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Recent Developments in Estate and Tax Planning . . . and What to Expect in 2015*

2014 was a relatively quiet year by historical standards, but there were nonetheless some major cases and pronouncements from the IRS that have a significant impact on clients and our practices. This article addresses the more significant events of 2014 . . . and planning ideas and actions you may want to consider as a result.


The Foreign Account Tax Compliance Act (FACTA) took effect July 1, 2014. Originally signed into law in 2010, FACTA was designed to fight tax evasion by taxpayers with undisclosed foreign financial accounts and other offshore assets by requiring reporting with respect to those accounts and assets by both U.S. taxpayers and the foreign financial institutions.

Under FACTA, a 30% withholding tax applies to payments to foreign institution of US-sourced income, unless the foreign financial institution enters into an agreement with the IRS to comply. As of July 1, 101 jurisdictions had entered into such agreements.

Practice Pointer: As a result of FACTA, those with foreign accounts now have additional reporting requirements. Those who assist clients with offshore accounts truly need to understand these regulations and reporting requirements.

Final 67(e) Regulations

On May 8, 2014 the Treasury adopted Final Regulations under IRC Sec. 67(e). These regulations explain that certain expenses, incurred solely because the assets are in an estate or non-grantor trust, are not subject to the 2% floor of Adjusted Gross Income (AGI) – and thus are far more like to be deductible. These include probate court costs and fees, fiduciary bond premiums, cost of legal publication to creditors and heirs, appraisals necessary to complete tax returns or make a distribution.

Also, the Final Regulations clarify that costs for estate, GST, fiduciary income tax and decedent’s final income tax returns are exempt from the 2% floor.

Practice Pointer: Those who represent estates and non-grantor trusts should be certain the estate/trust is deducting all expenses incurred due to the fact that it is an estate/trust, including the expenses listed above.

Impact of Supreme Court Case of Windsor

The US Supreme Court issued its opinion in U.S. v. Windsor in June 2013, so a detailed discussion is beyond the scope of this article. Suffice it to say that the Court struck down DOMA’s Section 3, which defined marriage as only between a man and woman, on the grounds that it was unconstitutional.

In February 2014, the IRS issued guidance explaining that legally married same-sex couples in Community Property states like California are treated as married for community property purposes on their income tax returns. Moreover, in March 2014 the IRS issued FAQs explaining that a same-sex couple legally married in a prior open tax year can amend its tax return for such years.

Practice Pointer: Same sex clients who were legally married at the time may now amend their open returns to reflect the community property nature of their property. This will be particularly important for clients whose spouse died during the preceding three years, since they can now claim that any property acquired during the marriage is community property subject to the double step-up in basis.

No Asset Protection for Inherited IRAs

A prior issue of our newsletter discussed the Supreme Court Case of Clark v. Rameker in great detail. Suffice it to say that the US Supreme Court ruled that there is no federal law protection for inherited IRAs. Thus, unless state law expressly provides protection, and California does not, an inherited IRA is available to satisfy a creditor’s claim both in and out of bankruptcy.

Practice Pointer: If a client wants the benefit of maximum income tax deferral by naming a younger individual as the beneficiary of an IRA or qualified plan, a trust drafted specifically for this purpose is the best way to accomplish this objective. This specialized trust will also protect the assets from the beneficiary’s creditors as long as the assets remain in trust.

Sales to IDGTs Under Attack

In Woelberg v. Comm’r , a late December 2013 case, the IRS is a making a “kitchen sink” attack on a sale to a grantor trust using a Wandry-type defined value clause. I.e., if the value of the shares transferred is ultimately determined to be higher or lower than appraisal, the number of shares adjusts accordingly.

In 2006, Mr. Woelberg sold his nonvoting shares in a family company to a grantor trust for a note in the amount of $59 million. The trust had independent means of at least 10% of the value of the note, including life insurance on the lives of Mr. and Mrs. Woelberg and personal guarantees by the beneficiary sons. After Mr. Woelberg died in 2009, the IRS challenged the 2006 sale on audit of his estate tax return. The IRS more or less ignored the note, valued the stock at the time of the gift at $117 million, and $162 million at the time of his death.

The IRS is arguing that the note should be ignored completely and that the stock transferred to the trust should be included in Mr. Woelberg’s estate under IRC Sec. 2036 and 2038.

Practice Pointer: This case reminds us of the IRS’s disdain for the sales to grantor trust technique. While prior, similar attacks have failed, it emphasizes the importance of dotting the “i”s and crossing the “t”s with these transactions.

Independent Trust Protectors Questioned

While not an estate tax case, the opinion of SEC v. Wyly (S.D.N.Y 2014) could have significant implications in the estate and gift tax world. In Wyly, the Wyly brothers were found to have  violated securities laws by using offshore trusts and entities to purchase shares in public corporations on which

they served on the board.  The Court found the trusts were grantor trusts because the Wylys could control the discretionary action of the trustees through independent Trust Protectors, who could remove and replace the trustee.

