2017 Tax Reform and Jobs Act

Download Full PDF

Tax Reform

ROADMAP TO 2017

TAX REFORM AND JOBS ACT

December 29, 2017 effective for 2018 and thereafter.

(Watch out for sunset provisions from 2025 to 2028.)

This roadmap shows how the 2017 Tax Reform and Jobs Act (“An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” Pub. L. No. 115-97; enacted by Congress Dec. 22, 2017, signed by President Trump Dec. 29, 2017) changed the tax code. The links outlined below emphasize the categories noted:

•    Corporate and Business    •    Compensation and Benefits    •    Tax-Exempt Organizations
•    Pass-Through Entities    •    Individual    •    Other Excise Taxes
•    International    •    Estates, Gifts & Trusts

2017 Estate and Gift Tax Limits

Download PDF

IRS ANNOUNCES 2017 ESTATE AND GIFT TAX LIMITS:

THE $11 MILLION TAX BREAK

 

For 2017, the estate and gift tax exemption is $5.49 million per individual, up from $5.45 million in 2016. That means an individual can leave $5.49 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield just shy of $11 million ($10.98 million) from federal estate and gift taxes. The annual gift exclusion remains at $14,000 for 2017.

 

The federal estate and gift tax exemptions rise with inflation, and the Internal Revenue Service announced the new numbers here.

 

The estate tax changes matter to wealthy folks who try to whittle down their estates to keep below the threshold and avoid the 40% federal estate tax.

 

The federal gift tax is tied to the estate tax, so the inflation indexing helps the wealthy make the most of tax-free lifetime giving too. You can make the gifts during your lifetime; just you have to keep track of them as they count against the eventual estate tax exemption amount. So a woman who set up a trust for her kids with $5 million a few years ago could make new gifts to add to the trust and bring it up to the $5.49 million amount.

 

Don’t let the $11 million number fool you. The rules for couples are tricky. Sure a husband and wife can each get their own exemption, meaning a couple will be able to give away nearly $11 million tax-free in 2017 (assuming they haven’t made prior lifetime gifts), but it’s not automatic. An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of federal estate tax. But to use your late spouse’s unused exemption – a move called “portability”—you have to elect it on the estate tax return of the first spouse to die, even when no tax is due. The problem is if you don’t know what portability is and how to elect it, you could be hit with a surprise federal estate tax bill.

 

Totally separate from the lifetime gift exemption amount is the annual gift tax exclusion amount. It’s $14,000 for 2017, stuck at that level since 2013. You can give away $14,000 to as many individuals as you’d like. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000. The annual exclusion gifts don’t count towards the lifetime gift exemption.

 

When you’re making gifts to children and grandchildren, keep in mind that there’s a federal kiddie tax that covers students through the age of 23 and puts investment income, above small amounts, into the parents’ tax bracket. For 2017, the kid pays no tax on the first $1,050 of unearned income and then 10% rate on the next $1,050, the same as in 2016. It pays to make gifts early in the year.

 

If you want to make gifts and not have to bother to keep track for gift tax purposes, you can make gifts for medical, dental, and tuition expenses for as many relatives (or friends) as you’d like so long as you pay the provider directly. These gifts don’t count towards any of the limits.

Treasury to Withdraw Valuation Rules

Download PDF

 

Treasury to Withdraw Valuation Rules.

 

 

In its final report on burdensome tax regulations, the Treasury Department has called for the withdrawal of Obama-era valuation rules that family business owners said would wreak havoc on their legacy plans. The proposed rules, issued in August 2016, “Restrictions on Liquidation of an Interest for Estate, Gift and Generation-Skipping Transfer Taxes” under Section 2704, would have curbed valuation discounts and meant increased estate taxes on the deaths of owners of family businesses. The Treasury has now concluded that “the proposed regulations’ approach to the problem of artificial valuation discounts is unworkable.” The report says that Treasury plans to publish a withdrawal of the proposed regulations in the Federal Register shortly.

 

So, it’s back to business as usual for the family business owners. The regulations were mucking up an area that was already difficult to navigate. Families can go back to wealth transfer planning using discounts without the fear of the 2704 regulations looming. Still, you don’t want to be too aggressive.

 

The Family Business Coalition, which lobbied hard to kill the 2704 regulations, issued a statement applauding Treasury Secretary Steven Mnuchin and the Administration “for protecting family owned businesses from this proposed stealth death tax increase.” Proponents of the rules said they would close a tax loophole that allows the wealthy to pass more on to heirs free of gift tax and estate tax by lowballing the value of what they gave away.

