“Rising interest rates, degrading asset valuations, and future legislative uncertainty coupled with high wealth transfer tax exemptions mean it’s a great time to revisit installment sales and similar transactions using grantor trusts.”
“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.”
“In legacy planning, the “clawback” refers to the additional estate taxes that could be triggered by lifetime gifts if the unified federal gift and estate tax exemption is less at the time of death than at the time of gift. If there is a lower exemption at death, without a special rule, the estate tax rules could recapture and tax the value of the gift that was originally sheltered from gift tax under a higher exemption. While final regulations issued in 2019 eliminated this clawback, the preamble to these final regulations acknowledged that the IRS needed to further consider whether gifts that they deem as not true inter vivos transfers should be excepted from this special rule.”
“The IRS, clearly interested in intergenerational private split-dollar, attempted to secure a third victory. After Morrissette and Cahill, it looked like intergenerational split-dollar was trending the way of the dinosaurs. Then in Estate of Marion Levine, the Tax Court not only resurrected intergenerational split-dollar life insurance planning, but it also offered a roadmap for successfully structuring traditional private split-dollar plans as well.”
“Synopsis: Presenters at the 2022 Heckerling Institute on Estate Planning identified several enhanced areas of focus for legacy and life insurance planning, including: (1) recent developments in areas like intergenerational split-dollar; (2) private placement life insurance; (3) spousal estate planning; (4) business succession planning; and (5) trends in modern trust laws.”
“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.”
“While conventional estate plans focus on a “traditional” family notion of one husband, one wife, and their children, families today often involve far more complex relationships. Thus, modern-day families often present unique planning issues, such as the need to satisfy obligations under marital agreements, the goal to provide simultaneously for both the surviving spouse and children from prior relationships, and the desire to ensure “fair” treatment of children from prior relationships, all while minimizing potential conflicts between the spouse and those same children. The acquisition of life insurance, as well as other “tweaks” to the conventional core plan, can address these objectives.”
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?