Here, the Trust protectors were the family attorney, the family office CFO, and a CFO of a Wyly-related entity. The Wylys would communicate to the Trust Protectors the transactions they wanted the trusts to enter into, and the Trust Protectors would then communicate with the offshore trustees, who consistently followed these requests.

The court found that the grantors had de facto control because the trustees followed every one of their recommendations. Significantly, in so doing the court ignored the precedent of Goodwyn v. Comm’r, T.C.M. 1976-238 which requires an agreement creating an ascertainable and legally enforceable right, not merely persuasive control. Thus, the court ordered the Wylys to disgorge $287 Million, plus interest.

Practice Pointer: This case seems to stand for the proposition that independence requires the affirmative rejection of one or more of the settlor’s recommendations. While this opinion contradicts Tax Court precedent, as a result of this opinion it may be prudent to have independent Trust Protectors act inconsistent with the settlor’s requests on at least one or two occasions.

Trust Can “Materially Participate” for Purposes of Avoiding 3.8% Tax

In Aragona v. Comm’r – 142 T.C. No. 9 (March 27, 2014), the court considered a trust’s “material participation” for purposes of avoiding the 3.8% tax on net investment income.

IRC Sec. 469(c)(1) generally defines “passive activity” as “the conduct of any trade or business … in which the taxpayer does not materially participate.” Section 469(h)(1) defines material participation as involvement in the operations of the activity on a “regular, continuous, and substantial” basis.

Despite Congressional intent to the contrary, the IRS position was essentially that a trust could not materially participate. The Tax Court held that a trust operating a real estate business could avoid the per se characterization of a real estate business as passive under section 469(c)(2) if, under Section 469(c)(7)(B):

“(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates, and

(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates.”

Practice Pointer:  This case clarifies that a facts and circumstances test applies for material participation of trusts, similar to non-trust taxpayers. Where material participation may be questioned, it is helpful for the trustee to document participation.

IRS Approves “NING” Trusts

In PLRs 201410001-201410010, the IRS ruled that a Nevada Income Non-Grantor (NING) trust would not be a grantor trust under Sections 673, 674, 676, or 677. However, the IRS expressly did not rule as to grantor trust status under Section 675, saying this was a question of fact.

Here, then transfer was incomplete because grantor retained:

• The power to consent to distributions (through a distribution committee of which was a minority member)
• Testamentary Power of Appointment

Practice Pointer:  The California Board of Equalization casts a large web when it comes to taxation of California-sourced income. However, to the extent your clients have non-California-sourced income, they may be able to defer and/or eliminate California taxation of that income through use of a properly structured NING. And if the NING invests in tax-free investments, including insurance, these monies may be able to avoid California taxation completely.

Green Book Recommendations

While not yet implemented, the President’s annual Green Book recommendations give us a sense of where we might see changes in the future. This year’s Green Book contained several long-time recommendations as well as some new ones that would change planning significantly:

• 2009 levels for gift, estate, and GSTT exemptions and rates: $3.5 M estate and GSTT exemption, $1 M gift tax exemption, and max. 45% rate
• Require basis of property received from a donor or decedent to be that of the donor or estate tax value
• Require a min. 10-year term for GRATs
• Limit GST exempt trusts to 90 years
• Coordinate rules for property that is owned by the grantor for income and estate tax purposes
• Extend the lien on estate tax deferrals under Section 6166
• Eliminate HEETs
• Limit tax free gifts to $50,000 per donor per year (new)
• Make the definition of “executor” apply to all purposes in the IRC.

Future of the Estate Tax

Does the Republican Party’s new-found control of the Senate mean we will see a Republican-led push for full repeal of the estate tax. While our crystal ball is no clearer than anyone else’s, it seems that  for there to be a full repeal of the estate tax the Republican party would have to either: (1) package estate tax repeal within a bill the President would not veto; or (2) win the White House and pick up additional Senate seats in 2016. If the latter, the same requirement that led to the 2001 Tax Act “sunset” – that no bill have a negative fiscal impact for more than 10 years without 60 votes in the Senate – still applies and would block any “permanent”  repeal efforts absent additional gains in the Senate.

Alternatively, the President’s Green Book contains a roll back of the gift, estate, and GSTT exemptions to 2009 levels, but there does not appear to be any other support for this position.


The rulings and pronouncements of  2014 were not earth shattering, but many were significant. It is critical that you work with lawyers like those at Matsen Voorhees LLP that stay abreast of recent developments and understand their significance when planning for clients.

We welcome the opportunity to assist you with these or any other planning strategies. Please contact us if you have any questions or need any assistance with case design or implementation.


• Ron Aucutt’s “Top Ten” Estate Planning and Estate Tax Developments of 2014 (Dec. 2014)
• AICPA’s The Tax Adviser Recent Developments in Estate Planning: Parts 1 and 2 (Sep. and Oct. 2014)
• ABA’s Estate Planning: Current Developments and Hot Topics (Steve Akers, June 2014)
• NBI 2015 Tax Update for Estate Planners (Kate M.H. Kilberg, Jan. 2015
• Some Things Old Are Now Quite New – What Should We Do? (Michael Vollmer, OCBA T&E Section Jan. 2015)

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