“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.”
“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.
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.
“Contained in the House Ways & Means version of the reconciliation package was a significant change that would materially impact the usage of grantor trusts for estate planning. Since its release, Finseca has been advocating to preserve the tax treatment of life insurance death benefits and to protect the clients who utilize your services to meet the anticipated liquidity needs at death inclusive of the taxes to be paid. Your Finseca team has had several constructive conversations with policymakers in Congress about correcting the unintended impact on life insurance. As always, nothing is final until the President signs the bill, and we do expect changes. We anticipate an updated draft of the bill in a few weeks when it moves to the House Rules Committee. Notably, the crafters of the provision have changed effective date for Section 1062 that would disregard ownership for any sales/transfers/swaps between the grantor and the trust and subject them to a tax realization event.”
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.”
“Although the grantor of an irrevocable trust surrenders the right to revoke the trust and amend its terms, the restrictions are no longer as limiting as they once were. Alternatives to judicial modifications abound. From nonjudicial settlement agreements to new trends in decanting practices to innovations in modifications by consent, clients, trustees, and beneficiaries have many potential avenues for modifying an irrevocable trust to accomplish their legacy planning goals.”
“The novel coronavirus has led many people – trustees, trust beneficiaries and advisors alike – to relocate their primary workplace or residency for the time being, sometimes across state lines. An irrevocable trust’s situs, or place of administration, may be impacted as this migration continues through the pandemic and likely into the future. The results may be intentional or inadvertent, with each having its own benefits and risks that should be evaluated both opportunistically and out of an abundance of caution.”
“The reciprocal trust doctrine can unwind legacy planning that involves mutually beneficial trusts; however, a careful and deliberate approach can shield transfers against application of the doctrine. In 2020, legacy planning for spouses and other related parties has focused largely on full use of their gift and estate tax exemptions due to the risk of prospective changes in the amounts of such exemptions. This type of planning often involves implementing mutually beneficial irrevocable trusts so that each party continues to have access to resources after the party gives assets away (e.g., spouses who each establish a spousal lifetime access trust (“SLAT”) for the benefit of the other spouse). However, such trusts can sometimes contravene the reciprocal trust doctrine, which applies to interrelated trusts that have substantially identical terms and are part of the same transaction or plan. While the facts of each case are unique, best practices indicate that related grantors vary several factors among the respective trust agreements to reduce the risk of reciprocal trust treatment.”