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Archive for January, 2016

This week’s blogger is Raymond G. Russolillo, CPA, tax partner and leader of Withum’s Family Office service niche.

I guess physical house robberies and street muggings are too risky for criminals these days.  Over the past couple of years, an entire cottage industry of IRS scammers has sprung up whereby telephone “solicitors” call unsuspecting Raymond Russolillotaxpayers and threaten them with legal action if they do not pay their back taxes immediately.  A number of my clients have received such calls and were, to put it mildly, shaken up by the whole experience.

Here’s the deal – we all know that the IRS is a huge, unwieldy bureaucracy that is very easy to criticize and ridicule and just as easy to fear.  As an institution, it is far from perfect.  But, the one thing IRS really knows, and lives by, is PROCEDURE!  There are time constraints and notice requirements and all kinds of legal processes procedures in place to protect both the taxpayer and the taxing agency.  And the bottom line is, procedure dictates that IRS not shake down taxpayers by telephone!  If the IRS is truly “after” you, you will know because they always make first contact by mail.  The telephone may be used to communicate with you once you are in the audit process, but any settlement offer, assessment, or bill will always be delivered to you on paper, not by an angry, demanding phone call.

Scammers rely on taxpayers’ ignorance of procedure and fear of government agencies.  Don’t be so easily fooled.  Knowing the rules the IRS lives by will enable you to spot a scam and nip it in the bud.  The IRS will never:

  1. Call to demand immediate payment, nor will they call about taxes owed without first having mailed you a bill.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount they say you owe.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

So, what if you receive a call from a scammer?  First of all, stop, take a deep breath….and do nothing.  End the call.  If you receive a voice mail message, you may want to save the recording, particularly if you plan to report the incident to the authorities.   If you have some doubt about the legitimacy of a call (under the theory that “where there is smoke there is fire” – perhaps you received a letter that you ignored or forgot about), you should immediately contact your tax advisor for assistance.  At the very least, you can contact the Internal Revenue Service yourself at (800) 829-1040 to see if there are any open tax items you may have neglected to address.  But, if you know you owe no taxes or you are unaware of any issues in dispute, you may want to consider reporting the incident to the Treasury Inspector General for Tax Administration (TIGTA) at (800) 366-4484 or at www.tigta.gov.  You can also file a complaint using the FTC Complaint Assistant; choose “Other” and then “Imposter Scams.”  Include the words “IRS Telephone Scam” in the notes.

Finally, regarding other forms of communication, it is safe to say that the IRS is not even in the 21st century yet.  They do not use unsolicited e-mail (which itself is so 20th century), text messages, or any kind of social media to discuss your personal tax issues.

You know the old saw about “a fool and his money are soon parted.”  Don’t let fear and ignorance make you that fool.

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Nappi-TedToday’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi.

Well, we have reached the final day of a very informative week at the 50th Annual Heckerling Institute on Estate Planning in Orlando, FL.

It was a short day, but filled with great speakers such as Natalie Choate, Todd Angkatavanich, Martin Shenkman and the famous Jonathan Blattmachr.

Natalie Choate presented on “Estate Planning for Retirement Benefits: A Step-by-Step, How-to-Do-It Manual for Practitioners.” Her presentation was a practical guide to estate planning for those troublesome assets called retirement benefits. She explains how to deal with retirement benefits as part of a client’s estate plan: whom to choose as beneficiary of the plan; how best to leave the retirement benefits to the chosen beneficiary if he/she is a minor, a spouse, a “second spouse,” a disabled beneficiary, a charity, or “other”—or some combination of the foregoing. She discussed how retirement benefits fit in (or don’t fit in) with federal transfer tax planning; and the special rules you need to know when planning for retirement benefits.

The second session covered by Todd Angkatavanich was titled, “Soup to Nuts: A Practitioner’s Guide Through the Minefield.” Todd’s presentation provided a discussion of the many estate and gift tax pitfalls that practitioners need to keep in mind whenever structuring transactions between family members. He discussed a broad overview of the statutory provisions of sections 2701 through 2704. Additionally, he presented proactive planning tips to help practitioners navigate the Chapter 14 minefield.

