Annual Trust & Estate Update

Sarah Adkisson: Thanks Scott. So as Scott mentioned, one of the big themes in every panel that we attended was kind of the uncertainty that is going around right now with all of tax policy, but also with some of the regulatory stuff. So as Scott mentioned, there's a lot of things actually that are going to be expiring within by the end of the year. We think maybe we don't know. So this is just kind of a breakdown of some of the most important ones that impact mostly individuals. So the double state deduction, the lower tax rates with expanded income brackets, the ever controversial state and local tax deduction that's capped at $10,000 increased AMT exemption, double the state, and of course the double estate tax exemption, and that goes for both the estate tax and the generation skipping trend for tax. So right now, like Scott said, it's about $13.99 million. The estimation for what it would go back down to beginning in 2026 is about $7.3 million per individual.

So this just kind of highlights the ones that are going to have probably the most impact for estate planning is going to be the changes with income tax rates. Also, probably the AMT exemption, which I didn't highlight, the increased charitable deduction percentage, that's going to go back down to 50% and the doubled estate tax exemption. So the question that everyone kind of had, and unfortunately we still don't have an answer to, I was hoping we might, is what exactly is going to happen, right? The TCJA is still scheduled to expire. The estimation for it to be paid for is $5.2 trillion and of that is $189 billion just to extend the estate and gift tax provision. So cost is the big fight right here and it's part of why we don't know how much is going to be extended, what's going to stay.

So the slim majority in the house, it means that every single Republican is going to have to vote in lockstep. The problem with this is that because there's only one or two people who need to break with the group, it really increases the potential for gridlock, right? If one person decides, hey, this one thing like this salt cap is the hell I want to die on, that will scuttle the entire bill. They do have two chances this year to at least schedule chances to pass legislation probably more if they really want to. We are seeing the fight going on in the background right now and one provision that has been put in what's called the menu in terms of things that they would use to pay for or not pay for but pay well, the things that might end up in the bill, we did see a provision that would eliminate the estate tax.

Now that has been Senator Thune's push for a while and he's now in charge of the Senate, but these bills also have to go through the house. So all of this is really a way of saying that there's so much uncertainty going on with the possible legislation. So we're really just kind of sitting around waiting to see what they put forth, what is going to happen, and that means that we are just kind of sitting in this Schrodinger estate tax exemption world where you might have it, you might not. There's a lot of different possibilities that this could take different routes.

We could see a bill go through before the end of March. We could see a bill go through in December, or we could see the TCJA expire and then them retroactively bring it back in 2026 through a bill like they often with tax extenders. So there's a lot of different ways that it could go. Kind of shifting gears, so there's the legislative uncertainty we have, right? There's also some regulatory uncertainty we have. There's a very big case called Loper Bright. I'm not going to get fully into the weeds on a tax case. Nobody has time for that. But basically it overturned a very, very longstanding administrative law principle that as long as an agency in interpreting and making a regulation, as long as their interpretation was reasonable, a court had to give deference to the agency's interpretation that has now been overturned. In this case called Loper Bright and Relentless. There were two cases put together. The Supreme Court overruled Chevron six to three and said that it is the responsibility of the court to decide whether the law means what the agency said, even for highly technical scientific, any kind of question like that. So this is going to have impacts in the tax world as well.

Regulations might be easier to challenge some of the secure 2.0 regulations that Derek is going to talk about later. We might also not see regulations come out as fast as we had in the past, which could impact more regulations for Secure Secure 2.0. Any of those regulations that we are still waiting on, I will say existing regulations can't be challenged or overturned just because they were previously upheld under Chevron. So we have both a legislative uncertainty and now we've also got this regulatory uncertainty. We also have, obviously the new administration has frozen certain regulations from being enforced. They've also frozen regulations coming into new existence, so a lot of uncertainty there as well.

We have new regulatory head as well. We have Scott Bessent who's going to be who is the Treasury secretary, sorry. So these are just some of the key takeaways that we could see that will, again, is causing a lot of uncertainty. One very last thing that a lot of people have a lot of uncertainty and I guess anxiety about is the Corporate Transparency Act. I think it was one of 20 people who went to this panel. It was very interesting panel, but the Corporate Transparency Act, I'm not going to get too far into it. Suffice to say it's on hold right now. There've been multiple legal challenges. This was the act that was going to require you to report beneficial ownership information for all individuals owning companies. It's on hold. The Supreme Court has waited in just barely. It's probably going to end up before the Supreme Court.

