InterActive Legal Blog

Flex your Beneficiaries: How to Reduce Income Taxes and Maintain Creditor Protection

By Jonathan G. Blattmachr and Elizabeth Q. Boehmcke

We hesitate to publish this, because as soon as we do, Congress will do a roundoff back handspring with a twist and things will change.  However, as of this writing, the versions of the Build Back Better Act passed by the House and recommended by the Senate Finance Committee do not include any of the measures that estate planners have been concerned about since the beginning of 2021: no inclusion of grantor trusts in the estate of a decedent, no deemed realization of capital gains at death or upon the passage of time, not even a decrease in the estate and gift tax exemption amounts.  So as we start the new year, it is unclear whether the Build Back Better Act, if it is ever passed, will contain any of the provisions concerning estate and gift taxes that we have been watching with anxiety.  We doubt many people are ready to exhale just yet.  However, dealing with the unknown is exhausting for both planners and clients.

For a breather, let's talk about one of the certainties in life: taxes.  This is one aspect of planning that does not seem to be in serious danger of current or immediate change - the need to prepare for and build in options to deal with income tax planning for trusts, particularly those that are intended to be long-term trusts.  As we know, estates and trusts are subject to highly compressed tax brackets which reach the highest marginal rate at $13,450 (in 2022) and are also subject to the 3.8% net investment income tax.  Both the version of the Build Back Better Act passed by the House and the version approved by the Senate Finance Committee include a 5% surcharge on the income of estates and trusts if modified adjusted income ("MAGI") exceeds $200,000 and 3% on the amount by which MAGI exceeds $500,000.  (MAGI means adjusted gross income as determined under Section 67(e) and reduced by the amount allowed as deductions under sections 642(c), 651(a) and 661(a).  In simple terms, this means that MAGI takes into account amounts of income that are distributed to the beneficiaries.)  The surcharge, if passed into law, only increases the pressure on estate planners to find creative ways to use the bracket run-up available to the individual beneficiaries of a trust instead of having the income tax paid by the trust.  Even if the current legislation does not include provisions designed to make planning with grantor trusts less appealing, there is no reason to believe that such changes could not come about in the future and, in any event, upon the death of the grantor, all trusts other than Sec. 678 trusts (which are deemed owned by the beneficiary for income tax purposes) will become non-grantor trusts, subject in most cases to higher income tax overall.

Grantor and Non-Grantor Trusts: Some Thoughts About Turning Off Grantor Trust Status

©2021 by Jonathan G. Blattmachr, Elizabeth Q. Boehmcke, Teresa L. Bush, and Vanessa L. Kanaga. All Rights Reserved.

Introduction

Since at least 1986, when tax brackets for almost all Americans were compressed, and as a result of Rev. Rul. 85-13, which held that grantor trusts effectively did not exist for income tax purposes, grantor trusts have been one of the most commonly used estate tax planning tools. A “grantor trust” is a trust in which the income is attributed to the creator of the trust under Section 671 of the Internal Revenue Code of 1986 (or in certain cases to the trust beneficiary under Section 678), as though the trust did not exist.

Many, if not most, common lifetime estate tax planning strategies have been built on the chassis of a grantor trust, exploiting the differences between the income tax rules and the estate tax inclusion rules to create a trust that is excluded from the grantor's estate for estate tax purposes, yet invisible for income tax purposes. This has many benefits. Because the income of the trust is attributed to the grantor, tax on the income or gain experienced by the trust will be paid by the grantor, allowing the trust to grow on a tax-free compounded basis, which is one of the most powerful forces in financial planning. The IRS conceded in Rev. Rul 2004-64 that the grantor’s payment of tax on income generated by trust assets is not a gift to the trust or its beneficiaries, essentially allowing those tax payments to constitute additional tax-free gifts to the trust. Under the current law, grantor trust status alone does not cause inclusion in the grantor's estate for estate tax purposes, so all appreciation and income (the tax on which was paid by the grantor) pass free of transfer tax. A so-called grantor retained annuity trust (GRAT), described in Reg. 25.2702-3(b), almost always will be a grantor trust, which usually is beneficial because appreciated assets can be used to pay an annuity back to the grantor without gain recognition. The sale or purchase of an appreciated asset between a grantor and a grantor trust does not cause gain recognition, because of the determination in Rev. Rul 85-13, which can allow a reshuffling of assets in and out of the trust free of income tax (with the hope that appreciation of the assets will generally occur while the assets are held by the trust, outside the taxable estate of the grantor, and depreciation will happen while assets are held by the grantor).

