Proposed regulations were issued in November under Code Section 2010 addressing the possibility of “clawback” when the temporary high exemption amount reverts to pre TCJA levels (adjusted for inflation).  The good news is that the proposed regulations state that clawback will not occur if one fully uses his or her exemption amount prior to sunset.  The bad news is that the proposed regulations did not address the issue of what happens if you only gift the temporary exemption increase during the period when the temporary high exemption is in effect.

The consensus at Heckerling was that if you only gift the exemption increase you will not have any remaining exemption left after sunset, other than annual increases for inflation.  So it is “use it or lose it.”

Here in Texas and other community property states, we can offer you ways to fully utilize the temporary high exemption amount without losing income on gifted assets and obtain some asset protection in the process.   The time to act is now, however, since it is very possible that the current political environment could result in a termination of the temporary high exemption amount as early as 2021.

In theory conservation easements are simple- a landowner grants a perpetual easement on a portion of his land for a charitable purpose and gets an income tax deduction for the reduction in value to the land encumbered by the easement.   Many wealthy landowners have successfully done conservation easements.  However, they have been highly abused over the years with inflated appraisals and syndication of the concept.

Recently, the Tax Court in Pine Mountain Preserve channeled Meatloaf’s famous song, and held that two out of the three conservation easements claimed were bad.  The issue here wasn’t inflated appraisals but rather improper reservations of future residential development of sixteen homes on the easement property without specifying where this potential residential development could be done.  This meant that the easement was not granted “in perpetuity” as required by Section 170(h)(2)(C) the Internal Revenue Code.

Bottom line is this- if you are going to consider a conservation easement, apply the KISS principle.  The statute is straightforward, keep the deal simple and get a highly qualified appraiser that follows best practices.

The legal role of the probate lawyer is to admit the decedent’s will to probate, advise the newly appointed executor on their responsibilities and duties, help the executor inventory all of the assets of the decedent’s estate, settle debts and distribute the assets to the beneficiaries named in the will.  Of course, numerous legal issues may arise, which complicate this basis process, but that is the essential role of the probate lawyer in the conventional sense.

But there really is more.  In many cases, particularly an unexpected death, the probate lawyer must deal with a client who is emotionally devastated.  The client may be depressed, panicked or angry or some combination of all of the above, and the lawyer must understand this and know how to respond.  The probate process is necessary, but the client may not want to deal with it.  The lawyer must be compassionate, responsive and diligent.   For example, the client may be more comfortable meeting at home rather than the office.  Things have to be done, but how they are done can make all the difference.

One of the changes made by the new tax act was to increase the standard deduction to $12,000 or $24,000 for a married couple filing jointly.  The upshot of that will be that many people will claim the standard deduction rather than itemize.  If they make any charitable contributions but total itemized deductions are still less than the standard deductions, those deductions will no longer be deductible.

There is a way to still achieve the charitable deduction, however, if the taxpayer can bunch his or her charitable contributions into a single year.  For example, if the taxpayer makes charitable contributions of $6,000 per year and has the financial ability to make a contribution of $24,000 in one year, the taxpayer’s contribution of $24,000 will exceed the standard deduction of $12,000 and it will benefit the taxpayer to itemize.

If the charity or charities would benefit more by receiving the $6,000 per year rather than $24,000 in one year, the taxpayer can establish a donor advised fund.  The donor advised fund is a mutual fund in which you make tax deductible charitable contributions to the fund and establish an account.  The contributed funds remain in the account until the taxpayer decides to direct them to charity.  So in this case the taxpayer would contribute $24,000 to the fund in year one, and could direct the fund to distribute $6,000 per year to his or her preferred charity or charities.

The new tax act temporarily increases the lifetime estate exemption to $11.2 million.  This change took effect on January 1, but sunsets on December 31, 2025.  On January 1, 2026, the exemption reverts back to the current $5.6 million, subject to inflation adjustment.  It is quite possible that the larger exemption doesn’t make it to December 31, 2025, if there is a Democratic administration and Congress come January 2021.

The upshot is that for wealthy clients there is a window to make lifetime gifts to take advantage of the temporary increase in the lifetime exemption.  There are many ideas to consider, but in this blog post I want to mention the spousal lifetime access trust (SLAT).   With a SLAT the grantor makes a gift to a trust that benefits his spouse or his spouse and descendants.   The spouse may serve as trustee, if the trustee is limited to an ascertainable distribution standard.

If both spouses do SLATs, a couple has the opportunity to “lock” in the increased exemption amount and transfer a whooping $22.4 million free of estate tax to younger generations.  With discount planning the amount could be even bigger.

If both spouses seek to do SLATs they must avoid the reciprocral trust doctrine, but that can be done with careful planning.

If you own real property outside of your state of residence when you die, you will have to conduct an ancillary probate in that state to transfer title to the property to your beneficiaries.  In some states, like Texas, ancillary probate is a simple process of recording copies of the out of state probate in the state in which the real property is located.  In others, the process is more complicated and will require hiring an attorney in the state and prosecuting a court proceeding.

