Planning and the Death of the Death Tax

On Wednesday afternoon the White House again proposed eliminating the so-called death tax as part of its tax reform plan, but the details remain sparse.  When pressed for specifics Director Cohn simply stated that with the implementation of the administration’s tax plan, the death tax would disappear.

The phrase “death tax” entered the popular lexicon by way of tax reformers wanting to summarize and caricature the several parts of the Federal transfer tax system.

What is the Death Tax?

The death tax could refer to the estate tax alone or to any combination of other taxes that grew out of the estate tax regime.  The modern estate tax was introduced in 1916.  In its current form it imposes a top rate of 40% on transfers above $5,490,000 per person made at death.

After the estate tax was instituted, savvy taxpayers quickly realized that a deathbed gift would avoid the estate tax altogether.  To prevent this, Congress passed the gift tax in 1936.  The current gift tax has the same top rate as the estate tax and shares the $5,490,000 exemption.  This means any gifts that use gift tax exemption during life reduce the available estate tax exemption at death.  The gift tax also excludes gifts up to $14,000 per year to any one person.

Under the estate tax, if a taxpayer pays estate tax and leaves the entire estate to his or her children, the children would again pay estate tax when the estate is passed to the taxpayer’s grandchildren. To avoid this problem, wealthy taxpayers began leaving a large portion of their estate to their grandchildren (or to trusts for their children for life, then to grandchildren), effectively leapfrogging one generation of the estate tax.  Not to be outmaneuvered, Congress passed the generation-skipping transfer (“GST”) tax on transfers to or for anyone in a generation below the taxpayer’s children.  The current GST tax has the same top rate and exemption level as the estate tax.

To avoid double taxation, Congress also introduced stepped-up basis at death.  This provision resets the basis of property acquired from a decedent to the date of death fair market value.  Thus heirs will not pay capital gains tax on later sales of property that already may have been subject to the estate tax.  Any or all of these tax regimes may (or may not) be targeted by the administration’s planned repeal.  But it is unclear what the tax landscape will look like once the dust settles.

What exactly will be repealed?

It is certain that the White House repeal will target the federal estate tax.  But this may not mean the end of the estate tax altogether, because some states have their own estate or inheritance taxes.  New Jersey may reinstate its previously repealed estate tax regime and California has proposed a new state estate tax based on the existing Federal system, in response to a Federal repeal.  Other states may follow suit.

If the estate tax is repealed it is unclear what will happen to the gift tax.  It could be repealed with the estate tax or retained – as it was under the Bush tax cuts.  Some argue that even if the estate tax is repealed the gift tax is necessary as a backstop against capital gains shifting.  But, if the income tax rates are collapsed, and depending on the capital gains rate, there might not be much need for such a backstop.

The White House plan does not mention what will become of the GST tax.  The House Republican Blueprint eliminates the GST tax.  And indeed it would seem obvious that a GST tax is unnecessary without an estate tax.  But repeal could create a problem if taxpayers unwind all of their GST tax exempt trusts only for the GST tax regime to be reinstated sometime in the future.  For exactly this reason, the GST tax regime was maintained under the Bush tax cuts with a 0% rate for 2010.

It also is unclear whether estate tax repeal would eliminate the rationale for providing a stepped-up basis at death.  At one point the administration thought so.  According to the administration’s 2016 proposal, the estate tax repeal would be accompanied by a repeal of stepped-up basis.  Instead the administration proposed a tax on capital gains at death at a rate of 20% with a Ten Million Dollar exemption.  This tax has not been mentioned in the most recent proposal and it is unclear whether it is still on the table.

The longevity of the death tax repeal may well depend upon the method used to move the tax bill through Congress.  Senate rules dictate that any legislation which increases the budget deficit beyond ten years requires the vote of 60 Senators.  Because the Republicans hold only 52 seats in the Senate, such legislation would require negotiation with the Democrats.  If the Republicans can’t attract votes from Democrats, they can pass their own version of the tax plan but the changes must be revenue neutral or they will sunset after ten years.

Until the details of the death tax repeal are made public and a final bill is passed, it would seem premature to plan for any specific scenario.


Comparison of Current Tax Rates, Trump Proposed Rates and Republican Blueprint Proposed Rates

While there is considerable uncertainty among wealth planners and tax professionals regarding how the incoming administration will impact the federal tax code, nearly everyone agrees that change is imminent. With that in mind, we have assembled this chart, which compares current tax rates with President-elect Donald Trump’s proposed tax plan, and the House Republicans’ Blueprint plan (released in June, 2016).  Click here.


Treasury Releases Final Program-Related Investment Regulations – Installment # 1

Treasury has released Final Regulations under Section 4944 of the Code providing additional guidance regarding program related investments (“PRIs”). Technically, a PRI is an investment by a private foundation (1) the primary purpose of which is to accomplish an exempt purpose, (2) no significant purpose of the investment is the production of income or the appreciation of property; and (3) no purpose of the investment is to influence legislation or to participate in, or intervene in any political campaign on behalf of (or in opposition to) any candidate for public office.  Classification as a PRI is important because it means the investment will not be considered a jeopardizing investment and the investment is included as a qualifying distribution for purposes of the foundation’s annual minimum distribution obligation.

