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Saturday, January 11, 2020

Private Foundations Gain a Small Tax Break on Investment Income

The SECURE Act stole all of the end of year thunder regarding changes in federal taxes. However, other changes were enacted. One of these was the repeal of Code Section 4940(e).

Code Section 4940 previously imposed a 2% excise tax on the investment income of private foundations. Section 4940(e) reduced that tax to 1% for foundations that increased their qualifying distributions over the average for the prior 5 years.

So as to simplify this small corner of the tax universe, this 2%/1% arrangement is now history. In its place the Taxpayer Certainty and Disaster Tax Relief Act of 2019 provides for a flat 1.39% rate.

Saturday, December 28, 2019


Taxpayers who fail to file an FBAR to report a foreign account can escape penalty if they can show reasonable cause for the failure (if the failure to file was nonwillful). A recent district court case failed to allow for reasonable cause - click here for a condensed summary of the good and bad facts and the court’s conclusions. The case illustrates that the failure of a taxpayer to disclose the account on Schedule B of their Form 1040 is a big obstacle to a finding of reasonable cause.

U.S. v. AGRAWAL, 124 AFTR 2d 2019-6970 (DC WI 2019)

Saturday, December 21, 2019

Taxpayers with Conduit Trust Planning Should Consider Revising that Planning ASAP

Taxpayers often direct their IRA accounts to be paid into trust for beneficiaries at their death. This is often done to accomplish the usual benefits of trusts, including limiting beneficiary access to funds, protection of trust assets from creditors, and third party management over trust assets. If accomplished through properly drafted trusts, the trusts can allow for the payouts to be stretched out over the lifetime of the trust beneficiaries. Such stretching of distributions also stretches out the taxability of those distributions, thus allowing for substantial income tax deferral opportunities.

Qualifying a trust for maximum deferral involves meeting various regulatory requirements in the form of what is commonly referred to as an “accumulation trust.” As a safe harbor method of meeting some of these requirements, accumulation trusts often are drafted so as to qualify as “conduit trusts.” A conduit trust for these purposes requires the distribution to the beneficiaries of no less than the required minimum distributions received by the trust from the subject IRA account in the tax year of receipt. Such required distributions are not usually problematic since as a stretch IRA, the required minimum distributions in any given year are usually not that large.

Along now comes the Setting Every Up Community for Retirement Enhancement (SECURE) Act. Enacted into law on December 20, 2019 and effective January 1, 2020, one aspect of the Act is an end to stretching distributions over the lifetime of trust beneficiaries other than spouses (with some exceptions). Instead, such accounts must be paid out no later than 10 years after death of the account owner.

This may adversely impact taxpayers who have conduit trusts named as beneficiary of their IRA accounts. Commentators are noting that the distribution at the end of the 10 year term out of the IRA into the trust will likely constitute a required minimum distribution that must be paid out to the trust beneficiary pursuant to the conduit provisions. If this turns out to be correct, then the purpose of having a trust to receive the IRA payouts will be materially dominished or defeated, since all of the IRA balances will have to go into the trust, and then out to the beneficiary, within 10 years of the death of the account owner.

So taxpayers with conduit trusts built into their planning may want to consult with their planners to see if some adjustment in planning is called for, such as removing the conduit aspects from the trust so that the trust can continue for periods longer than the 10 year deferral period. Mixing these rules with the limited circumstances under the Act that may allow for deferral (e.g., as to spouses and minors) may also complicate the original planning and provisions. How any new regulations may impact these conclusions and planning remains to be seen.