 

While the withdraw of the 2704 regulations is a huge victory for small businesses and the anti-death-tax lobby, it’s overshadowed by the prospect, under the Trump-GOP tax framework, of estate and generation-skipping-transfer tax repeal. Could this be the first nail in the coffin of the estate tax? It shows where the Administration is coming from. The §2704 regulations were on President Donald Trump’s April executive order hit list of potentially burdensome regulations. Estate tax repeal in the House is a safe bet; in the Senate, it’s at best unceartain.

 

 

Why it’s been 30 years since the last tax reform

Download PDF

Why It’s Been 31 Years Since the Last Tax ReformwKxFSZSources: Inside.gov & Internal Revenue Service

President Donald Trump has promised the most comprehensive overhaul of the tax system since 1986. That was when a Republican president joined forces with a Democratic House of Representatives and a Republican Senate to lower personal income-tax rates and simplify a messy and outdated tax system.

Today, Republicans control both houses of Congress as well as the White House. Democrats agree with them that the system has once again become messy and outdated. So in theory it should be easier to reach agreement now than it was then.

Forget that theory. Passing tax reform this year will be a much tougher slog than it was 30 years ago, or than Republicans expect it to be today.

Republican opposition would have doomed President Ronald Reagan’s plans without Democratic support, and the bipartisanship and skilled political leadership needed to push them through don’t exist today.

Thus while a sweeping tax-reform bill is a top priority of both Trump and House Speaker Paul Ryan, with a goal of passing it by July, the odds are that it won’t happen. A look at what took place in 1986 helps explain why.

The architect of the 1986 tax bill was a Democratic senator, Bill Bradley, who was a relentless and effective advocate. The concept was embraced and proposed by Reagan, who delegated the responsibility for getting it through to Jim Baker, the most politically skillful Treasury secretary of modern times, and his brilliant deputy, Richard Darman, a genius at navigating the intersection of policy and politics.

On Capitol Hill, the chairmen of the two tax-writing committees surprisingly rose to the occasion. The Democratic Ways and Means Chairman Dan Rostenkowski transcended his roots as a Chicago machine politician to become a national legislator. Senate Finance Committee Chairman Bob Packwood stopped defending tax benefits tailored for some of the business interests he and other Republicans had faithfully championed.

The result was a comprehensive bill that slashed individual and corporate rates while compensating for the lost revenue by closing loopholes. That meant eliminating tax advantages enjoyed by powerful interest groups like the oil and real-estate industries and overcoming their formidable allies in Congress.

On the way, the 1986 tax bill nearly died on multiple occasions as lobbyists pressed their cases. Throughout almost two years of debate and negotiation, the conventional wisdom was that the proposal would not survive. It was defeated once in the House. The Senate, with Democrats and Republicans equally beholden to special interests, appeared to be a certain graveyard.

Then, as the bill reached final passage, Senate Republican Leader Bob Dole marveled that in a matter of days, it went from “immovable to unstoppable.” It cleared the Senate by 97 votes to 3. A combination of will, skill and ideological flexibility made it possible.

For example, conservatives got the lower individual rates they favored by giving liberals something they wanted: stiff increases in corporate taxes (something Reagan chose not to talk about in public). Liberals suppressed their horror at the idea of a 28-percent rate for wealthy people (down from 70 percent just six years earlier) because conservatives overcame their fears about constraining economic growth.

Today, that spirit of horse-trading is gone. Many Republicans are dead-set against raising any taxes, even if needed to offset cuts elsewhere. Some Democrats are unbending on reducing high U.S. corporate tax rates despite widespread agreement that they are counterproductive. It’s hard to see why either side would give ground.

The Trump administration’s tax-reform effort, for now, is being guided by a top White House economic adviser, Gary Cohn. Until a month ago he was president of Goldman Sachs Group Inc., and undoubtedly is knowledgeable about taxes. When it comes to Washington politics, though, he’s no Jim Baker.

In Congress, Paul Ryan is a committed tax-policy wonk, as are a number of other Republican leaders. At this stage there is no Democrat who might be a Bradley or Rostenkowksi. In the Senate, Finance Committee chairman Orrin Hatch, who once worked across the political aisle, has become an aging partisan, lacking the dexterity Packwood displayed.

The reason personal heft matters so much is that tax reform is so hard. It directly affects as many, if not more people, than a health-care overhaul. By definition, there are winners and losers — somebody gets something at somebody else’s expense. The losers always feel more passionate and make more noise.

“Doing major tax reform with familiar income or consumption taxes has proved remarkably difficult — even when everyone agrees that reform is necessary,” notes Michael Graetz, a Columbia Law School professor and former Treasury Department tax official who has written extensively on the issue.

