Today’s blog post about the Heckerling Institute is written by Withum’s Estate & Trust Services Partner, Brian Wynne 335x310-brian-wynne-listing-b

Well, we made it.  Today is the final day of the 53rd Annual Heckerling Institute on Estate Planning from sunny Orlando, Florida.  Friday is the lightest day of Heckerling as most attendees make their way to the airport to head back home to share with colleagues and clients all the wonderful information they’ve accumulated over the week.

The final day still has a few things to offer, though.

The morning began with Natalie Choate of Nutter, McClennen & Fish in Boston discussing the tax consequences and challenges of dealing with a trust as the beneficiary of a retirement plan.  Mrs. Choate literally wrote the book on this topic!  It is almost always more desirable to name individuals to be beneficiaries of a retirement plan whenever possible.  However, if a trust must be named, there are several considerations.  The trust documents should speak to how the retirement plan will be treated for accounting purposes (what is income, what is principal), and how beneficiaries can access funds inside the retirement plan inside the trust.  The interplay between required minimum distribution (RMD) rules of the retirement plan and the concept of distributable net income (DNI) in the trust can create a lot of confusion if the trust document doesn’t speak to this directly.  If a $500,000 IRA held in the trust passes out a $35,000 RMD in a given year, is that income to be distributed or just a reclassification of principal inside the trust to be held for future beneficiaries?

The primary reason to name individuals as beneficiaries of retirement plans is to allow the retirement plan to pay out over the beneficiary’s life expectancy (not the decedent’s).  A trust named as the beneficiary can achieve this same result, so long as a few rules are carefully followed.  The five rules are as follows:

  1. The trust must be valid under state law.
  2. The trust is irrevocable or will become irrevocable upon the death of the retirement plan owner.
  3. The beneficiaries of the trust who receive benefits from the retirement plan must be identifiable from the trust instrument.
  4. Certain documentation must be provided to the retirement plan administrator.
  5. All trust beneficiaries must be individuals.

Generally, if these five rules are followed, the RMD rules of the retirement plan see through the trust and the retirement plan works almost as if there was never a trust named as the beneficiary.  There are two differences with the trust involved (vs. individuals named directly as beneficiaries) – beneficiaries cannot get “separate account” treatment (where the plan is effectively split into multiple plans for multiple beneficiaries to better align life expectancies) and a spousal beneficiary cannot take advantage of spousal rollover rules where a spouse can roll the decedent’s retirement plan into their own.

The second session of the morning was a little “inside baseball” as they say – it had to do with the benefit of engagement letters between practitioners and their clients to clearly outline the terms in which the two will work together.  This was more of a “best practices” session for the professionals attending the conference.

Finally, the conference ended with Turnery Berry and Charles Redd giving a great overview of what was discussed during the week.  They highlighted many of the “big topics” from the week.  They discussed the impact of the 2017 Tax Cuts & Jobs Act (TCJA) on estate planning, specifically the elimination of miscellaneous itemized deductions and the changes in tax treatment of alimony payments in divorce.  They reiterated and summarized lots of court cases that are applicable to estate planners related to state income taxation of trusts, charitable distributions from trusts, “death-bed” planning and the modification of trust instruments.  Finally, they went over considerations brought up during the week related to gifting, basis, charitable giving and IRAs.

Heckerling is a great conference, as evidenced by the ever-growing attendance (3,400 attendees this year!) and the top-notch speaker roster.  It fills two huge ballrooms in the largest Marriott in the world.  It’s a long week filled with invaluable insights and practical planning tips for attorneys, wealth planners and accountants.  Withum is proud to field a team of partners to attend this year and every year.  Thank you for following our updates this week!




Scheier-DonToday’s blog post about the Heckerling Institute is written by Withum’s Estate & Trust Services Partner, Donald Scheier.

Almost All You Need to Know About Powers of Appointment to Make You a Super Estate Planner was presented by Turney P. Berry and Jonathan G. Blattmachr.

Powers of appointment is a planning technique allowing for great flexibility.  In many circumstances the powerholder has the ability to postpone making decisions until a later date. The presentation discussed the reasons for giving powers of appointment including the benefits and pitfalls of doing so.  Combined with the written material the best ways to effectively exercise the power, modify existing powers and the various characteristics of these powers were considered.

Most powers of appointment are non-fiduciary powers of disposition over property.  The power was originally granted by the property owner (the “grantor, donor”) either in an inter-vivos instrument (Trust Agreement) or in a Will.  The person traditionally given the power is called the “donee” or “powerholder”. The significance of this power being non-fiduciary allows the powerholder to act within the power stated without having the responsibility to act in the best interests of the appointees as long as the exercise does not violate public policy.  Although powers can be granted in a fiduciary capacity it is much less common.

