Bonnie Lee for Fox Business writes: Our country’s tax code is long and complex and is regularly getting
changed by lawmakers, making it hard to keep up with all the updates. This year’s major tax law changes occurred early on with the
president signing into law the American Taxpayers Relief Act of 2012 on
Jan.2. The rest of the changes to the tax code this year were
enactments of new laws passed in prior years and from the Affordable
Care Act.
Here’s a look at the tax law changes that take effect this year, and how they may impact your return:
1. The Child Tax Credit of a maximum of $1,000 per child under age 17
is now permanent. If your income is greater than $110,000 (married
filing joint), $75,000 (single, head of household or qualifying
widow(er) or $55,000 (married filing separately) the amount of the
credit you can take will be limited.
The part of the Child Tax Credit that is refundable will expire in
2017. For example: you have one child and a tax liability of $300.
Currently, you would receive $300 to zero out your tax liability then a
refund of $700, the remainder. Beginning in 2017, you will not enjoy the
$700 refund.
2. Energy credits for improvements such as insulated hot water
heaters, insulation, double-paned windows, etc. expire after 2013. If
you are considering improvements in these areas, be sure to install them
before year end. The items that qualify for this special tax treatment
will be marked by the manufacturer. Be sure to keep this documentation
in your tax file in the event of an audit.
3. Tax-free charitable distributions directly from an IRA to a
qualified nonprofit organization by persons age 70 ½ or older continues
through 2013. The maximum you may contribute is $100,000. This is handy
for seniors who have paid off their homes and no longer itemize
deductions. You cannot take a charitable deduction unless you itemize. To take
advantage of this tax benefit, the IRA manager makes the allocated
donation from the IRA distribution and only reports to the IRS the
amount of the distribution received by the recipient. For example, you
normally take $12,000 per year in IRA distributions--this amount would
be 100% taxable income. However, let’s say you decide you want to donate
$1,000 to charity. You ask your plan manager to make the donation from
your IRA account and supply you with the remainder, $11,000 for the
year. You will pay taxes on only $11,000. The donation will come off the
top.
4.The Supreme Court handed down a decision that affects same sex
legally married couples. The IRS now recognizes this marital status, so
same-sex couples can now file their tax return as married filing joint
rather than as two single individuals.
5.Education credits, specifically The American Opportunity Credit,
will be allowed through 2017. And the existing provisions for Coverdell
Education Savings Accounts are now permanent. However, the tuition
deduction expires after 2013.
6.The student loan interest deduction is now deemed permanent.
7. Employer-provided education assistance benefits are now permanent
8. The dependent care credit as it stands at its current levels and calculations are permanent.
9. The Earned Income Tax Credit, a refundable tax credit for low to
moderate income workers, is set to expire in 2017.However, I expect
that it will be renewed.
10. The estate tax exemption for 2013 is set at $5,250,000 with a top
tax rate of 40%. If your estate is valued at less than this amount, and
you die by Dec. 31, no estate tax return needs to be filed and there
will be no estate tax levied.
ETFTrends.com writes: With less than six weeks until the end of the year, investors should start doing some tax planning on their taxable investment accounts to ease the burden of capital gains. Many advisors recommend different strategies to tackle this situation ranging from selling losing positions to gifting investments. The right strategy for you will ultimately depend on your individual mix of income, deductions, investment vehicles, and other factors.
Mutual funds have also begun to forecast their year-end income and capital gains distributions which may end up being higher than previous years. A recent Morningstar article pointed to the majority of large mutual fund companies such as Vanguard and Fidelity posting estimates in the 5-12% range for capital gains for 2013. These are typical of funds with a modest turnover rate and above-average gains for the year.
However, there are instances of mutual funds with large outflows that will be posting excessive distributions that can hurt investors that aren’t expecting it. The Calamos Growth Fund (CVGRX) is forecasting a distribution that will amount to nearly 25% of its NAV based largely on investor redemptions that forced it to sell appreciated positions. Other situations that can lead to large distributions are from funds that have changed managers or strategies. Often times a new manager will want to clean house and implement new holdings that will lead to a big tax bill at the end of the year.
Investors that are considering buying a mutual fund for their taxable accounts between now and year end should check with the fund company to see if they will be susceptible to any large distributions. The last thing you want to do is enter a new position, only to see it hit you right off the bat with short and long-term capital gains that you will have to declare on your 2013 tax return. This is even more critical for investors in the top tier tax bracket that will see their capital gains rates increase from 15% to 20% this year.
The most obvious way to avoid this situation is to purchase a mutual fund in a tax-deferred account such as an IRA or 401(k) where the distributions have little to no effect on the owner. If that is not a feasible solution, another option to consider is swapping that mutual fund for an exchange-traded fund. One of the benefits of owning a passively managed ETF is that they do not have a high degree of portfolio turnover and are less susceptible to large year-end distributions.
Kimberly Weisal for the Wall St Journal writes: In many ways, the client's situation was enviable: In his mid-50s, he had retired from a financial-services company with a lump-sum pension and other cash payments exceeding $3 million. A new position on another company's board of directors would provide $200,000 a year in the future.
But it posed a challenge for his adviser, Chuck Bean. "We had to ask, 'What can we do to mitigate taxes?'" said Mr. Bean, president and principal of Westwood, Massachusetts-based Heritage Financial Services, FMBI +0.22%First Midwest BancorpU.S.: Nasdaq$18.35 +0.04+0.22% Nov. 29, 2013 9:44 am Volume (Delayed 15m) : 0 P/E Ratio 18.49Market Cap $1.37 Billion Dividend Yield 1.53% Rev. per Employee $265,10711/29/13 Juggling to Trim a Wealthy Exe...More quote details and news »FMBI inYour ValueYour ChangeShort position which manages $825 million for 300 families. Mr. Bean had been the executive's adviser for 10 years, and he calculated that the client's blended federal tax rate would be about 35%--plus a blended state tax rate of 13% in California, where the client and his wife planned to move. The adviser first tackled the pension plan, which had a qualified and nonqualified component. Mr. Bean recommended rolling a $1.5 million lump-sum payment from the qualified portion of the plan into an IRA. The nonqualified portion was a cash-balance plan that would pay the client about $2 million over 18 months, and the adviser said the client had no choice but to take receipt of that money. The new board position presented another piece of the puzzle because the company offered a nonqualified deferred-compensation plan. Mr. Bean recommended deferring all of the annual earnings as a director until 2015, when payments from the cash-balance portion of pension plan would be fully paid out.