One way to avoid ancillary probate is to form a limited liability company (LLC) or limited partnership (LP) to own the out of state property.  If the client does this then he will no longer own real estate out of state.  Instead, he or she will own an interest in an entity that owns real estate in that state.  Accordingly, there is no longer the need to prosecute an ancillary probate.  The entity can be formed in the client’s state of residence, the state the property is located or some other jurisdiction.  It doesn’t matter.  Use of the LLC or LP also adds a layer of asset protection for the client.

Note that using an LLC or LP doesn’t mean the client will not owe property taxes or income taxes (if a rental property) in the state in which the property is located.

As we wait to see if Congress can pass a tax bill, we now know that estate taxes for the very wealthy will not be repealed immediately or at all.  The House bill that was passed yesterday bumps the lifetime exemption to $10 million indexed for inflation and retains the estate tax through 2023.   The Senate bill, which is still being debated, doubles the existing lifetime exemption and retains the estate tax indefinitely.   It is important to understand that since 60 votes was impossible in the Senate, a bill will have to be passed through reconciliation.  This means it will be subject to sunset in ten years, so Congress would have to act to make it permanent.  If not, the law will revert to the way it was before the bill was enacted into law.

But any bill may have a much shorter life.  Polls show the bills are extremely unpopular.  Polls also show historic unpopularity for the President and the Republican Congress.  Accordingly, there is a significant possibility that any tax bill would be partially or completely undone by the next Administration and Congress.

Accordingly, if a tax bill is enacted into law, wealthy individuals would be wise to consider taking advantage of the increased exemption amounts by making gifts next year.  As previously noted on this blog, discount planning is alive and well again.  So leveraging the large exemption to migrate wealth downstream presents a compelling opportunity.  This is particularly so when transfers are made to perpetual dynastic trusts.  Next year may be a very busy year.

 

A power of attorney is a document in which you give someone else the power to act on your behalf for financial transactions.  Texas, like many states, has adopted a statutory durable power of attorney form.  The form has a laundry list of transactions from which you can pick and choose from, and you can add additional powers as you wish.  The most significant issue to decide is whether to make the power effective immediately or become effective upon disability.  The problem with making the power effective upon disability is that the powerholder will have to prove disability to the third party to whom the power is presented.  Accordingly, I usually recommend that the power of attorney be effective immediately.  Now there have been situations in my career, where husband and wife didn’t trust each other, and were insistent on making the power effective upon disability.  They probably should have come to see a marriage counselor, instead of an estate planning lawyer.

In certain cases, such as where the the client has complicated assets, it is recommended that the client go beyond the statutory form and prepare a power of attorney that addresses specific transactions that might arise in the management of these complicated assets.

Powers of attorney are a simple but important piece of any adult’s personal planning.  Usually used in the case of an illness or travel, they can be a lifesaver in more dire situations.  I remember years ago a client came to me with the follow situation.  Her husband had disappeared (his car was found abandoned on the way to work), but no body was found.  Since he couldn’t be presumed dead under Texas law for four years,  the wife couldn’t sell the family home.  With the husband being the sole provider, she was forced to give up the home in foreclosure.

Proposed Valuation Discount Regulations Under Section 2704

This week the Treasury pulled proposed regulations under Code Section 2704 that would have virtually eliminated valuation discounts for family limited partnerships. https://www.journalofaccountancy.com/news/2017/oct/treasury-will-pull-sec-2704-and-other-burdensome-rules-201717601.html

This was not surprise, as a prior blog post noted.  So there is a window that is wide open for discount planning, and this planning will be useful whether or not the estate tax is repealed.    This is because even if there is repeal (i) it will be done through reconciliation, meaning the estate tax very likely will reappear in ten years and (ii) the gift tax will remain.

Republican Opposition to Estate Tax Repeal Emerges

Reports are emerging that several Republicans oppose elimination of the estate tax. http://www.foxbusiness.com/features/2017/10/05/senate-gop-hits-resistance-on-estate-tax-repeal-from-republicans.html   In addition, there are also reports that the Trump administration is thinking of removing it from the tax reform package. https://www.reuters.com/article/us-usa-tax-estate/white-house-weighs-abandoning-estate-tax-repeal-in-republican-tax-push-idUSKCN1BU2YS  Regardless, the path to tax reform is a complicated one and most experts do not think it is possible to get a bill to the President by the end of the year.

 

 

 

A recent Tax Court case, Estate of Minnie Lynn Sower, http://www.ustaxcourt.gov/UstcInOp/OpinionViewer.aspx?ID=11392, illustrates that, even though there is no estate due and a 706 return is filed to claim a deceased spouse’s unused exemption amount (“DSUE”) to preserve portability, care must still be exercised in preparing that return.

In Sower, the Tax Court re-examined the estate of the first spouse to verify that the DSUE claimed by the second spouse on her estate tax return was correct.  As it turned out, the first spouse failed to report some lifetime gifts.  The result, with penalties assessed, was that virtually all of the DSUE was lost.  This was the case even though the executor of the first spouse had obtained a closing letter.

The Tax Court rejected the argument that the IRS was conducting a second examination of the first spouse’s return.  Instead the Court said the IRS was examining the first spouse’s return only to properly evaluate the second spouse’s DSUE for her return.  The Court further rejected the estate’s argument that looking at the first return violated the statute of limitation because the portability provision has no statute of limitation.  As Stephen King once wrote “eternity is a long time.”