Powers of appointment can be general or non-general in nature, can be exercisable currently or upon the occurrence of an event or specified time or the meeting of an ascertainable standard.  There are major tax differences between general and non-general powers and considerations of these tax effects must be analyzed in determining what type of power should be given.

Some powers must be exercised (”imperative”) and if not the court having jurisdiction will exercise it.  Powers which need not be exercised (“non-imperative”) are much more typical and name the takers to the property in the default of such exercise.

The “doctrine of relation back” should be clearly understood that the powerholder does not own the property but simply has the right to appoint it.  As the name indicates the property is technically passing from the donor to the donee.  However, for tax purposes the doctrine of relation back is not always followed and the powerholder could be considered the holder of such assets.

Tax Treatment of Powers of Appointment

 General powers of appointment are defined by IRC Sec. 2041.  The following are excepted from the definition and would eliminate the potential tax burden of the powerholder:

  • If the powerholders authority is limited by an ascertainable standard.
  • If the power is exercisable only in conjunction with the donor of the power; or
  • If the powerholder can exercise the power only in conjunction with a person having an adverse interest in the property.

On death the estate of the powerholder is required to include all assets over which the power is held if it is a general power of appointment.  The mere existence of the power is all that is required even if not exercised.  Under certain circumstances if the powerholder was unaware or incapable of exercising the power the estate may recover from the recipient of the property the taxes assessed.

The release or lapse of a general power of appointment is deemed to be a transfer of property by the powerholder.  However, under IRC Sec. 2514(e) this release or lapse is only a transfer of property to the extent it exceeds the value of $5,000 or 5% of the total value of the assets out of which, or the proceeds of which, the exercise of the lapsed power that could be satisfied.  This “5 and 5” power may lapse annually without any transfer tax ramifications thus allowing a beneficiary the right to take any amount from a trust as long it does not exceed these amounts. The withdrawal rights in certain trusts (often referred to as a “Crummey Power”) are structured to lapse within the “5 and 5” power.  Where withdrawals without any limitations would exceed the annual non-taxable amount the use of “hanging” powers avoid the possible transfer tax until the trust is large enough to fully cover the total value of assets that could be withdrawn.

Non-general powers of appointment usually have no transfer tax effects.  However, if the release or lapse has an effect on the other interests held by the powerholder then a potential transfer tax may be generated.

Exercising a Power to Create a Power: Taxation and the Delaware Tax Trap

 It is not usual for a powerholder to exercise a power in order to create a new power of appointment.  If the power is a general power of appointment and is exercised by Will the appointive assets it will be subject to federal estate tax.  If the general power of appointment is exercised inter vivos then there will be a deemed transfer of assets subject to federal gift tax.

If the power is a non-general power of appointment and used to create a new second power then it will only have tax consequences if it satisfies the criteria of IRC Sec. 2041(a)(3) or Sec. 2514(d) commonly referred to as the “Delaware Tax Trap”.

In simple terms, the exercise of a non-general power of appointment to create a new power of appointment that has the effect of postponing the period of the Rule Against Perpetuities converts the non-general power of appointment into a taxable power for purposes of IRC Sec. 2041 and Sec. 2514.

The name “Delaware Tax Trap” is derived from the fact that usually the creation of a new non-general power of appointment from an old non-general power of appointment would not extend the Rule Against Perpetuities, thus the “lookback or relate back” period for perpetuities purposes would be the old non-general power of appointment date.  However, under Delaware law even the exercise of non-general power of appointment changes the date of creation to the new non-general power of appointment.

This so called trap sometimes is triggered purposely in order to generate estate tax or gift tax rather than generation-skipping tax transfer tax.

State perpetuities law must be reviewed and analyzed thoroughly to determine how the exercise of a non-general power of appointment creating a new power will be treated.

There are many additional reasons to use powers of appointment among them are:

  • To allow changes to be made to an existing Trust. Change of administrative provisions, investment provisions, or dispositive provisions.
  • For transfer tax or income tax purposes.
  • For spousal protection purposes.
  • Moving taxing Jurisdictions
  • Basis adjustments

 Thank you for reading Thursday, January 17th update on Heckerling, one more day of summaries to come! 

Today’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner, Alfred La Rosa.570x640-al-larosa

Well it’s Wednesday, January 16, 2019, and Day 3 of the 53nd Annual Heckerling Institute on Estate Planning. Once again, we have been introduced to many creative ideas and planning techniques presented by some of the most prestigious estate & gift tax planners in the country.

Bernard A. Krooks, of the NYC law firm Littman Krooks LLP  addressed situations where the estate planning professional encounters a client or beneficiary that faces mental or physical disabilities. It is important that the planner fully understand the client’s situation and needs, both financially and personally, and design and draft all the necessary documents with appropriate powers and flexibility that effectively address and accomplish client’s evolving needs and desires.