Then Mr. Bean looked to reduce the client's taxes after 2015. Serving three years as a director would provide the track record necessary to set up and fund a single-person defined-benefit pension plan, so he recommended the client work with his accountant to register as a sole proprietor and file a Schedule C for his board income. Then they can choose a third-party administrator to set up and administer the single-person plan, with Mr. Bean's firm managing the assets in it. For the next 10 years, according to the plan, most income from the directorship will go into this plan, while the client lives off his nonretirement assets. During these years, the client's taxable income will be relatively low, so Mr. Bean will use that opportunity to gradually convert the client's large IRA holdings into a Roth IRA. "We'll get it all out of the IRA and into a Roth by age 70 1/2," the adviser said. He estimates the client will pay a blended federal rate on those conversions of 25%. At age 70 1/2, the client will have converted about $2.3 million into the Roth, which will be growing tax-free with no required distributions. At that stage, the client will live on the required minimum distributions from his single-person pension plan and payments from the deferred compensation plan. The client was happy to have a strategy that provides adequate retirement income and tax efficiency, while also creating a sizable Roth account to grow tax-free. But there was one idea the client wouldn't accept: Mr. Bean's recommendation that the couple postpone their move to California, so they could collect the nonqualified lump-sum distributions at their home state's lower, 5.25% state income-tax rate. In that case, lifestyle choices trumped the chance to save even more on taxes. "The client and his wife can't wait to get back to Northern California," said Mr. Bean. "They love wine country and they have family there."
David M Allen for Katten Muchin Rosenman LLP writes: Last year’s looming fiscal cliff crisis and the 13th hour passage of the American Taxpayer Relief Act of 2012 (ATRA 2012),
have resulted in a period of relative calm in the estate planning
world. For the first time in over 11 years, we may not have to plan with
imminent change on the horizon. Under ATRA 2012, the estate and gift
applicable exclusion amounts and the generation skipping transfer (GST)
exemption amount (the “applicable exclusion amounts”) were initially set
at $5 million, and are indexed for inflation in 2013 and future years,
resulting in the current $5.25 million applicable exclusion amounts.
Although the applicable exclusion amounts and the tax rates are said to
be permanent, the Obama Administration’s latest budget proposal already
seeks to make changes to them. ATRA 2012 made permanent the so-called
“portability” provisions of the federal gift and estate tax laws,
whereby a surviving spouse is entitled to use any portion of the
deceased spouse’s unused applicable exclusion amount (DSUE), allowing
the surviving spouse to make tax-free gifts and/or reduce the amount of
estate taxes owed upon the surviving spouse’s death by adding the DSUE
to the surviving spouse’s own applicable exclusion amounts (note,
however, that the DSUE does not increase the surviving spouse’s federal
GST exemption). The historically high exclusion amounts and the
portability provisions under ATRA 2012 create many new estate planning
opportunities.
At the same time, income tax rates were significantly increased by
ATRA 2012, thus placing a new emphasis on achieving basis step-ups
wherever possible as well as other techniques that decrease income tax
liability. There is a certain tension now between income tax and estate
tax planning. In fact, some commentators say that, conceptually
speaking, income tax is becoming the new estate tax in terms of
effective tax planning.
Though ATRA 2012 was a tough political act to follow, the US Supreme
Court (Supreme Court) did its best to upstage Congress and grant a major
victory to the marriage equality movement by striking down Section 3 of
the federal Defense of Marriage Act (DOMA) as unconstitutional in the
case ofUnited States v. Windsor (Windsor). Relatedly,
the Supreme Court dismissed an appeal from the federal district court
ruling that struck down California’s Proposition 8 (which prohibited
marriages of same-sex couples in California) as unconstitutional in the
case of Hollingsworth v. Perry(Perry), thus judicially
adding California to the list of states that permit marriage for
same-sex couples. In addition to California, seven other states,
including Delaware, Hawaii, Illinois, Maryland, Minnesota, New Jersey
and Rhode Island, decided to permit marriages between same-sex couples
in 2013. The federal and state recognition of marriages between same-sex
couples has significant tax consequences (positive and negative) for
married same-sex couples, among them the ability to take advantage of
the marital deduction from federal estate, gift and GST taxes. Note
that, pursuant to federal guidance implementing the Windsor decision,
the federal government will recognize as “married” only those couples
that were lawfully married in any jurisdiction. Same-sex couples that
are in so-called “marriage equivalent” legal relationships, e.g., civil
unions, registered domestic partnerships and domestic partnerships, will
not be treated as married.
These are just a few of the significant developments at the federal,
state and international levels this year, and the Trusts and Estates
practice at Katten Muchin Rosenman LLP is pleased to provide you with a
summary of those developments, along with a number of important,
time-sensitive recommendations for you to consider for planning before
year end.
Federal Estate, GST and Gift Tax Rates
For 2013, the exclusion amount is $5.25 million. For 2014, the
exclusion amount will be $5.34 million. The maximum rate for estate,
gift and GST taxes will remain at 40%.
Annual Gift Tax Exemption
Each year individuals are entitled to make gifts of a certain amount
(the “Annual Gift Tax Exemption Amount”) without incurring gift tax or
using any of their lifetime applicable exclusion amount against estate
and gift tax. The Annual Gift Tax Exemption Amount will remain at
$14,000 per donee in 2014. Thus, a married couple together will be able
to gift $28,000 to each donee. However, gifts made to noncitizen spouses
are limited to a different Annual Gift Tax Exemption Amount, which will
increase from $143,000 to $145,000 in 2014.
Federal Income Tax Rates
Individual ordinary income tax rates will remain the same in 2014.
The threshold amount for the maximum tax rate of 39.6% for 2014 will
rise to $457,600 for married couples filing jointly, $228,800 for
married couples filing separately, $432,200 for heads of households, and
$406,750 for single filers.
For taxpayers whose ordinary income is taxed at the maximum 39.6%
level, long-term capital gains will be taxed at 20%. Long-term capital
gains for taxpayers in lower ordinary income tax brackets will be taxed
at 15%, or 0% if the taxpayer’s ordinary income is taxed at 10% or 15%.
Qualified dividends are taxed at the long-term capital gains rate.
The so-called “Pease Limitation,” whereby certain itemized
deductions, including deductions for mortgage interest, property taxes,
state and local taxes, and charitable contributions, are reduced by an
amount equal to 3% of the excess of the adjusted gross income (AGI) over
a threshold amount, indexed for inflation, but not by more than 80% of
the itemized deductions, is expected to impact taxpayers with AGI above
$305,050 (married filing jointly) or $254,200 (unmarried) for 2014.
Taxpayers with AGI above the same thresholds will also be subject to the
so-called “PEP Limitation,” whereby their personal and dependency
exemptions will be reduced by 2% for every $2,500 or part thereof that
the taxpayer’s AGI exceeds the threshold.
Certain itemized deductions, including the deduction for state and
local sales taxes, were extended through 2013 under ATRA 2012, but will
expire on December 31, 2013.