There are a number of gift and estate tax issues that may arise under Internal Revenue Code (the “Code”) Chapter 14 in connection with transfers of business interests or transfers in trust when family members are involved. Contained within Chapter 14, generally there are numerous gift and estate tax provisions that are designed to discourage certain types of transactions or arrangements entered into between members of the same extended family. The violation of one or more of these provisions can cause an unanticipated deemed gift or increase in the value of one’s estate, which can potentially result in substantial gift or estate tax. Many of these sections of the Code are written very broadly and are not intuitive and can unexpectedly apply even when a transaction has not been structured with the intention of achieving estate or gift tax savings, or in circumstances where wealth transfer may not even be the objective.

Finally Marty Shenkman and Jonathon Blattmachr closed the conference with their presentation on “Practical Planning Strategies for the Future.” Their presentation reviewed several of the key planning strategies covered during the week, and explained why and how some of them will remain viable strategies for the future. They offered practical suggestions for how practitioners can prepare and grow despite the uncertainty the future presents. They discussed how estate planning will become increasingly dependent upon investment strategies and results, and explained why planning will be more predictable with greater investment certainty.

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Heckerling Day 4

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

Today started with M. Read Moore’s recognition that U.S. estate planners must now work in a global environment. We can no longer only concern ourselves with the laws of the United States. We must be educated with respect to how various countries will treat the use of certain tax planning devices/methods.

We rely on the widespread use and acceptance of trusts, simplicity in organizing companies and expediency in financial transactions. However, governments and regulators around the world are often skeptical of these features, among other things, suspecting them of facilitating money laundering and tax evasion.

For example, many governments and international organizations think the following are sound public policies:

  1. Requiring financial institutions, lawyers, accountants, trust and company service providers and others providing services that involve some financial component to determine who actually owns and controls an entity, including in the case of a trust, most or all of the trust’s beneficiaries.
  2. Having a central register of shareholders of companies and settlors and beneficiaries of trusts that is available for review by law enforcement authorities, interested persons or perhaps even the general public.
  3. Requiring financial institutions and other persons involved in handling money to disclose information about their foreign customers and clients to governmental authorities or home countries on an automatic basis.
  4. Requiring lawyers advising clients outside of litigation to disclose known or suspected violations of domestic and foreign law to governmental authorities without tipping off the client.

Although the United States is a member of the Financial Action Task Force (“FATF”), its customer due diligence rules lag behind those in much of the rest of the world. Currently, U.S. financial institutions must generally verify the identity of their customers by taking a copy of their driver’s license or passport and proof of address. Many financial institutions go beyond this with respect to entities and ask for copies of relevant organizational documents, including trust agreements. The United States, however, currently does not require financial institutions to identify the beneficial owners of entity accounts except in certain (two) limited situations.

However, in August 2014, the Department of the Treasury, through the Financial Crimes Enforcement Network or “FinCEN,” proposed certain regulations that would require U.S. financial institutions to increase the information they are required to gather.

Mark R. Parthemer spoke in detail about concerns and problems one faces when trying to select a Trustee. He aptly named his discussion, “The Trustee Selection Minefield.” He focused on the tax and non-tax factors that must be considered in the choice of Trustees, such as the grantor’s desire to keep as much control over the assets and beneficiaries. These choices have to be reviewed in light of the potential pitfalls of appointing a person who can cause complications under IRC Section 2036, 2038, 2014 and situs.

Among the Non-Tax Factors to consider are:

  1. Legal Capacity
  2. Personal attributes of Trustee
    • Judgement and Experience
    • Impartiality and Lack of Conflict
    • Investment Sophistication
    • Permanence and Availability
    • Sensitivity to Individual Beneficiaries Needs
    • Accounting, Tax Planning and Record Keeping
    • Fees
  3. Situs Selection issues

Among some of the more common gift tax issues are:

  1. Complete or incomplete gift
  2. Should there be an Ascertainable Standard (HEMS)

Estate tax issues such as who is the “Grantor” is important because of IRC Sections 2036 & 2038 have estate inclusions where certain powers retained by the Grantor will bring the Trust back into the Estate.