Steve R. Akers of Bessemer Trust- Dallas Texas, Samuel A. Donaldson from the Georgia State University College of Law, Amy K. Kanyuk of McDonald & Kanyuk, PLLC- Concord, New Hampshire, and Carlyn S. McCaffrey of McDermott Will & Emery LLP-N.Y., New York served on the Questions and Answers Panel to answer and comment on some of the numerous questions from the attendees. The following are just some of the many questions, concerns and comments that were addressed during this very informative session:           

  • For individuals, miscellaneous deductions such as tax preparation fees and investment management fees are no longer deductible under the 2017 Tax Act. However, the issuance of Notice 2018-61 does confirm that trusts & estates can continue to deduct expenses incurred for the administration of the trust/estate (including trustee fees, accounting and attorney fees). Investment management fees are not deductible.

On the termination of an estate or trust, the excess of deductions (IRC 642h) over the gross income for the last taxable year was allowed as an itemized deduction (2% AGI limitation) to the beneficiaries succeeding to the property of the estate or trust. Although many practioners believe that these excess deductions on termination will no longer be deductible under the new law by the beneficiaries, it should be noted that Notice 2018-61 does provide that the IRS and Treasury are studying whether such excess deductions under 642(h)(2) may be deductible.

Since a possibility that excess deductions on termination would be allowed as an income tax deduction, the applicable beneficiary may want to get an extension of time to file his/her income tax return. If guidance is not issued by the extended due date, file the return, pay the tax, and file a protective claim to keep the statue open. 

  • Often irrevocable trusts are intentionally drafted as a grantor trust for income tax purposes. As a grantor trust the grantor is responsible for reporting the trust’s income and paying the income tax on such income. By having the grantor pay the tax, the trust is not depleted by income taxes allowing for greater growth, while at the same time reducing the grantor’s estate free of any additional estate/gift tax. There are additional benefits to consider.

Sometimes circumstances change and the grantor may not want to pay the income tax on income that he will never receive. Therefore, a provision should be included in these trusts giving the trustee the authority to reimburse the grantor for such income taxes. The trust terms may also include a provision that would allow the grantor to “turn off” grantor trust status for income tax purposes. Of course, this must be properly drafted to avoid any potential inclusion in the grantor’s estate.

  • The inability to choose a family member, friend, of professional as a fiduciary continues to be one of the major reasons/causes for not getting estate planning documents completed. The conference did devote sessions and discussions on fiduciary selections. A corporate or professional trustee is always an option.
  • Use of Charitable Lead Trusts (“CLTs”) have regained popularity in today’s low interest rate environment. In general, CLTs are designed to provide income payments to qualified charitable organizations for a term of years and/or the lives of one or more individuals. After this term, the trust assets are paid to either the grantor or to one or more noncharitable beneficiaries.


In drafting and administering CLTs it is important that the grantor not be named as trustee and not retain control over the charitable lead payments or of the recipient of these payments (including a private foundation that is “controlled” by the grantor). Such a retained power may cause the transfer to be incomplete for gift tax purposes, resulting in the trust being includible in the grantor’s estate. This problem can be avoided by not retaining the power, having a person other than the grantor serve as trustee, or by providing for an independent special trustee whose sole purpose it is to select charitable income recipients.

  • As expected a great deal of time was spent on Section 199A. During these discussions, the panel reiterated that the proposed regulations confirm that the multiple trust rules of Section 643(f) apply for purposes of the QBI deduction. These trusts will be aggregated where two or more trusts have substantially the same grantor or grantors, similar terms, substantially the same beneficiary(s), etc. This anti-abuse rule means that trusts formed or funded with a significant purpose of receiving the QBI deduction under Section 199A will not be respected for purposes of Section 199A.

After lunch the attendees had a choice of attending several concurrent “breakout” sessions. One of the sessions that I attended was:

Structuring the Tax Consequences of Marriage and Divorce After the 2017 Tax Act

Carlyn S. McCaffrey of McDermott Will & Emery LLP-New York, New York,  Linda R. Ravdin of Pasternak & Fidis, P.C.-Bethesda, Maryland, and Scott L. Rubin of Fogel & Rubin-Miami, Florida, addressed the changes in the 2017 Tax Act that should be considered when negotiating a prenuptial and a divorce settlement. The post-divorce treatment of trusts created by one spouse when the other spouse is a beneficiary, and using such trusts as replacements for the repealed alimony deduction and as estate planning devices were explored.

More to come from the Heckerling Conference as the week continues!