The machinations Republicans are starting to go through attests to that wisdom. Ryan says the final product won’t reduce government revenue and Treasury Secretary Steven Mnuchin says the wealthy won’t get a net tax cut. Those claims are overtures to moderates. But given Republican fondness for lowering rates, especially for the wealthiest taxpayers, neither result is likely.

Republicans envision a new sales tax on domestic and imported goods and services dubbed a “border adjustment tax,” a variation of a European-style value-added levy that would favor exporters like Boeing and Caterpillar over equally powerful consumer-product companies like Wal-Mart and Target, not to mention consumers themselves. There’s economic merit to the idea since it would raise money to enable rate cuts and avoids the crude protectionism that Trump has championed.

But it would create a big new tax, and already some House conservatives are objecting. So has the right-wing advocacy group Americans for Prosperity, which was founded by the Republican mega-donors Charles and David Koch.

Politics aside, Graetz, who’s supported a form of a value-added levy, warns that the border-tax idea proposes “a unique tax used nowhere in the world with big but uncertain economic effects, which certainly will produce major legal challenges both here and from our trading partners.”

Thus, concludes Len Berman of the Tax Policy Center, “The theory of this tax looks good but the politics may prove impossible.” U.S. retailers already are rallying in opposition.

Another source of revenue could be a special lower rate on corporate income from foreign sources intended to allow companies to invest that money in the U.S. instead of banking it abroad to avoid high corporate taxes. Perhaps Democrats could be brought on board by a promise to use some of the resulting revenue to finance infrastructure improvements, as Trump has promised to do.

But those revenues would be temporary while the tax cuts, Ryan insists, would be permanent. Democrats, skeptical of cutting any deal, sense a trap where Republicans subsequently would come back with big spending cutbacks to make up for the deficits.

It may not be that tough for Republicans to cut taxes, mainly on a party-line vote. But as they struggle to pass comprehensive tax reform by this summer, expect sometime this spring for them to start wondering: Where are Bill Bradley and Jim Baker?

THOMAS LAW FIRM
C H A R T E R E D
2632 Mesilla Street, NE
Albuquerque, New Mexico 87110
P. O. Box 21580
Albuquerque, NM 87154-1580
Telephone: 505-837-2344
Facsimile: 505-837-2141
USA Toll Free: 888-837-2343
Firm E-Mail: Attorneys@ThomasLaw.US

What’s New in Estate and Gift Tax

Download PDF

 

WHAT’S NEW – ESTATE AND GIFT TAX

 

  1. Consistent Basis Reporting Between Estate and Person Acquiring Property from Decedent

On March 23, 2016, the IRS issued Notice 2016-27, which provides that statements required under section 6035, regarding the basis of property distributed from the estate of a decedent, need not be filed or furnished until June 30, 2016. Other notices had previously delayed the filing of such statements. See Notice 2016-19 (PDF), Notice 2015-57 (PDF), and temporary regulations, T.D. 9757.

In addition, proposed regulations, REG-127923-15, provide guidance regarding the requirement that a recipient’s basis in certain property acquired from a decedent be consistent with the value of the property as finally determined for Federal estate tax purposes.

The statements noted above are required by H.R. 3236, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which was signed into law on July 31, 2015.

The law created Section 6035, which requires the executor of an estate required to file an estate tax return to also provide certain statements to the IRS and to beneficiaries receiving inherited property. This also applies to 6018(b) filers.

The law also adds Section 1014(f), which requires consistent basis reporting between an estate and the beneficiary receiving certain property from a decedent.

These changes apply to any estate tax return filed, and to property with respect to which an estate tax return is filed, after July 31, 2015.

 

  1. Form 706 Changes

The basic exclusion amount (or applicable exclusion amount in years prior to 2011) is

  • $1,500,000 (2004-2005)
  • $2,000,000 (2006-2008)
  • $3,500,000 (2009)
  • $5,000,000 (2010-2011)
  • $5,120,000 (2012)
  • $5,250,000 (2013)
  • $5,340,000 (2014)
  • $5,430,000 (2015)
  • $5,450,000 (2016).

 

For Estate Tax returns after 12/31/1976, Line 4 of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (PDF) lists the cumulative amount of adjusted taxable gifts within the meaning of IRC section 2503. The computation of gift tax payable (Line 7 of Form 706) uses the IRC section 2001(c) rate schedule in effect as of the date of the decedent’s death, rather than the actual amount of gift taxes paid with respect to the gifts.

