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Heard at Heckerling 2020 - Day 1

The first day at the 54th Annual Heckerling Institute on Estate Planning kicked off with a morning discussion on the “Magic of Grantor Trusts” followed by an information-packed afternoon covering current legislation, litigation, and rulings.

In his presentation on grantor trusts, Professor Samuel Donaldson shared the following insights:

  • The original intent in the 1954 Internal Revenue Code was to use grantor trust rules as a weapon against tax planning. The 54 Code had tax rates that ranged from 20% to 91%, and non-grantor trusts were treated as individuals, allowing two opportunities for graduated rates.
  • A carefully constructed Delaware incomplete gift non-grantor income trust can be used to give up enough control over assets to not be a grantor trust, but not enough to be a gift. This allows the trust to enjoy an exclusion from certain state income taxes (however, not New York).
  • The Code treats certain third parties as owners of trust assets for income tax purposes. Section 678 treats beneficiaries who have the power to vest income or corpus to themselves, as the owner of the trust, which results in current taxation of income to them. This can be used as a planning tool. Section 679 is a tax trap that could create grantor trust when a U.S. person creates a foreign trust that has a U.S. beneficiary.
  • Various grantor trust type provisions create either income inclusion to grantor, estate tax inclusion, or both and can be used for planning:
    • A near death grantor can swap high basis assets with low basis assets in a grantor trust to get a basis step up on death without an increase in estate tax.
    • While a tax reimbursement provision in a grantor trust can be used to allow a grantor to be reimbursed for taxes they incur on trust income, care should be taken to observe the rules of Rev Rule 2004-6,4 which controls the potential estate tax inclusion of certain assets. A mandate to reimburse should be avoided.
    • Installment sale of assets to a grantor trust is treated as “a tax nothing” but can be used to effectively remove post transfer appreciation of the asset from estate taxes.

The afternoon provided insights into regulatory updates from Turney Berry, Steve Akers, and Carol Harrington. Among the most interesting were:

  • Final regulations under Section 199A will allow a trust to use the 65-day rule distributions to manage taxable income to a level that would qualify a trust for the 20% deduction on non-qualified Specified Service Trade or Business Income.
  • Final regulations on Qualified Opportunity Zones expands the list of transactions that would accelerate the inclusion of income deferred into a QOF beyond the statutory “sale or exchange” transactions. Income inclusion would now result when a QOF is gifted, but transfers on death (including distributions to beneficiaries) will not.
  • The IRS announced in late 2019 that it intends to examine many conservation easement transactions, particularly the ones marketed through promotors.
  • In most states, a promise to make a gift, even when covered by a note, may not be valid.

There is a lot more interesting material on the agenda in the coming days, so stay tuned. 

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