The thresholds for the imposition of the 3.8% Medicare surtax on
investment income and 0.9% Medicare surtax on earned income will remain
the same as they were in 2013 ($200,000 for single filers, $250,000 for
married filers filing jointly, $125,000 for married filers filing
separately, and $11,950 for trusts and estates).
The exemption amount from the alternative minimum tax (AMT) is
projected to rise to $82,100 for married couples filing jointly and
surviving spouses, $52,800 for unmarried single filers and heads of
household and $41,050 for married couples filing separately in 2014.
President’s Budget Proposal for Fiscal Year 2014
The President’s budget proposal for Fiscal Year 2014 includes a
number of transfer tax-related items, some of which have been proposed
in prior years. In contrast to the President’s budget proposals in prior
years, the 2014 proposal does not include a proposal to limit the
availability of valuation discounts on family limited partnerships,
limited liability companie and other family entities—a very favorable
development for taxpayers.
Subject Payments From Health and Education Exclusion Trusts (HEETs) to GST Tax
Payments made by a donor directly to a medical provider for medical
expenses and/or directly to an educational institution for tuition are
exempt from gift tax. When such payments are made on behalf of the
donor’s grandchildren and subsequent generations, they are exempt from
both gift tax and GST tax. A HEET, which is a trust designed to provide
for the medical expenses and tuition of multiple generations of
descendants, has historically been used to bypass the need to make
direct payments from the donor to the provider in any particular year.
Under the proposal, however, only qualifying payments for tuition and
medical expenses by a living individual directly to the medical provider
and/or school will be exempt from GST tax. Distributions from trusts,
such as HEETs, for such purposes would not be GST-exempt. This proposal
would apply to trusts created after the introduction of the bill and to
transfers after that date that were made from preexisting trusts.
Reset Exclusion Amounts and Tax Rate
Just when we thought we could breathe a sigh of relief as to the new
“permanent” applicable exclusion amounts and tax rates, the budget
proposal provides for a permanent return of the estate, gift and GST tax
regimes to their 2009 levels, i.e., a 45% top tax rate and $3.5 million
exemption for estate and GST tax and $1 million for gift tax, beginning
in 2018. Note that the proposal makes clear that there would be no
“clawback” of transfer taxes for those who took advantage of higher
applicable exclusion amounts prior to 2018.
Change the Treatment of Intentionally Defective Grantor Trusts (IDGTs)
The budget proposal contains a provision that would significantly
undermine the utility of a highly effective planning technique. IDGTs
are currently used as a central part of much tax planning, as they allow
a grantor the ability to be taxed on all of the trust’s income, thus
allowing the trust assets to grow undiminished by tax payments. Under
the proposal, the assets in IDGTs would be included in the grantor’s
estate and subject to estate tax. In addition, distributions from an
IDGT would be subject to gift tax and if the trust ceases to be a
grantor trust, the remaining assets would be subject to gift tax.
Require Consistency of Basis Valuation
The proposal to require consistency in value for transfer and income
tax purposes requires that the basis for income tax purposes be the same
as that determined for estate and gift tax purposes.
Impose New Requirements for Grantor Retained Annuity Trusts (GRATs)
The proposal adds three additional requirements that would be imposed
on Grantor Retained Annuity Trusts (GRATs): (i) they must have a
10-year minimum term; (ii) they must have a remainder interest greater
than zero; and (iii) the annuity amount cannot decrease in any year
during the annuity term.
Limit the Duration of the GST Exemption
Under the proposal, the exclusion from the imposition of GST tax
would last only 90 years for additions to pre-existing trusts and trusts
created after the date of enactment, regardless of whether the trust
has a longer duration under the trust instrument and/or state law.
Extend Liens on Estate Tax Deferrals
Currently, the law allows a deferral for estate tax on closely held
business interests for up to 15 years and three months from the date of
death. The proposal would extend the current 10-year lien that is
imposed on estate assets to secure the full payment of the estate tax
through the full period of the estate tax deferral.
Disallow Deductions for Contributions of Certain Conservation Easements
The proposal would prohibit a deduction for any contribution of a
partial interest in property that is used as a golf course, and would
also prohibit a charitable deduction for the contribution of a historic
preservation easement associated with forgone upward development above a
historic building.
It is impossible to say which if any of these proposals may ever be
enacted, but it is important, in reviewing one’s planning options, to
note which devices are on the President’s radar screen for change.
Important Planning Considerations for 2013 and 2014
Review and Revise Your Estate Plan to Ensure It Remains Appropriate
If you made large gifts before the end of 2012 you should review your
estate planning documents to make sure that those documents still make
sense in light of your recent gifting. For example, your estate planning
documents may assume that you will have a high applicable exclusion
amount remaining to be used at the time of your death. If you made large
lifetime gifts, that assumption is likely no longer true. You should
consider having your documents revised to a “disclaimer plan,” which
provides the greatest level of flexibility to take into account the
possibility of future changes to the applicable exclusion amount. Under a
disclaimer plan, your assets pass to your surviving spouse (thus
qualifying for the unlimited marital deduction from estate tax if the
surviving spouse is a US citizen), subject to your spouse’s option to
disclaim, i.e., refuse to accept, some or all of such assets, causing
the disclaimed assets to pass to a trust for the benefit of your spouse
and descendants. The amount of any such disclaimer can be based on your
remaining applicable exclusion amounts at the time of your death, as
well as your spouse’s comfort level with ceding control of the assets to
a trustee.
For some individuals, it may be advisable to distribute property
previously transferred into a trust in order to obtain a step up in
basis for such property upon the death of the beneficiary. Whether such a
distribution is advisable depends on a careful analysis of the
beneficiary’s assets and applicable exclusion amounts.
You should not rely on portability for all of your planning, as it is
unclear that the portability provisions under existing laws will remain
in place. In addition, the DSUE may not be available upon remarriage.
You should also review any provisions in your wills and trust
agreements that distribute assets according to tax formulas and/or your
applicable exclusion amounts to ensure that the provisions, when taking
into account the higher applicable exclusion amounts, continue to
reflect your desires and take full advantage of your applicable
exclusion amounts, as appropriate under the circumstances.
Other provisions which should be reviewed include the allocation of
the GST applicable exclusion amount. If you are married, you should
carefully review the provisions regarding your applicable exclusion
amount from GST tax because the portability provisions discussed above
do not apply to the GST tax. In addition, whether single or married, if
you did not have sufficient GST applicable exclusion amount to exempt
all of your prior gifts to a trust from GST tax, that trust will only be
partially exempt from GST tax. In order to avoid the expense and
administrative difficulty of a trust that is only partially exempt from
GST tax, you could consider making a “qualified severance” of the trust
into two trusts, one of which is entirely exempt from GST tax, and the
other of which is nonexempt from GST tax. If you were the beneficiary of lifetime gifts made by someone else,
you should review your estate planning documents to ensure that they
take such gifts into account and take full advantage of your applicable
exclusion amounts.
