430 west 7 avenue suite 100 anchorage, ak 99501 …...430 west 7th avenue suite 100 anchorage, ak...

430 West 7th Avenue

Suite 100

Anchorage, AK 99501

Tel. 907.341.3750

Fax 907.341.3755

admin@ak‐estate‐cpa.com

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ANCHORAGE ESTATE PLANNING COUNCIL FEBRUARY 26, 2018 HECKERLING ESTATE PLANNING CONFERENCE – SELECTED TOPICS

529 PLANS EXPANDED under New Tax Act

529 Plans can now be used for K-12 expenses up to $10,000 per year.

Qualifying schools include public, private, and religious.

Tuition is definitely covered; other costs may also be allowed, such as room & board, books, computer software & equipment, etc. We may need more IRS guidance.

Earnings that are part of withdrawals are federally tax free, but may be subject to state

income tax

Some states will need to update their 529 Plans to be in conformity with new law. CAUTION: Check the state rules before assuming your withdrawal is allowed. State Prepaid tuition type plans may not allow withdrawals for K-12. States might enact minimum holding periods.

529 Plan investing just became trickier as it will be more difficult to create age-based portfolios. Plans may become more expensive to administer.

FIDCUIARY ACCOUNTINGS – REASONS TO DO EVEN IF NOT REQUIRED

We recommend fiduciary accountings are prepared every year after the death of the 2nd spouse, even if not required.

Proactive accountings provide information and disclosure that protect the Trustee.

These should be accompanied by attorney cover letter explaining the rights of the

beneficiaries and statute language under state law (note some states have different requirements). E.g. Timeframe for which beneficiaries can challenge or contest Trustee’s actions and transactions. Language should include that by accepting the accounting, either implicitly by timeframe or explicitly by signature, the beneficiary


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“signs off” on ALL transaction and ALL actions of the Trustee for the time-period presented in the accounting.

Helps to ensure that provisions of the Trust are being followed and the Trustee is

appropriately allocating between income and principal beneficiaries according to the terms of the document.

Provide better cash-flow, tax, legal, and transactional planning since there is what is

effective an annual review of the Trust.

Helps prevent legal actions by beneficiaries after years of Trust management, which is an expensive and time-consuming process and likely records will not be as accurate. Do accountings now, instead of later when historical information starts to deteriorate.

Provides documents that can later submitted to an oversight court.

ELIMINATION OF 2% MISCELLANEOUS ITEMIZED DEDUCTIONS – PLANNING & STRATEGIES FOR ESTATES & TRUSTS

New Tax Act suspends the miscellaneous 2% itemized deductions from 2018-2025. Note this could be a temporary law.

Miscellaneous itemized deductions for estates and trusts typically include items such as (most common items):

excess deduction upon termination, investment/broker fees, other investment-related expenses, bank & escrow fees, utilities, maintenance, and other holding costs of real estate, but does not

include mortgage interest and real estate taxes. Any of these types of expenses that pass-thru to the Estate or Trust from K-1

entity.

Note that Estates and Trusts are typically allowed legal and accounting fees as a cost of administration and are not subject to the 2% limit.

Can these costs be capitalized to the investment/property? You may need an election

on the 1041 to properly do this. Capitalizing as much as possible will likely convert the expense from a 2% limit type expense to a future capital gain offset and/or will allow the Estate/Trust to eventually pass out any leftover capital losses to heirs/beneficiaries.

Any other ideas from the council members?


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Please let us know if you have any questions regarding the above.

NOTES:

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What the Heckerling

did I Learn at Heckerling?

(A few key takeaways)

Presented for: Anchorage Estate Planning Counsel

Presented by: Jamie Delman, of

S-Corp Planning Techniquesfrom “Starting off on the Right Foot While Avoiding Foot Faults – Issues at the Formation of Closely-Held Business.”Stephanie Loomis-Price, Samuel A. Donaldson, and Ivan TabackMonday, January 22, 2018, Fundamentals Program

1. Beware the Ides of March.a. Election for new business and returns (1120S) due

March 15th.

2. What can S-Corp Shareholder pay herself?a. Between 41% and 47% of net profits probably

acceptable.b. BUT – only real answer is what shareholder would have

to pay herself on the open market.

S-Corp Planning Techniques(Continued)

3. Qualifying Disqualified Shareholdera. No shareholder can be a non-resident alien. Fix?

Non-Resident Alien (disqualified Shareholders)US Individual Shareholders

S Corp

Partnership

UsS corp transfers capital to partnership. NRA transfers capital to partnership.