The Waiting Game

Written by The ILS Legal Team

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None of us can predict what will happen in D.C.,
but estate planners can take steps now
to prepare clients for changes coming in the near future.

 

As we write this commentary, Congress and the White House are negotiating over proposed legislation which, if enacted in its current form, would significantly change tax laws that impact estate planning. Last week, InterActive Legal sponsored a 90-minute webinar on this topic (which we invite you to watch for more detail), and below we summarize what we see as the most important potential changes that could affect your clients.

The latest proposals, incorporated into the budget reconciliation bill commonly known as the "Build Back Better Act," come on the heels of earlier proposals from Senators Sanders and Van Hollen. Each of these proposals includes slightly different tax law changes which, if enacted, would have a significant impact on estate planning. Although some of the proposals in the Van Hollen draft would apply retroactively, most of the relevant proposals in the reconciliation bill would be effective as of the date of enactment or as of January 1, 2022. Understandably, estate planners are anxious about advising their clients to take action now in order to preserve certain advantages that could be curtailed by any new legislation. However, given the potential magnitude of the proposed changes and the uncertainty as to which, if any of them, will pass, it can be a challenge to know exactly what we should advise our clients to do.

The bottom line is that we don’t know what the final legislation will look like, or when specific new rules will be effective. All we can do is consider what has been proposed and how to advise clients in the event those proposals do become law. The best advice for estate planning professionals and their clients at the moment is to be prepared – have documents ready to sign (perhaps more than one version, each designed to address a different legislative result) and have assets ready to transfer because time is – and will continue to be – of the essence.

Keeping Pace with Afterlife Innovation

 

by Lee Poskanzer, CEO & Founder, Directive Communication Systems, Inc.

Imagine, you’re an estate attorney having a meeting with client who’s been trying desperately to gain access to his late wife’s Gmail account. He knows her emails contain important documents, but he is not exactly sure what or where they are. Google has denied the request because it failed to meet their policy requirements as well as the Revised Uniform Fiduciary Access to Digital Access Act (RUFADAA). What next?

If this scenario sounds like both a significant headache and burden, you are correct. If you have a username and password, you’ve created an asset…it’s just that simple. Today, the average person has over 200 accounts such as Amazon, Apple, Google, banking, cloud storage, and utilities, that’s up from 150 just a few years ago. We’re doing far more online than we were 20 years ago when the internet was still a novelty. People are accumulating more assets while innovators are coming up with new asset types as NFTs, holographic bots and more. And, custodians are developing new account holder features and options for handling contents in the event of their death.

Several of the latest digital asset offerings play increasingly significant roles in estate planning and administration. These assets are being developed so quickly that designees responsible for reviewing accounts information and contents face a quickly changing world of new controlling authorities, policy changes and custodian offering for data handling directions. Some of these new features include Apple’s digital asset management, holographic bots, and Non-fungible Tokens (NFTs).

Protecting Your Client’s Digital After Life

 

By Betsy Ehrenberg, CEO & Founder of Legacy Concierge

Strictly speaking, digital assets are content that is stored in any electronic format. That could mean photos, videos, emails, spreadsheets or text. New digital formats are constantly emerging therefore the definition of a digital asset is always expanding as well. Rather than a definitive list of file formats that qualify as a digital asset, digital assets can be any content, in any format, that is stored electronically and provides value to a company, user or consumer.

Over $58 billion in digital assets are lost from estates each year. This is a combination of theft (one out of eight estates experience identity or other theft) and people not knowing where all of the assets may be.  Data shows that the average person under the age of 75 has more than 160 records in their digital footprint, both financial and social.