With the top bracket tax rates decreasing from 55 percent (in 2001) to 35 percent (in 2010), and then increasing to 40 percent (in 2013), the IRS has encountered situations where gift taxes paid were greater than the tax calculated using the rate in effect at the date of death.

It appears that some Form 706 software used by practitioners require a manual input of the gift tax payable line. Some preparers are reporting gift taxes actually paid rather than calculating the gift tax payable under date of death rates. These errors result in underpayment of estate tax due. Cases with this issue will involve estates where large gifts were made during life and at a time when tax rates were higher than at date of death. (Posted 6-5-06)

Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exclusion to the surviving spouse. This election is made on a timely filed estate tax return for the decedent with a surviving spouse. Note that simplified valuation provisions apply for those estates without a filing requirement absent the portability election. See the Instructions to Form 706 for additional information.

  1. Exclusions

The annual exclusion for gifts is:

  • $11,000 (2004-2005)
  • $12,000 (2006-2008)
  • $13,000 (2009-2012)
  • $14,000 (2013-2016).

 

The basic exclusion amount (or applicable exclusion amount in years prior to 2011) for gifts is

  • $1,000,000 (2010)
  • $5,000,000 (2011),
  • $5,120,000 (2012)
  • $5,250,000 (2013)
  • $5,340,000 (2014)
  • $5,430,000 (2015)
  • $5,450,000 (2016).
  1. Federal Transfer Certificates (International)

For more information about securing a transfer certificate, please see:

Transfer Certificate Requirements for U.S. Citizens

Transfer Certificates for Non-U.S. Citizens

  1. Form 706 Filing Instructions

The instructions (which include rate schedules) may be found on the Forms and Publications – Estate and Gift Tax.

There are few significant changes to Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The one change that will impact all filers is the elimination of the allowable State Death Tax Credit; for decedents dying in 2005 and later years, it is a deduction.

If you are filing a request for an extension of time to file an estate or gift tax return, remember that the request must go to the Cincinnati Service Center, even if you file your income or other tax returns elsewhere.

The instructions to Form 706 contain detailed guidance on completing the form and the required documentation to include with estate tax returns being filed solely to elect portability.

STATEMENTS TO IRS & BENEFICIARIES REGARDING BASIS REPORTING POSTPONED UNTIL JUNE 30, 2016

 

Download PDF

 

 

STATEMENTS TO IRS & BENEFICIARIES REGARDING BASIS REPORTING POSTPONED UNTIL JUNE 30, 2016

 

IRS has again delayed the initial due date for providing statements to IRS and

to beneficiaries, under the rules requiring consistent basis reporting for estate

tax and income tax purposes, this time until June 30, 2016. (Notice 201627,

201615 IRB 1)
Background. The executor or administrator of a decedent’s estate must file

the estate tax return. (Code Sec. 6018(a))

 

If the executor or administrator is unable to make a complete return with

respect to any part of the gross estate, he must include in his return all the

information he has, including a description of such part and the name and

address of every person holding a legal or beneficial interest in such part. If

they are notified by IRS, such legal or beneficial owners must then file returns

as to their parts of the estate. (Code Sec. 6018(b))

 

On July 31, 2015, President Obama signed into law the Surface

Transportation and Veterans Health Care Choice Improvement Act of 2015

(P.L. 11441;the Act). Section 2004 of the Act enacted Code Sec. 1014(f) and

Code Sec. 6035).

 

Under the Act, effective for property with respect to which an estate tax return

is filed after July 31, 2015, the basis of any property to which Code Sec.

1014(a) (i.e., the rules for determining basis of property acquired from a

decedent) applies can’t exceed:

 

(A) In the case of property, the final value of which has been determined

for purposes of the estate tax on the estate of the decedent, such value.

(B) In the case of property not described in (A), above, and with respect

to which a statement has been furnished under new Code Sec. 6035(a)

(see below) identifying the value of such property, such value. (Code Sec. 1014(f)(1))

 

Code Sec. 6035 imposes new reporting requirements with regard to the value

of property included in a decedent’s gross estate for federal estate tax

purposes.

 

Code Sec. 6035(a)(1) provides that the executor of any estate required to file

an estate tax return under Code Sec. 6018(a) must furnish, both to IRS and

the person acquiring any interest in property included in the decedent’s gross

estate for federal estate tax purposes, a statement identifying the value of

each interest in such property as reported on such return and such other

information with respect to that interest as IRS may prescribe.

 

Under Code Sec. 6035(a)(2), each person required to file a return under

Code Sec. 6018(b) must furnish, both to IRS and each other person who

holds a legal or beneficial interest in the property to which such return relates,

a statement identifying the information described in Code Sec. 6035(a)(1).

