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Saturday, March 09, 2019

Bernie Sanders’ Tax Proposals

We all know that come 2025 the aggregate transfers covered by the unified credit for estate and gift taxes will revert to pre-Trump levels (subject to adjustments for inflation), thus ensnaring more taxpayers in the estate and gift tax web. Of course, should a Democrat be re-elected in 2020, changes in taxes to the higher side may occur even sooner than 2025.

A recent tax bill filed by Senator Bernie Sanders, a candidate for President, gives some insight about what tax legislation might look like if a Democrat is elected – more so if he is elected, but perhaps also as to other Democratic candidates.

Some key changes he would make to the high side include:

a. Increases in estate, gift and GST rates, to a maximum of 77% for members of the billionaire’s club;

b reduction in the unified credit exclusion amount to $3,500,000;

c. elimination of entity valuation discounts as to entity assets that are not business assets;

d. imposing a 10 year minimum term for grantor retained annuity trusts;

e. subjecting grantor trusts to estate tax inclusion at the death of the deemed owner;

f. limiting the GST exemption to a 50 year term; and

g. reduction in the annual gift tax exclusion.

These changes would be good news for tax planners, and bad news for those of moderate or higher wealth.

The old Chinese curse says – may you live in interesting times. I think most of us can agree, at least from a tax perspective if not a political perspective, we are all cursed under that measure.

S.309 — 116th Congress (2019-2020)

Sunday, March 03, 2019

Beneficiaries Hit with Transferee Liability Suit for Estate Taxes 19 Years After Date of Death

A recent case illustrates how beneficiaries and recipients of property from a decedent do not receive the property free and clear from estate tax liabilities. If estate taxes are not paid, the IRS can seek collection of the taxes from such beneficiaries and recipients as transferees under Code §6324(a)(2). And it may be a long, long time before the IRS ‘comes a knocking.’

The case illustrates to us that:

a. Transferee liability is not limited to those who receive a gift or bequest pursuant to a last will or disposition of property being administered under a revocable trust. Instead, it extends to recipients of all property included in the gross estate including:

     1. Transferees who received lifetime gifts that are included in the gross estate under Section 2035 because made within 3 years of death;

     2. Gift recipients whose gift was a discharge of indebtedness to the decedent;

     3. Transferees who receive the property as surviving joint tenants;

     4. Property passing to remaindermen when the decedent had a life tenancy in the property;

     5. Life insurance proceeds on the life of the decedent;

b. The IRS may take a long time before asserting transferee liability. The statute of limitations is 10 years from the date the assessment of tax is made against the estate. Here, the IRS filed suit in the 9th year of that 10 year period (and 19 years after the date of death).

c. The IRS will pursue transferee liability even when the estate tax liability is not that significant. Here, the unpaid tax was $28,939 (but with interest and penalties the amount sought was $65,874.80.

There are numerous Code provisions and procedures for relieving a fiduciary from liability for such taxes - but this is not the case for beneficiaries. Conservative recipients of property may not want to spend their inheritances or received property until they know the 3 year assessment period has expired without an assessment.

U.S. v. Ringling, 123 AFTR2d 2019-XXXX (DC SD 2/21/19)

Monday, February 18, 2019

IRS Blesses 2nd Marriage Planning Technique for IRA

A common issue in planning for marriages with prior children is how to provide for the surviving spouse, while also making provision for children of a prior marriage or relationship. A regularly used planning arrangement is to designate as successor owner at death of the original owner a marital trust that provides for assets to be expended for the surviving spouse during his or her lifetime, with a remainder to the children and lineal descendants of the first spouse to die. This avoids the problem of leaving the assets outright to the surviving spouse, who then can leave the assets to other beneficiaries at his or her death.

If the asset at issue is an IRA or qualified plan interest, the owning spouse may have similar concerns. However, income tax issues complicate the planning. For income tax planning purposes, it is usually desirable that the owning spouse have the option to “stretch” the payouts over the life expectancy of the surviving spouse (or of the decedent spouse) and thus defer income taxes by having the beneficiary be a “qualified beneficiary” of the IRA/qualified plan assets. This can be done via an outright beneficiary designation to the surviving spouse, but presents the same issues with prior children of the decedent spouse as discussed above. Unfortunately, in regard to an IRA or qualified plan asset, the use of trusts to receive the interests faces planning obstacles per the provisions of the Regulations that limit the ability to have the trust beneficiary(ies) be treated as "qualified beneficiaries.”