To avoid inadvertent adverse tax effects, consider using a “savings clause” to limit automatically any retained powers of the grantor or of the beneficiary.

It is important to understand what the grantor is trying to accomplish in order to determine the powers and limitations that must be incorporated into the trust.

Nancy G. Henderson explored the strategies to use when a poorly drafted or “stale” trust which she defined as an “existing irrevocable trust no longer serving a client’s estate planning objectives.” However, such old and cold trusts can be diamonds in the rough that simply need a little polish to shine again. Her session examined in-depth the use of trust-to-trust transfer techniques such as loans, guarantees, purchases, consolidations, distributions, joint investments and preferred partnerships, among others, to rejuvenate existing inter-vivos and testamentary irrevocable trusts to assist the client in meeting his or her new estate planning goals.

Some alternative strategies for handling a stale trust:

  1. Just Ride it Out – A Stale Trust might be ignored and minimally maintained. The grantor hopes that, with the passage of time, it will be consumed and disappear.
  2. Use It for the Benefit of the New Trust – Rather than abandon the Stale Trust, another trust might be created (the “New Trust”) and the assets of the Stale Trust might be used to grow the assets in the New Trust.
  3. Partner Up with a New Trust – Sometimes the hidden value of the Stale Trust can be realized by partnering with a New Trust in some form of joint venture or joint investment.

Richard S. Franklin’s session on Lifetime QTIPs underscored the multipurpose use of them. These are increasingly the strategy of choice for exclusion use, but these versatile trusts also facilitate minority interest valuation savings, asset protection, gift tax valuation protection, sales to defective “grantor” trusts, and more. His session provided ideas for specific uses (see below) of Lifetime QTIPs and practical implementation guidance.

Some of the Specific Uses of Lifetime QTIPs:

  1. Funding Testamentary use of Donee Spouse’s Applicable
    Exclusion Amount
  2. Funding Lifetime use of Donee Spouse’s Applicable Exclusion Amount
  3. Funding use of Donee Spouse’s GST Exemption
  4. Funding Lifetime use of Donor Spouse’s Applicable Exclusion Amount
    • Formula QTIP Election
    • Simulated FAC Gift
    • Formula Disclaimer
    • Decedent’s Surviving Spouse v. Transferor’s Spouse.
  5. “Grantor” By-Pass Trust
  6. Minority Interest Planning
  7. Donee of Excess Value under Formula Allocation Gift or Sale (a la Petter)
  8. Sales to Defective Grantor Trusts
  9. Income Tax Basis Adjustment
  10. Creditor Protection Planning
  11. Elective Share Planning
  12. Pre-Separation/Divorce Planning

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

Today at Heckerling, we continued to hear from some of the most prestigious presenters in the estate and trust arena.

In the morning, we heard from Bernard Krooks of Littman Krooks LLP, NYC on how special needs trusts (“SNTs”) and special needs planning are becoming increasingly more complex and important. Mr. Brooks addressed how more and more clients have family members with special needs who could benefit from a properly constructed plan. “Even high-net‐worth clients are not immune from having to deal with these issues.” The session focused on the different types of special needs trusts, when they should be used, relevant tax considerations and certain drafting and administrative issues to be aware of when designing these plans.

One of the goals of special needs planning and SNTs is to allow the individual with disabilities to qualify for government benefits while also having a source of funds that can be used to pay for services, assistance and things that government programs will not pay for. By doing so, the quality of life of the individual with disabilities is improved. Special needs planning may be appropriate for someone who is already receiving government benefits or for someone who may potentially need government benefits in the future.