GRAT Remainder Interest Sale (CAUTION)from “Recent Developments - 2017”Carol A. Harrington, Steve R. Akers, and Jeffrey N. PennellMonday, January 22, 2018, Recent Developments Panel

1. CCA 201745012During his life, D formed two GRATs. The remainder of each GRAT was to go to a third irrevocable trust (IT). During the annuity terms of the GRATs and one day before his death, D purchased the remainder interests from IT using an unsecured promissory note.D’s executor filed GTR for year of death reporting no gift because adequate consideration was received.

GRAT (Continued)On D’s 706, D’s executor filed claimed a deduction for promissory notes as claims against estate. 706 also reported the corpus of the GRATs as included under 2036.

Per IRS Office of Chief Counsel: The purchase of the remainder interest did not replenish D’s estate because the assets of the GRATs were all to be included under 2036 anyhow. Therefore adequate consideration exception inapplicable. Therefore, notes to IT are treated as taxable gifts. And because the notes were gifts, they were not allowed as claims against estate.

GRAT (Continued)CONCLUSION: Very bad result.

Deathbed planning resulted in creation of phantom asset. D’s estate would have been much better off without the planning.

Electronic WillsAbigail O’Connor

Holland & Knight LLPAnchorage, Alaska

[email protected]

Will by Samsung Galaxy??

»In re Estate of Castro, Case No. 2013ES00140»Lorain County, Ohio»“In writing requirement”»Words and signatures by stylus pen on Samsung Galaxy = “writing”

Current Laws Allowing E-Signatures Exclude Wills

»Uniform Electronic Transactions Act (1989)»Electronic Signatures in Global and National Commerce Act (1990)»Both allow electronic signatures»Both exclude wills, codicils, and testamentary trusts

Electronic Wills in Nevada - 2017

»No witnesses with “authentication characteristic of the testator;” or

»Signed in “presence” of electronic notary; or

»Signed in “presence” of two witnesses who place their electronic signatures in the “presence” of each other

Electronic Wills in Nevada – 2017 (continued…)

»“Presence”–Same physical location–Different physical locations but can see, hear, and

communicate with each other in real time by audio-video communication

»Electronic signature? Not quite defined there, but…–Probably sound, symbol, or process attached or

logically associated w/record and executed/adopted with intent to sign

Electronic Wills in Nevada – 2017 (one more slide…)

»Deemed executed in Nevada if–Says & intends to execute per Nevada law–Document says governed by Nevada law–Any witnesses or notary physically in Nevada–Qualified custodian in Nevada

»AS 13.12.506 –“execution complies with the law at the time of

execution of the place where the will is executed…”

Uniform Law Commission

»Drafting Committee on Electronic Wills Act–Meeting this coming weekend–Defines electronic will–Envisions witnesses who are not physically w/testator–Notion of a “qualified supervisor”–Harmless error doctrine

»Stay tuned!!!

Heckerling 2018

Charitable Giving Update

Presented by:

Jobs Act of 2017 – Key Changes for Charitable GivingPrior Law• $12,700 Standard

deduction (married)• $4,050 personal

Exemption• Many Deductions

Available

New Law• $24,000 Standard

Deduction (married)• No Personal Exemption• Limitation or

elimination of many deductions

Tax Cuts and Jobs Act of 2017 2

Reduced or eliminated deductions

Reduced• state and local income

taxes (SALT) 10k limit• Home mtg. interest dd

lowered to 750k• Alimony shifted to

payor (no dd and no inclusion)

Eliminated• Expenses related to tax

return prep• Moving expenses (bad

for AK)• Home equity interest dd• casualty loss dd• unreimbursed employee

expenses


Effect of Changes

Key Changes• Increased Standard

Deduction• Limited deductions

Effect• More taxpayers will use

the standard deduction and not itemize

• Standard dd taxpayers will not benefit from:

• 1 – Charitable giving• 2 – home mort. Int. dd• 3 – SALT payments


Solution 1: Bunching Deductions

• “Bunching Deductions” • Client could make a large contribution in year 1 to a donor advised fund or private foundation

• The DAF gift would then fund annual contributions the client would otherwise make in later years.


Solution 2: Qualified Charitable Distributions from IRAs• An over-age-70½ IRA owner can, in any calendar year,

instruct admin to transfer up to $100,000 directly to charity

• The amount so transferred is not includible in the gross income of the IRA owner

• The transfer is a distribution from his or her IRA, and it counts towards the required minimum distribution

• SO (1) same effect as charitable dd (reduction of taxable income, (2) counts as MRD, (3) donor can still make use of the standard deduction (4) does not increase AGI.


