Table of Contents:
Business Roundup
While tagged as “Advertising Supplement,” I found this article – Tax and Wealth Under One Umbrella – from Tax Adviser to be quite interesting for a variety of reasons.
For a while, I have carved out a niche of tracking the integration of estate planning into wealth management. I wrote an article in Trusts & Estates back in April 2021 summarizing some of the business models I had observed. What I could not state in that article was my direct anecdotal market research. Throughout late 2019, and into 2020 and early 2021, I spoke to a variety of registered investment advisory firms who were looking to bring the function of drafting estate planning documents in-house. To my knowledge, none of the firms I spoke to have been successful in this endeavor. (I will present a refresh on some of these issues, integrating a new wave of software providers and AI, to the Colorado FPA on April 25, 2024.)
The reasons for lack of success are plentiful, and notwithstanding the compliance and fee-sharing issues (which have been relaxed in some states like Arizona and Utah), I concluded that the in-house drafting model on the estate planning side was highly reactionary and structurally ineffective. While there are some very large RIA firms who successfully implemented this model using their own captive law firm, the business model of estate plan drafting – which is infrequent and transactional – does not merge well with the recurring revenue model of RIA firms lacking sufficient volume of new business or evergreen estate planning clients (at least not without the RIA paying the attorney out of wealth management revenue or sharing its own fees, subject to conflicts of interest).
Such is not the case for tax, however. What has remained strong is the push for RIAs to bring CPAs and EAs in-house. Sometimes, entire accounting firms may be acquired for this purpose. By bringing tax prep in-house, a valuable service with at least annual or quarterly implications for clients is added.
There is a hidden issue, however, that is alluded to in the article and has become the bane of many accounting firms. That issue is talent. And, it goes deeper than just traditional accounting firm positions. From a demographic perspective, there just aren’t enough successors in the pipeline. And, the successors who are close to reaching the golden ring are often burnt out – and sometimes see more value in going solo instead of leaning on the firm-based equity model.
That being said, the scales have not been fully tipped – yet. I personally have worked with multiple RIA firms seeking to find someone to transition in-house to a tax strategist role (arguably a role with more balanced hours), with few takers so far. Sometimes the issue is compensation, and sometimes it is not. But, for those beating the drum of “compensation,” I have a feeling that the hesitancy to pivot is not the immediate compensation. It is, instead, the “temporarily disadvantaged millionaire” syndrome – the realization and/or hope that one’s earning potential could have hockey stick growth by staying put for just a little bit longer.
Blake Oliver has covered this talent shortage extensively on the accounting firm side. Max Shatzow also discussed bringing CPAs and estate attorneys under one roof in this article, while citing some of the compliance concerns. But, in both cases, labor and talent will continue to be the limiting factor – with a peppering of the hope among candidates of finally, after many years, realizing economic returns commensurate with one’s past experience by not making any drastic moves. And, while there are several software providers purporting to solve this problem for employers, I have a feeling that they, too, will feel the bite of the shortage in labor and talent. (Why? Because certainty in avoiding UPL requires a staff of review attorneys licensed in all states – an expensive, low-compensation task, fraught with volume-driven burnout leading to possible high turnover.)
Either way, we are in a rare period of time where it is easy to call your shot – whether you are a CPA, financial advisor, or an estate planning attorney – and while I focus on education in this newsletter I am also happy to be a sounding board from a career and business strategy perspective. Feel free to reach out if I can be of assistance, especially when weighing your current practice against the landscape painted by the above-cited articles.
Article Summaries
Family Limited Partnerships and IRC Section 2036: A High-Level Overview
This is more of a video mini-course (with slides) than an article. That being said, the whole reason I started this newsletter and my YouTube channel was to make education useful again. Post-Powell,[1] there was a flurry of renewed guidance on family limited partnerships weighing the tension between generating estate/gift tax discounts and risking gross estate inclusion under IRC Section 2036. Frankly, I found a lot of the guidance useless because it took on the air of debates between thought leaders in our space.
So, this course reflects my attempt to extract some black-letter law and clear facts-and-circumstances from the line of family limited partnership cases culminating in Powell and Moore,[2] with a peppering of principles from recent generational split-dollar cases. Like I said in the intro to the article, there are tons of ACTEC fellows out there who could probably tear my arguments apart as incomplete. In fact, some showed up in LinkedIn posts I made previewing some of the conclusions I reached – perhaps the only time I have encountered this type of criticism in the 4+ years of content I have been providing.
Nonetheless, this course has earned rave reviews thus far from those who don’t have a dog in this academic fight. I would encourage you to bookmark and listen, or at least download the slides linked in the article.
An Intro to Trustee Distribution Powers
Continuing my series on basics of estate planning trusts and trust principles, we have been exploring ways to get property out of a trust by the three main trust parties – settlors, beneficiaries, and finally trustees.
Prior articles covered a settlor’s right to revoke transfers to a trust, along with a beneficiary’s (or third person’s) power of appointment. Traditionally, each of these powers is held in a nonfiduciary capacity. In other words, none of the usually fiduciary duties of a trustee attach. Later we will discuss how this could get blurred if, for example, a beneficiary is also acting as a trustee.