Sentiments on the Reality of a Virtual Event

 

Dear Friends and Colleagues,

Last week, as the 55th annual Heckerling Institute on Estate Planning concluded, I took a few moments to reflect on the conference which, like many events, was different this year. All of the presentations were virtual, with the presenters streaming from their respective locations and all of us in the audience watching from the relative comfort of our homes or offices (or, in many cases, home offices). InterActive Legal was present at our "booth" in the virtual exhibit hall, and I have to give proper credit to our Marketing team for creating a digital space that was both visually appealing and informative.

My assessment of this year's conference is a bit of a mixed bag. Don't get me wrong: the actual conference was well-managed and informative as always. The Institute and the presenters all deserve praise for delivering high quality content with few, if any, technical glitches. There is also something to be said for the virtual format. It was nice to be able to clearly see and hear the presenters. It was also a bit easier to focus without the distractions of finding a seat and connecting to the WiFi. For someone like me who always seems to be late in making it to the ballroom no matter how hard I try, it was nice to know that I had a desk on which to set my computer and my coffee, rather than trying to balance everything on my lap while seated in the rows of chairs in the back. I also found it oddly satisfying to tour the virtual exhibit hall, seeing a scene from my memories rendered in a digital format.

Given those factors, I questioned whether I might actually prefer a virtual conference. When I thought about it more, my answer became a resounding "no," as I was flooded by the thoughts of what I missed. Simply put, I missed the people. I missed wandering the aisles and meeting other exhibitors. I missed seeing former colleagues, now several jobs and cities removed, but with whom I still connect each year at Heckerling. I missed meeting attorneys who are new to the conference and new to estate planning, whose eagerness to learn is evident as they stop by the booth to chat.

I missed our InterActive Legal team, my dear colleagues, many of whom I only see once a year in normal circumstances. As I spoke with them last week, to regroup and debrief on the conference, it became clear to me that the thing all of us missed the most was getting to see and talk to our subscribers. I do not think any of us realized before how lucky we are to be able to do that each year. As a technology company delivering service remotely to firms across the country, we don't often have the need or the opportunity to interact with our subscribers in person. Our team has always enjoyed Heckerling for that reason; it is nice to put a face with a name, to share a laugh, coffee, or even a meal, to have the time to really engage in conversation on the topics discussed in the lectures, and to learn what we can do to enhance our services and provide more value. However, I did not understand until now that it is a gift, and a rare one in the technology business, to be able to make that personal connection.

This is the outcome of my reflections: Despite the silver lining I was able to find in the virtual conference, I look forward to the day when the clouds part, and we can meet again in sunny Orlando next January. Until then, I speak for all of us at InterActive Legal in saying to you, our subscribers, that we miss and appreciate you, and can't wait to see you soon.

Sincerely,

InterActive Legal Names Vanessa Kanaga as CEO

Melbourne, FL- InterActive Legal, a knowledge company and software solutions provider in the legal arena of trusts and estates, elder law, and special needs planning, announced the promotion of its 8-year veteran, President and Director of Content Development, Vanessa Kanaga, to the office of Chief Executive Officer. After several successful years in directing the day-to-day operations of the company as President, Ms. Kanaga will now be responsible for guiding the company's future, overseeing new investments in technology, exploring additional revenue channels, and increasing the value proposition of subscribership.

Vanessa Kanaga replaces Michael L. Graham as CEO, who will continue his active involvement with InterActive Legal as Chairman. Mr. Graham is also a co-Founder and co-Author of the InterActive Legal programs. Ms. Kanaga, 41, began her career with InterActive Legal’s co-Founder/Co-Author and renowned Trust & Estates thought-leader, Jonathan Blattmachr, in New York. After moving from New York to her home state of Kansas, she was recruited by Blattmachr in 2013 to join InterActive Legal’s Content Development Team. Ms. Kanaga now resides in Arizona and directs the Melbourne-based company remotely.