Same-sex couples who are married or plan to marry should immediately
review and revise their estate planning documents to take advantage of
the unlimited marital deduction from federal estate tax and gift tax for
transfers between same-sex spouses that is now available after the Windsor decision.
Existing estate planning documents may have been drafted with the
assumption that any gift or bequest to a spouse of the same sex over and
above the individual’s applicable exclusion amount would be subject to
federal estate tax. However, that assumption is no longer true. Indeed,
such gifts and bequests, if properly structured, are now entitled to the
unlimited marital deduction. In addition, under the portability
provisions of federal gift and estate tax laws, a surviving spouse of
the same sex will also be entitled to use any portion of the deceased
spouse’s DSUE, allowing the surviving spouse to make additional tax-free
gifts and/or reduce the amount of estate taxes owed upon the surviving
spouse’s death (note, however, that the DSUE does not increase the
surviving spouse’s federal GST exemption). Accordingly, married same-sex
couples may wish to modify their estate planning documents to provide
that any assets included in their estates in excess of their applicable
exclusion amounts will pass to their surviving spouse, either outright
or in a properly structured marital trust for the spouse’s benefit, thus
deferring all federal estate taxes until the death of the surviving
spouse. Further, documents that refer to a “spouse” should be sure to
define that term to marriages that are valid where celebrated, so that
if the couple moves to a nonrecognition jurisdiction, the claim cannot
be made that the survivor is not a spouse under local law and therefore
not a spouse under the documents.
Avoid the Medicare Surtax With Trust Income Tax Planning A trust with undistributed annual income over $11,950 will be subject
to the 3.8% Medicare surtax. However, some or all of the Medicare
surtax may be avoided by distributing such income directly to
beneficiaries who are below the individual net investment income
threshold amount for the Medicare surtax ($200,000 for single filers,
$250,000 for married couples filing jointly, and $125,000 for married
couples filing separately).
Note that trusts created under Section 2503(c) of the Internal
Revenue Code and so-called “Crummey trusts,” unlike uniform transfers to
minors act (UTMA) accounts, are treated as separate taxpayers for
federal income tax purposes, provided that the beneficiary is under the
age of 14, and are not subject to the so-called “kiddie tax.”
Accordingly, such trusts can be used to avoid the Medicare surtax on the
first $11,950 of trust income in situations where the beneficiary would
be subject to the surtax based on the beneficiary’s individual income. Careful evaluation and tax calculations should thus be made to
determine whether trusts should distribute or retain their income.
Make Gifts to Take Advantage of the Increased Applicable Exclusion Amount
You now have a total of $5.25 million ($10.5 million for a married
couple) that you can gift in the aggregate during your lifetime, subject
to reduction for any gifts in excess of the annual gift tax exclusion
amount you have previously made. Gifts in excess of these amounts are
subject to a maximum federal gift tax rate of 40%. If you are a
surviving spouse and your deceased spouse left you with any unused
applicable exclusion amount from estate tax, you may add such unused
applicable exclusion amount to your own applicable exclusion amount from
gift tax, thus permitting you to make larger lifetime gifts without
paying gift tax. It is less expensive to make lifetime gifts rather than
making gifts at death. This result occurs because you do not pay a tax
on the dollars used to pay gift tax, but you do pay estate tax on the
dollars used to pay estate tax. In addition, you will benefit by getting
any income and appreciation on the gift out of your estate.
The downside of lifetime gifting is that the assets given away will
not get a step up in basis upon your death and will thus generate
capital gains tax if they are subsequently sold for an amount higher
than their basis. Accordingly, the decision of whether and how to embark
on a lifetime gifting strategy depends on a number of factors,
including the basis of your various assets, their projected income and
appreciation, the total amount of your assets, and your applicable
exclusion amount. For individuals with assets far exceeding their
applicable exclusion amounts, lifetime gifting of high-basis assets
generally will be recommended. However, individuals with total assets
close to or below their applicable exclusion amounts should consider
holding their assets until death in order to achieve a step-up in basis
upon death while minimizing estate taxes. We are available to discuss
this analysis with you in more detail.
Note that your applicable exclusion amount will increase by $94,000
($188,000 for a married couple) in 2014. Therefore, even if you use some
or even all of the applicable exclusion amount available to you before
the end of 2013, you may still make additional gifts in 2014 without
paying any gift tax. Your applicable exclusion amount will also be
adjusted for inflation in future years. Thus, you may “max out” your
applicable exclusion in 2013 and still make additional gifts in 2014 and
subsequent years to take advantage of the increased applicable
exclusion amount available in each year.
Grantor Retained Annuity Trusts (GRATs)
GRATs remain one of our most valuable planning tools, particularly in
this time of historically low interest rates and depressed asset
values. Because of the continuing possibility that legislation may soon
pass changing how GRATs may be structured and that interest rates may
rise, GRATs should be created as soon as possible. An important point to
note is that GRATs may currently be structured without making a taxable
gift, so even if you have used all of your applicable exclusion amount,
GRATs may be used without incurring any gift tax. In addition, while
interest rates are projected to begin rising sometime next year, they
are still relatively low, which further increases the effectiveness of
GRATs.
A GRAT provides you with a fixed annual amount (the annuity) from the
trust for a term of years (currently as short as two years). The
annuity you retain may be equal to 100% of the amount you use to fund
the GRAT, plus the IRS-assumed rate of return applicable to GRATs (which
for transfers made in December 2013 is 2%). As long as the GRAT assets
outperform the applicable rate, at the end of the annuity term you will
be able to achieve a transfer tax-free gift of the spread between the
actual growth of the assets and the applicable rate. Because you will
retain the full value of the GRAT assets—as calculated using the IRS’s
assumptions for growth—if you survive the annuity term, the value of the
GRAT assets in excess of your retained annuity amount will then pass to
whomever you have named, with no gift or estate tax, either outright or
in further trust.
Sales to “Defective” Grantor Trusts
Because the President’s budget proposals eliminating the benefit of
grantor trusts may still be enacted, we recommend implementing these
trusts as part of immediate planning. You would sell assets likely to appreciate in value to the trust in
exchange for a commercially reasonable down payment and a promissory
note for the balance. From an income tax perspective, no taxable gain
would be recognized on the sale of the property to the trust because the
trust is a defective grantor trust, which makes this essentially a sale
to yourself. For the same reason, the interest payments on the note
would not be taxable to you or deductible by the trust.
If the value of the assets grows at a greater pace than the
prevailing applicable federal rate (which for sales in December 2013 is
as low as 1.65%), as with a GRAT, the appreciation will pass free of
gift and estate tax. The current record-low interest rates make sales to
defective grantor trusts most opportune to structure now.