An alternative to a SNT is the ABLE account. ABLE accounts are modeled after IRC Section 529 plans and provide a mechanism to fund an account in the name of certain individuals with disabilities. The funds in that account accumulate income tax-free, and if certain conditions are met, the assets contained in the ABLE account will not disqualify the beneficiary from government benefits. Although ABLE accounts are not a type of SNT, it should be discussed with the client as a possible alternative. ABLE accounts are easy to setup and administer; however, they do have certain limitations.

Session two included the renowned Richard B. Covey, senior counsel with the New York City law firm of Carter, Ledyard & Milburn Turnry P. Berry of Wyatt, Tarrant & Combs LLP from Louisville, Kentucky. In celebration of the 50th Anniversary of the Heckerling Estate Planning Conference, Richard Covey was invited as a special guest speaker. He spoke at the first conference 50 years ago! He addressed certain tax law changes and how the conference has grown tremendously over  50 years. This year, there were approximately 3,200 attendees.

Before lunch, Dennis I. Belcher of McGuireWoods, LLP from Richmond, Virginia, Carol A. Harrington of McDermott Will & Emery LLP in Chicago, Illinois and Jeffrey N. Pennell from the Emory University School of Law in Atlanta, Georgia served on the Questions and Answers panel to respond to numerous questions from the audience. The following are just some of the questions, concerns and comments that were addressed during this very informative session:

  • Concerns and questions regarding the implications when a Trustee fails to issue Crummey letters to beneficiaries were addressed. Carol Harrington informed the audience that there are three cases that support the position that Crummey letters need not be issued. The only support that the IRS has is a PRL, which is not authority. Although “you should not ignore issuing Crummey notices, the Government has no authority to disallow the annual exclusion if Crummey notices are not issued.”
  • Various questions on the potential income and estate tax issues regarding the discounted valuation of promissory notes between related parties were discussed. The panelist reminded the audience to beware of cancellation of indebtedness income. However, if a debt is cancelled as a gift, bequest or inheritance there is no cancellation of indebtedness income.
  • What amount of time should be spent and what level of due diligence must an executor perform in order to be comfortable that the decedent did not make unreported lifetime taxable gifts? There is no need to be “Sherlock Holmes,” but the executor must make a reasonable effort. Consider performing those procedures that the Service would perform if the estate is being examined (reviewing the decedent’s bank/brokerage accounts for approximately 3 years prior to death, review personal property insurance records, ask for a transcript from the Service to see if gift tax returns were previously filed, etc.). If it is determined that unreported gifts were made, the executor has a fiduciary obligation to make certain that gift tax returns are properly filed and the applicable taxes paid. It is always advisable for an executor to “hold back” a reserve and not distribute all the assets until the estate is “closed”.
  • The panelist addressed their concerns and the lack of guidance as to the new consistency of basis rules that were passed as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. For estate tax returns filed after July 31, 2015, executors are required to file a return reporting the value of property to each person acquiring any interest in property included in the decedent’s estate.
  • Gift splitting for gift and GST purposes where addressed. You must be able to split a gift for regular gift tax purposes in order to split for GST purposes.
  • Who is required to pay the appraisal fee of assets in a QTIP trust that is includable in the estate of the surviving spouse? The QTIP trust or the probate estate? The panelists felt that it is an obligation of the executor. A possible solution might be to have a provision in the will that governs the payment of such expenses. Although there is authority to charge the QTIP with its allocable share of estate taxes, there is no authority as to the payment of administration expenses.
  • Although you cannot get portability if an estate tax return is not filed, you may be able to get 9100 relief, but it can be expensive. Can the preparer be held responsible for that fee?
  • A discussion on what should be considered as a reasonable method to determine allocation of a bundled fee between those costs that are subject to the 2-percent floor and those costs that are not. (Consider analyzing time records, the nature of the underlying investments, etc.). Although the panelists agreed that the likelihood of a Form 1041 being examined by the Service is very low, they did feel that the issues pertaining to bundled fees may trigger examinations.
  • The panelists discussed sales to intentionally defective trusts and the importance of having the grantor initially gift/fund the IDGT with sufficient seed money to be used as a cash down payment for the sale. As a “rule of thumb”, 10% of the purchase price is often used in determining the initial gift into the trust. The panelists were uncomfortable with less than 10% and recommended using 10-20 %. It is important that the transaction be properly structured.
  • If possible, the panelists advised not having a parent be the manager of the LLC; however, some clients refuse to give up that control.