Today’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi. 570x640-ted-nappi-plus

Tuesday January 15, 2019 – Day 2 at Heckerling Conference 2019

Even though there were some excellent presentations on Day 2 related to such topics as Qualified Small Business Stock, Tax consequences of marriage and divorce under the new tax act, and making your charitable estate plan great again, we have chosen to focus this discuss on IRC Section 199A since it may affect many of our trust and estate clients.

GETTING THE 411 ON IRC 199A: JUST THE FACT MA’AM Melissa J. Willms Davis & Willms, PLLC

From time to time, a new law comes along that can dramatically affect estate and business planning, and cause accountants to lose many nights of sleep. The 2017 Tax Act brought us IRC Section 199A and the qualified business income deduction.

Code Section 199A applies to nongrantor trusts and estates as well as to their beneficiaries. The section can apply such that either the trust or estate may be treated as an individual and qualify for the Section 199A deduction, or the trust or estate may be treated as an RPE (Relevant Pass Through Entity) , passing the various elements of the deduction through to its beneficiaries who then, as individuals, may qualify for the Section 199A deduction.

Because of the nature of grantor trusts, Section 199A would not apply. The Code provides a set of rules that override the general trust taxation rules and cause the income of certain trusts to be taxed to the grantor (or someone treated as the grantor) to the extent that he or she has retained prohibited enjoyment or control of trust income and/or principal. The grantor trust rules generally treat the grantor as the owner of any portion of the trust property over which a grantor trust power applies. As a result, all items of income, deduction, expenses, and credits associated with that portion of the trust are reported directly by the grantor on his or her income tax return. The grantor calculates the Section 199A deduction as if he or she conducted the portion of the activities attributed to the trust.

Broadly speaking, income earned by a nongrantor trust or an estate in any year is taxed to the trust or estate to the extent that the income is retained, but is taxed to the beneficiaries to the extent that it is distributed to the beneficiaries with the trust or estate receiving a distribution deduction in the latter case. Subject to several exceptions, the general rule is that any distribution from a trust or an estate will carry with it a portion of the trust or estate’s DNI. Trust and estate distributions are generally treated as coming first from current income, with tax-free distributions of “corpus” arising only if distributions exceed DNI. If distributions are made to multiple beneficiaries, DNI is generally allocated to them pro rata. Once the trust or estate’s taxable income is determined, we then know whether the trust or estate falls in Stratum I, II, or III. Because the threshold limits for single filers applies to trusts and estates, for 2018, the threshold amount is $157,000, and is $160,700 for 2019.

As it currently stands, in determining a trust or an estate’s taxable income for Section 199A purposes, proposed § 1.199A-6(d)(3)(iii) provides that the trust or estate’s taxable income is calculated before taking any distribution deduction. This means that for purposes of determining the threshold amount and whether a trust or an estate falls within Stratum I, II, or III, the entity must consider all of its taxable income, even if all of its taxable income is distributed to its beneficiaries. The proposed regulations argue that because taxable income can be shifted between trusts and estates and their beneficiaries, QBI could be shared among multiple individuals, entitling each of them to their own threshold amount and that would be a bad thing.

Because Section 199A requires each nongrantor trust and estate to calculate its respective QBI, W2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income based on those items that are allocated to it, the trustee or executor will need to establish a system to track these items in its books and records. When a nongrantor trust and estate is allocated QBI, W-2 wages, UBIA of qualified property, qualified REIT dividends, and qualified PTP income, calculations of items related to Section 199A are first made at the trust or estate level, and then, if appropriate, are further allocated to the trust or estate’s beneficiaries. If those items are further allocated to a beneficiary, the trust or estate becomes an RPE to the extent of its allocation. Prop. Treas. Reg. § 1.199A-6(d)(1). If a trust or an estate allocates a portion of these items to a beneficiary and retains a portion of these items, for Section 199A purposes, the trust or estate will be treated partially as an RPE and partially as an individual.

The proposed Treasury regulations adopt DNI as the method to allocate Section 199A items between a nongrantor trust or estate and its beneficiaries, and similar to the notion that DNI carries out to beneficiaries only to the extent of taxable income, Section 199A items are allocated to beneficiaries to the extent DNI is distributed (or deemed distributed) to the beneficiaries. Once Section 199A items are allocated to a beneficiary, the beneficiary uses the allocated amounts to calculate the beneficiary’s Section 199A deduction. Likewise, the trust or estate uses its retained Section 199A items to compute its Section 199A deduction. If no DNI is distributed or deemed distributed to the beneficiaries or if the trust or estate has no DNI in any year, all Section 199A items will be allocated to the trust or estate, which will then calculate its Section 199A deduction.