Code Sec. 6035(a)(3)(A) provides that each statement required to be

furnished under Code Sec. 6035(a)(1) or Code Sec. 6035(a)(2) must be

furnished at such time as IRS may prescribe, but in no case at a time later

than the earlier of: (i) the date which is 30 days after the date on which the

return under Code Sec. 6018 was required to be filed (including extensions, if

any); or (ii) the date which is 30 days after the date such return is filed.

Previous delays. Notice 201557, 201536 IRB 294, provided that, for

statements required under Code Sec. 6035(a)(1) and Code Sec. 6035(a)(2)

to be filed with IRS or furnished to a beneficiary before February 29, 2016,

the due date under Code Sec. 6035(a)(3) was delayed to February 29, 2016.

Notice 201619, 20169 IRB 362, provided the same rule, except with

March 31, 2016 substituted for February 29, 2016.

 

And, in temporary regulations issued earlier this month,

IRS reiterated the March 31, 2016 date by saying

that executors and other persons required to file or furnish a statement under

Code Sec. 6035(a)(1) or Code Sec. 6035(a)(2) before March 31, 2016, need

not do so until March 31, 2016.

 

IRS announces second delay.

 

IRS has now announced that statements

required under Code Sec. 6035(a)(1) and Code Sec. 6035(a)(2) to be filed

with IRS or furnished to a beneficiary before June 30, 2016 need not be filed

with IRS and furnished to a beneficiary until June 30, 2016.

2016 INFLATION ADJUSTED EXCLUSION – ESATE & GIFT TAX

Download PDF

 

INFLATION-ADJUSTED 2016 FIGURES FOR ESTATE AND TRUST TAX BRACKETS AND OTHER TRANSFER TAX ITEMS

 

A number of tax figures are adjusted each year for inflation based on the average Consumer Price Index (CPI) for the 12-month period ending the previous August 31. The August 2015 CPI has been released by the Labor Department. (U.S. Department of Labor, Consumer Price Index (for all-urban consumers), 9/16/2015). Using the CPI for August 2015 (and the preceding 11 months), the Thomson Reuters Checkpoint editorial staff has calculated adjustments for 2016 to the estate and trust income tax rate schedule, and for transfer tax items.

 

Tax rate schedules. The tax rate schedules for 2016 will be as follows:

 

            FOR ESTATES AND TRUSTS:

If taxable income is:                 The tax is:

———————                 ———–

Not over $2,550                       15% of taxable income

Over $2,550 but not                   $382.50 plus 25% of the

 over $5,950                            excess over $2,550

Over $5,950 but not                   $1,232.50 plus 28% of the

 over $9,050                            excess over $5,950

Over $9,050 but not                   $2,100.50 plus 33% of the

 over $12,400                            excess over $9,050

Over $12,400                          $3,206 plus 39.6% of the

                                        excess over $12,400

 

Unified estate and gift tax exclusion amount. For gifts made and estates of decedents dying in 2016, the exclusion amount will be $5,450,000 (up from $5,430,000 for gifts made and estates of decedents dying in 2015).

 

Generation-skipping transfer (GST) tax exemption. The exemption from GST tax will be $5,450,000 for transfers in 2016 (up from $5,430,000 for transfers in 2015).

 

Gift tax annual exclusion. For gifts made in 2016, the gift tax annual exclusion will be $14,000 (same as for gifts made in 2015).

 

Special use valuation reduction limit. For estates of decedents dying in 2016, the limit on the decrease in value that can result from the use of special valuation will be $1,110,000 (up from $1,100,000 for 2015).

 

Determining 2% portion for interest on deferred estate tax. In determining the part of the estate tax that is deferred on a farm or closely-held business that is subject to interest at a rate of 2% a year, for decedents dying in 2016, the tentative tax will be computed on $1,480,000 (up from $1,470,000 for 2015) plus the applicable exclusion amount.

 

Increased annual exclusion for gifts to noncitizen spouses. For gifts made in 2016, the annual exclusion for gifts to noncitizen spouses will be $148,000 (up from $147,000 for 2015).

 

Reporting foreign gifts. If the value of the aggregate “foreign gifts” received by a U.S. person (other than an exempt Code Sec. 501(c) organization) exceeds a threshold amount, the U.S. person must report each “foreign gift” to IRS. (Code Sec. 6039F(a)) Different reporting thresholds apply for gifts received from (a) nonresident alien individuals or foreign estates, and (b) foreign partnerships or foreign corporations. For gifts from a nonresident alien individual or foreign estate, reporting is required only if the aggregate amount of gifts from that person exceeds $100,000 during the tax year. For gifts from foreign corporations and foreign partnerships, the reporting threshold amount will be $15,671 in 2016 (up from $15,601 for 2015).