There were many other interesting topics and comments discussed during this session.

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ted-nappi-300dpiToday’s blog post about the Heckerling Institute is written by Withum’s Private Client Services Partner and Practice Co-Leader, Ted Nappi.

Some interesting topics were discussed today, starting with Joshua S. Rubenstein speaking on the top of Heads I Win, Tails You Lose: Advising the Wealthy in Times of Protracted and Unprecedented Political, Economic, Cultural and Scientific Change. This session considered how difficult it has become to do estate planning and wealth preservation for clients when the rules are constantly changing. Tax enforcement changes have led to an over whelming number of new reporting obligations including FATCA. Accesses to information, reasonable expectations of privacy, and changes in the nature of families have added considerable complexity to the client relationship. What can be done?

  1. Plan for change.
  2. Plan for controversy
  3. One size does not fit all – use customized solutions and a variety of vehicles/approaches
  4. Where possible, keep it flexible and simple.
  5. Where possible, be transparent – avoid surprise.
  6. Tax laws and compliance will become more uniform.

Paul S. Lee next spoke about using partnerships in estate planning. ATRA has sprung income tax planning and tax basis management to the forefront of estate planning. Entities taxed as partnerships are the ideal vehicle in this new model. The presentation discussed how partnerships can be used to change the basis of assets, maximize the “step-up”, defer and shift tax items (income and deductions), and transfer wealth in a world of diminishing valuation discounts.

The enactment of ATRA marked the beginning of a “permanent” change in perspective on estate planning for high-net-worth individuals. The large gap between the transfer and income tax rates, which was the mathematical reason for aggressively transferring assets during lifetime, has narrowed considerably, and in some states, there is virtually no difference in the rates. With ATRA’s very generous applicable exclusion provisions, the focus of estate planning will become less about avoiding the transfer taxes and more about avoiding income taxes. The speaker touched upon the use of a concept of “preferred interests” in a partnership which can be used to shift income between partners to maximize both income and transfer taxes. More of this concept will be covered at a later session. A very interesting concept of “basis strip to maximize step-up” and moving tax basis under Section 734 for partnership assets was discussed. This concept can generate significant income tax savings under the right circumstances.

In the afternoon, Robert A. Romanoff spoke on the topic of Don’t Be Afraid of the Dark—Navigating Trusts Through the NIIT. Trustee selection and trust design can dramatically affect the application of the Net Investment Income Tax under section 1411 to trusts. The presentation focused on the application of the NIIT to trusts and reviewed strategies to avoid or minimize imposition of an additional 3.8% tax.

It remains to be seen whether the NIIT will become a permanent feature of our income tax system or merely a surtax that was enacted and repealed within a relatively short period of time. We have encountered temporary tax measures before, such as the one-year repeal of estate tax and imposition of a carryover basis regime in 2010. The speaker indicated that even if the NIIT proves to be a short-lived tax, it would not be prudent or in clients’ best interests for practitioners to wait until after the 2016 elections to consider whether and how to incorporate NIIT planning into the design and administration of trusts.

One of the primary challenges created by the enactment of the NIIT is the tension between techniques that may reduce or eliminate exposure of NIIT and the value of long-term accumulation of wealth in trusts for estate tax minimization. This tension existed prior to 2013 but the enactment of the NIIT has only made the issue more pronounced. How clients respond to this tension will depend both upon their intent behind the creation of a trust and the techniques we create to reduce exposure to NIIT.