A recent private letter ruling confirms a fairly straightforward planning mechanism to obtain stretch status for an IRA via a trust under these circumstances. The blessed methodology is for the IRA owner’s revocable trust to be named as beneficiary of the IRA at the owner’s death. The revocable trust provides that a separate trust will be created to hold all IRA and qualified plan assets received. The spouse is named as the sole lifetime beneficiary of the trust, and the owner’s children are named as remaindermen. The IRS ruled that this arrangement passes muster under the Regulations, and the surviving spouse is treated as a qualified beneficiary of the IRA,and the sole one at that.

To reach this result, the general provisions for qualifying trust beneficiaries as qualified beneficiaries must be met. These include the requirements under section 1.401(a)(9)-4, Q&A-5:  (1) the trust is valid under state law, or would be but for the fact there is no corpus; (2) the trust is irrevocable or will, by its terms, become irrevocable upon the death of the employee; (3) the beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the employee's benefit are identifiable within the meaning of section 1.401(a)(9)-4, Q&A-1, from the trust instrument; and (4) the documentation described in section 1.401(a)(9)-4, Q&A-6, has been provided to the plan administrator. Further, for the spouse to be sole designated beneficiary, the trust must be a conduit trust - it must contain provisions requiring the immediate distribution of all retirement plan or RIA distributions by the trustee to the beneficiary.

The payment to two trusts (first the revocable trust, and then onto the separate trust for IRA/retirement plan assets), is permitted under section 1.401(a)(9)-4, Q&A-5(d). That provision states that if the beneficiary of the trust named as beneficiary of an employee's interest is another trust, the beneficiaries of the other trust will be treated as having been designated as beneficiaries of the first trust, and thus, as having been designated by the employee under the plan for purposes of determining the distribution period under section 401(a)(9)(A)(ii), provided that the requirements of section 1.401(a)(9)-4, Q&A-5(b), are satisfied with respect to such other trust in addition to the trust named as beneficiary.

PLR 201902023

Sunday, February 10, 2019

Court Order Enjoining Occupancy or Residence by Owners Did Not Terminate Homestead Status [Florida]

A recent case addressed whether owners who had to cease living on homestead property by reason of a court order to vacate the property and enjoining them from residing thereon due to unsafe conditions and code violations, should automatically be treated as having abandoned their homestead. Homestead status was relevant because the husband deeded the property away without joinder of his wife – such a transfer is void under Florida’s Constitution if the property remained homestead property. Here, the husband and wife had moved off the property and been living in a rented residences or stayed with friends for five years after the court order.

The trial court found that the property ceased to be homestead property. Reversing the trial court, the 4th District Court of Appeal ruled that abandonment of homestead status under these circumstances was not automatic, and denied the buyer’s request (who was seeking to enforce the transfer) for summary judgment on the issue. While homestead status can be lost through abandonment, a finding of abandonment requires a strong showing of intent not to return to the homestead. Such a determination requires a review of the totality of circumstances to determine such intent. Case law supports that an involuntary cessation of residency on the homestead does not alone constitute abandonment. Based on the foregoing, the appeals court remanded the case for further proceedings, including resolving the question of fact of the wife’s intent (or absence of intent) to abandon the subject property.

Yost-Rudge v. A-to-Z Properties, Inc., 2019 WL 459015 (4th DCA, February 6, 2019)

Saturday, January 26, 2019

Real Property Rental Safe Harbor under Code §199A

Code §199A allows taxpayers up to a 20% income tax deduction for business income earned through a sole proprietorship or pass-through entity. There are numerous requirements to meet, and one of these is that the business constitute a trade or business under Code §162.

Unfortunately, for rental real estate activities it is not often clear whether the activity constitutes a trade or business. To assist taxpayers, the IRS has published Notice 2019-07 which provides a safe harbor to obtain trade or business status for rental real estate activities. Note that if a taxpayer does not meet the requirements, they can still claim trade or business status – they just do not have the benefit of automatic IRS approval of that conclusion via the safe harbor.

