Weeks in Review: April 27 - May 10, 2024
Upcoming Webinars, Using this Newsletter, and Article Summaries
Upcoming Webinar
I am conducting an upcoming free webinar, Why You Should Care About Generation-Skipping Transfer Tax. You can take your pick of two different dates – May 15 at 1:00 pm ET/10:00 am PT, or May 23 at 1:00 pm ET/10:00 am PT.
To register, click here. (Note that this webinar is provided for educational purposes only, for an audience of wealth transfer professionals. It is not intended to substitute for legal or tax advice, nor to provide a how-to aid for individuals preparing their own tax returns.)
With the upcoming “wealth wave” or “great wealth transfer,” not only will new trusts be created but older trusts will be divided, distributed, and/or terminated. These divisions and distributions carry certain GST tax reporting obligations that often fly under the radar. If you are only vaguely familiar (or completely unfamiliar) with Forms such as 706-GS(D-1), 706-GS(D), and 706-GS(T), this webinar is for you – especially if you work with trustees or beneficiaries of trusts.
Many GST tax issues are deferred from a time when the GST tax exemption was much lower. In fact, from 1986 – 1998, this exemption was only $1,000,000. (The webinar has a historical table of this exemption amount.) Also, this exemption was not always unified with the estate and gift tax annual exclusion – creating odd outcomes.
Tune in if you are able. I will have the recording available for paid subscribers, and for purchase (see note below), after the webinar.
Webinars will become a new feature where you can be a “guinea pig” for new content I am developing. So, if this topic does not appeal to you, stay tuned.
I will circulate more office hours offerings, probably next week. I am working on changing the scheduling software to allow better coordination of availability.
Using This Newsletter
It seems juvenile to tell you how to “use this newsletter,” but there are features that I have created to enhance the user experience and I want to make sure you know about them.
If you feel like there is just too much reading and you cannot keep up, I provide this update every two weeks to give you executive summaries of articles published during that timeframe. (Paid articles are not always conducive to executive summaries without giving everything away, but I am exploring ways to do so that does not take away from the article itself.) The summaries can help you get a better sense of what you might want to go back and read.
On that front, many paid articles are available for one-time purchase. Future webinar recordings (like the one referenced above) will also have one-time purchase access for those who cannot attend the live webinar. You can find the link at the top of many articles, like this:
One common question I get, both about my newsletter and competitors’ content, is how to quickly find material on a particular topic. For series of articles, the first article in each such series contains an index – like this:
Here are the indices for various ongoing series:
Everything You Ever Wanted to Know About Estate Planning Trusts
And, if you want to see an index of YouTube videos I have produced, it is pinned to the top of the newsletter or accessible at this link.
If you train newer associates or employees, my goal is to serve you by creating materials that assist you in this training process. To that end, if you have anything you want to see, please let me know. And while you may not need a subscription, did you know you can gift one to your employees - with a 20% group discount? For larger packages I am happy to negotiate corporate subscriptions as well.
Article Summaries
An Intro to Retained Interest Trusts
This article is part of my subscription offering. Before we can get into some of the exotic four-letter trusts like GRATs, QPRTs, CRATs, CLATs, etc., one must understand the basic structures underlying each.
Generally, these trusts leverage tax benefits based on either the present value of some retained interest in the trust, or the present value of a remainder interest in the trust. To get these tax benefits, the present income interest in the trust must be structured in a way that creates certainty of distributions – both in frequency and amount. In this article, I discuss how the Tax Code gets us there.
The SLAT Series, Part IV: Forward-Looking Application of IRC Section 2036
This article is part of my subscription offering.
The zeitgeist of planning for the potential sunset of the gift and estate tax basic exclusion amount suggests that the funding of SLATs, beyond what one can afford to transfer without directly or indirectly relying on distributions, is a safe alternative.
This is a dangerous assumption.
One flaw in this assumption has to do with the application of IRC Section 2036 to interspousal transfers. For certain transfers, like residences, 2036 has been determined not to apply. But, using this to justify the overfunding of SLATs may be too narrow of a reading.
While this article is more theoretical, there are some practical conclusions you can reach. Putting oneself in a situation where reliance on the SLAT during life or even after death is foreseeable, especially for payment of income taxes on behalf of the SLAT (as a grantor trust) or apportionment of estate tax to the SLAT, can create 2036 inclusion issues.
And, while the usual cost of 2036 inclusion is estate tax on prior gift tax discounts and post-gift appreciation in the value of principal, there is a new risk under proposed regulations – loss of the “sunsetted” portion of the basic exclusion amount that is used as applicable credit against gift tax prior to the sunset. But, the magnitude of 2036 inclusion is also reduced by the actual lifetime distributions taken from the SLAT – a strategy to be weighed in the next article.
While marital trusts are often used for transfer tax planning, they have non-tax utility when compared to their usual alternative – outright spousal transfers at first death. Why? Because outright spousal transfers allow the surviving spouse to change the estate plan with respect to the assets transferred from the deceased spouse. In a blended family or remarriage scenario, this can lead to the disinheritance of the deceased spouse’s intended beneficiaries. It can also expose the transferred assets to creditor claims, divorce claims, and even elective share claims in the event of remarriage.
Trust transfers solve some of the non-tax issues, by allowing the deceased spouse to lock in their choice of remainder beneficiaries. But, only certain transfers in trust qualify for the estate and gift tax marital deductions. Marital trusts are structured to meet the requirements for this marital deduction.
In this article, I discuss the life estate chassis around which many marital trusts are built – requiring a spouse to be the sole beneficiary for life, with distributions of all net income being made annually and no principal being distributed or appointed to anybody but the spouse. From there, we compare the outcomes and elections between a general power of appointment marital trust, a QTIP trust, a QDOT, and the estate trust.
Choice of assets to fund marital trusts can also be important, because the life estate chassis requires the beneficiary spouse the right to demand that unproductive assets be made productive.
End of an Estate Tax Inclusion Period: The Ultimate Guide to Form 709
This article is part of my subscription offering (especially because part of the subscription is discouraging access by DIYers, especially for tax returns, instead of the target audience of wealth transfer professionals).
The retained interests trusts I described above, such as GRATs and QPRTs, are subject to an estate tax inclusion period (ETIP). An ETIP is significant, because no GST exemption can be allocated to a trust until an ETIP closes. Then, at that time, GST exemption is allocated based on the value of the remainder interest in the trust so long as it is a GST trust.
Effectively, this means the gift tax discount obtained through a retained interest cannot be claimed for GST tax purposes. This creates two portions of a transfer subject to an ETIP that must be separately reported – the gift portion for the year of the transfer, and the GST portion in the year the ETIP ends.
Because of this uncertainty, the intent is usually to leave the remainder (at the end of the ETIP) non-exempt from GST tax. In other words, no GST exemption will be allocated. But, doing so requires election out of automatic allocation. And, for an ETIP, the method of doing so can be confusing since (unlike other gifts) the gift and GST portions are separately reported.
In this article, I discuss some best practices about where, when, and how to elect out of automatic allocation of GST exemption – preferably without having to file two separate 709s at different times for the gift portion and GST portion, respectively, of a transfer subject to an ETIP.