But, for the time being and as a prelude to fiduciary duties, this article discusses the high-level principles of trustee distribution powers. As usual, even if you think you are familiar with these principles, I encourage you to read the article because I often add my own twist – that is, after all, the true value-add of this newsletter. (This stems from a habit I picked up in law school when studying for exams which carried over to practice. I tend to read and review materials with an eye towards finding the things I know nobody else will spot or remember.)
C and S Corporations for Estate Planners: IRC Section 303 Stock Redemptions After Death
This article is part of my subscription offering. In the article, I continue the prior discussion on redemptions of C and S corporation stock. Redemptions can either be treated as a dividend, or as a sale or exchange – the differences being that dividends in this context often are taxed as ordinary income, and that this tax treatment converts return of basis (including stepped-up basis at death) into a taxable dividend to the extent of a corporation’s accumulated earnings and profits.
Long story short, in a family ownership or estate planning context, it is difficult to avoid dividend treatment on redemption – which has an outsized effect for redemptions at death which could turn stepped-up basis into a taxable dividend as noted above. But, there is a workaround under IRC Section 303. In this article, I discuss the hoops an estate or trust must jump through to satisfy this Code Section, while also highlighting some helpful tips on structuring the estate for Section 303 purposes.
Incomplete Gift Crummey Powers: The Ultimate Guide to Form 709
This article is part of my subscription offering. Many Crummey withdrawal rights are hanging Crummey powers. These powers often have three issues.
One, they leave trust principal tied up until powers have lapsed, and the rate of lapse (usually $5,000 per year) is outpaced by the rate of trust additions (often equal to the annual exclusion, currently $18,000 per year).
Two, while qualifying for a gift tax annual exclusion, they don’t qualify for any exclusion from GST tax. So, GST exemption must often be automatically or manually allocated to hanging Crummey powers – creating a possible gift tax filing obligation that is not required under the Code but nonetheless is necessary to maintain GST exempt status.
Three, if the lapse is not limited to $5,000 per year, then the holder of the Crummey power holder has made a deemed gift to the other trust beneficiaries. This resets any of the original grantor’s allocation of GST exemption.
So, this article discusses an alternative – the incomplete gift Crummey power. I outline the basic requirements, some structuring issues that are often missed, and the general strategy from an accounting and gift tax reporting perspective.
Previews of What’s Coming
Unlike the movies, I won’t force you to read through previews first. Coming up, in addition to the current article series, here is what I am working on for future content:
Funding of the estate plan continues to be confusing - especially for financial advisors. So, I have an entire series on estate plan funding coming down the pike. (This, along with the current series on basics of estate planning trusts, reflects the estate planning basics course I promised in mid-2023 but never delivered.)
Duties of diversification and prudent investment are often waived in modern trusts. But, the duty of loyalty (requiring no self-dealing) is much more nefarious than these traditional investment duties – especially where family business interests and real estate are involved. Waiving this duty may be an extremely important touch point for families who do not appoint corporate trustees, or who appoint “independent” trustees who are still co-investors with a trust.
GST tax will become a huge issue for those representing trustees and beneficiaries. Why? Because trusts often reflect much lower GST exemptions on prior transfers (which often occurred several year or decades prior), coupled with a deferral of GST tax. The outcome is that you are more likely to encounter deferred GST tax issues from the past than you are to encounter present gift or estate tax issues (under a much higher exclusion, even post-sunset). We will discuss how and why. I have an extensive YouTube series on GST tax planning for current and prospective transfers (direct and indirect skips), but where the rubber meets the road is in identifying and planning around taxable terminations and taxable distributions.
After death, there are lots of accounting income and taxable income issues relating to the funding of trusts under formulas, and funding of bequests. These are exacerbated by a shift from formula funding outcomes to a reliance on disclaimers, portability elections, and/or partial QTIP elections. Coming up, I will discuss over several articles the tax issues to be considered in the probate process for estate plans containing both traditional A/B formulas, and newer disclaimer/portability types of formulas.
Proposed Regulations pre-dating the SECURE Act 2.0 have been pending for almost 3 years. These will change the landscape of trust look-through planning for IRA and qualified plan beneficiary designations. I have series coming up comparing old to new, to highlight what will change under these regulations pending finalization.
Finally, if you are an advisor, how do you build an advanced planning team? I will examine this from a somewhat biased and self-promotional perspective.
Speaking of self-promotion, if any of these previews resonated with you, please consider a paid subscription. To upgrade, you can log in to Substack and add your payment info - and cancel at any time if you get sick of hearing from me. Your support helps me keep producing independent, objective, and useful education for you.
[1] Powell v. Commissioner, 148 T.C. No. 18 (2017).
[2] Moore v. Commissioner, originally heard in the U.S. Tax Court with an opinion issued as T.C. Memo 2020-40, and subsequently appealed to the Ninth Circuit with an opinion issued October 18, 2021 – not to be confused with the pending U.S. Supreme Court decision in Moore v. United States regarding gain realization.