“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.”
“What is the answer? It is a change of attitude, a paradigm shift. It is moving away from the notion that responsibility for and commitment to the client can be divided, i.e., if there are four advisors working for the client, then each is 25 percent responsible. No that’s not good enough. Each of us is 100 percent responsible for our client and the proper implementation of the plan. None of the advisors should sleep at night until it is clear that all of the i’s have been dotted and all of the t’s have been crossed. When flawless implementation has been achieved, that is when the client has been served and we, the advisors, ‘prove’ our care and concern.”
“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.”
“In anticipation of potential tax legislation in 2021, many ultra-high net worth clients took advantage of the large exemption amount to transfer assets outside of their taxable estate. Despite this planning, numerous clients will still have a significant estate tax liability that will need to be funded. Trust-owned life insurance is a helpful planning solution that creates future liquidity outside of client’s taxable estate to help fund this liability.”
An excellent primer in Bloomberg Tax on the benefits of Private Split Dollar.
“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.”
In 2021, the House and Senate proposed various bills that would have shut down virtually every estate planning strategy that ultra-high net worth clients rely on today to transfer hard-earned wealth to family members. Taken together, these proposals would have destroyed estate planning as we know it today:
Eliminate grantor trusts
Tax gains of appreciated property at death by eliminating the stepped-up cost basis
Raise estate tax rates on large estates
Sunset (cut in half) gift exemptions as of the beginning of this year rather than the end of 2025
Severely limit annual gift tax exclusion
Reduce the duration of GRATs and dynasty trusts.
Tax mega-IRAs (thanks to the publicity surrounding Peter Thiel’s incredible IRA)
Fortunately, these proposals all failed. Unfortunately, the threat has not passed – largely due to the impression created by the press that the ultra-wealthy are getting away with murder. Consider the following:
February 14, 2022 Bloomberg article entitled, “Shale King Harold Hamm Is Passing Billion to His Heirs Tax-Free.”
“Harold Hamm executed one of the largest wealth transfers in U.S. history last week, handing each of his five children a stake worth about $2.3 billion in Continental Resources inc., the shale drilling company he founded more than 50 years ago. Like other ultra-rich Americans, Hamm’s massive gift, years in the making, is likely to be passed down largely tax-free.”
“Hamm, 76, seems to have relied on two of the most common loopholes for avoiding the U.S.’s 40% estate-and-gift tax levy as he shifted the majority of his fortune. The key to these techniques, both perfectly legal, is to carefully structure transactions so they benefit heirs but aren’t technically gifts at all. Democrats had proposed shutting down the strategies….”
February 23, 2022, Washington Post editorial entitled, “Congress Passed Up an Obvious Policy Tool to Fix Wealth Inequality” – a call for tougher inheritance taxes.
“The estate tax is so riddled with exemptions and loopholes that only 0.04 percent of U.S. deaths resulted in the filing of estate tax returns in which inheritance tax was owed and the effective tax rate paid was only 14.7 percent….Alas, federal policy has gone in the wrong direction in recent years. The 2017 Republican tax bill doubled the amount of money exempt from estate taxes, from $11 million to $22 million per couple. This exemption is due to phase out in 2026, but expect Republicans to push to keep it in place.”
We don’t know what the future holds and what changes may await us. So many clients focus only on lifetime exemption limits. Frankly, I’m not nearly as concerned with exemption limits as I am with a complete and total re-do of our most valuable estate planning tools and techniques.
“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.