Category: Gift Tax

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Accounting Estate Tax Gift Tax

Updated Reporting Requirements for Foreign Gifts and Foreign Trusts

James R. O’Neill —

Proposed Treasury Regulations (the “Proposed Regulations”) have recently been issued to update and clarify existing reporting obligations for U.S. persons who receive gifts from abroad or who are owners or beneficiaries of foreign trusts.[1] These gifts, ownership interests, and distributions are required to be reported annually to the Internal Revenue Service (“IRS”) using Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. The Proposed Regulations provide guidance under Internal Revenue Code (“IRC”) Sections 643(i), 679, 6039F, 6048, and 6677 with respect to reporting receipt of large foreign gifts, transactions with foreign trusts, and loans from, and uses of, property of foreign trusts.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 5: Estate Planning and the M&A Process

Andrew J. Haas —

Once the business owner is ready to sell the business, there will be considerable time and energy focused on that goal. The client may engage an investment banker or business broker to assist in the sale, along with dedicated legal counsel specializing in mergers and acquisitions (“M&A”) for the transaction. The business’ accountant will play an important role as will the personal financial advisers. It is possible that these roles may change from the individuals currently serving in these roles given the complexity and dollars involved, which is a natural progression during a business sale.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 4: Document the Transfer

Andrew J. Haas —

Once a business owner has an understanding of the value of the business and the tax and cash flow impacts of the transfer, the next step is to document the transfer. This may be done by the client’s separate business legal counsel or, if there isn’t one, the estate planner can usually handle the appropriate documentation. It is important to remember that if the client’s goal is to sell to a third party, all of these documents will be reviewed and scrutinized during due diligence, so it is best practice to have them all complete and organized so there is no question about the ownership of the business and the effectiveness of any transfer.

First, all of the existing documents will need to be reviewed. For example, there may be transfer restrictions in old bylaws that will need to be amended, or there may be an existing operating agreement or shareholder agreement requiring that certain consents be obtained from the manager or board in order to transfer equity. If there are lenders or other third-party agreements in place, those should also be reviewed to ensure there are no other separate consents that need to be obtained. Those agreements may also give guidance as to how the transfer must be structured. For example, a gift to a trust for the benefit of a spouse or family members of a current equity owner may be allowed, but only if the Trustee is an individual that is qualified under the bylaws or operating agreement. The existing agreements may provide guidance as to the ultimate structure of the transfer depending on the relationship between the parties.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 3: Examples of Business Transfers and Valuations

Andrew J. Haas —

The purpose of this post, part three of our “Estate Planning for the Business Owner” series, is to provide a sample using real numbers showing the impact and benefit of using closely held business interests in lifetime gifting. Assume a new business-owner client comes in and says that he or she has never had his or her business valued, but based on the earnings and the industry he or she is in, he or she is confident that a third party would buy 100 percent of the business for $100 million. Let’s further assume that the effective income tax rate on the sale of the business is 30 percent, and the client has $13 million of gift/estate tax exemption available.

Option 1: No planning

Assuming the client is able to sell the business for $100 million, and keeps the net sale proceeds at a constant value until death.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner Series, Part 2: Valuing the Business

Andrew J. Haas —

The value of an asset at the time of a transfer is the key component to the United States’ transfer tax system. Gratuitous transfers during lifetime are considered gifts, while transfers as a result of the death of the owner are included in the value of the decedent’s estate. Some assets are easy to value: marketable securities have a value based on the mean of the high and low on the public exchange on the applicable date where they are listed, while the value of cash is equal to the total amount transferred. Valuing an interest in a closely held business is much more complex. When an estate planner has initial discussions with a client and invariably asks how much their business is worth, the client may give you a number based entirely on speculation, or perhaps they are using “book value,” a multiple of the business’ EBITDA (i.e., earnings before interest, taxes, depreciation, and amortization), a value used in a recent loan application, or even the value used for equity as compensation (a “409A” value). None of these values are “adequate” for purposes of determining the value of the business at the time of a transfer for estate planning purposes, and none of these “values” can be used to substantiate the value of a transfer on a Federal Gift or Estate Tax Return.

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Business Succession Estate Planning Generation-Skipping Transfer (“GST”) Tax Gift Tax Income Tax

Estate Planning for the Business Owner, Part 1: The Business Owner as a New Client

Andrew J. Haas —

For most business owners, the business is the most valuable item on their balance sheet. From an estate planning perspective, the equity in the business is also often the best asset to use for lifetime transfers to pass value (and future appreciation) out of the taxable estate. Before an estate planner can effectively provide guidance on the planning opportunities for the business, he or she will need some background information about the business. This data gathering does not need to be all-encompassing, but a good estate planner will want to know as much information about the business as possible since it is often closely intertwined with the client. Some information can be gathered through the business owner’s other professionals, such as separate business legal counsel, internal executives, accountants, and financial advisers, and it is important to have an open communication among the estate planner and these professionals as early on in the process as possible.

