Author: Blank Rome LLP

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Estate Planning Estate Tax Gift Tax

Increasing the Available Gift and Estate Tax Exemption for a Surviving Spouse

James R. O’Neill —

In planning for the estate of a surviving spouse, the availability of the unused gift and estate tax exemption of his or her deceased spouse can be important, and particularly so with the impending reduction of the exemption. The federal gift and estate tax exemption, which was doubled pursuant to the 2017 Tax Cut and Jobs Act and presently stands at $12,920,000, is scheduled to be automatically reduced by approximately one-half on January 1, 2026.[1] The exemption is portable between spouses allowing for use by the surviving spouse of any unused exemption of the deceased spouse. This portability arises under IRC Section 2010(c)(5)(A), which provides that a deceased spousal unused exclusion (“DSUE”) amount becomes available for use with a surviving spouse’s subsequent transfers during life and at death, but only if the executor of the first-to-die’s estate timely files Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return (“Form 706”). The due date of a Form 706 required to elect portability is the date which is nine months after the decedent’s death, or the last day of the period covered by an extension, which may be obtained for six additional months. The so-called DSUE election is automatically made by timely filing a Form 706 unless the executor affirmatively opts out as permitted on the return. The portability election, once made, becomes irrevocable once the due date of the Form 706, including extensions granted, has expired.

An executor may file a Form 706 for the estate of any U.S. citizen or resident, but the executor is only required to file a Form 706 under IRC Section 6018(a) if the value of the gross estate, plus adjusted taxable gifts, exceeds the exemption amount for the year of death. Given the effort and expense of preparing a Form 706 when not otherwise required, particularly when the assets of the surviving spouse are not expected to exceed the current exemption amount, a Form 706 is often not filed when the first spouse dies, resulting in the deceased spouse’s unused exemption being unavailable to the surviving spouse. With the scheduled reduction of the exemption after 2025, it may, in many cases, be important to recover that unused exemption of the deceased spouse for use by the surviving spouse.

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Categories
Asset Protection Estate Planning Matrimonial Law

To Trust, or Not to Trust: That Is the Question

Sean R. Weissbart —

Sean Weissbart's headshot photo

Mom and Dad, a lovely couple in their early 50s, meet with me to discuss their estate planning. Mom shares, “our two children—ages 23 and 25—are special and productive. One just graduated law school and the other finishes medical school next spring.” Dad jumps in, “when we die, split all of our asset equally among our kids.”

And so, I ask, “would you like them to receive their inheritance outright or in trust?” Mom answers nicely, but firmly, “like I said, our children are fantastic. We want to give them full access to their inheritance. No interest in tying it up in trusts.” To which I respond, “got it. But just to confirm—are you aware trusts can protect assets from taxes, divorce, and creditors?” Their interest piques. Dad says, “we hadn’t thought of that. Please tell us more.”

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Capital Gains Tax Estate Planning Income Tax

IRS Disallows Step-Up in Tax Cost Basis for Assets Held by an Irrevocable Grantor Trust

Kyle G. Durante —

Under current law, assets acquired from a decedent receive an adjustment in cost basis to fair market value, thereby potentially eliminating significant unrealized gain. Although Congress has and likely will use this tax benefit as a pawn in future tax legislation, under current law, this benefit remains available to taxpayers. With respect to assets held in trusts excluded from estate tax, the IRS recently released guidance shutting the door on the application of this generous tax treatment to such assets.

Section 1014(a)(1) of the Internal Revenue Code of 1986, as amended (the “Code”) provides that “. . . the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent’s death by such person, be (1) the fair market value of the property at the date of the decedent’s death . . . .” But does this Code section apply to assets that are held in an irrevocable trust that is not subject to estate tax upon the settlor or donor’s death, when the settlor of the trust is treated as the owner of the assets for income tax purposes during his or her lifetime?

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Estate Planning

Don’t Wait until Time Is Up

Sara K. Osinski —

Lately, friends, family, and clients seem to be asking the same questions: “When should I think about estate planning? Is it actually necessary for me to have an estate plan?” As life is unpredictable, it is better to start planning sooner rather than later. In fact, upon attaining the legal age of majority in your state of residence (typically at age 18), you should begin considering some form of an estate plan. An individual’s estate planning needs, however, vary based on numerous factors, assessed generally in the timeline below.