From a trust design standpoint, there are issues to consider and changes in drafting may be in order. First, it may be advantageous to consider whether a one-pot discretionary trust could be used to facilitate distributions to beneficiaries who would not be subject to NIIT. Changes in drafting of trusts may also be warranted in order to afford a greater measure of flexibility to a trustee to plan to reduce exposure to NIIT. The selection of a trustee or fiduciary, already a critical issue for any trust, will be an even more important consideration for trusts that are intended to own interests in closely-held businesses given that the imposition of NIIT on business income and covered gain will likely be based on the activity of the trustee. For trusts that are intended to own stock in an S corporation, a decision whether to be taxed as a defective grantor trust, as an ESBT or as a QSST may be driven (at least in some measure) by the consideration of whether one or more of the grantor, trustee or beneficiary is active in the underlying business.

Changes in the administration of existing trusts may also be warranted in view of the very low threshold at which NIIT can be imposed on trusts. Trustees may decide to distribute a greater measure of trust income or even capital gains in order to reduce or eliminate overall exposure to NIIT. That must, of course, be consistent with standards for trust distributions. Trustees must also consider how to allocate trust expenses between net investment income and non-investment income and the impact of those allocations on overall imposition of NIIT. Finally, trustees will need to take a fresh look at the investment of trust assets in light of the NIIT. In certain circumstances, the potential imposition of NIIT on trust income may drive changes in the overall investment mix of assets held by a trust. The enactment of the NIIT has created new wrinkles in the design and administration of trusts. How taxpayers and their advisors respond to the new tax and plan for the future is a work in progress.

Diana S.C. Zeydel finished up the day speaking on the topic of Effective Estate Planning for Diminished Capacity—Can You Really Avoid a Guardianship? The presentation examined the effectiveness of estate planning documents when a client begins to lose capacity. She addressed the questions, “Can all of the client’s personal and financial needs be addressed with proper planning?” and “What are the best practices to ensure that a client’s wishes are fulfilled when the client has become vulnerable?”

Typically, estate planning is undertaken when the client is well, and the possibility of incapacity may seem remote and unlikely to occur. In addition, the subject is unpleasant for the client to contemplate and may be uncomfortable for the estate planning professional to discuss except in general terms. Yet the persons appointed to act in a client’s stead when the client is unable to act personally will have significant powers, and the client will no longer able to protect himself or herself against abuse of those powers.

Planning in anticipation of a client’s diminished capacity or incapacity is challenging. A full discussion of the options and their limitations will assist the client and his or her family in making appropriate decisions. In an egregious case of abuse, or severe family disharmony, a trip to guardianship may be unavoidable. Understanding the process and the estate planner’s ability to help guide the outcome will be key to preserving to the greatest extent possible the client’s wishes.

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Heckerling Day 1

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.

Greetings from the University of Miami’s 50th Annual Hecklering Institute on Estate Planning, the largest continuing legal education conference in the country. Over 3,200 of attorneys, accountants, trust officers and other financial advisors gather for a week in Orlando, Florida to listen to the top speakers in estate planning.

The conference kicked off with a panel discussion on recent developments by Dennis Belcher, Carol Harrington and Jeffrey Pennell. Although less estate tax returns are being filed, estate planners were busy filing significantly more gift tax returns in 2015 due to the low interest rate environment. Due to lower estate tax rates and increasing capital gain, net investment tax and state income tax rates considerations of income tax planning and cost basis in assets play an important role in estate planning.

Significant discussion for the recent consistency of basis rules passed as part of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. These rules were to eliminate perceived abuses of difference in cost basis reporting from assets included on estate tax returns versus when beneficiaries sold the inherited assets on their income tax returns. It was the panel’s belief that this was an exception basis and did not believe that this would generate the expected $1.5 billion revenue as indicated in the legislation.