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

Don’t Wait until Next Year to Make Your Gift!

Sean R. Weissbart —

Any estate planning attorney will tell you that certain years stick out in their professional lives more than others. Here are some recent examples:

  • 2010: The year that estates of billionaires—including, most famously, New York Yankees owner George Steinbrenner—were administered without paying a penny of federal estate tax.
  • 2012: The year the affluent made gifts to capture gift tax exemptions—then, at $5.12 million—before a scheduled reduction to $1 million.
  • 2020: An election year where wealthy individuals feared record-high exemptions scheduled to remain in effect for five more years might abruptly be slashed with little notice.

In the final months of these years, scores of individuals emerged hoping to take advantage of tax benefits before it became too late. To accommodate, members of the trusts and estate community worked around the clock to finalize trust agreements, engage valuation companies, and draft documents transferring stock in closely held companies to irrevocable trusts. But many clients were frustrated when they learned that optimizing these tax benefits usually requires more than writing a check and signing a trust agreement, and can take well more than a month to craft and effectuate.

We expect 2025 to be another year for the estate planning record books. Absent legislative action, the federal estate, gift, and generation-skipping transfer (“GST”) tax exemptions—currently at $13,610,000 per individual—will be reduced by approximately one-half. Undoubtedly, scores of individuals sitting on the sidelines waiting to see if the tax laws will actually change this time, will emerge in the waning months of 2025 asking trusts and estates practitioners to help them capture these tax benefits.

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Estate Planning Gift Tax Trust Administration

Is CCA 202352018 the Death of Irrevocable Trust Decantings?

Kyle G. Durante —

For years, practitioners have freely used irrevocable trust decantings as a means to make various changes to irrevocable trusts without concern of giving rise to gift tax consequences. However, the Internal Revenue Service’s (“IRS”) Chief Counsel Advice Memorandum (CCA 202352018) (the “CCA”) may be the death to irrevocable trust decantings as we know them.

The term “irrevocable trust” is somewhat of a misnomer—there are mechanisms by which irrevocable trusts can be modified in certain respects. Generally, irrevocable trusts can be modified in one of two ways depending on applicable state law: (i) some states, such as New Jersey, Pennsylvania, and Connecticut, permit an irrevocable trust to be modified with the consent of the beneficiaries and the trustee (some states also require the consent of the settlor if he or she is then living), which is typically referred to as a “non-judicial modification;” and (ii) some states, such as New York, Delaware, and Florida, permit an irrevocable trust to be modified by a decanting, which is a process by which an authorized trustee exercises his or her independent discretion to pay over the property of the trust to a new trust that has different terms.

For years, practitioners have been concerned that using a non-judicial modification to make certain changes with the consent of the beneficiaries (such as removing a beneficiary, shifting beneficial interests, or diluting a beneficiary’s interest), may be deemed to be a taxable gift by the beneficiaries. However, this concern was not present with respect to decantings since a decanting is effectuated by the independent act of an authorized trustee, who does not have a beneficial interest in the trust, without the consent of the beneficiaries. That was, until the CCA.

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

Take Note: Significant 2024 Gift/Estate Tax Exemption Inflation Increases

Kyle G. Durante —

The New Year brought inflation adjustments to the federal and some states’ gift/estate tax exemption amounts, thereby increasing the amount individuals can gift during life and at death free of federal and state gift and estate tax. Given the significant 2024 inflation adjustments, particularly with respect to the federal gift/estate and generation-skipping transfer (“GST”) tax exemption amounts, the New Year presents a prime estate planning opportunity not only for those individuals who have not previously engaged in significant gifting, but also for those individuals who previously made gifts to capture their exemptions and who now have additional exemption available.

The Federal Gift, Estate, and GST Tax Exemption Amounts

Under current federal law, the federal gift/estate tax exemption amount (i.e., the basic exclusion amount) is an amount equal to $10,000,000, adjusted for inflation since 2017. In 2023, the federal gift/estate tax exemption amount was $12,920,000, which increased to $13,610,000 with the 2024 inflation adjustment (a $690,000 increase).

In addition, the federal generation-skipping transfer (“GST”) tax exemption amount is an amount that mirrors the basic exclusion amount. Accordingly, the federal GST tax exemption amount also increased from $12,920,000 to $13,610,000 as of January 1, 2024.

These amounts will continue to increase for inflation each year until December 31, 2025. Under current federal law, the increase in the federal basic exclusion amount is scheduled to automatically sunset on December 31, 2025, from $10,000,000 plus an inflation adjustment, to $5,000,000 plus an inflation adjustment. As such, on January 1, 2026, the exemption amounts are scheduled to be automatically slashed by approximately one-half.

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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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