These Final Regulations provide several new examples of investments that will be classified as PRIs.  It is important to note, however, that these Final Regulations do not change or amend existing law.  In other words, the Final Regulations were not necessary to reach a conclusion that any of the investments in the examples qualified as a PRI.  That said, it is always useful to have additional examples illustrating investments that further an exempt purpose.  In addition, the Preamble to the Final Regulations and some of the specific examples address concepts that apply beyond an analysis of PRIs, including application of the private benefit doctrine.  We will take the opportunity to discuss some of these concepts in a series of future installments.  Stay tuned.


Will the Senate Vote on Conservation Easements?

the-capitol-4-1225800-mThe America Gives More Act of 2014 (the “Act”) includes several provisions about charitable deductions. Among those provisions are changes to the donations of conservation easements that would make permanent temporary provisions that terminated as of December 31, 2013. The Act would permit individuals and corporations to continue to take a deduction of up to 50% of their adjusted gross income and permit individuals and corporations to carryover the aggregate amount of the deduction for up to 15 succeeding years.

The permanent provisions of Section 170 of the Internal Revenue Code only permit individuals and corporations to take a deduction up to 30% of their adjusted gross income and to carryover the aggregate amount of the deduction for up to 5 succeeding years.

The Act was introduced May 22, 2014 by Representative Tom Reed (R) and was passed by the House (277-130) on July 17, 2014. The Senate returns from recess on September 8, 2014, but it is unclear whether Senate Majority Leader Harry Reid (D) will bring the Act to the Senate floor for a vote.


New York’s Non-Profit Revitalization Act of 2013 and Its Impact on Non-Profit Organizations

At the end of 2013, Governor Cuomo signed into law the Non-Profit Revitalization Act of 2013 (the “Revitalization Act”), which made significant changes to the way not-for-profit corporations will be required to operate in the State of New York.  The Revitalization Act presents the first significant changes in 40 years to the New York Not-for-Profit Corporation Law (the “NPCL”).  The changes focus on corporate governance reforms as well as updates to certain procedural rules. Most of the Revitalization Act’s provisions will go into effect on July 1, 2014. (more…)


IRS Provides Additional Guidance Regarding Reinstatement of Exempt Status

The IRS recently issued Revenue Procedure 2014-11, 2014-3 I.R.B. 411 (the “Revenue Procedure”) providing procedures for reinstating the tax-exempt status of organizations that have had their tax-exempt status automatically revoked under section 6033(j) of the Internal Revenue Code for failure to file required annual returns or notices for three consecutive years. The Revenue Procedure modifies and supersedes Notice 2011-44, 2011-25 I.R.B. 883 (the “Notice”).

In general, the Notice permitted certain organizations to request reinstatement of its tax-exempt status effective from the date of the organization’s automatic revocation (“retroactive reinstatement”) if the organization filed its application for reinstatement of tax-exempt status within 15 months of the revocation and proved reasonable cause for failing to file the required annual return or notice in each of the three consecutive years and over the entire consecutive three-year period. The Revenue Procedure liberalizes the criteria for requesting retroactive reinstatement for an organization that (i) was eligible to file Form 990-EZ or Form 990-N for each of the three consecutive years it failed to file, (ii) has not previously had its tax-exempt status automatically revoked pursuant to section 6033(j), and (iii) files its application for reinstatement within 15 months of the revocation and pays the applicable user fee. Under the Revenue Procedure, such organizations will be deemed to have reasonable cause for its failures to file Form 990-EZ or Form 990-N, as applicable, for each of the three consecutive years and will be retroactively reinstated upon the IRS’s approval of such organization’s application for reinstatement.

The Revenue Procedure can be read in full here.


Final Regulations for Type III Supporting Organizations

The IRS released the long-awaited final Regulations for Type III supporting organizations.  The final Regulations may be viewed by clicking here.


IRS Releases Examples of Program-Related Investments

The IRS released proposed regulations under Section 4944 providing additional examples of program related investments (PRIs) (PRIs are excepted from the jeopardizing investment rules).  The proposed regulations add nine new examples intended to illustrate that a wider range of investments qualify as PRIs than the range currently presented in Treas. Reg. § 53.4944-3(b). The proposed regulations do not modify the existing regulations; rather, they provide additional examples that illustrate the application of the existing regulations.  Generally, the charitable activities illustrated in the new examples are based on published guidance and on financial structures described in private letter rulings. (more…)


New Regulations on Public Inspection of Letter Rulings

On February 28, the IRS issued final regulations amending sections 301.6104(a)-1(i) and 301.6110-1(a) to expressly allow public inspection of letter rulings denying or revoking an organization’s tax exempt status. The amendments are in response to Tax Analysts v. IRS, 350 F.2d 100 (D.C. Cir. 2003), in which the court held that including denials and revocations of tax exempt status “within the ambit of section 6104″ and, thus, preventing disclosure, violated the plain language of section 6110. The final regulations are published in T.D. 9581, which can be read in full here.


Revised 990 Regulations

Until recently, when an organization sought public charity status on its Form 1023 and received a favorable determination letter from the Internal Revenue Service recognizing it as exempt under Section 501(c)(3) of the Code, its public charity status (if granted) would be for a five-year “advance ruling period”. After this advance ruling period, the organization would make a separate filing to the IRS to establish public charity status based on satisfaction of one of the Support Tests. On September 7, 2011, final regulations were issued that change the timing and process of determining public charity status.  A brief description of the changes can be read here.

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