 

Kiddie tax. The exemption from the kiddie tax for 2016 will be $2,100 (same as for 2015). A parent will be able to elect to include a child’s income on the parent’s return for 2016 if the child’s income is more than $1,050 and less than $10,500 (same as for 2015).

 

AMT exemption for child subject to kiddie tax. The AMT exemption for 2016 for a child subject to the kiddie tax will be the lesser of (1) $7,400 (same as for 2015) plus the child’s earned income, or (2) $53,900 (up from $53,600 for 2015).

 

2017 ADMINISTRATION BUDGET PROPOSALS INCLUDE TWO NEW ESTATE PLANNING CHANGES

Download PDF

 

 

ADMINISTRATION BUDGET PROPOSALS INCLUDE TWO NEW ESTATE PLANNING CHANGES, AND MANY OLD ONES

 

In Dept. of the Treasury, “General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals,” (Feb. 2016), https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf, the Administration included in its 2017 budget proposals two new proposals to impose more restrictions on contributions of conservation easements, and to extend the mandatory consistency rule of Code Sec. 1014(f) to bind persons receiving property from a decedent to use the estate tax value in determining basis, even if the property qualified for the estate tax marital deduction, and to require donees to report their basis consistently with that of the donor with respect to lifetime gifts reported on gift tax returns. It also repeats several former estate planning-related proposals, including:

(a) simplifying the income tax limitations on charitable deductions for gifts to private foundations;

(b) disallowing the charitable deduction for gifts that are required to be made as a condition for obtaining college sporting event tickets;

(c) requiring that GRATs have a minimum length of 10 years and a minimum remainder of 25 percent of the value of the transferred assets (or $500,000, if greater);

(d) requiring a person who buys an interest in an existing life insurance contract with a death benefit of $500,000 or more to report the purchase and report any payment of the policy benefits;

(e) restoring the estate, gift, and GST rates and exemptions to their 2009 levels (top estate and gift tax rate and sole GST tax rate of 45 percent; $3.5 million estate tax applicable exclusion amount and GST exemption, and $1 million gift tax exemption), beginning in 2016;

(f) limiting to 90 years the protection from the GST tax afforded by allocation of GST exemption;

(g) treating as an incomplete transfer for gift and estate tax purposes a sale or exchange of property to a grantor trust deemed owned by the seller;

(h) clarifying that the GST exclusion under Code Sec. 2611(b)(1) for payments of medical and tuition costs applies only to direct payments by a donor to the provider of medical care or to the school in payment of tuition, and not to trust distributions;

(i) extending the lien on estate tax deferrals with respect to taxes attributable to interests in a closely-held business interest to continue throughout the deferral period;

(j) limiting to $50,000 per year the annual exclusion for gifts to most trusts, gifts of interests in passthrough entities, gifts of interests subjection to a sales prohibition, and other transfers of property that cannot be liquidated immediately by the done;

(k) empowering an authorized party to act on behalf of a decedent in all matters relating to the decedent’s tax liability, so that the estate tax definition of “executor” applies to all tax matters;

(l) eliminating stretch IRAs by requiring non-spouse beneficiaries of a decedent’s IRA or retirement plan to take inherited distributions over no more than five years;

(m) prohibiting a taxpayer who has accumulated amounts within an IRA or qualified plan or other tax-favored retirement plan in excess of the amount necessary to provide the maximum annuity permitted for a tax-qualified defined benefit plan to make additional contributions or receive additional accruals; and

(n) eliminating the deduction for gifts of conservation easements over golf courses.

2017 BUDGET PROPOSAL – SIGNIFICANT ESTATE AND GIFT TAX CHANGES ARE PROPOSED

Download PDF

 

 

PRESIDENT’S FY 2017 BUDGET CONTAINS ESTATE AND GIFT-RELATED TAX PROVISIONs

 

On February 9, 2016, President Obama released his federal budget proposals for fiscal year 2017. The Treasury Department also released its “General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals” (the so-called “Green Book”). Although many of the proposals are unlikely to become law, the budget nonetheless is a strong policy statement that may well influence the tone and direction of the coming tax debate in the presidential election, both in respect to politicians who generally align themselves with the President’s objectives and those who vehemently disagree with them. (Fiscal Year 2017 Budget of the U.S. Government; General Explanations of the Administration’s Fiscal Year 2017 Revenue Proposals).