Your 20s

Individuals in their 20s are typically focused on starting their careers, acquiring assets, and just living life—death is consequently one of the last things on their minds. In fact, many individuals in their 20s do not consider any form of an estate plan and likely do not believe they need one. While a Will or trust may not be necessary for most individuals in their 20s, “ancillary” estate planning documents, such as a power of attorney, healthcare proxy, and living will, should all be considered. These ancillary documents are also known as “living” estate planning documents because they go into effect while you are alive as soon as they are executed. These ancillary documents appoint an agent or agents to carry out your financial or health wishes, as applicable, in the event you become incapacitated, either temporarily or permanently. These documents may also assist in avoiding the need for the appointment of a guardian or conservator if you were to become incapacitated or unable to care for your own financial and/or medical affairs.

In addition to these ancillary documents, individuals in their 20s should also ensure that all of their bank accounts, brokerage accounts, retirements accounts, and life insurance policies have valid beneficiary designations. By designating a beneficiary on these accounts and policies, you not only control the disposition of your assets, but also may effectively avoid probate at death.

Of course, if you get married, divorced, remarried, have children, buy a home, and/or inherit a large sum of money in your 20s (or at any time), then estate planning becomes more crucial (as discussed in more detail below).

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Estate Planning

A Different Kind of IPO: Going “Public” with Your Private Foundation

Andrew M. Logan —

Many philanthropically minded clients have established their own private foundations to support charitable causes they believe in now, and to serve as a vehicle for giving for future generations of their family. While many family foundations flourish for multiple generations, many others struggle to survive for a single generation after the founders are gone. In the latter cases, the governing body (e.g., Board of Directors, Trustees, etc.) of the organization may start to consider terminating its status as a private foundation under Section 507[1]. Clients currently serving as directors or trustees should be aware that termination does not necessarily mean shutting down their organization, as one of the ways to terminate a private foundation is to convert to a public charity.[2]

In order to convert from a private foundation to a public charity, the private foundation must operate as a public charity as described in 509(a)(1), (2), or (3) for a continuous 60-month period, commencing on the first day of the tax year after it notifies the Internal Revenue Service (“IRS”) of its intent to terminate as a private foundation (the “Termination Period”).[3] In general, in order to qualify as a public charity, an organization must fall into one of the following three categories: (1) “per se public charities,” such as churches, schools, and hospitals, that qualify by virtue of the nature of their activities; (2) “publicly supported public charities” that qualify because they receive a substantial amount of their support from the public; or (3) “supporting organizations” that qualify as public charities because they support one or more of the organizations described in (1) and (2).[4]

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Estate Planning Estate Tax Gift Tax Income Tax Litigation

A Promise Is a Promise: The Enforceability of Charitable Pledges under New York Law

Haley B. Bybee —

Charitable contributions are often utilized in estate planning to assist a client not only in supporting his or her favorite charities but also to reduce tax liabilities both during life and at death. However, before clients agree to make any charitable contributions, they should understand that the agreements between themselves and charitable organizations, such as pledge agreements, can be binding.

Historically, New York courts have favored enforcing charitable pledges as a matter of public policy and in doing so, courts have relied on three common law contract law theories: (1) unilateral contract, (2) bilateral contract, and (3) promissory estoppel.[1]

Courts have most frequently relied on the theory of unilateral contract to enforce charitable pledges.[2] Under that theory, a charitable pledge or promise to make a future gift constitutes a unilateral offer, and “when accepted by the donee charity by the incurring of liability or detriment . . . [the offer] ripens into a binding contractual obligation of the donor and [is] enforceable against him.”[3] There have been numerous cases in which a donor’s promise to make a charitable contribution has been enforced on this ground.

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Categories
Estate Planning

Transfer on Death Beneficiary Designations for Financial and Real Property Assets

James R. O’Neill —

Transfer on Death (“TOD”), also known as Payable on Death (“POD”), account registrations are a popular way to avoid the requirement to pass assets through probate upon death and operate as an alternative to retitling assets into a revocable trust during life. Typically used with financial accounts, a TOD account registration designates one or more beneficiaries to receive the assets of the account upon death of the account holder directly from the financial institution without the need for probate or estate administration. Similar to designating beneficiaries for retirement and insurance assets, a TOD account registration is accomplished by completing standard beneficiary designation paperwork with the financial institution. Upon the death of the account holder, the designated beneficiary presents to the financial institution a death certificate and documentation that the state or financial institution may require, and the proceeds generally are distributed reasonably promptly. As with a revocable trust, the TOD registration can be changed or revoked at any time during the account holder’s lifetime.

