InterActive Legal Blog

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).

Reflections on a Year Unlike Any Other

Dear friends,    

     As 2020 draws to a close, and I reflect on a year unlike any other, I find that I am full of contradictions. I marvel at how quickly these twelve months seem to have passed, yet somehow wish that time would move faster. I feel joy for every day that I have with my friends and family, but sorrow for the many who are suffering the loss of their loved ones, their health, or their means of living. My fear of the unknown suddenly seems more present, but so is my awareness of all the many things, big and small, for which I am grateful.

     I am writing this note for three reasons. First, it is a thank you note, to all those who are part of InterActive Legal: Our Advisors, my colleagues, and of course, our subscribers. Thank you for your loyalty to InterActive Legal and to our profession. Your commitment to your craft, your clients, and your communities is proving more important than ever.    

InterActive Legal Leaders Co-Author Important Article Addressing How Artificial Intelligence May Affect Legal Practitioners

 

 This article was written by the authors expressly for Trusts & Estates Magazine, and appeared in the February 2020 issue. It is being reposted here with permission from the publisher.

 

AI and the World of Estate Planning

Artificial intelligence symbolizes both a promise and a threat.

Michael L. Graham, Jeff Glickman, Jonathan G. Blattmachr, and Vanessa Kanaga

January 23, 2020

Click Here to Download Article

 

The importance of the advances in science and knowledge over the past several decades cannot be exaggerated.  One area that has been most profound is artificial intelligence (AI).  Virtually, everything we use every day, from our iPhones to our automobiles, is driven by AI.  Its impact on the legal industry is enormous from word processing to computer research to email to Zoom conference calls.  The attached article describes many of these that have occurred and, perhaps, even more important, discusses some that will soon add more to our profession.

Defined Value Clauses: Ensuring No Adverse Surprises

©2020 by Jonathan G. Blattmachr, Mitchell M. Gans, and Vanessa L. Kanaga. All Rights Reserved.

With very limited exceptions, estate, gift and GST (called "wealth transfer") taxes are imposed on property's fair market value (FMV). Only cash and publicly traded securities have definite values for estate and gift tax purposes. All other assets, such as closely held business interests, land, private equity and art, do not and their FMVs are equal to the price at which the property would trade hands between a willing buyer and willing seller, neither of whom is acting under a compulsion to buy or sell but both of whom have full knowledge of the "knowable" facts affecting value (e.g., the price of land is determined without regard to the fact that there is undiscovered gold under the ground).

In fact, the IRS is known to collect more additional wealth transfer taxes on account of challenges to values reported by taxpayers than all legal issues combined. Moreover, penalties of between 20% and 40% may be imposed on the amount of tax underpaid attributable to an undervaluation of property for wealth transfer tax purposes. Section 6662(g). A reasonable cause exception (subject itself to exceptions) to the penalty is provided under Section 6664(c). The requirements for this exception are fleshed out in Reg. 1.6664-4 and are very worthwhile studying. Among other requirements is that the taxpayer must obtain an independent appraisal of the property transferred.

Hence, one way to try to avoid penalties and an additional wealth transfer tax by reason of an undervaluation is to rely on a thorough and complete appraisal. However, that has not, in many cases, avoided an increase in tax even if it did avoid the Section 6662(g) penalty.

How I am Changing My Practice, Client Meetings, Client Planning, and More to Address the Coronavirus

This article originally appeared in the American Bar Association, RPTE eReport 2020 Spring Issue (May 2020).  This version contains non-substantive grammatical edits for clarity.

Authors: Jonathan G. Blattmachr, Barron Henley, Thomas A. Tietz, Martin M. Shenkman, and Mary Vandernack

Prominent Trusts and Estates attorneys Jonathan G. Blattmachr, Barron Henley, Thomas A. Tietz, Martin M. Shenkman and Mary Vandernack provide their valuable tips for practicing and best serving clients during the current Coronavirus crisis. During the pandemic, trusts and estates services are acutely needed, and the authors give us the benefit of their collective experience.

Introduction

We are in the throes of the Coronavirus pandemic, and even though states are loosening stay-at-home restrictions, the impact on estate planning professionals, as well as their families, finances, and our country, will continue for some time. Estate planners have an incredible opportunity to help clients through this difficult time. However, to do so, we have to address how we can operate our practices though the challenges of remote work and more. A business disaster is defined as anything that interrupts the normal flow of business and the severity is a function of how long the business is impaired, and the severity of the impairment.  For most or perhaps all estate planning firms, this pandemic is classified as a catastrophic business disaster. For some, the severity of the impairment is very significant.  There have been numerous blogs and articles published in the last several weeks of firms that have had their partners stop drawing profits from the firm, had to drastically cut compensation for and laid off both associates and support staff, and still may not be able to weather the economic storm we are currently experiencing. Generally, 25% of businesses do not reopen after closing for a disaster.[1] The long-term impact of Coronavirus on the viability of law firms is uncertain, but by taking proactive measures now, firms may reduce the impact.

What steps and considerations should practitioners, and their firms, take in these times?

Estate Planning is a Process

by Vanessa L. Kanaga, Esq.

Each year, at the annual Heckerling Institute on Estate Planning (known simply as "Heckerling"), InterActive Legal hosts a luncheon for our subscribers, prospective subscribers, and Advisors. The luncheon is our way of thanking those who support us (in addition to providing some sustenance in the middle of a marathon week), and each year we provide a program that we hope our attendees will find interesting and enlightening.  This year, our program featured InterActive Legal Advisor and respected Florida estate planning attorney Alan Gassman, as well as guest speaker, Dr. Srikumar Rao. Dr. Rao is a celebrated author, speaker, and coach, helping professionals better manage and improve their lives and work, and the balance between the two¹.