There has been a couple bills introduced to push the effective date to 2026 instead of 2025, and President Trump has suggested some tweaks to it. So I would say while it's on hold right now, really the biggest thing anybody who might be impacted by the Corporate Transparency Act should know is it was a bipartisan bill. There is still bipartisan congressional support for it. So even if it's on hold, I do think that it's going to be something to consider. So that is the main one. So I think we're at our first polling question here. Astrid, do you want to?

Astrid Garcia: Poll #2.

Sarah Adkisson: We do have a couple of questions in the chat if we want to discuss is there any effort to get rid of inheritance taxes? There's a suggestion of eliminating the estate tax completely. I don't know if it's going to end up in any bill. I haven't heard of it being in the bill. I think the bigger push for any legislation is to just keep the extension, either make it extended or permanent, the amount of the increased exemption amount

Astrid Garcia: We have 84 of you have already answered. Make sure that you hit the submit button, select your answer and hit the submit button. All right, I'll be closing the polls now. Back to you.

Sarah Adkisson: All right, so now Scott, right?

Scott Testa: Yes, thanks Sarah. Sarah discussed there's no guarantees and it could even take some time before and any legislation has passed. There's always hurdles or prices to pay are bigger fish to fry like immigration or tariffs or Gaza or Greenland. So we just don't know. But estate planning has always been more than just about saving estate taxes, so it would be wise to continue to plan to get future income and appreciation out of your estate. The key is to build flexibility into the plan and tee it up for possible sunset. In other words, put planning in place. Now, even if you don't pull the trigger until the end of 2025, if you want to wait to see what happens, getting back to the bonus exemption again, the lifetime exemption is set to be cut in half in 2026 and it's used it or lose it and there's no claw back. So if you give it away now, it won't be put back into your estate and clawed back. The key is to understand this bonus exemption and that you have to use your base first before you can use this bonus exemption. One of the speakers used the cupcake analogy to explain this. He said the base is the cake part, which is the exemption in effect at death. Let's say it's 7 million, the bonus is the icing, which is the current exemption, 13.99 million over the base. That's the cake.

Again, the base is the cake. You have to eat the cake part first before you can get to the icing. So if you want to lock in the higher exemption now before it goes away, or if it goes away, you need to give away the base first and it won't be clawed back. If you wait until 2026 to start giving, you'll only be able to give away 7 million tax free. And the example here is that if somebody's plans on giving away 13.99 million, the remaining exemption amount to a slat for let's say for example, and assuming the trust value stays the same in the exemption sunset, so at death at 7 million, had he done nothing, he would've had a taxable state of 6,000,009 90. After the exemption, 13,000,009, nine minus 7 million, the base and the estate taxed 2,796,000. Again, this could have been saved by using the slat and giving away the assets before it sunsets. Let's say the trust grows to 25 million at death when the exemption 7 million, the taxpayer would've used this bonus exemption plus got the future appreciation out of the estate and result in a state tax savings of 7.2 million. The point is now even if Congress extends the exemption amount or you don't use any of your bonus exemption, planning now removes future appreciation out of your estate.

Now the question is how do you plan for this uncertainty? It makes it tough since we don't know what's going to happen and how to secure both exemptions. So that was a popular topic at Heckerling, knowing that clients may be hesitant to make gifts based on the overall wealth. It depends on the size of your estate, the sources of cashflow, and depending on what the exemption is. But one of the other things they talked about, if you wait until the end of 2025, it may be too late. State planners and drafters and attorneys are just going to be too busy to be able to draft all the trusts that are required. So some of the ways to hedge your bets is start planning now, one is to set up a standby trust. Set up a trust fund now with a nominal amount so it's in place if you want to potentially make a large gift at the end of 2025, you could tee up your gifts.

For example, if they're LLC interests, you can get your assignments and any documents in place. You can make loans now outright or in trust or sales to defective grants or trust and forgive those notes later on if you want to make a gift and user exemption. And if you are not sure what assets you want to give, if you give cash now to an intentionally defective grant or trust, you can swap the assets out later. Mostly going to get into using typical trust or disclaimer trust to QTIP and as one way to defer the decision.