Consider Making Qualified Payments From HEETs for the Benefit of Grandchildren
Because the President’s budget proposal would subject distributions
from HEETs for the benefit of the grandchildren and/or more remote
descendants of the transferor, for GST purposes, of the trust property
to GST tax, we recommend making payments for covered medical and tuition
expenses from HEETs for the benefit of such beneficiaries as soon as
possible.
Consider a Swap or Buy-Back of Appreciated Low Basis Assets From Grantor Trusts
Some of you sold or gave (through a GRAT or other grantor trust) an
asset with a low basis. If the asset is sold at a gain, the gain will
trigger capital gains tax. However, if you purchase the asset back from
the grantor trust for fair market value, no gain or loss is recognized.
The trust would then hold cash equal to the value of the asset that was
repurchased, leaving the same amount to escape estate tax.
Alternatively, many grantor trust instruments give the grantor the power
to substitute the trust’s assets with other assets, which would allow
the low-basis assets to be removed from the trust in exchange for assets
of equal value that have a higher basis.
The advantage is that, on your death, the purchased or reacquired
asset will be included in your taxable estate and will receive a step-up
in basis equal to fair market value. This means that the capital gains
tax on sale of that asset is eliminated and the beneficiaries still
benefit from the grantor trust’s cash.
Consider the Use of Life Insurance
Though the higher annual exclusion amounts available after ATRA 2012
may have reduced the role of life insurance as a means to minimize
estate taxes and/or provide liquidity to pay estate taxes, life
insurance still presents significant opportunities to defer and/or avoid
income taxes altogether. Generally speaking, appreciation and/or income
earned on a life insurance policy accumulate free of income taxes until
the policy owner makes a withdrawal or surrenders or sells the policy.
Thus, properly structured, life insurance may be used as an effective
tax-deferred retirement planning vehicle. If the gain is distributed
upon the death of the insured, such gain is completely free of income
taxes. You may also want to consider paying off any outstanding loans
against existing policies in order to maximize the income tax savings.
Note that the decision to pay off such loans requires a comparison of
the rate of return available under the policy versus alternative
investments that may be available to you and the applicable interest
rate on the loans. In addition, paying off loans held in an Irrevocable
Life Insurance Trust (ILIT) may use part of your applicable exclusion
amount from gift tax.
Many same-sex spouses previously purchased individual life insurance
policies of which the other spouse is the beneficiary (either directly
via beneficiary designation or indirectly through a life insurance
trust) in order to provide the surviving spouse with sufficient liquid
assets that may be used to pay federal estate taxes due upon the death
of the first to die. With the unlimited marital deduction and DSUE now
available to married same-sex couples, as explained above, there may be
little or no need for such liquidity upon the death of the first spouse
to die. Thus, married same-sex couples should consider replacing such
individual policies with so-called “survivor” or “second-to-die”
policies that pay benefits only upon the death of the surviving spouse.
Such policies will still provide liquidity to children or other
beneficiaries of the married same-sex couple and are generally less
expensive than individual policies having the same death benefits.
Use Intra-Family Loans
Because interest rates are so low, many techniques involving use of intra-family loans should be considered, including:
Forgiving loans previously made to family members. The amount that is
forgiven in excess of the annual gift tax exclusion amount will be a
gift, and thus will use a portion of your applicable gift tax and/or GST
tax exclusion amount. Note that forgiveness of debt that is a gift is
not treated as taxable income of the borrower.
The purchase of life insurance on the life of one family member by an
irrevocable life insurance trust, with premium payments funded by loans
from other family members.
The creation of trusts by older generation members for the benefit of
younger family members, to which the older generation members loan
funds. The spread between the investment return earned by the trust and
the interest owed will create a transfer tax-free gift.
Consider Charitable Planning
A variety of planning tools are available for the charitably
inclined. One planning tool that is very effective in a low interest
rate environment is a Charitable Lead Annuity Trust (CLAT), which
combines philanthropy with tax planning. A CLAT is an irrevocable trust
that pays one or more named charities a specified annuity payment for a
fixed term. At the end of the charitable term, any remaining assets in
the CLAT pass to the remainder, noncharitable beneficiaries. As with a
GRAT, to the extent the assets outperform the IRS assumed rate of return
(2% for December 2013), those assets can pass transfer tax free to
whomever you would like. Like GRATs, CLATs can be “zeroed out” so that
there is no taxable gift. Taxpayers over the age of 70½ should consider making up to $100,000
of qualified charitable distributions from IRAs on or before December
31, 2013. Note that taxpayers will not have the ability to make such
distributions in 2014 unless Congress acts to extend the underlying
statutory provisions.
Further, giving appreciated assets directly to charity has always
been an effective means to avoid capital gains tax on the donated
assets. Now it is also an effective way to avoid the 3.8% Medicare
surtax. The income tax deduction for charitable gifts may also be worth
more as a result of the higher tax rates. Note that the Pease Limitation
described above, if applicable, may reduce the amount of the deduction
for charitable gifts.
Consider Utilizing a Nevada Incomplete Gift Nongrantor Trust (NING Trust)
If you live in a state with a high state income tax that does not tax
trusts created by state residents but sitused out of the state (such as
New York and New Jersey), you should consider utilizing a
properly-structured NING Trust as a state income tax planning tool.
These trusts are self-settled irrevocable trusts designed to avoid state
income taxes by transferring income-producing assets to trusts sitused
in Nevada, which does not have a state income tax, while simultaneously
providing the asset protection benefits available for self-settled
trusts under Nevada law.
To create a NING Trust, you would transfer income-producing assets to
a trust and would retain enough control over trust assets so that you
do not make a completed gift, such as by retaining a lifetime power of
appointment, but give up enough control so that the trust does not
achieve grantor trust status for federal income tax purposes, such as by
specifying that distributions must be authorized by a “distribution
committee.” As a nongrantor trust, the trust is treated as a separate
taxpayer and pays no state income tax on its earnings (but does pay
federal income tax).
Because the transfer to the trust is an incomplete gift, subsequent
distributions made to you will not be subject to federal gift tax
because such distributions are treated as a return of your own assets.
Distributions made to other beneficiaries will be treated as gifts,
however. At your death, the assets remaining in the trust will be
included in your estate and will get a step up in basis, thus avoiding
capital gains tax. Note that a NING Trust must be carefully structured
in order to achieve the above results and the potential tax savings will
depend on your particular facts and circumstances.
Year-End Checklist for 2013
In addition to the above planning ideas, consider the following before 2013 is over:
Make year-end annual exclusion gifts of $14,000 ($28,000 for married couples).
Make year-end IRA contributions.
Create 529 Plan accounts before year end for children and
grandchildren, and consider front-loading the accounts with five years’
worth of annual exclusion gifts, taking into account any gifts made
during the year to children and grandchildren.