In issuing the proposed Treasury regulations related to Code Section 199A, Treasury and the IRS took the opportunity to also issue new proposed Treasury regulations related to Code section 643(f) which deals with multiple trust rules. As set forth in the statute, in order for multiple trusts to be treated as one trust, Code Section 643(f) requires four elements: (1) there must be two or more trusts, (2) with substantially the same grantor(s), (3) with substantially the same primary beneficiary(ies), and (4) a principal purpose of the trusts is the avoidance of income tax. The proposed Treasury regulations take the elements of the statute a step further, providing that two or more trusts will be treated as a single trust not only if such trusts have substantially the same grantor(s) and primary beneficiary(ies), as long as the principal purpose for establishing the trusts or for contributing additional cash or other property to the trusts is the avoidance of federal income tax. The proposed Treasury regulations set forth a presumption for determining whether a principal purpose for establishing or funding a trust is to avoid federal income tax. Specifically, if establishing or funding a trust results in a “significant income tax benefit,” it is presumed the principal purpose is to avoid federal income tax, unless it is shown that there is a significant non-tax or non-income tax purpose that could not have been achieved without the creation of the separate trusts. Although proposed § 1.643(f)-1 was issued as an anti-avoidance rule to apply to all trusts, an additional proposed regulation was issued to apply to trusts, but only for Section 199A purposes. Specifically, proposed § 1.199A-6(d)(3)(v) provides that “trusts formed or funded with a significant purpose of receiving a deduction under section 199A will not be respected for purposes of section 199A.”

Proposed § 1.199A-6(d)(3)(iv) confirms that electing small business trusts (ESBTs) are entitled to a Section 199A deduction. In addition, the proposed regulation clarifies that QBI and other Section 199A items are to be accounted for separately for each of the S portion, non-S portion, and any grantor portion from any S corporation owned by the ESBT.

No specific provisions were made in Section 199A or the proposed regulations regarding charitable remainder trusts (CRTs) and whether a Section 199A deduction would be available to recipients of any taxable portion of such trusts that could result in a deduction. The suggestion made by the tax professionals is that for any Section 199A items that may be allocated to a CRT, the CRT will be treated as an RPE, like a non-charitable trust that allocates such items in accordance with the DNI rules, with those items being reported to the beneficiary on a Schedule K-1.

Section 199A and its related proposed Treasury regulations add a new income tax wrinkle, when planning involves businesses and their owners. Proposed § 1.643(f)-1 adds a new wrinkle, and uncertainty, in trust planning. Regardless, estate planners must be aware of and have working knowledge regarding the income tax issues that are important to their clients. As planners, we anxiously await the final Treasury regulations with the hope that we will have more certainty!

HalTerr-12-09Today’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Hal Terr.

After the ball drops in Times Square for the New Year a considerable number of attorneys, accountants and trust officers finalize their travel plans to go to Orlando, Florida the second week of January.   No, it is not to go see Mickie and Minnie Mouse at Magic Kingdom but to attend the Heckerling Conference held by the University of Miami to listen to the preeminent speakers in estate planning.   Once again, the Private Client Service tax partners at Withum will be summarizing each day’s discussion from the insights they have heard.   Leading off the insights of the first day is Hal Terr, co-Practice Leader of the Private Client Services Niche.

This year’s conference has 3,400 professionals attending, exceeding the prior year attendance records which emphasizes that even with great change in the law, there will always be the two constants of death and taxes.   The Recent Developments section this year was presented by Steven Akers, Samuel Donaldson and Amy Kanyuk and provided an overview of recent IRS pronouncements of the 2017 Tax Act as well as tax court decisions in the areas of estate and gift.

The recent proposed regulation from the IRS indicates that there will be no claw back if a taxpayer utilized the increased gift exemption, currently $11.4 million, under the 2017 Tax Act prior to 2025 and the law sunsets after 2025 to $5 million, indexed for inflation.   This will provide some certainty to high net worth individuals that they can utilize the increased gift and estate exemption and not created a tax liability if the exemption is less when they eventually pass away.   In addition, it was discussed that the increase in the Generation Skipping Tax (GST) exemption can be allocated to pre-existing trusts established prior to the passage of the 2017 Tax Act.   For some trust this can then lower or reduce the inclusion ratio to zero for prior GST trust to reduce any GST tax in the future.

The new year brings a new administrative change by the IRS for the filing of gift and estate tax returns.   For a long time, gift and estate tax returns have been mailed to the IRS processing center in Cincinnati, Ohio.   Effective January 1, 2019 all gift tax returns will be filed and mailed to the IRS processing center in Kansas City, Missouri and effective after June 30, 2019 all estate tax returns will be filed and mailed to the IRS processing center in Kansas City, Missouri.