While this technique for avoiding probate is quite easily accomplished, consideration should be given to the overall estate plan, including post-death liquidity needs for taxes and other expenses of the estate, prior to removing assets from the estate through TOD registrations or other beneficiary designations. While accounts with a TOD registration pass outside of the estate with no probate, the assets in the account are subject to estate taxation and generally are not available to the estate for the payment of taxes or other expenses of administration.[1] If all of the decedent’s assets have designated beneficiaries, the question of payment for funeral and other expenses and remaining tax and other obligations of the decedent either requires cooperation among the beneficiaries or becomes a point of contention and potential litigation.

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Estate Planning Income Tax

What Makes a Trust Foreign or Domestic—And Why Does It Matter?

Sean R. Weissbart —

Sean Weissbart's headshot photo

The United States is one of two countries in the world that imposes a tax on the worldwide income of its citizens. (The other is the East African country of Eritrea, which imposes a two percent tax on its citizens living abroad, far less than the top rate for U.S. income tax of 37 percent.)

Of course, trusts do not have citizenship like individuals, but trusts that are classified as domestic trusts for U.S. income tax purposes “suffer” the same fate: U.S. income tax is imposed on the worldwide income of the trust even if its income is earned from sources outside the United States or the Settlor and beneficiaries reside outside the United States.

So, what makes a trust a domestic trust and would it be better to avoid this classification? Paradoxically, a trust must meet two tests to be considered a domestic trust, and if it fails either of these tests, it will be classified as a foreign trust.

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Categories
Capital Gains Tax Estate Planning Income Tax State Tax

NFTs: A Tale of Two Classifications

Sara K. Osinski —

On March 21, 2023, the Department of the Treasury and the Internal Revenue Service (“IRS)” released Notice 2023-27, announcing their intent to provide guidance on classifying certain non-fungible tokens (“NFTs”) as “collectibles,” which could subject owners of NFTs to higher long-term capital gains tax.

Digital assets, such as NFTs and cryptocurrencies, are currently generally classified as “property.” Therefore, under current law, gains from the sale or exchange of NFTs are taxed based on how long such NFT was held by the owner. For instance, if the owner sells an NFT he or she has held onto for one year or less, then the sale of such NFT would be subject to short-term capital gains tax. Short-term capital gains are taxed at the ordinary income rates, and the federal[1] ordinary income tax rates currently range from 10 percent to 37 percent depending on the taxpayer’s taxable income. On the other hand, if the owner sells an NFT he or she has held on to for more than one year, the sale of such NFT would be subject to federal long-term capital gains tax. Long-term capital gains are subject to federal tax at a rate of zero percent, 15 percent, or 20 percent depending on the taxpayer’s taxable income.

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Categories
Estate Planning Exemption Capture Planning Generation-Skipping Transfer (“GST”) Tax

Proposed Resurrection of the Common Law Rule against Perpetuities—At Least for GST Tax Purposes

Kyle G. Durante —

There is one common law rule that haunts most law students, and many legal practitioners: “no interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.” This rule, known as the rule against perpetuities, has many applications, but, most importantly, it limits the duration that an irrevocable trust may remain in existence. This rule was initially adopted in an effort to limit dead-hand control over property by requiring property to vest in a beneficiary within a certain period of time.

Generally, at common law, an irrevocable trust could remain in existence for a period of time not exceeding 21 years after the death of all members of a particular class of persons who were alive at the time the perpetuities period began. For an irrevocable trust, generally, the perpetuities period will begin on the date the trust was created. While some states, such as New York,[1] continue to follow the common law rule, a number of states, such as New Jersey, Pennsylvania, Delaware, and South Dakota,[2] have completely abrogated the rule, while others have extended the period of time that an irrevocable trust may remain in existence, such as Connecticut (which applies an 800 year period in gross) and Florida (which applies a 1,000 year period in gross).

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