Pay tuition and medical expenses directly to the school or medical provider.
Consider making charitable gifts before year end to use the deduction on your 2013 income tax return.
Below is a discussion of national, international and local developments that occurred in 2013.
National Developments in 2013
The Supreme Court Struck Down DOMA as Unconstitutional
As mentioned above, the Supreme Court struck down Section 3 of the DOMA statute in the Windsor decision. In Windsor,
Edith Windsor and Thea Spyer, a same-sex couple, married in Canada in
2007 after having been together in New York for over 40 years. New York
law did not permit marriages between same-sex couples at the time but
recognized marriages of same-sex couples performed in other
jurisdictions. Spyer died in 2009, and Windsor inherited all of Spyer’s
estate as Spyer’s surviving spouse. However, because of DOMA, which
defined “marriage” as “a legal union between one man and one woman as
husband and wife” and “spouse” as “a person of the opposite sex who is a
husband or a wife,” the federal government refused to recognize the
couple’s marriage for federal estate tax purposes. As a result,
Windsor’s inheritance from Spyer was not entitled to the unlimited
marital deduction from federal estate tax that would have been available
had Windsor and Spyer’s marriage been recognized by the federal
government. After paying the estate taxes owed on her inheritance as a
result of DOMA, Windsor sued for a refund of the estate taxes on the
grounds that DOMA unconstitutionally discriminated against same-sex
married couples. Windsor prevailed in the US District Court for the
Southern District of New York and also in the Second Circuit Court of
Appeals. The Supreme Court agreed with Windsor, holding that “DOMA seeks
to injure the very class [of married same-sex couples] New York seeks
to protect. By doing so it violates basic due process and equal
protection principles applicable to the Federal Government.” The Supreme
Court further explained that DOMA’s “demonstrated purpose is to ensure
that if any State decides to recognize same-sex marriages, those unions
will be treated as second-class marriages for purposes of federal law.”
Federal Agencies Have Begun to Implement the Windsor Decision
Following the Windsor decision, on August 29, 2013, the US
Department of the Treasury (Treasury) and the Internal Revenue Service
(IRS) issued Revenue Ruling 2013-17 (the “Ruling”) holding that, for
purposes of administering all federal tax laws, including those
pertaining to income, gift and estate taxes, married same-sex couples
who were lawfully married in any jurisdiction (domestic or
international) will be treated as married regardless of whether the
jurisdictions in which such couples are resident and/or domiciled
recognize the marriage. However, neither Treasury nor the IRS will
recognize as married those unmarried same-sex couples that are in
so-called “marriage equivalent” legal relationships, e.g., civil unions,
registered domestic partnerships and domestic partnerships.
The Ruling “applies to all federal tax provisions where marriage is a
factor, including filing status, claiming personal and dependency
exemptions, taking the standard deduction, employee benefits,
contributing to an IRA, and claiming the earned income tax credit or
child tax credit.” As a result of the Ruling, married same-sex couples
generally will be required to file their 2013 federal income tax returns
with a “married filing jointly” or “married filing separately” filing
status. In addition, same-sex couples who were married in prior years
may, but are not required to, file original or amended tax returns
within the statutory limitations period, which is ordinarily three years
from the date the tax return was originally due or filed (if on
extension) or two years from the date the tax was paid, whichever is
later. Accordingly, married same-sex couples ordinarily may amend their
returns for the years 2010, 2011 and 2012 and obtain a refund of any
overpayment of taxes, if applicable. Taxpayers with special situations
(e.g., those who filed protective claims for a refund or that signed
tolling agreements with the IRS) may be able to amend their returns for
2009 and/or prior years as well.
A handful of other federal agencies have issued their own guidance on various nontax issues in the wake of Windsor,
but have taken contrasting positions on whether they will follow the
“place of celebration” rule, i.e., by referring to the law of the
jurisdiction where the marriage took place, as the Treasury and IRS have
done, or the “place of domicile” rule, i.e., by referring to the law of
the jurisdiction in which the couple is resident and/or domiciled, in
determining whether married same-sex couples should be treated as
“married” under federal law. Some agencies have indicated that they will
follow the “place of celebration” rule, including: the Office of
Personnel and Management (spousal benefits for federal employees); the
US Department of Labor (ERISA-covered plan benefits) the US Department
of Health and Human Services (Medicare eligibility for certain
services), and the US Department of Homeland Security (immigration
visas). Other agencies have indicated that they will follow the “place
of domicile” rule, including the Social Security Administration (spousal
social security benefits). In accord with the Treasury and IRS, none of
the above agencies have indicated that they will recognize marriage
equivalent relationships. Still more federal agencies are expected to
issue their own guidance implementing Windsor in the future.
However, it is too soon to predict which of such agencies will follow
the “place of celebration” rule or the “place of domicile” rule or
whether any such agencies will recognize marriage equivalent
relationships for purposes of determining which same-sex couples will be
entitled to the more than 1,000 benefits, responsibilities and
protections applicable to married opposite-sex couples under federal
law.
International Developments in 2013
US International Developments
In August 2013, the US Department of Justice (DOJ) announced a new
voluntary disclosure program for Swiss financial institutions whereby
eligible Swiss banks that are not already under investigation by the DOJ
may avoid criminal prosecution in the United States by disclosing
detailed information on US-held accounts and, in some cases, paying
significant penalties.
On January 18, 2013, Treasury issued the long-awaited final
regulations (the “FATCA Regulations”) promulgated under the Foreign
Account Tax Compliance Act (FATCA). FATCA imposes a new withholding tax
on foreign entities, unless such entities comply with new information
reporting requirements. The FATCA Regulations provide detailed guidance
on complying with FATCA.
Relatedly, Treasury continues to negotiate so-called
“inter-governmental agreements” or “IGAs” with other countries pursuant
to FATCA. Under such IGAs, foreign financial institutions report
tax-related information about accounts held by US customers to the
foreign government, which relays that information to the IRS. In
exchange, the IRS provides similar information to the foreign government
with assistance from US financial institutions. To date, Treasury has
entered into IGAs with 10 countries, including: Denmark, France,
Germany, Ireland, Japan, Mexico, Norway, Spain, Switzerland and the
United Kingdom. Treasury is very close to entering into final IGAs with
Bermuda, the Cayman Islands, Italy and Malta. In addition, final
negotiations are underway with the following jurisdictions: Australia,
Belgium, British Virgin Islands, Canada, Czech Republic, Finland,
Guernsey, Isle of Man, Israel, Jersey, Luxembourg, Netherlands, New
Zealand, Singapore and Sweden.
Germany
In September 2012, the German Federal Tax Court issued a decision
that clarified the tax treatment of foreign trusts and held that all
distributions from foreign trusts to beneficiaries resident in Germany
are subject to German gift tax. Though the decision did not expressly
state whether such distributions would also be subject to German income
tax, there is a significant risk that that such distributions will
indeed be subject to German income tax in addition to German gift tax.