With the increased estate exemption some high net worth individuals do not want to incur the expense of filing of an estate tax return on the death of the first spouse just to elect portability.   Prudent practice of estate attorneys and accountants would get in writing the surviving spouse’s intentions to avoid any disputes at a later time.   There is not extension for portability election if the estate is required to file an estate tax return if the estate exceeds the estate exemption at the time of the decedent’s passing.   However, if the estate is not required to file estate return, the executor can make portability election within 2nd anniversary of decedent’s passing under administrative relief and not have to apply for a costly private letter ruling.

Recent proposed regulations for Qualified Business Income and deductions for trusts and estates were then discussed.   The details of the operations of the Qualified Business Income (QBI) deduction will be discussed in a future presentation but there were three important items that were highlighted.  The first is that the QBI deduction does not reduce an individual’s tax basis in the flow-through entity.    For trusts, the QBI deduction will be allocated between trusts/estates and the beneficiaries in the same proportion of the allocation of Distributable Net Income (DNI).   Finally, there will be a presumption by the IRS under code section 643(f) that multiple trusts with the same grantor and substantially the same beneficiaries will be combined if the only reason for the multiple trusts is to get a benefit for the QBI deduction.   Final regulations to provide additional clarity for the QBI deduction are expected but delayed to the recent government shutdown.

For individuals, miscellaneous deductions such as tax preparation fees and investment management fees are no longer deductible under the 2017 Tax Act.   There was some uncertainty of the deductibility of these items for fiduciary income tax purposes for trusts and estates.   The IRS issued Notice 2018-61 to allow trusts and estates to deduct expenses incurred for the administration of the trust/estate, including trustee fees, accounting and attorney fees.   However, investment management fees would not be deductible, including any investment management fees incorporated in the trustee fee.

The priority guidance plan of the IRS was issued in November 2018 which provides an insight of future pronouncements by the IRS.   In the estate and trust area, the guidance plan addressed the IRS’s intention to reduce the administrative burden for basis consistency reporting to beneficiaries of an estate.  Currently executors are required 30 days after the filing of an estate tax return to report the basis of assets inherited by a beneficiary.   In addition, the IRS included in the priority guidance plan issuing rules to determine basis adjustments for assets owned by a grantor trust.

Those were the highlights from the first day.   Stay tuned for tomorrow’s blog post you will hear from Ted Nappi on Heckerling’s Tuesday presentations.

Today’s blog post is written by Withum Wealth Management’s Managing Principal, James Ferrare, CFA, CPA.Jim Headshot

Many of our clients are undoubtedly familiar with beach clubs and the sound of a life guards’ whistle signaling dangerous water conditions. Well the market doesn’t sound a warning whistle allowing time for investors to return “safely to shore” when they should. On February 5th, 2018, many investors dabbling in exotic instruments would have appreciated any type of warning signal. On that day, the CBOE Volatility Index (the VIX), a measure of expected volatility in the market recorded its biggest one day percentage change ever, climbing 100% and causing sudden and significant losses for those on the opposite side of that trade.

So, what happens when market volatility, as measured by the VIX, increases 100% in a day…as we all found out together, plenty. If you were an investor in any of the inverse volatility products such as the XIV, (the VIX spelled backwards, how clever), you lost about 94% of your investment in one day. But we soon learned that was only half of the story.

From supposedly sophisticated hedge funds to all levels of investors, surprisingly including millennials and endowments such as Harvard University, we found many had become entangled in a seemingly “safe” paired trade: 1) betting against volatility; expecting to profit from markets remaining calm and 2) maintaining long exposure to the equity markets. In some cases, market participants were “selling” volatility and using the premiums received to help finance a call option and/or long exposure to the equity markets. As the first part of the paired investment was imploding, the other side—long the stock market—was starting to exhibit tremendous downside pressure.

In times of market turmoil selling tends to beget more selling, even absent any deterioration in stock market fundamentals (i.e. earnings and growth outlook— both demonstrating strength not seen in over a decade). This type of non-fundamental selling did however have real roots; distressed selling related to margin calls, the receipt of unwelcomed stock related to risky option investments and the collapse of inverse related funds. Moreover, the uncertainty as to how many investors were trapped in this trade and how entangled were these seemingly disparate trades helped create a riptide type effect sucking markets lower.

As we also found out in the current period of low bond returns many market participants were utilizing leverage to magnify their results. The low rate environment also encouraged pension funds to assume greater portfolio risk, whether they knew it or not, as they too ventured into more esoteric “risk-on” investments to help compensate for below average bond yields and high expected returns. Warren Buffett once said “you never know who is swimming naked until the tide goes out”. Well the tide went out and the picture wasn’t pretty.

Withum Wealth has always believed portfolio construction should emphasize high quality stocks, bonds, select index based investments and prudent diversification. Swinging for home run investments (which begs the basic question is volatility even an asset class?) unfortunately can lead to disappointing outcomes as many investors were reminded of in February. To paraphrase the legendary Warren Buffett, we serve as a client fiduciary and as such we prefer to hold on to our bathing suit.

