“Life insurance continues to play a vital role in legacy planning because of its unique value proposition – a source of income tax efficient liquidity, efficient wealth transfer on a multi-generational basis, a mortality hedge, a non-correlated asset class, and strong internal rates of return relative to the current stock market. Nonetheless, advisors should evaluate how higher rates and a volatile market may impact the performance of both new and existing life insurance funding approaches.”
“For many clients, especially public company executives, retirement plans can constitute a significant portion of their wealth. Determining the proper beneficiary for a client’s retirement plans is an integral part of their overall legacy plan. The identity of the selected beneficiary (e.g., spouse, descendants, trust, charity) can greatly affect the income tax impact and thus a family’s lasting legacy.”
“The “step transaction” doctrine is alive and well. In the foot-race to beat potential tax law changes, families often miss the forest from the trees. The economic realities and entity formalities must be respected in the execution of a gift transaction….On November 10, 2021, the Tax Court rendered its decision in the case of Smaldino v. Commissioner, which involved a purported gift of LLC interests by Mr. Smaldino to his wife, followed by a purported gift of the same LLC interests, the very next day, from Mrs. Smaldino to a dynasty trust for the sole benefit of Mr. Smaldino’s children from a prior marriage. The Court found a series of ignored formalities, and that as a practical matter there was never a time when Mrs. Smaldino would have been able to effectively exercise any ownership rights with respect to the LLC interests “given” to her. The Court held that Mr. Smaldino never effectively transferred any LLC interest to Mrs. Smaldino, and consequently the dynasty trust received its entire LLC interest from Mr. Smaldino, creating a taxable event.”
2021 was a strange and challenging year in the estate and tax planning field, particularly life insurance….In the rush to address and mitigate potential consequences before they came into existence, practitioners, advisors, and clients all made decisions and took actions which, in retrospect, may not have been most advisable, were just plain mistakes, or failed to plan for the problems that these actions had potential to cause in the future, regardless of whether any of the concerning factors came to fruition. This article describes many of these “mistakes” which occurred due to rushed planning and may serve as a warning if we are (and we will be) faced with similar situations in the future.
There is an adage in the medical field that applies to planning for insurance trusts right now, namely: “First do no harm”. What is particularly difficult for estate and tax practitioners today is they are being asked to plan for previously proposed legislation that, while currently out of the legislative debate, might resurface and pass in the future. Given this situation, what can we do to position our clients so that we are helping them in the event that the now shelved legislation reenters the debate and is passed, while simultaneously not hurting them if the laws do not change?
This morning, President Biden delayed his trip to see the Pope to meet with Congressional Democrats about moving forward on the Bipartisan Infrastructure bill (BIF) and on the reconciliation bill (Build Back Better plan, or BBB). In concert with that meeting, the White House released two documents (below) explaining the current state of play on the reconciliation package.
We view this as an offer, not a conclusion. These documents are focused on the big picture items. They leave out many important details. There are other items not covered here that key Democrats have said must be addressed in a final deal (i.e. SALT).
Here are the things we are watching closely:
Grantor Trusts. We do not read their absence from this document as a guarantee that they are off the table.
Millionaires Surtax. To what definition of income is this being applied?
199A. While this document is silent on 199A adjustments, it does reference expansion of the Net Investment Income Tax. The House bill expanded that to cover active passthrough income, a small business tax increase.
Estate Tax Exemptions Expiration. Not addressed in the announced framework.
Again, this is a very fluid situation. Please don’t hesitate to reach out with questions.
An interesting article by Laura Saunders for the Wall Street Journal on July 2, 2021.
“Large Roth IRAs owned by the superrich are in the tax spotlight now, and all savers should consider the implications for their own retirement accounts….The story [ProPublica] claimed some wealthy Americans have multimillion- or even billion-dollar, tax-advantaged retirement-savings accounts. The largest one cited was a Roth IRA with $5 billion in assets (as of 2019) belonging to PayPal founder and investor Peter Thiel.”
“Financial advisers say they have been flooded with calls from clients who are trying to predict which of President Biden’s tax proposals will become law….I don’t know where we’re going with any of these taxes,” said Bill Schwartz, managing director of Wealthspire Advisors, which advises clients with $5 million to $20 million in assets. “But I do know it’s really difficult right now to justify what people call a loophole or what I call using the tax code to your advantage. In fact, it’s really hard to justify any of these techniques for the affluent right now, not that I think they’re right or wrong.”
A very interesting article in today’s NY Times Business Section. Estate planners will be surprised at the issues discussed.
“The answer: help rich people pay less in taxes. In the case of Mr. Black, the chief executive of Apollo Global Management, his advice could have been worth as much as $2 billion in savings, according to a law firm’s review of Mr. Black’s business dealings with Mr. Epstein….Mr. Epstein’s specialty was suggesting ways for wealthy clients to use sophisticated trusts and other investment vehicles to reduce their tax liability while passing on assets to their children, according to documents reviewed by The New York Times and interviews with 11 people familiar with his work. In the process, he collected hefty fees — usually based on a cut of the anticipated tax savings….In Mr. Black’s case, according to the review by the law firm Dechert, the savings were enormous: about $1 billion for a single GRAT. Mr. Epstein’s detection of a problem in a trust set up in 2006 and his proposed solution were “the most valuable piece of work” that he performed, the report said. “Outside legal counsel described the solution as a ‘grand slam,’” according to the Dechert report, which was commissioned at Mr. Black’s request after The Times reported in October that he had paid Mr. Epstein at least $75 million in fees.”
An interesting article in today’s NY Times authored by Paul Sullivan. He writes, “So the question for taxpayers now is: What happens once Mr. Biden can begin enacting changes in tax policy? The biggest long-term change involves the estate tax.” Sullivan goes on to discuss the possible loss of step-up in basis, “A Biden administration may move to change this for logical and revenue reasons. Imagine trying to determine the capital gains from AT&T stock that your grandmother bought in 1943 when record-keeping was done with a pencil and paper. Today, cost-basis information can be retrieved in seconds.” He goes on to discuss some of the inherent problems in this approach.
A different approach could be adjustment to current estate tax exemptions and rates. “With Democrats controlling the legislative and executive branches, there is concern that the exemption level could drop to $5 million or even $3.5 million…For the wealthiest in the country, the bigger concern is the rate itself. It’s now at 40%, but it was as high as 55% in 2001.”