Israel
As a result of recent legislation, beginning on January 1, 2014, a
trust will be classified as a “Foreign Settlor Trust” only where the
settlor and the beneficiaries are relatives, and the trust will cease to
be a Foreign Settlor Trust upon the death of its settlor. A Foreign
Settlor Trust is a trust funded by a non-Israeli resident and which is
not subject to the direct or indirect control of an Israeli resident,
and which yields important tax benefits to Israeli resident
beneficiaries. As a result of the recent legislation, the trustee of a
Foreign Settlor Trust will need to elect for either the Trust’s current
income, allocable to its Israeli beneficiaries, or the income
distributions to Israeli beneficiaries to be taxed in Israel. Israeli
beneficiaries who receive any distribution from any trust will now be
required to report such distribution.
Italy
Under new Italian reporting regulations that came into effect on
September 4, 2013, trust beneficiaries who are “beneficial owners,”
defined broadly by reference to anti-money laundering rules, of offshore
structures are subject to the existing Italian taxpayer reporting
obligations. If applicable, such beneficiaries may be required to
disclose the existence of the trust in their tax return.
Additionally, the Italian Securities and Exchange Commission has
issued new rules that now subject trusts that hold 2% or more of the
ordinary shares in a listed Italian company, or are a party to a
shareholders’ agreement in relation to such a company, to disclosure
requirements. In these cases, trustees must disclose the identity of the
settlor, beneficiaries, protectors as well as the nature and duration
of such trusts. Failure to comply will result in a fine.
Local Developments in 2013: State-Specific Considerations
California
Contemporaneous with the Windsor decision, the Supreme Court
also dismissed an appeal from the federal district court ruling that
struck down California’s Proposition 8 (which prohibited marriages of
same-sex couples in California following a brief six-month period in
which such marriages were permitted as a result of a prior California
Supreme Court decision) as unconstitutional in the Perry decision. In Perry,
two same-sex couples wished to marry in California. Though the
California Supreme Court held in 2008 that the California Constitution
required the State to recognize marriages of same-sex couples,
California voters passed Proposition 8 later the same year, amending the
California Constitution to provide that only “marriage between a man
and a woman is valid and recognized in California.” As a result of
Proposition 8’s passage, the two couples were unable to marry. They sued
the California Governor, attorney general and various other state and
local officials responsible for enforcing California’s marriage laws
(the “California officials”), claiming that Proposition 8 violated their
rights to due process and equal protection under the United States
Constitution. In the US District Court for the Northern District of
California (district court), the California officials refused to defend
Proposition 8, but the private parties who were the proponents of
Proposition 8 (the “Proposition 8 proponents”) successfully intervened
to defend the measure. After the district court held that Proposition 8
was unconstitutional, the California officials declined to appeal the
decision and the Proposition 8 proponents appealed. The Ninth Circuit
Court of Appeals (Ninth Circuit) upheld the district court’s ruling that
Proposition 8 was unconstitutional. The Supreme Court dismissed the
appeal from the district court on the grounds that the Proposition 8
proponents lacked standing to appeal because they were merely private
parties and were not properly authorized under state law to defend the
constitutionality of Proposition 8. As a result of the Supreme Court’s
ruling, the district court’s ruling that Proposition 8 is
unconstitutional remains in place and marriages between same-sex couples
are once again permitted in the State of California beginning June 28,
2013.
The California Revised Uniform Limited Liability Company Act (RULLCA)
will take effect on January 1, 2014 and replaces the Beverly-Killea
Limited Liability Company Act (Beverly-Killea), the current California
law governing limited liability companies (LLCs). RULLCA will apply
automatically to all existing California LLCs and all foreign LLCs
previously registered with the California Secretary of State as well as
to LLCs formed after January 1, 2014. There is no option to opt out.
Existing LLCs will not be required to file any new documents with the
California Secretary of State or any other governmental agency as a
result of RULLCA coming into effect.
RULLCA made some important changes to Beverly-Killea, including the following:
Adding provisions under which a member may be dissociated from a LLC and the effects of dissociation on the member;
Distinguishing between a manager-managed LLC and a member-managed LLC
for purposes of defining the scope of a member’s agency and imposing
fiduciary duties only on persons in control of a LLC;
Authorizing the establishment of classes of members;
Allowing a LLC to be subject to the nonexclusive jurisdiction of
courts in another state or the exclusive jurisdiction of California
courts; and
Allowing a member to consent to arbitration.
Florida
In 2013, Florida updated the Florida Principal and Income Act (FPIA).
The amendment clarified its use of the terms “trustees” and
“fiduciaries,” making clear that certain sections apply only to trusts
while other sections apply to both trusts and estates. The amendment
additionally defines “carrying value” to mean the “fair market value at
the time the assets are received by the fiduciary.” Accounting income
allocated to beneficiaries should be based upon carrying values, except
where disproportionate distributions are made. The amendment also
incorporates a “smoothing rule” to compute the fair market value of a
unitrust.
Illinois
A 2013 change to the Illinois Administrative Code affects how
Illinois residency is determined for state income tax purposes. In
general, Illinois defines a resident for state income tax purposes as
someone who is in the state for other than a temporary or transitory
purpose during the year or who is domiciled in the state but absent from
the state for a temporary or transitory purpose during the year. The
amendments revised the factors that may be used to prove or disprove
Illinois residency. One of our Chicago attorneys would be happy to
discuss whether and how you may be affected by the amendments based on
your individual facts and circumstances. Illinois Governor Pat Quinn signed the Religious Freedom and Marriage
Fairness Act into law on November 20, 2013, making Illinois the 16th
state to allow same-sex marriage. As a result, beginning on June 1,
2014, same-sex couples will be able to marry in Illinois. Illinois’ new directed trustee statute went into effect on January 1,
2013. The new law, which applies to all Illinois trusts in existence or
established after the effective date, specifically authorizes a trust
to bifurcate management duties between a trustee and an investment trust
advisor, trust protector, distribution advisor, or other person or
entity acting as a fiduciary. The new statute insulates the trustee from
liability for following the direction of the advisor. Illinois’ new trust decanting statute went into effect on January 1,
2013. Trust decanting may be used to update the terms of an otherwise
irrevocable trust by distributing trust assets from one trust to another
trust that contains the desired terms. The extent to which a trustee
may modify the terms of an irrevocable trust through decanting depends
on how much discretion is granted to the trustee under the original
trust. If the trustee is granted “absolute discretion” to distribute
trust assets to beneficiaries under the original trust, then the trustee
may eliminate the interests of one or more beneficiaries and may also
modify any powers of appointment granted under the original trust. If a
trustee does not have absolute discretion to distribute trust assets,
then the trustee is not permitted to change beneficiaries, but may make
other changes to the original trust. The new statute applies to all
Illinois trusts in existence or established after January 1, 2013. The Illinois state estate tax threshold amount will increase to $4 million for all decedents dying on or after January 1, 2013.