I have summarized in this link a mind map summary of the safe harbor requirements, so those with an interest can get quickly up to speed on them. It is possible that these requirements may be tinkered with by the IRS when it issues a final Revenue Procedure, so readers should check whether such a procedure has been issued before relying on the Notice. Of course this is a summary only – check the Notice provisions directly instead of relying on this summary alone.

Notice 2019-07 – LINK TO MAP SUMMARY

Sunday, January 20, 2019

U.S. Supreme Court to Decide Whether a State Can Tax a Trust Solely Based on Residence of a Beneficiary

The Due Process Clause of the U.S. Constitution requires a taxpayer have sufficient contacts with a state before the taxpayer can be subject to income taxes in that state. This has led to disparate results on when the income of a trust is subject to the taxing jurisdiction of a state.

One common fact pattern is a trust where a state seeks to tax a trust on its income because a beneficiary of the trust resides in the state, even though the trust was formed out of state, the trustee resides out of state and administers the trust from out of state, and the assets are situated outside of that trust. Under such a facts, the State of North Carolina has asserted it can tax the income of the trust. Eleven states tax trust income when a trust’s beneficiaries are state residents.

The Supreme Court has granted certiorari in that case, so much needed guidance should soon be coming on this important issue!

NORTH CAROLINA DEPT. OF REVENUE V. KAESTNER FAMILY TRUST

Wednesday, January 09, 2019

Mandatory Restricted Depository Arrangements in Probate Questioned [Florida]

Fla.Stats. §69.031(1) authorizes a probate court to direct the financial assets of a probate estate be deposited into a restricted depository account held by a financial institution. This is a protective mechanism, since assets may be disbursed from that account only upon court order, instead of mere direction by the personal representative. Thus, it acts a mechanism to reduce the risk of improper use, dissipation, or disbursement of estate assets by the personal representative.

Fla.Stats. §69.031(1) reads as follows:

(1) When it is expedient in the judgment of any court having jurisdiction of any estate in process of administration by any guardian, curator, executor, administrator, trustee, receiver, or other officer, because the size of the bond required of the officer is burdensome or for other cause, the court may order part or all of the personal assets of the estate placed with a bank, trust company, or savings and loan association (which savings and loan association is a member of the Federal Savings and Loan Insurance Corporation and doing business in this state) designated by the court, consideration being given to any bank, trust company or savings and loan association proposed by the officer. When the assets are placed with the designated financial institution, it shall file a receipt therefor in the name of the estate and give the officer a copy. Such receipt shall acknowledge the assets received by the financial institution. All interest, dividends, principal and other debts collected by the financial institution on account thereof shall be held by the financial institution in safekeeping, subject to the instructions of the officer authorized by order of the court directed to the financial institution. (emphasis added)

Some counties have opted to impose restricted depository accounts for all estates, raising the issue whether a blanket prohibition is appropriate, or whether the above highlighted language of the statute first requires either a determinization that the size of a bond would be burdensome or there is other good cause in each estate.

In an opinion released today, the Fourth District Court of Appeal ruled against local rules requiring the mandatory use of restricted depositories. The Court nonetheless allowed the restricted depository order under appeal in that case to stand, since there was otherwise good cause for the court to order the account under the facts. The case is not final, pending the possibility of a motion for rehearing and the outcome of such a rehearing if it is granted, but interested persons should monitor its status.

Assuming the Court’s opinion becomes final, it is difficult to know how counties with such mandatory requirements will react, both within and without the counties making up the Fourth DCA (such as whether they will remove such mandatory requirement, otherwise attempt to re-work their rules in light of the opinion, or await appellate decisions in their own circuit).

DISCLOSURE: Our firm, through Jenna Rubin, Esq., represents the appellees in this case.

