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Estate Planning: Current Developments and Hot Topics Estate Planning: Current Developments and Hot Topics December 2014 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 Introduction ....................................................................................................................... 1 1. Legislative Developments ............................................................................................ 1 2. Treasury-IRS Priority Guidance Plan; “BDITs” ............................................................... 7 3. General Approaches to Estate Planning Following ATRA; The “New Normal” .................... 8 4. Planning for Couples Having Under $10 Million .......................................................... 10 5. Portability................................................................................................................ 23 6. Estate and Income Tax Intersection—Basis Planning for Larger Estates ......................... 37 7. Basis Adjustment Flexibility Planning ......................................................................... 42 8. Planning Basis Adjustment Regardless Which Spouse Dies First; Joint Spousal Trusts (To Facilitate Funding Credit Shelter Trusts and for Basis Adjustment); Section 2038 Marital Trust ....................................................................................................................... 54 9. Trust and Estate Planning Considerations for 3.8% Tax on Net Investment Income and Income Taxation of Trusts ......................................................................................... 60 10. Drafting for Maximum Flexiblity (and “Dead Hand Control”); But Can It Go Too Far? ...... 88 11. Gift Planning Issues for 2014 and Beyond .................................................................. 97 12. Defined Value Clause Updates ................................................................................. 101 13. Sale to Grantor Trust Transaction (Including Note with Defined Value Feature) Under Attack, Estate of Donald Woelbing v. Commissioner and Estate of Marion Woelbing v. Commissioner ........................................................................................................ 104 14. Self-Canceling Installment Notes (SCINs); CCA 201330033 and Estate of William Davidson ............................................................................................................... 109 15. Same-Sex Marriage Issues ....................................................................................... 115 16. Life Insurance Developments—Right to Dividends, Shark-Fin CLATs, Intergenerational Split Dollar Insurance, Transfer for Value .................................................................. 118 17. 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 and Rule 155 Order ............................................................................................................................ 119 18. Recent Cases Addressing Asset Protection Planning and Domestic Asset Protection Trusts ............................................................................................................................ 122 19. 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 .......... 125 20. Net Gift Offset by Donee’s Assumption of Potential §2035(b) Estate Tax Liablility if Donor Dies Within Three Years, Steinberg v. Commissioner .................................................. 126 21. Valuation of Investment Holding Company; Valuation Method, Built-In Gains Tax Adjustment, Lack of Control and Marketability Discounts, and Undervaluation Penalty, Estate of Richmond v. Commissioner, T.C. Memo 2014-26 ........................................ 127 www.bessemer.com/advisor i 22. Recent State Income Tax “Resident Trust” Cases ; New York Estate, Gift, GST, and Trust Income Tax Issues .................................................................................................. 135 23. Family Limited Partnership Attack for Estate Inclusion Without Any Discounts, Estate of Williams ................................................................................................................ 139 24. Valuation of Real Property in 2009 (When Comparables Were Not Available Reflecting Depresed Values Folliwing the 2008 “Crash” Because Properties Were Not Selling), Estate of Lovins ............................................................................................................... 140 25. Appraiser Failed to Testify; Estate Arguing Lower Value Than on Form 706, Estate of Tanenblatt ............................................................................................................. 140 26. Inherited IRAs Not Protected in Bankruptcy, Clark v. Rameker.................................... 140 27. “SOGRAT” Patent Under Review ............................................................................. 141 28. Business Opportunities—Bross Trucking v. Commissioner and Estate of Adell v. Commissioner ........................................................................................................ 142 29. Significant Discount Allowed for Undivided Interest in Art—Estate of Elkins v. Commissioner ........................................................................................................ 147 30. Resurrection of “De Facto Trustee” Concept—Securities Exchange Commission v. Wyly 152 31. Interesting Quotations From Heckerling Institute ....................................................... 160 APPENDIX A .................................................................................................................. 169 APPENDIX B ................................................................................................................. 171 APPENDIX C .................................................................................................................. 173 Copyright © 2014. Bessemer Trust Company, N.A. All rights reserved. December 18, 2014 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 ii INTRODUCTION This summary of current developments includes observations from the 48th Annual Philip E. Heckerling Institute on Estate Planning in 2014 as well as other observations from various current developments and interesting estate planning issues. 1. LEGISLATIVE DEVELOPMENTS a. Overview of Administration’s Fiscal Year 2015 Revenue Proposals. The Treasury on March 4, 2014 released the General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals (often referred to as the “Greenbook”) to provide the details of the administration’s budget proposals. For a discussion of the proposals impacting estate planning in the 2014 Fiscal Revenue Proposals, see Item 2 of the Hot Topics and Current Developments Summary (December 2013) found here and available at www.Bessemer.com/Advisor. A few summary comments about particular proposals in the Greenbook are included below. b. Transfer Tax Legislation Unlikely Without General Tax Reform. The various transfer tax proposals will likely proceed only as part of a general tax reform package, and not as a package of separate transfer tax legislation. There have been some indications, however, that transfer taxes are not being considered in the reform measures. Congressional tax-writing committees have spent a lot of time over the last several years laying the groundwork for comprehensive tax reform. The House Ways and Means Committee and the Senate Finance Committee both held hearings in 2013 about various issues related to tax reform. There is a broad consensus of an aspiration for tax reform (both business as well as individual tax reform) but strong disagreement over details of reform and whether the overall reform would be revenue neutral. General tax reform did not occur in 2014, the there could be a shift in emphasis in 2015 with the Republicans controlling both the House and Senate. Any serious tax reform effort will probably start with corporate tax reform and bleed over into individual reform measures. The likelihood of separate transfer tax legislation (which itself is always politically charged) in the near future is almost nil. Inclusion of some of the specific transfer tax measures that would raise some revenue is always possible, however, as an add-on to other legislation that needs revenue offsets to help pay for the legislation. c. Summary of Specific Proposals in Fiscal Year 2015 Revenue Proposals. • Restore 2009 estate, gift and GST Tax parameters, beginning in
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