The other thing is the key is to figure out when to utilize the remaining exemption for both of you or for one spouse and preserving the exemption for the other. Now when planning, you have to understand there are some, even though there's no claw back, there are anti-abuse rules and one of the things they talked about is a gift by promise, which is a legally binding promise to make a gift in the future. It has been determined that it's a taxable gift that the time entered, but this has been targeted by the authors of proposed regs. I mean, it leaves it open if theres a promise, if the promise is satisfied more than 18 months, but I'd be leery of trying to rely that on that to use your exemption. Also know that the difference is, well, what if you make a cash gift to a trust filed by a loan to the grantor? Is that any different? I would say just don't do the same amounts as the cash gift than the loan. Keep in mind that if you're planning and using cups that if you die during the fixed term, the gift does fail to lock in the bonus exemption. And there's also discussion of using a grits that's also on the anti-abuse list.

Go ahead.

Derek Dockendorf: Sorry about that. I was going to say, I thought it was really interesting when we were at Heckerling where they talked about the standby trust, right? I think that's a great thing to start thinking about where we've been kind of in this position before, right? Back in 2012 when the exemption was 5 million set to go down to a million dollars, we had a lot of clients, a lot of taxpayers that are looking to make transfers and they rushed and tried to push it in at the end of the year and there might not have been as much thought going into it because they were just rushing to it and utilize that exemption, and I think it's a great point to start thinking about those things now, looking to have that standby trust ready to go, so it'll afford you time to think through all the different pieces, mechanics that are there.

So as we continue to get more clarity as the year goes on, it becomes more certain or less certain if the exemption's going to stay or be cut, it then puts you in a position to go ahead and move that asset or finish fully funding the trust. You don't have to try to take it from zero to hero in a short amount of time. I think you hit on it. We're going to have a hard time finding capacity between attorneys or people that are going to be drafting those documents help to make sure that they're actually in place to accept that gift before the end of the year.

Scott Testa: Yes, thanks. Some of the things that we also talked about, things to do specific to 2025 and beyond, if you can make pain-free taxable gifts and use your exemption, if you have the wealth, do it. You can also use your deceased spouse's unused exemption. Keep in mind that the exemption is the same for GST purposes and it will also sunset, and you may have unused GST exemption that you could use by making a late allocation or maybe a reverse Q-tip election. Well, this is kind of also an agenda of what I'm going to talk about. Formula clauses are a good way to make gifts without making any taxable gifts. I'll get into that. Also, there's a lot of talk about using your bonus exemption by making a deemed transfer under section 25 19, the assignment of income in QTIP trust, and there was actually a recent two weeks ago private letter rule and that talked about that there's also a way to fix mismatch exemptions and then keep in mind somebody with 20 to $40 million of assets, they're not going to be able to give away their exemption amount and there's no reason to go out of the way to try and use it all.

There's still the typical planning methods to use to make tax-free gifts and get assets out of your estate, and there's also things to do anytime that are just good planning ideas. We'll talk about slats. We won't get into the reciprocal trust doctrine, but that could be used as an IRS sword. It's not as a shield. I've had had the IRS bring this up in certain gift tax audits. As an aside, just be wary of it. There's a lot of talk about also using a circumscribed general powerful point for ways to get a step up basis kind of upstream planning, give a beneficiary of the spouse the right to a general power to include assets back in her estate if it won't cause any estate tax using swap powers. We'll get into Q-tip trust. I won't talk about the qualified small business stock, but there is a way to stack the gain exclusion by making gifts either outright or to non-grant or trust.

So if both spouses plan to use the remaining exemption amount, but only one spouse has sufficient assets, gifts, splitting may be the answer. There are some caveats, however proper planning is necessary. First, note that if gift splitting is elected, all gifts made during the year must be split unless they can't. If spouses have different unused exemptions, this could make gift splitting tricky. So maybe best not to split gifts in this situation. So there's the need to plan. Second, suppose there's a gift to an irrevocable trust where the spouse, the grantor spouse, is a permissible beneficiary In that case, a gift to this trust cannot be split even if gifts splitting is elected, unless the spouse's interest is both ascertainable and severable, which is usually not the case for discretionary trusts. A further caveat applies here, if there are crummy powers in that trust, the gifts subject to the crummy withdrawal power considered gifts to the power holder and therefore may be split in that case. If that is the case, then since any part of the gift may be split for gift tax purposes, then for GST purposes, the entire gift of the trust must be split again for GST purposes. Getting a little tricky here, but just be wary of those rules.