Important Disclosure: Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Withum Wealth Management. [“WWM”] ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from WWM. Please remember to contact WWMin writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. WWM is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the WWM current written disclosure statement discussing our advisory services and fees is available for review upon request.

al la rosaToday’s blog post about the Heckerling is written by Withum’s Private Client Services Partner, Alfred La Rosa.

Well it’s Thursday, January 25, 2018 and Day 4 of the 52nd Annual Heckerling Institute on Estate Planning. Once again we have been introduced to a number of creative ideas and planning techniques presented by some of the most prestigious estate & gift tax planners in the country. The presenters continued to address certain revisions of the recent 2017 Tax Act and how such revisions may impact on estate, gift and income tax planning

This morning’s general sessions included the following presentations:

Joshua S. Rubenstein, of the New York City law firm Katten Munchin Rosenman kicked-off the morning with a very intriguing and interesting presentation addressing various tax and non-tax considerations when an individual from a community property jurisdiction has different connections to a common law (i.e. separate) property jurisdiction. This for example, can occur when people from different countries and/or states marry while owning assets in different property jurisdictions (community vs. common), or when family members (including spouses) live in different countries or states with different property jurisdictions.

Robert H. Sitkoff, a renowned professor of law at Harvard Law School addressed the new Uniform Directed Trust Act (“UDTA”), and explored how the Act simplifies drafting and administering directed trusts. In general, the investment, distribution, and management of a trust’s property are the responsibilities of a trustee. When the power to administer a trust belongs exclusively with a trustee, the fiduciary obligations, duties and responsibilities would apply exclusively to that trustee. In a directed trust however, a person other than a trustee has a power over some aspect of trust administration i.e., investment or distribution decisions. Unlike a trustee, a so-called “trust director,” who may also be referred to as a “trust protector” or “trust adviser,” does not necessarily hold title to a trust’s property. The division of authority between a trust director and a trustee raises difficult questions about how to divide fiduciary power, duty, responsibility and liability. The UDTA provides guidance on how to structure a directed trust while safeguarding the beneficiaries.

Michele A.W. McKinnon from the law firm McGuireWoods LLP in Richmond, Virginia addressed the manner in which donors should approach planned giving under the new tax laws, as well as changes affecting the charitable deduction and the impact on giving techniques. The presentation also addressed various charitable gifting techniques including Charitable Remainder Trusts, Charitable Lead Trusts, Private Foundations and Donor Advised Funds, Gift Annuities, using retirement accounts, etc. We explored the reasons why donors make gifts and whether these considerations are likely to be effected by the 2017 Tax Act.

While the 2017 Act preserves the deductibility of charitable contributions, the higher standard deduction means fewer people will itemize their deductions. It is anticipated that the number of taxpayers that will itemize will drop for 30% to 5%. Certain charities are concerned that this will impact on the incentive by “non -itemizers” to give the “smaller gifts” that so many charities rely upon.

In order to get “non-itemizers” over the new standard deduction to itemize, they may want to consider “bunching” the amount of the charitable gifts that they would ordinarily make over a few years into one year. Creating a donor advised fund would be quite useful here to help prevent certain charities from getting and spending all of the “bunched” contribution in the year received.  The doubling of the estate and gift tax exclusion amount from $5.6 million to approximately $11.2 million ($22.4 million for married clients) was also addressed, and, whether such increase will erode the incentive to leave the larger bequests to charity.  The changes that were made to contribution deductions under the new act have not been to significant.

The following revisions were discussed:

  • The increase in the limit on cash contributions from 50% to 60% of adjusted gross income.
  • For years, colleges and universities relied on somewhat of an obscure tax rule where a payment to a college or university for the right to buy certain tickets to athletic events (as opposed to the actual ticket themselves) was 80% deductible as a charitable contribution.  The Act repeals this 80% charitable deduction. There is a concern that the loss of this incentive could drastically reduce the amount of donations received by colleges and universities tied to seat licenses, which have become a stream of revenue for college athletics.

The Act changes the charitable contribution deduction of an Elective Small Business Trust (“ESBT”), and provides that the rules under IRC Section 170 applicable to individuals should control the deductibility of charitable contributions attributable to the ESBT. Thus, the percentage of contribution base limitations and carry-forward provisions applicable to individuals applies to charitable contributions deemed made by the portion of an ESBT holding S Corp stock. Further, the ESBT should be able to deduct the fair market value of long-term capital gain property gifted in-kind to charity, subject to applicable percentage limitations. The changes for ESBTs are permanent and do not sunset after 2025.Some other interesting facts/statistics were addressed during the presentation, supporting the fact that in many instances taxes are not the main motivator for charitable giving. For many people in the United States philanthropy is important and despite these tax uncertainties impacting their charitable giving, in addition to other economic factors, many people continue to give generously.