For estate tax returns filed after July 31, 2015, executors are now required to file a return reporting the value of property to each person acquiring any interest in property included in the decedent’s estate. The IRS provided relief under Notice 2015-57 that these returns would not be due until February 29, 2016, and just recently issued draft copy of the Form 8971 and instructions. The form is required to be filed within 30 days of the filing of estate tax return. Now that the form is released more questions arise. Which estates are required to file this form? The draft instructions indicate that the form is not applicable for estates under the estate exemption amount, currently $5.45 million. However, does this include estates filing for portability? What about estates that are not taxable due to the marital or charitable deduction, there is little guidance to know if these new rules apply to these estates. The information on basis needs to be provided to the beneficiaries of the estate within 30 days after the return’s due date. Most estates are not administered within 30 days after the filing of the estate tax return, so how is the executor to make the determination which asset is distributed to which beneficiary of the estate? Will this lead to over reporting of the information of basis of the assets to the beneficiaries. As the panel indicated, the amateurs (Congress) created the law and the experts (the IRS) are trying to write the regulations and returns to implement the law.

The next anticipated topic was a discussion on the expected proposed regulations on valuation discounts. This is not new as these rules have been either part of the IRS/Treasury Priority Guidance Plan or the administrations legislative proposals since 2003. The IRS has indicated that the proposed regulations may have a dramatic impact on the valuation of interests in closely-held corporations or partnerships that are transferred to family members. IRS officials first announced that these regulations would be issued by Labor Day 2015, but estate planning professionals are still waiting for the announcement of the proposed regulations and the effective date. Will it be effective the date of the proposed regulation or the date the regulations becomes final? Will it be effective based on when the entity was created or the date of the gift? Will it only impact entities which own marketable securities and other passive assets or will these regulations eliminate valuation discounts usually available for operating entities? Planners are in a wait and see mode until the proposed regulations are finally issued.

It is the expectation with the election that there will be no significant changes to the federal estate tax law this year. However, in reviewing the administration’s legislative proposals and IRS priority guidance plan can give the estate planning community hints for future changes, such as the consistency of basis rules that became law this year. One administration proposal is to modify the rules for Grantor Retained Annuity Trusts (GRAT). Previous proposals were to have a minimum term of ten years (to eliminate rolling GRATs) or minimum remainder interest of 10% (to eliminate Walton zero GRATs). The administration recent proposals regarding GRATs were minimum term of ten years, minimum remainder interest of the greater of 25% of the value of the assets contributed to the GRAT or $500,000, no decrease in annuity payments during the term of the GRAT and eliminate transactions between the trust and the grantor. These new rules will significantly curtail the benefits of GRATs and if GRATs are being considered by clients these GRATs should probably be completed if it is reasonable to do so.

Another administration proposal was to “eliminate the largest single loophole in the entire income tax code” by eliminating stepped-up basis rules, treating bequests and gifts as realization events subject to capital gains tax. And this would be in addition and not a replacement of the estate tax. While the panel and most in the audience agree this proposal has zero chance of becoming law in this Congress it could be an indication of future bargaining of new law. If one party wants to eliminate the estate tax the other party may negotiate for the elimination of step up in basis. It is hard enough to have clients provide the correct cost basis of investments on their individual tax returns while they are alive, how is the executor going to know the cost basis of previous purchased investments when the client is deceased. I think this law should only be passed if one member of Congress can determine the cost basis of AT&T and spin off companies from 1,000 shares of AT&T owned prior to the baby bell divestiture in 1984 and I won’t even complicate the calculation for dividend reinvestment.

Well that’s all for today! More commentary to come from the other Withum Estate Tax Partners attending the conference.

Stay tuned.

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heckerlingThe most prestigious estate planning conference of the year is starting this week, the 50th annual Heckerling Institute on Estate Planning, located in Orlando, Florida. Our recent merger with Averett Warmus Durkee, P.A. (AWD), a $15 million Central Florida CPA firm with about 100 staff members, makes Orlando a hot spot for activity this month.

Heckerling is the largest and most prestigious estate planning conference in the country. This year’s Institute has again drawn more than 3,000 attendees. Several Withum partners specializing in estate planning and private client Services are attending this week’s Institute and will be reporting on important topics being discussed. This is the first of a series of blogs on the Institute.

Stay tuned!

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