 

The process for passing a budget generally begins with the President submitting a comprehensive detailed budget request to Congress. Then, House and Senate Budget Committees typically hold hearings on the President’s budget request, inviting White House officials to testify (which the chairman of the respective Committees have decided not to do this year), then pass their own respective budgets, which are in turn negotiated by the full House and Senate before passage of a single congressional budget resolution. The budget resolution is then the basis of annual appropriation bills.

 

For the 2017 fiscal year (i.e., starting October 1, 2016), spending levels have already been set by the Bipartisan Budget Act of 2015. The President’s budget is essentially a suggested method of allocating the agreed-upon funds.

 

The estate and gift-related proposals in the budget would:

 

  1. Generally treat transfers of appreciated property as a sale of the property, such that the donor or deceased owner of an appreciated asset would realize a capital gain (FMV over basis) at the time the asset is given or bequeathed to another that would be taxable income to the donor in the year the transfer was made (in effect, ending stepped up basis). Unlimited use of capital losses and carry-forwards would be allowed against ordinary income on the decedent’s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent’s estate (if any). The proposal would also: exempt any gain on all tangible personal property such as household furnishings and personal effects (excluding collectibles); allow a $100,000 per-person exclusion of other capital gains recognized by reason of death (indexed for inflation after 2017 and portable to the decedent’s surviving spouse); and allow a $250,000 per person exclusion for capital gain on all of the donor/decedent’s residences, that also would be portable to the decedent’s surviving spouse. Gifts or bequests to a spouse or to charity would carry the basis of the donor or decedent;

 

  1. Restore the estate, generation-skipping transfer (GST), and gift tax exemption and rates to 2009 levels. Thus, the top tax rate would be 45%, and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes;

 

  1. Expand the requirement of consistency in value for transfer and income tax purposes to also include certain property qualifying for the estate tax marital deduction and certain property transferred by gift;

 

  1. Effective for trusts created after the enactment date, require a grantor retained annuity trust (GRAT) to have a minimum term of ten years and a maximum term of the life expectancy of the annuitant plus ten years. Also, the remainder interest would have to have a value greater than 25% of the value of the assets contributed to the GRAT or $500,000, and any decrease in the annuity during the GRAT term and any tax-free exchange of any asset held in the trust would be prohibited;

 

  1. Effective for trusts created after the enactment date (and for the portion of a preexisting trust attributable to additions to such a trust made after that date), limit the duration of GST tax exemption by, on the 90th anniversary of the creation of a trust, providing that the GST exclusion allocated to the trust would terminate;  

 

  1. Extend the estate tax lien under Code Sec. 6324(a)(1) to apply throughout the Code Sec. 6166 deferral period;  

 

  1. Modify GST tax treatment of health and education exclusion trusts such that the Code Sec. 2611(b)(1) exclusion from the definition of a GST applies only to a payment by a donor directly to the provider of medical care or the school in payment of tuition, and not to trust distributions, even if for the same purposes;

 

  1. Simplify the gift tax exclusion for annual gifts by eliminating the present interest requirement in order for gifts to qualify for the gift tax annual exclusion. Instead, the budget proposal would define a new category of transfers and would impose an annual limit of $50,000 per donor on the donor’s transfers of property within this new category that will qualify for the gift tax annual exclusion (in addition to the $14,000 per donor limit); and

 

  1. Expand the applicability of the definition of an “executor” to expressly make the Code’s definition applicable for all tax purposes, and authorize such executor to do anything on behalf of the decedent in connection with the decedent’s pre-death tax liabilities or obligations that the decedent could have done if still living.

 

All of this will doubtless be the topic of partisan discussions over the coming months.

Have Recent Court Decisions Sounded The Death Knell For Single Member LLCs In An Asset Protection Plan?

Download PDF

Have Recent Court Decisions Sounded The Death Knell For Single Member LLCs In An Asset Protection Plan?

As LLCs are creatures of state law, any analysis of an LLC’s role in an asset protection strategy must consider the relevant state’s LLC act as well as case law that interprets it. The Revised Uniform Limited Liability Company Act, on which most state LLC legislation, including Wyoming’s, is based, provides in Section 304(b):

“The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not ground for imposing liability on the members or managers for the debts, obligations or other liabilities of the company.”

In other words, failure to observe corporate formalities is not a reason to pierce an LLC’s veil.

Or is it?

A recent case out of the Supreme Court of Wyoming, Greenhunter Energy, Inc. v. Western Ecosystems Technology, Inc. (2014 WY 144), left many wondering (1) if the death knell had sounded on the use of Wyoming single-member LLCs in an asset protection strategy, and (2) if other states like New Mexico would follow suit in liberally piercing the veil of a single-member LLC. The case serves as a sobering reminder of the vulnerability of single-member LLCs even in a traditionally LLC-favorable jurisdiction such as Wyoming.