STEVEN GOODSTEIN, as Personal Representative of the Estate of Andrew Scott Goodstein v. SHELLEY GOODSTEIN, as Conservator for BLAKE GOODSTEIN and CHANDLER GOODSTEIN, and GRANT GOODSTEIN, 4th DCA, Case No. 4D18-2382 (January 9, 2019)

Sunday, January 06, 2019

Rules Issued on Excess Remuneration Paid by Exempt Organizations

The 2017 Tax Act imposed a penalty on excess compensation paid to employees of an applicable exempt organizations (“ATEO”). Code §4960 imposes an excise tax of 21 percent on compensation paid to a covered employee in excess of $1 million and on any excess parachute payments paid to a covered employee.  A “covered employee” is any employee (or former employee) who is one of the five highest - compensated employees of the organization for the taxable year or was a covered employee of the organization (or any predecessor) for any preceding taxable year.

The IRS has issued Notice 2019-9, which contains interim rules on how the excise tax will apply. Some interesting aspects of the new statute and rules are summarized below:

  • Related Entity Aspects:
    • Any remuneration paid to a covered employee by a related entity is included in the calculation of the covered employee’s total remuneration for the year.
    • A payment from a related entity, including a related entity that is an ATEO, for services rendered to the common-law employer, is considered a payment to the employee from the common-law employer. Calculation of the excise tax is separate from any arrangement that an ATEO and any related organization may have for bearing the cost of the excise tax.
    • Remuneration paid by a separate organization on behalf of the ATEO, whether related to the ATEO or not, for services performed as an employee of the ATEO is treated as remuneration paid by the ATEO.
    • An employee may be a covered employee of more than one ATEO and that each ATEO employer calculates its liability under Code Sec. 4960(a)(1) taking into account the organizations to which it is related. However, an employer is liable only for the greater of the excise tax it would owe as an ATEO or the excise tax it would owe as a related organization with respect to that covered employee.
  • Determining Compensation Aspects:
    • Wages include all remuneration for services performed by an employee for the employer, except for fees paid to a public official, and other specifically excluded types of remuneration.
    • Remuneration is treated as paid when there is no substantial risk of forfeiture of the rights to such remuneration (i.e., when the compensation is vested). Remuneration in which the covered employee vested before the effective date of Code §4960 is treated as paid before that effective date. The definition of substantial risk of forfeiture under Prop Reg § 1.457-12(e)(1) is the definition of substantial risk of forfeiture within the meaning of Code §457(f)(3)(B) for purposes of Code §4960(a). Under Prop Reg § 1.457-12(e)(1), an amount of compensation is subject to a substantial risk of forfeiture only if entitlement to the amount is conditioned on the future performance of substantial services, or upon the occurrence of a condition that is related to a purpose of the compensation if the possibility of forfeiture is substantial.
    • For purposes of determining when remuneration is treated as paid, the timing rule in Code Sec. 4960(a) applies,and the timing rule for wage inclusion under Reg § 31.3402(a)-1(b) is not relevant. Under Notice 2019-9, Q/A-13, the amount of remuneration treated as paid at vesting is the present value of the remuneration in which the covered employee vests.
  • Who Is a Covered Employee:
    • Once an employee is a covered employee, he or she continues to be a covered employee for all subsequent tax years. There is no minimum dollar threshold for an employee to be a covered employee.
    • Remuneration paid for medical services is not taken into account for purposes of identifying the five highest-compensated employees.
    • Whether an employee is one of the five highest-compensated employees is determined separately for each ATEO, and not for the entire group of related organizations. Therefore, each ATEO has its five highest-compensated employees. Thus, a related group of entities may have more than five covered employees.
    • Only an ATEO’s common law employees (including officers) can be one of an ATEO’s five highest compensated employees. There is a limited services exception from highest compensated employee status under which, unless an ATEO pays at least 10% of the total remuneration paid by the ATEO and all related organizations to an employee during the calendar year, the employee is not treated as one of the ATEO’s five highest compensated employees.
  • Misc.:
    • Certain governmental entities are not ATEOs. A governmental entity (including a state college or university) that is not recognized as exempt from taxation under Code §501(a) and does not exclude income from gross income under Code §115(1) is not an ATEO described in Code §4960(c)(1). A governmental entity that sought and received a determination letter recognizing its tax-exempt status under Code §501(c)(3) may relinquish this status pursuant to the procedures described in Rev Proc 2018-5.
    • For purposes of calculating the remuneration upon which the tax is calculated, remuneration does not include certain retirement benefits or certain directors' fees.