Thursday, January 29, 2015

Inherent Unfairness In The Proposed Closing Of The “Trust Fund Loophole”

In November of 2014, I wrote a blog entitled Income Tax Basis Adjustment of Trust Assets at Death of Trustor.  The blog discussed how under long-standing tax law, an asset of a decedent or of the decedent’s revocable trust or estate receives a new basis for income tax gain and loss purposes equal to the value of asset as of the date of death of the decedent.  For example, if the decedent or the decedent’s revocable trust died owning Apple stock with a value of $115.00 per share on the date of death, if and when the stock was sold by the trust or its beneficiaries any taxable gain is equal to the excess of the sale price over $115.00 per share.  This is true even though the decedent may have purchased the stock at $90.00 per share during his or her lifetime, and $90.00 per share was the decedent’s basis in the asset.  As noted by Attorney Collins Hunsaker in his recent blog entitled President Obama’s Tax Plan and the “Trust Fund Loophole, President Obama wants to eliminate this income tax basis adjustment of an asset to the value on the date of death, and instead require that the income tax basis remain the decedent’s basis even after death.  Mr. Obama touted this in his most recent State of the Union Speech, and labeled it the closing of the “trust fund loophole”.  If such a proposal was enacted into law, if and when the stock was sold by the trust or its beneficiaries in the above example, any taxable gain would be equal to the excess of the sale price over $90.00 per share, the decedent’s basis, and not the $115.00 per share, the value as of the date of death. 

So what is unfair about that? After all, that is what the decedent’s income tax basis was when he or she was alive.  Why should the beneficiaries obtain an increase in the income tax basis to the value on the date of death just because a death occurred?  The answer is federal estate tax.  When one dies, the decedent’s estate and trust is potentially subject to federal estate tax depending on the value of the estate and trust assets.  If federal estate tax is due as a result of the death of the decedent, the tax rate is 40% and generally the tax must be paid within 9 months of the date of death.  Federal estate tax is based on the value of the assets as of the date of death, not the decedent’s basis in the assets.  Accordingly, to subject the decedent’s estate, trust and beneficiaries to federal estate tax based on the value of the assets as of the date of death, it is only consistent from a tax point of view to adjust the asset basis to the same value for income tax purposes if and when the asset is sold, namely the value of the asset on the date of death.  To do otherwise has traditionally been viewed as unfair and inconsistent. As opposed to closing the “trust fund loophole”, arguably the adoption of such a proposal would allow the government “to have its cake and eat it too” tax-wise.   

-Attorney John R. Mugan

 

Friday, January 23, 2015

President Obama’s Tax Plan and the “Trust Fund Loophole”

Last November, Attorney John Mugan wrote a blog titled “Income Tax Basis Adjustment of Trust Assets at Death of Trustor”.  I would suggest one reads this blog to gain an understanding as to how income tax can largely be avoided at the time of death applying the long standing Internal Revenue Code rule more commonly referred to as the “step-up” basis rule. 

It is rumored that President Obama would like Congress to reexamine this rule.  In a New York Times article (Obama Will Seek to Raise Taxes on Wealthy to Finance Cuts for Middle Class) dated January 17, 2015, Julie Hirschfeld Davis wrote:

The centerpiece of the plan, described by administration officials on the condition of anonymity ahead of the president’s speech, would eliminate what Mr. Obama’s advisers call the “trust-fund loophole,” a provision governing inherited assets that shields hundreds of billions of dollars from taxation each year.”

The proposed elimination of “step-up” basis rule has already proven to be a highly contested issue among political pundits.  Although it is difficult to know for certain as to whether or not President Obama will be successful in his efforts to push through legislation that would cause the elimination of this rule, many believe that a GOP led Congress will impede his efforts. 

If you find this topic of interest, I would recommend that you take a look at the article “Obama Plan to Lower Middle Class Tax at Expense of Rich is Non-Starter for GOP” for another writer’s perspective.

-Attorney Collins Hunsaker

 

Tuesday, January 13, 2015

New Year’s Resolutions

There’s a lot of talk this time of year about resolutions, goals, and changes that people want to make in their lives.  The best joke that I heard on this subject was one fellow who said that for his new year’s resolution, he’d like to keep his computer screen at 1280 x 1024.  I’d like to throw out a serious suggestion for a goal for 2015; but I won’t be asking you to improve your health through exercise or better eating.
 
Estate Planning.  That’s a broad category, but I have two targets:  1) those who need to implement their first estate plan; and 2) those who need to review and update their existing estate plan.
Initial Estate Planning:  This one’s pretty obvious, and for those that fit into this category, you know who you are.  It may be an awkward topic or it might scare you to talk about estate planning.  But it’s not as bad as it might seem.  Just get it done and you will feel better and more prepared for the future.
Review and Update:  This category scares me because I am afraid that there are still a lot of people that need to have their old estate plan reviewed.  A trust originally drafted and signed in the ‘90’s or early 2000’s, likely needs to be updated.  We at JEFFREY BURR have talked a lot about this with newsletters to our clients, letters discussing estate tax updates, and this blog.
Our concern is that a lot of these old trusts may have language requiring the surviving spouse to divide and allocate the entire trust estate between two separate sub-trusts.  These divisions into sub-trusts were originally intended to reduce or eliminate the impact of the federal estate tax.  But the estate tax laws were significantly changed in 2012.  The 2012 estate tax changes made permanent a much higher exemption amount ($5 million per spouse – indexed for inflation), and the idea of portability of the estate tax exemption was introduced.  Portability allows a surviving spouse to claim and preserve a deceased spouse’s $5 million exemption regardless of the details of their estate planning or even without having a Will or Trust in place.  And the increase in the exemption amount means that far fewer people will be impacted by the federal estate tax. 

The combined result of these changes is that married clients with an estate less than $10 million may be able to greatly simplify their trust by removing the requirement to divide the trust.  While this administrative burden to divide the trust upon the death of the first spouse may no longer provide a tax advantage, it may be a mandatory requirement of the trust contract and the surviving spouse may have few options other than to fulfill the mandatory obligation to divide and operate the trust as two or three trusts after the first spouse’s death. 
Please make an appointment with your estate planning attorney to have your trust reviewed.  It won’t take too long because most attorneys will be able to quickly identify if an update is warranted and 2015 is a great year for a checkup if you haven’t had one in a while.