When asked about taking over the reigns for all aspects of InterActive Legal, Ms. Kanaga responded:

“This is a time of great challenge and opportunity for the estate planning profession, and I feel very fortunate to be in a position to help attorneys meet those challenges and seize those opportunities. As I write this, InterActive Legal is in the process of launching a new online version of our document assembly suites, a development which will allow our subscribers to be more mobile and efficient, and will allow us to deliver content quickly and in a more modern framework. We are standing ready to address any changes to the tax laws in the near future, and we are looking to the horizon to see what content and technology our subscribers will need in their practice over the next several years.”

Flexible, Cautious Drafting Can Save the Day – Even Publication 590-B is No Problem

by Elizabeth Q. Boehmcke, Esq.

The Internal Revenue Service (the "Service") issued the 2020 version of Publication 590-B "Distributions from Individual Retirement Arrangements (IRAs)" on March 25, 2021, to assist taxpayers with understanding how their retirement accounts are taxed, how to calculate required distributions, and how they should report distributions from such accounts. It should have been a quiet affair, attracting little attention. While a publication like this cannot be relied upon as authoritative guidance of any sort, tax planners would normally try to "read the tea leaves" to see what the IRS position may be on some issues related to the SECURE Act, about which further guidance is needed while awaiting regulations. Unfortunately, the Publication made some startling and contradictory statements about the operation of the SECURE Act with respect to inherited IRAs, the operation of the 10-year rule and to whom it applies, and under what circumstances. (A detailed analysis of Publication 590-B is beyond the scope of this article. For more information on the various issues presented by Publication 590-B, including some actual clarifications of policy, I direct you to Natalie Choate's excellent commentary on the subject, "Natalie Choate's Guide to the New IRS Publication 590-B." You can access the article here.)

Planning in Upheaval

by Vanessa L. Kanaga, Esq., InterActive Legal

Two bills introduced in the Senate could impact estate plans – What is a planner to do?

Ever since the middle of 2020, there have been rumblings in the estate planning profession; murmurs of tax proposals waiting in the wings, the anticipation mounting as the federal elections (eventually) concluded and the White House and Congress shifted to the Democrats. This change in power, combined with the increased spending by the federal government due to the pandemic, led many to expect proposals for changes to the Internal Revenue Code (the "Code"), including those provisions relating to estate planning. At last, the moment we expected has arrived, with two bills introduced in the Senate: the "For the 99.5% Act," introduced by Senators Sanders and Whitehouse on March 25 (the "Sanders' bill"), and the "Sensible Taxation and Equity Promotion Act of 2021," or "STEP" Act, introduced as a proposal by Senators Van Hollen, Booker, Sanders, Whitehouse, and Warren on March 29 (referred to herein as the "Van Hollen bill," although it has not been formally introduced at the time of this writing). Each of these bills proposes changes which, if enacted, would cause a fundamental shift in estate planning, from the foundations up to the more sophisticated spires of wealth preservation strategies. What would these proposals mean for clients, and what should we, as planners, be doing to alert them to the potential changes on the horizon?

Leave the Gift of True Thoughtfulness to Heirs

by David MacMahan

Few things are more overwhelming, or more emotionally challenging for heirs than the “stuff” left behind; especially in overstuffed garages and storage units.

Today, nearly all of us have been trapped in our homes by Covid for nearly a year, with at least several months ahead of us looking similar. Do you have clients over sixty, have a will or trust set up, and feeling OK about how they will be leaving their family to deal with the estate? Awesome! Now do they have a garage, attic or self-storage unit, with things not seen or thought about in months or years? These represent an amazing gifting opportunity, and useful task during COVID.

Can you imagine how overwhelming the duties will be for their beloved executor trying to let heirs know what personal property is available to divide, sell or donate? They can’t all meet at the house like in earlier times. The tangible assets, aka personal property, furniture, art, jewelry, sentimental items are usually the most difficult and contentious part of an estate to divide. The practical challenges alone of letting all heirs know what is there, getting it listed, sometimes valued are huge. Then how does one go about dividing peacefully? Worst of all, they have typically never done it before, so it is all completely overwhelming.