And again, we may be running out of time. So there's also discussion about step transaction doctrine. There was a small Dino case a few years ago that talked about basically that highlights what not to do when trying to secure both exemptions and when you have a wealthier spouse, so as an alternative to gift splitting, the wealthier spouse could transfer assets to the other spouse so that the less wealthy spouse can make gifts of their own, for example, to the a trust for the benefit of the wealthy spouse. The danger here again, is a step transaction doctrine to minimize concerns that the IRS may collapse the transactions and treat the gifts as if they all came from the wealthier spouse. The transfer of the spouse must not be a conduit as part of a prearranged plan. It must stand on its own. The less wealthy spouse must be able to do whatever she wants with the property while she owns it.

Therefore, there should be sufficient time between received from the wealthier spouse and the gift and the property itself should be subject to economic risk in the hands of that spouse. And generally you want to try and do a transfer to the spouse in one year and a gift in the next, but it's too late for that. What's sufficient time? Is it six months? Is it longer? Is it shorter? Again, there really has to be real risk. If there's a gift of cash, let the spouse invest it. If there's a gift of property like real estate, let the spouse improve on that property. If it's a partnership interest, then they need to act as a partner, receive a K one, and again, one suggestion is to not make the transfer the spouse the same amount that the spouse is going to gift I.

Now clients want to make gifts using their remaining gift tax exemption, but they don't want to pay any gift tax. The problem is what if you have hard to value assets? The IRS is more likely to challenge the value of gifts, the hard to value property like closely held businesses and family limited partnerships, especially if valuation discounts are taken because of this planner should consider using a formula clause to facilitate the transfers. Now, there's several types of formula clauses that are available. One suggestion is to divide the transfer into two segments. The first segment would go to the primary recipient as a state of dollar amount equal to the donor's remaining basic exclusion amount. The balance would go to charity such as the donor's private foundation, the gift that would be stated that gift to the private foundation be stated as amount equal to the difference between the state dollar amount and the fair market value is finally determined for federal gift tax purposes of the property transferred.

Another approach assigned value is to state the gift as a number of shares in equal in value to the donor's remaining basic exclusion amount and no more. In other words, you want to make a fractional gift that's finally determined for gift tax purposes with the excess going to a donor-advised fund. It's also been suggested that gifts should be over the fraction amount, the remaining exclusion, so something does go to the fund. What we don't want to do is what Mrs. Nelson did a few years ago in a case and make a gift for a specific dollar amount as determined by a qualified appraiser within 90 days of the effective date of the assignment.

Next up, I want to talk about slats. For couples reluctant to part with assets you consider a slat with the slat, gifted assets grow stay tax-free. The trust is not included in the surviving spouse's estate and we're planning to use, like I said, planning to use the remaining exemption amount. The spousal lifetime access trust or the slat is an effective tool for making gifts that allows the clients to have their cake and eat it too. Slat is an irrevocable trust with the spouse and heirs as beneficiaries. This provides flexibility since a trustee can make distributions to the spouse if needed. Again, gifted assets in this trust grow estate tax free. This trust is not included in the estate. Here's some things. There's a lot of reasons why we like this sla because of the flexibility it offers estate and non-tax benefits going beyond the bonus exemption.

You got to watch out for the reciprocal trust doctrine. The trusts have to be different enough in terms so that they're not uncrossed and treated as gifts to the other spouse and they'll uncross the gifts. There's a lot of advantages to using a slat one. If you're giving minority interests, you can take discounts. All future income and appreciations is out of your state. It provides asset creditor protection assets stay in the trust for future generations. It's also a grant or trust, so you pay income tax on all the income in the trust so the cash stays in the trust and into the hands of your children or future generations. That payment is not considered additional gift. The other key is that you can sell assets to or swap assets out the trust with no gift or income tax consequences. Again, with any gift, there are disadvantages, one that if you make a gift, you don't get a step up in as if you died with the assets, but this could be mitigated by the swap powers in the trust is this is key to your overall estate plan loss and step up could be costly to your assets and the swap has to be done during lifetime.

Next, I want to talk about as in addition to this, I want to talk about Q-tip trust and I'll get into some details on that. But when planning to use remaining, if you want to make a gift to a slat and also want to use a defined value clause, one way to do this is to make the SLAT Q typical trust. So again, to the extent that Q tip election does not mean the gift to the trust will not qualify for the amount deduction and will use the donor's gift tax exemption, you can make a formula QTIP election on the donor's gift tax return with respect to the smallest amount that will result in no gift tax being payable, and this was sanctioned by the regulations under 25 23. You can also give the beneficiary spouse testimony non-general power of appointment over the elected and non-elected property for the purposes of a second look.