Solution 2: Qualified Charitable Distributions from IRAs• IRC 408(d)(8); IRS Notice 2007-7 Q&A 34-44

• Who can make QCDs? Only individuals over 70 and ½ years of age• Note—only provision where reaching the 70 and ½ “birthday” is an event.

• What Accounts? Only traditional IRAs—not Keogh, 401(k), or 403(b)

• What Amount? No more than $100,000 of QCD in each year.

• 100% charity rule. donor can’t get something back. Only direct transfers to charity qualify—if money is distributed to donor then to the charity, not a QCD.

• Follow other rules. Substantiation and contemporaneous receipt requirements.


Solution 3: Non-grantor trustShenkman and Blattmachr

• Consider forming a simple local non-grantor trust with a non-compensated family member serving as trustee.

• Include IRC Sec. 642(c) language so that the trust can elect to qualify for a charitable contribution deduction.

• Gift sufficient investment assets to this trust to generate sufficient income annually to pay intended charitable contributions. (Special type of annuity is available).

• The section 642(c) deduction permits trusts (for current distributions) to deduct from income amounts distributed to charity

• Name heirs as well as charities as beneficiaries and give trustee power to allocate or distribute in his or her discretion.


Solution 3 (continued): 642(c) non-grantor trusts

• This will permit clients to donate to charities and still obtain a full tax deduction.

• Because children and other heirs are included as permissible beneficiaries, this trust structure can provide or direct distributions to heirs in a given year.


Charitable Deduction Change

• Jobs Act increases limitation on cash contributions

• From 50% of contribution base (modified AGI) To 60% of contribution base

• The 80% dd for contributions made for university athletic seating rights is eliminated


Credit against State Taxes for certain charitable contributions• The $10,000 limit on SALT deductions has led some

states to consider implementing laws providing relief from state income tax to the extent of contributions to a specified charitable fund, in hopes that the taxpayer could deduct the full charitable contribution without any $10,000 limitation.

• As an example, a taxpayer in Arizona may donate $500 to a tax-exempt private school in Arizona and receive a dollar-for-dollar reduction in state income tax liability (up to a maximum of $500) against the state income tax liability.

• See Alaska Education Tax Credit• With the passage of HB 306, the Education Tax Credit

for all tax types will no longer be available after 12/31/2018.


Pease Limitation Eliminated

• The Pease limitation reduces most itemized deductions by 3% of the amount by which AGI exceeds a threshold amount [$313,800 in 2017] but with a maximum reduction of 80%) is eliminated for 2018-2025

• Eliminating the Pease limitation can still be important for individual taxpayer itemizers who have substantial charitable (or other) deductions.


Paradigm Shift

• The increased $10 million exclusion amount for every individual means that estate and gift taxes are irrelevant for most clients.

• Concepts that have been central to the thought processes of estate planning professionals for their entire careers are no longer relevant for most clients – even for “moderately wealthy” clients (with assets of over several million dollars).

• For example, structuring testamentary charitable trusts to qualify for the estate tax charitable deduction under §2055 will no longer be important for many clients.

• It is hard for “old dogs to learn new tricks,” and planners will constantly have to be sensitive to the major paradigm shift resulting from the Act.


QUESTIONS ?


Tax Cuts and Jobs Act of 2017

Gift, Estate and GST Taxes

Presented by:

Tax Cuts and Jobs Act of 2017

No RepealApplication Exclusion Amount

andGST Exemption Amount

Doubled

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Applicable Exclusion AmountYear(s) Amount2000 – 2001 $ 675,0002002 – 2003 $ 1,000,0002004 – 2005 $ 1,500,0002006 – 2008 $ 2,000,0002009 $ 3,500,0002010 $ 1,000,000 (repeal)2011 $ 5,000,000 (to be adjusted)2017 $ 5,490,0002018 $10,000,000 (adjusted to $11,180,000)


Population Subject toTransfer Taxes

Year Number Decedents

2017 5,000

2018 1,800


Temporary8 years

2018 - 2025Then,

Sunsets(goes back to 2017 law)


“Byrd Rule” in Senate,so can pass Act with

majority vote, rather than 60 votes


No “clawback”


Window of opportunity8 years

maybe 3 years(political winds)


Planning for net worthgreater than

$5,590,000 (unmarried), $11,180,000 (married):

•Gift now, while “window” open•Use trusts•Section 2704 regulations withdrawn


Allocate GST exemption:•New trusts•Existing non-GST exempt trusts


Planning for net worthless than

$5,590,000 (unmarried), $11,180,000 (married):•Basis adjustment rules not changed

•Reposition assets so basis will be adjusted


QUESTIONS ?


430 west 7 avenue suite 100 anchorage, ak 99501 …...430 west 7th avenue suite 100 anchorage, ak...

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