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ESTATE PLANNING: Current Developments and Hot Topics December 2013

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ESTATE PLANNING: Current Developments and Hot Topics December 2013 ESTATE PLANNING: Current Developments and Hot Topics December 2013 The Estate Planner’s “Playbook” for 2013 and Going Forward Under the Post-ATRA “New Normal” of Permanent Large Exemptions and Portability. Steve R. Akers Senior Fiduciary Counsel — Southwest Region, Bessemer Trust 300 Crescent Court, Suite 800 Dallas, TX 75201 214-981-9407 [email protected] www.bessemer.com TABLE OF CONTENTS 1. American Taxpayer Relief Act of 2012 and “3.8% Medicare Tax” ................................ 1 2. Administration’s Fiscal Year 2014 Revenue Proposals ................................................. 8 3. Treasury-IRS Priority Guidance Plan ........................................................................ 17 4. Possible Tax Reform Legislative Developments.......................................................... 18 5. Planning for Donors Who Made Large 2012 Gifts ...................................................... 20 6. Generation Skipping Transfer Tax Reporting Issues ................................................... 26 7. General Approaches to Estate Planning Following ATRA; The “New Normal”................ 31 8. Portability ............................................................................................................. 41 9. Trust and Estate Planning Considerations for 3.8% Tax on Net Investment Income and Income Taxation of Trusts ....................................................................................... 57 10. Strategies to Preserve Basis Adjustment Upon Grantor’s Death ................................... 69 11. Strategies to Preserve Basis Adjustment Upon Surviving Spouse’s (or Other Donee’s) Death ................................................................................................................... 73 12. General Gift Planning Issues for 2014 and Beyond ................................................... 79 13. Gift Strategies That Provide Some Benefit to Grantor and/or Grantor’s Spouse — Overview ................................................................................................ 83 14. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Borrowing From Trust .................................................................................................................... 84 15. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Lifetime Credit Shelter Trust for Donor’s Spouse (also referred to as Spousal Lifetime Access Trusts, or “SLATs”); Exercise of Powers of Appointment for Grantor and/or Grantor’s Spouse ....... 84 16. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — “Non-Reciprocal” Trusts ................................................................................................................... 90 17. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Discretionary Trusts in Self-Settled Trust States ..................................................................................... 92 18. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Sale for Note or Annuity ................................................................................................................. 95 19. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Transfer of Residence to Trust or Co-Tenancies Between Grantor/Spouse of Grantor and Trust ....... 95 www.bessemer.com/advisor ii 20. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Exercise Swap Power or Repurchase Assets From Trust ................................................................... 97 21. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Preferred Partnership Freeze ................................................................................................. 97 22. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Terminate Grantor Trust Status .......................................................................................................... 97 23. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Payment of Management Fees to Grantor ................................................................................... 98 24. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Inter Vivos QTIPable Trust ...................................................................................................... 98 25. Gift Strategies That May Benefit Grantor and/or Grantor’s Spouse — Retained Income Gift Trust .............................................................................................................. 99 26. Wealth Transfer Strategies — Generally .................................................................. 100 27. Defined Value Clause Updates, Including Wandry.................................................... 101 28. GRAT Strategies .................................................................................................. 119 29. Supreme Court in Windsor Creates Planning Opportunities for Same-Sex Married Couples .............................................................................................................. 127 30. Installment Sales to Grantor Trusts and Spousal Grantor Trusts ................................ 139 31. Installment Sales by Beneficiary to Section 678 Trust ............................................. 140 32. Sale of S Corporation Stock by Beneficiary to QSST ................................................ 144 33. Transfers Involving Family Limited Partnerships or LLCs .......................................... 145 34. Intra-Family Loans and Notes ................................................................................ 149 35. Planning for Surviving Spouse Who is Beneficiary of QTIP Trust; Sale of Assets for Deferred Private Annuity, Estate of Kite v. Commissioner, T.C. Memo. 2013-43 ........ 154 36. Value of Fractional Interests in Art; Consider Likelihood That Family Members Would Purchase Hypothetical Purchaser’s Fractional Interest; 10% Fractional Interest Discount, Estate of Elkins, 140 T.C. No. 5 (2013) ...................................... 168 37. DING Trust Letter Rulings, PLRs 201310002-201310006 ..................................... 171 38. Interest on Graegin Loan Not Deductible; Majority Interest in LLC Valued With Low Marketability Discount, Estate of Koons v. Commissioner, T.C. Memo. 2013-94 ........ 178 www.bessemer.com/advisor iii 39. Self-Canceling Installment Notes (SCINs); CCA 201330033 and Estate of William Davidson ............................................................................................................. 181 40. Decanting—Massachusetts Court Recognizes Common Law Decanting Authority Based on Trust Instrument, Morse v. Kraft et al. ................................................................... 197 41. Social Security and Medicare Basics—What One Needs to Know When Approaching Mid-60s .............................................................................................................. 199 42. Net Gift Offset by Donee’s Assumption of Potential § 2035 Estate Tax Liability if Donor Dies Within Three Years, Steinberg v. Commissioner ...................................... 206 43. Interesting Quotations .......................................................................................... 214 Copyright © 2013 Bessemer Trust Company, N.A. All rights reserved. Important Information Regarding This Summary This summary is for your general information. The discussion of any estate planning alternatives and other observations herein are not intended as legal or tax advice and do not take into account the particular estate planning objectives, financial situation or needs of individual clients. This summary is based upon information obtained from various sources that Bessemer believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in law, regulation, interest rates, and inflation. www.bessemer.com/advisor iv INTRODUCTION This summary of recent developments includes observations from some of the seminars at the 47th Annual Philip E. Heckerling Institute on Estate Planning as well as other seminars and developments during the year. This summary focuses on practical planning issues that estate planning professional will be facing under the “new normal” of transfer tax certainty, large indexed transfer tax exemptions, and portability provided by the American Taxpayer Relief Act of 2012 (ATRA). Topics include: • legislative matters and proposals (Items 1-4); • planning for donors who made 2012 gifts, including compliance details (Items 5-6); • planning approaches for various categories of clients going forward in light of permanent large indexed exemptions and portability (Item 7-8); • planning considerations for the new 3.8% Medicare tax on net investment income (Item 9); • strategies to preserve basis at death (turning some traditional planning on its head) (Item 10- 11); • wealth transfer planning strategies leaving some indirect access for the donor and donor’s spouse (Items 12-25); • other sophisticated wealth transfer planning strategies (including using defined value clauses) (Items 26-28, 30-33); • planning considerations for commonly used intra-family loans and notes (Item 34); • planning considerations for same-sex spouses in
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