The key here also is that the donors have until October 15th, the 2026, the time that you have to file your gift tax return including extension to make this Q-tip election. So if you can wait and see what's going to happen and then either make the Q-tip election or not make the Q-tip election to use a marital deduction or not to use the exemption on a timely filed gift tax return. An alternative to this is to make the slat as a discretionary trust with backup Q-tip provisions. Design the slat so that it's not a Q-tip trust, but contains provisions at any disclaimed property by the beneficiary spouse passes to Q-tip trust and this offers more flexibility because this could be a discretionary trust what Q-tip has to require. It could be distributed, this trust does not, so property, not could disclaim, could be held in this discretionary trust. And we have our next polling question.

Astrid Garcia: Poll #3.

Scott Testa: I realize I'm talking about QTIP trust, but whether I need to take a step back and define what QTIP trust is because it's effective way to use the marital deduction and retain control of the assets from either you could do an in vivos trust or testamentary trust, but in order to qualify for the matter deduction, the Q-tip, there's four requirements must pass from the decedent. The spouse must have a qualifying income interest. In other words, income must be paid annually. There can't be any other beneficiaries during the spouse's life and elections needs to be made. I always say Q-tip trust. Think of the tip first terminal interest property, which ends upon the spouse's death. You don't get a marital deduction for that, but you do get a marital deduction. It's like making a deal with the government. You'll say, I'll take the marital deduction now if I agree to include those assets in the spouse's debt estate upon her debt. And again, you could have a Q-tip with trust and decide up until the due date of the return, the gift tax return to make the Q-tip action. Also, if you make an InVivo gift, you can make a reverse Q-tip election as a way of using the GST exemption.

Astrid Garcia: All right, we'll give it a few more seconds. We have about 84% of you guys have answered your question. Have a few more coming in, so just make sure to select an answer and hit the submit button directly on the slide widget. Alrighty, back to you.

Scott Testa: Thank you. Some of the speakers talked about section 25 19 as a hot topic with the IRS and that section 25 19. Actually I've never really come across this so far in my career, but it addresses the matter which a transfer tax is applied to Q-tip assets when there's a distribution during the life rather than at death for gift and estate tax purposes, 25 19 treats a disposition of any of the spouse's income interests as if the surviving spouse transferred a hundred percent of the remainder interest in the Q-tip. So this could be a way of being able to get assets out of your estate by making gifts and using the bonus exemption. As I mentioned, assets in qip trust will be included in the estate of the surviving spouse subject to estate tax. But let's say you have this example, the spouse, surviving spouse wants to use the bonus exemption but doesn't have sufficient assets in her own name to make gifts, but there are assets in the acute tip trust.

The question is, can the trustee distribute the assets to the spouse beneficiary so that spouse can engage in traditional estate planning such as using the bonus exemption or getting discounts of minority interests or making gifts or setting up freezes to get these assets out of the estate? And I said the IRS and there were a couple of cases in 2024. The iris has been attacking plants to transfer assets to the spouse in these situations. But the key is to look to the distribution powers in the trust. You might be able to rely on the distribution powers if the distribution standards are broad enough. They have to be broad enough to allow for distributions of principle to the spouse or give the trustee or third party the power to appoint assets to the spouse, if not a judicial determination of the trust is needed resulting in all trust assets being distributed to the spouse.

And I kind of just want to go quickly over a couple of cases out there because I thought these were interesting and will affect any Q-tip planning. And I also want to get into a private letter ruling that came out a couple of weeks ago. In one case, this Annenberg case, the Q-tip trusts that were judicially terminated and distributed to the surviving spouse, she then gave a small portion to trust for sons and sold remaining stock back to trust for sons and grandchildren. Here, the holding was that there was no gift tax result from these deemed transfers. The termination distribution of spouse was not a taxable gift. She received all the assets and there's no transfer of property by gif. There's also no deemed transfer upon the sale of the assets because following termination qip, the qualifying interest terminated and no longer exists. What this case did not address is whether the sons made a gift by consenting to the wife receiving all the Q-tip assets.