In the weeks since Heckerling, I have reflected on Dr. Rao's comments during our program, and in the materials I read and watched in preparation for the luncheon. Like any expert teacher, Dr. Rao weaves together several conceptual threads to illustrate his overall lesson, which is intended to guide his audience on the path to a more fulfilling life and career. To loosely paraphrase Dr. Rao, one of those threads is the notion that we, as part of our human nature, focus too intently on the results of our actions, eager to evaluate those results and categorize them as good or bad. Rather than focus on those results, Dr. Rao teaches, we should instead set a goal and then focus on the process we take to achieve that goal. By doing so, we are more present in our daily lives, and able to benefit from the process itself, regardless of whether the result is as we expected. Ironically, by focusing on the process, we often are more likely to achieve the desired result.

I know that many of you reading this will think of it simply as new-age babble, not applicable or helpful to you in your busy workday and life. I know it because I also felt that way at first. We are in a results-driven business; estate planning is just that – planning in order to bring about a certain result. Our clients come to us seeking that result, and we have a duty to do our best to achieve it, if possible. Accordingly, teachings like Dr. Rao's seem, at first glance, not only unhelpful, but anathema to what we are trying to do in our profession. However, being the diligent student, I tried to apply the concept in my work and my life, and I now see the benefit in it. By being cognizant of what we are doing each step of the way toward our goals, we are better able to learn from each experience. We are able to be more flexible and adjust our behavior along the way, which may very well lead to better results in the end. More importantly, even if the result is not what we expected, learning from and appreciating the experience allows us to understand that we have accomplished something through the process, even if not what was intended.

'Twas the Week Before Christmas

by Teresa Bush, Esq.

 

Twas the week before Christmas, and Congress was trending.

Impeachment and budget bills both had been pending.

Articles to impeach were debated and passed

And left for the Senate to later rehash.

 

With that taken care of, the next thing to do

Was keep the government running, the whole year through.

So Nancy in her power suit and Mitch in his tie

Passed a spending bill that included a little surprise.

 

In the back of the bill, they included a matter,

That sent estate and financial planners a-chatter.

Away to the end of the bill we all paged,

To read about the SECURE Act, and how it had changed.

The Collectibles Trustee: It's crucial to place your treasured items in the right hands

Historical items can be valuable.  This presentation-inscribed Colt Model 1861 New Model Navy Revolver, from the Colt Co. to E.W. Parsons of Adams Express Co., sold for $805,000 at a September 2011 auction. 

by Vanessa L. Kanaga, Esq.

This article was originally published by Heritage Auctioneers & Galleries, Inc., "Trusts & Estates Journal," Fall 2019, page 17.

Tell me if this story sounds familiar: Brian was a military history buff who gathered a carefully curated collection of books and artifacts over his lifetime. By the time Brian died, his collection was quite valuable. Brian named his daughter, Jessica, as the Executor under his Last Will and Testament. Jessica was the only of Brian's three children living nearby, had always been a devoted daughter, and had an MBA, so it only made sense for her to administer his estate. Unfortunately, Jessica did not share Brian's love of military history and, not knowing what she had on her hands, sold most of the collection to a local pawn shop for less than half of what it was worth. Brian's son, Jacob, who shared his father's affinity for the collection, was devastated when he heard what his sister had done. Not only was the estate depleted of valuable assets, Jacob was deprived of the opportunity to own these very meaningful items.

Selecting an Executor or Trustee

Naming an Executor (called a Personal Representative in some states) to administer your estate is an important decision, and can be a difficult one, particularly if you own property that requires special knowledge and attention, such as fine art and collectibles. Though sad, it is safe to say that most estate planners could tell a tale or two like Brian's. Often, the people we trust most to handle our affairs after death did not share all of our interests in life, and may not be the best choice to manage, sell, and distribute items that are precious and valuable. Conversely, those who share a common interest in collectibles may not be the best fit when it comes to handling the other financial and personal aspects of estate administration (not to mention that it can be quite a burden to place on someone who is not a close family member).

Are You a Sitting Duck in Your Law Practice? An In-Depth Look at ADA Accessible Websites

by Audrey Ehrhardt, Esq., CBC, Practice42

ADA accessibility and compliance in law firm websites across the nation are becoming not only more relevant, but a necessity as we see an increasing amount of litigation against businesses over their websites.  Website accessibility lawsuits center around the fact that all, or a portion of, the business website or app is inaccessible to the disabled.  We are watching as the filing of website accessibility lawsuits rises dramatically.  While in 2017, we only saw an increase in these types of lawsuits by 17%, in 2018 we have seen an increase by 181%.¹

Most of us understand and have taken the steps we need to take in order to ensure our physical location is ADA friendly, but what about our law firm website?  From parking spaces and clear, wide entryways to employee training on relay communication and braille friendly documents, our law practices are friendly to disabled persons.  This holds true in many small firms, even when they are not required to be disability-friendly under Title I of the ADA.

Documentary Film, “Lives Well Lived,” Continues to Impact Lives, For Both Young and Young at Heart

In January 2019, at The Heckerling Institute on Estate Planning, a select group of InterActive Legal subscribers were invited to a private luncheon screening of the documentary film, "Lives Well Lived."  The film visits with 40 people ranging in age from 75 to 100 years young and casts a light on what these fully actualized individuals continue to do in order to make their own lives rich and well lived in the latter decades of life.

At the January event, InterActive Legal guests were delighted to meet and have their photo taken with the film’s creator, Sky Bergman.  Ms. Bergman closed out the event by describing the creative process behind the film and answering audience questions.