Current market conditions should favor charitable giving and, in particular tax efficient charitable giving through the use of appreciated property gifts. Continued uncertainty in political and economic landscape may also inhibit charitable giving.  Perceived and real cuts in government funding for certain programs and activities may be a motivating factor for some individuals to increase charitable giving as social needs increase.

Farhad Aghdami, the Managing Partner of the Richmond office of Williams Mullen, focused on the income tax and wealth transfer tax planning opportunities (and pitfalls) associated with planning for real estate investors, including a discussion of non-tax considerations and obstacles. The program also explored valuation discount planning, freeze, and leveraging strategies when transferring real estate. The 2017 Tax Act basically doubled the estate and gift tax exclusion amount from $5.6 million to approximately $11.2 million. The GST exemption will also be $11.2 million in 2018, the maximum estate/gift tax rate is 40%, and the Code §1014 basis adjustment (“step-up”) at death is retained. The increase in the exclusion amount is scheduled to sunset after December 31, 2025.

The planning implications of the new tax law are significant. For married clients with assets below $22.4 million, the need to engage in sophisticated estate tax planning is substantially diminished. However, we should be aware of the potential risk of a repeal of current law and a return to the lower exemption amount.

Some of the issues that were addressed:

  • The risk of engaging in lifetime gifting is the loss of the basis adjustment (“step-up”) at death which, for real estate investors and developers, can be significant. It was noted that “a gift of a $1 million assets with a zero basis would have to appreciate to approximately $2,470,000 (to a value that is 247% of the current value) in order for the estate tax savings on the future appreciation ($1,469,135 x 40%) to start to offset the loss of basis step-up ($2,469,135 x 23.8% for high bracket taxpayers.). The required appreciation will be even more if state income taxes also apply on the capital gains.
  • Clients may want to consider “unwinding” certain lifetime transfers to cause estate tax inclusion to obtain a step-up in basis at death.
  • For clients with assets significantly in excess of estate and gift tax exclusion amount, the change in law presents additional planning opportunities and strategies. For example, a husband and wife considering a sale to a grantor trust could fund a trust with a 10% “seed money” gift of $22.4 million and then sell $201.6 million of assets to the trust.

Mr. Aghdami focused on some of the basics of valuing property for estate and gift tax purposes, including the use of fractional interest, minority, and marketability discounts to achieve substantial transfer tax savings. He discussed how the implementation of a proper plan will decrease the risk of the IRS challenging the valuation for gift or estate tax purposes.

Some of the wealth transfer planning techniques that can that work well with real estate were addressed, including: grantor retained annuity trusts, sales to defective grantor trusts (including the use of self-canceling installment notes or private annuities), sale/leasebacks, and personal residence trusts.

After lunch the attendees had a choice of attending a fundamental presentation on the various tax issues when dealing with families who have multi-national members and assets (including U.S. income and transfer tax rules relevant to residents and non-residents, inbound and outbound investments, foreign trusts and their U.S. beneficiaries, and expatriation), or a number of concurrent “breakout” sessions. I attended the following two concurrent sessions:

Trust Asset Protection Through a Tri-Focal Lens Daniel S. Rubin of Moses & Singer LLP, Terrence M. Franklin of Sacks Glazier Franklin & Lodise and Michael M. Gordon of Gordon, Fournaris & Mammarella, addressed the asset protection provided to beneficiaries through trusts from the unique and sometimes conflicting perspectives of (i) the drafting attorney, (ii) the trustees and other fiduciaries administering the trust and (iii) those creditors seeking to reach the trust assets

All Present and Accounted For: Proactively Preparing Fiduciary Accountings to Facilitate Pre- and Post-Mortem Planning and Mitigate Risk Joshua Rubenstein of Katten Muchin Roseman LLP and Scott Ditman of Berdon LLP did a very interesting presentation on the importance of a rendering fiduciary accountings. The world is becoming more litigious, especially in the private client arena. Legal and accounting professionals must work together to make sure that when their clients are serving as trustees and executors, fiduciary accountings are properly prepared on a current basis, that they are issued to the interested parties, and “sign-offs” from beneficiaries are received currently. Not only will this protect fiduciaries and the professionals who represent them from litigation, fiduciary accountings can serve other useful and valuable purposes. They can be used to properly calculate annual fiduciary accounting income, trustee commissions, cash flow and liquidity analysis, facilitate pre and post mortem income and estate tax planning, etc.

Thank you for following our recap of the 2018 Heckerling Institute on Estate Planning!