And that's what the McDougall case addressed. And the facts of this case real quick are that pursuant to a settlement, all Q-tip trust assets were distributed to the surviving husband who immediately gave and sold assets to the trust for the descendants. And the holding was that there was no gift of the remainder under 25 19. There was neither determination of the trust, neither the termination of the trust and the distribution assets, the age nor the distribution filed by the sale in return for notes resulting in gifts by h relying on Annenberg case, the court concluded H ended up with all the assets and made no gifts, but they did say that the children, the remainder beneficiaries, did make gifts by agreeing that all assets could be distributed to age. So that's a problem. It was then sent back to determine the value of the gifts that the children made to H in a later proceeding. But the question is again, this is a trust where the distribution to the surviving spouse were limited say by an ascertain standard. I clear the impact of if H had a limited power of appointment to appoint his remainder interest, he could appoint them away from his children or those making the gifts.

The key here is that with Q-tip planning after these cases, just keep in mind that terminating the Q-tip early and distributing assets to the spouse maybe on the IRS hot list again, there were two recent cases dealing with that. There are ways to plan around this By having QTIP enter into freezing transactions, you need to make distributions pursuant to the trust standards use decanting rather than a judicial termination. And another key is to make sure that the terms of the trust are broad enough that allow for distributions of principle to the spouse or give a third party power to appoint spouse, the assets to the spouse.

And then as I mentioned on number seven, that you could divide the Q-tip into separate trust to minimize the potential 25 19 risk and disclaim the interest, which is exactly what happened in this private letter ruling that came out two weeks ago. And I thought it was interesting. So I thought I would try and get into it a little bit. This was a Q-tip trust created at death of the spouse. So upon the death of the spouse, the assets will be included in the spouse's gross to state under 20 20, 20 44, I think there was income to the spouse quarter annually. Principal was for the benefit of the spouse in the trustee's discretion limited to that ascertainable standard. That's the issue. But the trust provides no power to the spouse to appoint any portion of the marital trust. The trustees have the power to partition the trust to distribute the assets on a non-pro rata basis.

And they came to an agreement by all the parties saying that the QIP trust was to be divided into two trusts, T one and T two, and they will have the same terms as the marital trust. T one will hold cash and secures equal to the spouse's remaining gift tax. Exclusion and trust. Two holds the balance of the trust property trust will have the same terms as the matter of trust. As I mentioned, espoused through a durable power of appointment by a child then renounced and disclaimed their interest in trust. One, the assets in trust one went to the beneficiary's outright. Pursuant, pursuant to the terms of that trust and the rulings of this case, that division of the trust and the two trusts didn't cause any gain recognition. Further, it did not affect the Q-tip status of trust one or the trust two, she still qualifying interest in both trusts. Then spouse's disclaimer of her interest in trust. One, it was a gift under 25 11, her qualifying interest and 25 19 all her other interests other than the qualifying interest. So it was treated as a gift of the entire fair market value of the assets in trust one and trust one is not included in her estate. So this was an effective way of using the Q-tip trust by disclaiming or giving away the income interest.

So that's just something to consider as a planning move. Again for situations where a lot of the assets are tied up in Q-tip trust, as I mentioned, there's a lot of discussion at heckling about giving senior using circumscribed general power of appointment for purposes of obtaining a step-up basis. In other words, if surviving spouse doesn't have a taxable estate to give her the general power to include those assets in her taxable estate for purposes of getting a step up in basis and it will be capped at such an amount subject to the power when other assets added to the produces a total of that is $10,000 less than the basic exclusion amount. Further with trust planning, I was thinking if you have assets in a credit shelter trust that won't be included in the surviving spouse's estate and the spouse does not have a taxable estate, you could have the trustee distribute assets to that spouse beneficiary so they can be included in her estate and get ineligible for the step up basis. And again, if there's any 25 19 arguments, if distributions are limited, just watch out for 25 19 and the McDougal case. Next I'm going to throw it over to Derek to discuss business succession planning

Derek Dockendorf: Plan. Perfect. Thank you Scott. So a little bit of a transition, but it'll all kind of tie back into everything that Scott was talking about previously. So this topic came up, business succession planning came up a couple of times during Heckerling. So we thought it would be important to kind of bring it back into the fold here because a lot of our lot taxpayers, a lot of clients we're working with their family owned business might be the main asset that we're trying to do their estate planning around. So there's a number of factors that we need to consider when trying to figure out what's the right way to either utilize some of their exemption, do some of the planning that we're looking at, but making sure that business is still going to be set up for success into the future. So just kind of a couple of things here, kind of talking about what succession planning is a strategic process that helps the owners think through and develop a plan that ensures your business continuity is going to develop future leaders, but also wanting to make sure that they're going to provide for the health and wellbeing of their family.

