ruled that the reformation of trusts to correct scrivener’s errors regarding Crummey withdrawal powers results in powers of appointment that are limited and not general.
- Valuation of Business Interests. The panel discussed two cases on "tax affecting" on valuation of closely held entities, which is to adjust for certain differences between pass-through entities and C corporations. Tax-affecting was approved by a district court in Kress v. United States, after being applied by both the Kress' and the Government’s expert. In Estate of Jones v. Commissioner, the Tax Court approved valuing timberland by an income approach rather than net asset value and approved tax-affecting for valuing interests in an S corporation and a limited partnership.
- Defined Value Clauses. In Coal Property Holdings, LLC v. Commissioner, a savings clause was rejected by the court in a conservation easement case and deemed a condition subsequent clause. Although the case was not directly relevant to formula valuation clauses, it is interesting in its discussion of saving clauses generally and the IRS' and court's rejection of clauses that change results after the fact. The panel discussed that while there is little downside with including general savings clause in a document, a specific override may work better.
- PLR on GST. Private Letter Ruling 201936001 ruled that while the taxpayer failed to include a notice of allocation, the taxpayer substantially complied with the requirements for allocating GST exemption to an indirect skip trust. Despite the generous ruling, the panel noted that for the avoidance of such issues, taxpayers should not only check the box for elections, but also include attachments noting which elections were made.
- PLRs on Extension of Time. Several rulings discussed 9100 relief with respect to GST allocation. Private Letter Ruling 201923022 allowed an extension of time to taxpayers to allocate GST exemption. Private Letter Rulings 201927014, 201927015, and 201929006 ruled that the taxpayers are granted an extension of time to opt out of automatic allocation of GST exemption. The panel noted that 9100 relief would not be available to take away an affirmative election for GST to apply.
- PLRs on Portability. There were a number of PLRs discussing portability (Private Letter Rulings 201850015, 201852016, 201852018, 201902027, 201921008, 201923001, 201923014, and 201929013). Generally, in each of these rulings, decedent died and was survived by spouse, and the estate did not file a timely return to make the portability election. The estate found out its failure to elect portability after the due date for making the election. For instances that the value of decedent's gross estate was less than the basic exclusion amount in the year of decedent's death (including taxable gifts made during his lifetime), 9100 relief was allowed. The rulings did not permit a late portability election and 9100 relief when the estate was over the filing threshold, even if no estate tax was owed because of the marital, charitable, or other deductions. Note also that there is a 2 year rule under Revenue Procedure 2017-34, where it is possible to file the return for portability without 9100 relief.
Federal Estate and Trust Income Tax Developments
- INGs. Recent rulings provide and reiterate the "cookbook" on establishing an incomplete non-grantor trust. (Private Letter Rulings 201848002, 201848009, 201850001 through 201850006, 201852009, 201852014, 201908002 through 201908007, and 201925005 through 201925010).
Charitable Contributions and Charities
- Value Affected by Subsequent Action. In Estate of Dieringer v. Commissioner, the Court of Appeals upheld the Tax Court's holding of a deficiency and penalty against an estate. The estate claimed a larger estate tax deduction, however, the charity received less than the amount of the deduction. The estate tax charitable deduction was reduced when the trustee diverted property from charity and altered the testamentary plan.
- Conservation Easements. The panel noted that there may be a chilling effect on implementing conservation easements. See Pine Mountain Preserve, LLP v. Commissioner, a recent case on the topic; the conservation easement was disallowed where there was a right to change areas subject to reduced restrictions. Syndicated conservation easements are included on the IRS's 2019 "Dirty Dozen" list. Even if a conservation easement transaction is non-syndicated, it may be difficult to examine on the gift tax return the variety of easement it is. The panel noted that all conservation easement files may end up being pulled for audit.
Other Federal Tax Developments of Interests
- Inflation Adjusted Amounts for 2020. Some of the important 2020 figures include: basic exclusion amount of $11.58 million, annual exclusion gifts to non-citizen spouse of $157,000, and standard deductions of $24,800 for married individuals filing jointly, $18,650 for heads of household, and $12,400 for unmarried individuals and married individuals filing separately. Annual gift tax exclusion remains at $15,000.
State Tax Developments
- State Income Taxation of Trusts: Kaestner. The US Supreme Court held unanimously in North Carolina Dept. of Revenue v. Kimberly Rice Kaestner 1992 Family Trust that it is unconstitutional for income taxation of an out-of-state trust based solely on a beneficiary’s residence. The panel noted, however, that the US Supreme Court declined to hear Fielding (Fielding, et al. v. Commissioner of Revenue, which the Minnesota Supreme Court held that there is insufficient nexus to tax a trust solely because a grantor is living in the state).
Notable Non-Tax State Law Developments
- Spendthrift Provision Respected: Cameron. In re Cameron Gift Trust is a case where a spendthrift clause trumped a child support clause, peculiar to South Dakota law. However, this is not a self-settled spendthrift trust case. More importantly, the case involves a trust situs change in which the administration was moved from a creditor-friendly state (California) to a jurisdiction less so (South Dakota). The panel noted that if judged under California law, a California court would have likely enforced a California child-support order against a California third-party trust.
- Electronic Wills. The Uniform Electronic Wills Act was approved at the Uniform Law Commission 2019 Annual Meeting. The Act allows for the electronic execution and enforcement of wills, enabling online estate planning services. Much remains to be seen whether states will adopt it.