New Jersey
Effective October 21, 2013, New Jersey permits marriages between same-sex couples. In Garden State Equality v. Dow,
a New Jersey Superior Court held that New Jersey’s civil union statute
violates equal protection under the New Jersey constitution after the
Supreme Court’s Windsor decision by virtue of the fact that
same-sex couples in New Jersey civil unions will be denied many federal
benefits because they will not be deemed “married” under federal law.
Though Governor Chris Christie initially appealed the decision to the
New Jersey Supreme Court, his administration ultimately dropped the
appeal.
New York
Section 467-a of the Real Property Tax Law has been amended to
provide that a property tax abatement that is afforded to an individual
will not be lost if a dwelling unit held in the form of a cooperative or
condominium is transferred to a trust if such trust is for the sole
benefit of such individual. This act was effective on its enactment on
July 3, 2013, and is retroactive to June 1, 2012. Various sections of New York’s so-called “decanting statute” under
the Estates, Powers and Trusts Law (EPTL) were amended to make certain
technical and clarifying amendments to the statute. The new law
clarifies that where a trustee has unlimited discretion to invade
principal, the trustee may decant a portion or all of the trust
principal in favor of one or all of the current beneficiaries and that
in such circumstances, the trustee may exclude any of the remainder
beneficiaries of the invaded trust. The new law also addresses how the
six-year statute of limitations governing a proceeding to compel a
fiduciary to account is affected by decanting. Present law merely states
that the failure of a beneficiary to object to the exercise of the
decanting power does not foreclose an interested party from objecting to
an account or compelling a trustee to account. The new law would
require that the instrument by which the decanting power, in an inter vivos trust,
is exercised contain a statement that in certain circumstances the
appointment, i.e., the exercise of the decanting power, will begin the
running of the statute of limitations that will preclude persons
interested in the invaded trust from compelling an accounting by the
trustees after the expiration of a given time. Whether the exercise of
the decanting power actually triggers the running of the statute of
limitations on an action to compel a trustee to account will be based on
all relevant facts and circumstances. The new law also clarifies that
unless otherwise specified in the governing instrument, decanting may be
done by a majority of the trustees authorized to invade trust
principal. Last, if a nongrantor trust is decanted to a grantor trust,
the new law makes clear that a provision in the new trust allowing for
tax reimbursements does not in and of itself cause the creator of the
trust to be considered a beneficiary of the decanted trust. These
amendments became effective on November 13, 2013. The decanting statute
was previously amended on August 17, 2011, and those amendments (the
“2011 amendments”) made sweeping changes to the decanting statute.
However, there was some confusion as to whether the 2011 amendments were
effective to trusts created on the date of the 2011 amendments, in
addition to trusts created before or after the effective date. Thus, on
October 23, 2013, the decanting statute was amended to make clear that
the 2011 amendments were effective to trusts created on the effective
date, as well as to trusts created before or after that date. Section 3-3.3 of the EPTL, New York’s anti-lapse statute, was amended
to clarify that it applies, absent a condition precedent of survival,
to a testamentary disposition, including a disposition to a future
estate, for a beneficiary who is one of the testator’s issue or a
sibling. If the anti-lapse statute is applied to a disposition, the
disposition is by representation, i.e., all beneficiaries at a
generational level will receive equal shares, regardless how the shares
were distributed at the preceding generational level (a so-called “per
capita” distribution), and applies regardless of when the testamentary
instrument was executed. The law was enacted on September 27, 2013, and
is effective immediately, but applies only to estates of decedents dying
on or after September 27, 2013. Sections 715 and 716 of the Surrogate’s Court Procedure Act (SCPA)
were amended to permit a resigning fiduciary to settle his/her account
judicially or informally, provided that no person interested in the
estate or trust is under a disability. Current law requires a judicial
settlement of a resigning fiduciary’s account. This amendment took
effect on November 13, 2013 and will apply to estates of decedents dying
on or after that date. A new Section 991 has been added to the Tax Law that precludes the
Tax Department from charging interest on any additional estate tax
liability owed by an estate due to late-discovered assets in the
possession of the State Comptroller as abandoned property and for which
the State Comptroller did not pay interest. This relief is available
only if the information pertaining to the asset did not appear in the
public records of abandoned property at the time the estate tax return
was due, including extensions. This law was enacted on July 31, 2013, is
effective immediately and applies to estates of decedents dying or on
or after June 1, 1944, provided, however, that no refunds or credits are
to be granted as a result of this act. Two other significant bills were passed by the New York legislature
this year. Though they have yet to be signed by the Governor, he is
expected to sign both bills. The Nonprofit Revitalization Act of 2013 would make significant
changes to the Not for Profit Corporation Law (N-PCL) and will also
result in changes to other statutes such as the EPTL, SCPA and the
Executive Law. The objective is to reduce unnecessary and outdated
burdens on nonprofits and to enhance nonprofit governance and oversight
to prevent fraud and improve public trust. The changes are considerable,
but some of the highlights that would affect the N-PCL include the
following: a) eliminating distinctions in the types of nonprofits and
instead categorizing entities as either charitable corporations or
noncharitable corporations (existing entity types will be grandfathered
to eliminate the need to file a certificate of amendment); b) permitting
facsimiles, emails, video conferencing, Skype and other more modern
technological means for meeting notifications and meetings themselves;
c) requiring that nonprofits adopt written conflict of interest
policies; d) prohibiting any employee from also serving as chairperson
of the board in order to have clear lines of accountability; e)
simplifying the process and reducing costs where an organization wants
to sell, lease or dispose of substantially all of its assets by
eliminating the need for court approval and instead relying on the
review and approval of the Attorney General as a control mechanism; f)
similarly simplifying the steps for a proposed merger; and g) requiring
organizations with 20 or more employees and annual revenues in excess of
$1 million to adopt whistleblower policies. Generally, the changes
would be effective as of July 1, 2014. Section 951 of the Tax Law would be amended to add a new Subsection
(c) that would provide, in the case of an estate where no federal estate
tax return is required to be filed, that a disposition to a surviving
spouse who is not a US citizen does not need to pass to a qualified
domestic trust (QDOT) in order to qualify for the marital deduction
under state law. The act is to be effective immediately upon enactment,
is to apply to estates of decedents dying on or after January 1, 2010
and is to expire and be deemed repealed on July 1, 2016.
North Carolina
In July 2013, North Carolina repealed its estate tax. The repeal will
be retroactive to January 1, 2013 and will be effective for estates of
decedents dying on or after that date.