Oftentimes owners have ideas around what this is going to look like or they've thought this through a little bit, but it's never written down. They haven't developed a formalized plan to help with the implementation on all the number of factors that we'll kind of touch on here in the next couple of slides. And I think a key thing that we all need to think about and always keep in mind, regardless of some of this tax legislation and everything else, we know that a hundred percent of business owners one day won't be, whether it's voluntary, it's their choice. They're deciding to either implement a plan, sell to a strategic third party, whatever it might be, or there's the involuntary decision, the proverbial hit by the bus scenario. We want to make sure as we're looking at this plan, thinking through it and trying to understand what's right for the family and the business that we're taking both of these pieces into consideration.

So just kind of a real quick, just a couple of stats about succession planning and everything else. On the economic side, there's roughly 32.4 million family businesses in North America that represents roughly 90% of all business enterprises in North America contributing about 12.9 trillion in GDP and really the other two sides that are there. What we're focusing on, what are some of the headwinds that are facing these family owned businesses? Almost half of the owners are expecting to retire soon and soon. Often it isn't very well defined in their mind it might be six months, sometimes it might be five years. So we need to work through the mechanics that are going to be there to help them make sure that they can exit their business in a strategic manner. 72% of owners would love to have it stay in the business, but we know through history, statistics and everything else that the likelihood of success, that second bullet point that's down in that little quadrant, as we transition from the owners to the first generation, it's only got a 30% success rate drops down to about 12% of us, a successful transition from G two to G three and then less than 3% as we're getting into the third generation and even that 30% as we're going from the original founders to the next generation in the last five years, that's actually dropped down to about 19%.

So the likelihood of trying to have that successful transition as we're working through this process continues to work against those business owners. So that's where the sooner that we start this process, the sooner we look at thinking about how it factors into the overall estate planning, succession planning, all of the things that we've kind of covered today, it's important to keep that in mind that we need to be diligent, start the process early so we have more options that are going to be on the table and so forth.

A couple things here that are important steps when we're looking at and discussing this with owners, and again, I believe this thoroughly ties back into the estate planning that we just walked through in the process that these owners need to go through themselves. Starting at the top, there is no magic solution. One owner might be transitioning it down to their children, gifting it into trust. That might be the absolute right decision for them. For another owner, it might be finding a strategic partner. Maybe there's someone else that's in the industry that's in their geographic region that might make a lot of sense for them to team up with or combine with to make sure that their business continue on moving forward. And there's always the market that's going to be out there, private equity, strategic acquisitions, those are always parts that are going to be there.

So we want to make sure that we're helping owners think through all the various steps. There's going to be pros and cons for each option that's going to be there. We want to make sure that the owners understand all of those pros and cons for that process. It's really important to understand the value of your business. What's the value today versus what do you need the value to potentially be as you're looking to exit this business and transition it on. If we're looking to accomplish some of the gifting that Scott was talking about, we're going to want a certain value, we might want that to be even lower and utilize some of those discounts that he was talking about. If we're looking to sell to an outside third party or a strategic buyer, we want the opposite side. We want to maximize the value of that business at the end of the day so we can get the most out of that for the owner.

So again, as we're trying to think about the solutions, that's going to help to sharpen the focus on where are we at with the value the business today and where are we ultimately trying to get to and if there's a gap between those, how do we help close that gap as much as possible? An important thing as well is trying to understand the difference between ownership and leadership. It might make all the sense in the world that you want to have you, your children or grandchildren have the ownership of the business. You might ultimately want them to own the shares of that company at the end of the day, but you might have to go through the process to figure out are they the right leaders to help to get that business to continue on through that next generation? And if they're not the right leaders, is there training or development that's there to help them get to that point or they're key people inside of that business that you've already tagged to sit in those leadership seats.

So that might be part of the things we're looking at where it's recapitalizing the business where you've got voting stock, non-voting stock, all that kind of factors into some of that ownership and leadership conversation and discussion. Oftentimes we also need to think about the non-tax reasons. It's really easy to look at, Hey, what's the sale of this business? What am I going to net after tax and is that enough for me to have the lifestyle that I want to have in retirement? Extremely important to go through those mechanics to make sure we're doing that personal planning for the owners themselves. But oftentimes there's a number of reasons from a non-tax perspective that we also want to factor, and Scott talked about it, creditor protection spend through protection. There's ways that they want to help make sure that the blood sweat equity that they put into this business is preserved for their family for multiple generations into the future.