Greenhunter Energy involved a contract for consulting services between GreenHunter Wind Energy, LLC (the “Debtor LLC”) and Western Ecosystems Technology, Inc. (the “Consultant”). The Consultant provided services to the Debtor over the course of a year and never received payment. The Consultant sought to obtain judgment against the Debtor LLC only to learn that the Debtor LLC had no assets. The Consultant then sought judgment against the Debtor LLC’s sole member, GreenHunter Energy, Inc. (the “Sole Member”).

The primary issue before the Court was whether the Debtor LLC’s veil of limited liability should be pierced, subjecting the Sole Member to liability. In analyzing this issue, the Court outlined a new test:

The veil of a limited liability company may be pierced under exceptional circumstances when:

(1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and

(2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity.

In considering whether both prongs of its “fact-driven and flexible” test had been met, the Court applied the following non-exhaustive factors:

(1) presence of fraud,

(2) inadequate capitalization,

(3) the degree to which the business and finances of the LLC and its member are intermingled, and

(4) manipulation of assets and liabilities between the LLC and its member to concentrate the assets in the member and the liabilities in the LLC.

The Court repeated that the analysis is fact-driven and clarified that no one factor, except fraud, alone justifies piercing an LLC’s veil of limited liability.

Additionally, to pierce the veil, “an injustice or unfairness must always be proven.”

Despite reiterating that “limited liability is the rule, and piercing is the rare exception to be applied only in cases involving exceptional circumstances,” the Court affirmed the district court’s judgment piercing the LLC’s veil and holding the Sole Member liable for the debt to the Consultant. The Court cited the following facts to support its holding:

(1) Undercapitalization: During the period that the Consultant provided services to the Debtor LLC, the Debtor LLC often had $0 in its operating account and received periodic transfers from the Sole Member who had sole discretion in how the money was used. The Consultant submitted seven invoices to the Debtor LLC over time, yet never received payment. The Court held that these facts indicated that the Debtor LLC was inadequately capitalized due to manipulation by the Sole Member.

(2) Inter-mingling: Although the Sole Member and Debtor LLC had separate bank accounts and business records, the Court nonetheless found evidence of improper intermingling. The Sole Member and the Debtor LLC had: (a) overlapping ownership, membership and management; (b) the same business address; and (c) the same accountants, who consolidated the entities’ tax returns. Funds were passed through the Debtor LLC by periodic transfers from the Sole Member to pay selected expenses.

(3) Misuse of the Debtor LLC: The Court pointed out that the Sole Member “enjoyed significant tax breaks attributable to the LLC’s losses, without bearing any responsibility for the LLC’s debt and obligations that contributed to such losses” and held that the “disparity in the risks and rewards resulting from this manipulation would lead to injustice.” The Court recognized that filing a consolidated tax return was permitted by federal tax law, and concluded that the tax filings were only one of many relevant pieces of evidence that the Sole Member had improperly directed benefits from the Debtor LLC to itself.

As the Sole Member argued in Greenhunter Energy, the holding is troubling from a policy perspective.

Federal tax law permits the consolidated tax filing. To identify this fact as supporting veil piercing puts single-member LLCs in the position of having to choose between the tax and asset protection benefits of an LLC. Furthermore, LLCs are defined by their flexibility and lack of corporate formalities. The minimal requirements of forming and operating a single-member LLC are part of the entity’s attractiveness, and it is not inconceivable that such informality and flexibility would lead to some degree of overlap between the business and its owner. No fraud was proven, yet the veil was still pierced, leading many to question whether LLC veil piercing, particularly in the case of single-member LLCs, truly is reserved for exceptional circumstances.

As case law continues to develop around this issue, business owners and their advisors should be cautious about the potential dangers of using a single-member LLC where asset protection is a primary objective.

After Greenhunter Energy, it would be prudent to (1) keep adequate funds in the LLC’s operating account, allowing it to pay all debts as they come due, (2) consider using a separate accountant for the LLC’s bookkeeping, (3) establish separate mailing addresses for the entities, (4) acknowledge and prioritize ongoing LLC compliance responsibilities, and (5) ensure that all liabilities associated with any tax benefits derived from an LLC are satisfied in full in a timely manner.

For more information on this issue and other matters related to the proper formation and administration of limited liability companies, please contact THOMAS LAW FIRM, Chartered, PO Box 21580, Albuquerque, NM 87154-1580 Telephone: 505-837-2344 Email: Attorneys@ThomasLaw.US.