And the thing that I like to try to highlight most as we talk to clients taxpayers about this is it's never too early to start this process. These business owners saw an opportunity, had an idea and saw that there was a chance to go ahead and start and create this business and grow it from there. At that same time as they're thinking about it, we need to start putting the seeds out there. What's the exit strategy? At what point in time would you want to try to transition out of this business? So it's never too early to start that process. It can be too late. It can be too late for us to go ahead and get into the succession planning to do some of the effective things that we've already talked about from the estate planning side, helping to remove some of that future appreciation. If we've got an offer on the table or a letter of intent, the dime might be set. We might be too far down the path that we can leverage some of those tools that we might've had at our disposal had we started that process sooner and everything.

Alright, kind of a pivot there from that piece to some of the secure act items that we've got here. So covering some of the final regulations and some of the proposed regulations under secure 2.0. Right, so both of these came out July of last year. They issued the final regs under Secure Act, which we came into playback in 2019 as well as issued some additional proposed regulations under secure 2.0. The final regulations for secure are effective as of January 1st, 2025, and we'll hit on here some of the key pieces, the key items that we need to look at to make sure that we're aware of. But the big thing to walk away with as we're thinking about secure and everything else is the required beginning date and whether or not the participant or the owner of that IRA or 401k died before or after that required beginning date, right?

I've got a couple of tables in here that we'll touch on real fast, but understanding whether that participant died before or after that required beginning date is going to set the scene for us to understand who needs to take required distributions and how long might they be able to stretch these IRA distributions out over for that beneficiary of that IRA and everything. So again, so we're looking at participants who died after July 31st, 2019, right? If somebody died before July 31st, 2019 before secure was in place, they've got the old grandfather rules and when secure and secure 2.0 came in, they muddied the waters a little bit as far as when is someone going to reach that required beginning date to take their RMDs from those accounts before secure. Everybody knew it was 70 and a half. Really easy, really cut and dry after secure. You can see here from this table that we've got kind of a tiered approach of when different taxpayers based off their birth year are going to hit that required beginning date to have to start taking those RMDs.

And why is that important? As you can see, they're down below. We need to look at not only when they were born, but what type of qualified plan did they own. If they had an IRA that's going to follow the tables that's up above for those required beginning dates. If they had an employer plan, a 401k for instance, we need to understand what did that plan consist of? Is it all pre-tax dollars that were set aside? Are there some Roth components that are going to be there? Because again, that is also going to help dictate when do they need to start taking required distributions from those plans. And whether or not a participant has reached that required beginning date is going to dictate how much and when they need to start drawing money out after the participant's death with those inherited accounts that they're going to get.

And for a Roth IRA, we know that there is no required beginning day, right? Roth IRAs that are in the hands of the participant, there currently is no requirement for them to take required distributions. So if a participant dies owning a Roth IRA as the beneficiary, right, you're going to follow the rules to assume that they died before that required beginning date. And that really is beneficial for a non-eligible designated beneficiary, which we'll jump into here for beneficiary considerations. Secure basically created three categories, three main categories. Keep it high level on everything. We've got the eligible designated beneficiaries, EDBs is what they like to call 'em, and if you have a beneficiary that fits into that category, they be able to stretch the IRA distributions beyond the 10 year cliff that is in place for most inherited IRAs and inherited accounts under the Secure Act.

You can see the list there for who are these eligible designated beneficiaries, surviving spouse participants, minor child, which the final regs clarified as age 21, a disabled or chronically ill individual or an individual who's not more than 10 years younger than the participant. Someone who's close in age to the participant that's there. They're able to benefit and utilize potentially a longer time horizon than the 10 year cliff that might be there. Most IRA beneficiaries are going to be the individuals who don't qualify as eligible designated beneficiaries. Think about your adult child. They would fall into that middle category there that are going to have to either take required distributions or complete withdraw that entire account at the anniversary of the 10th year of that participant's death.

So I want to make sure we get this final poll question in here before we get to the end of the time as we talk about a few more things. But which of the following beneficiaries is not considered to be an eligible designated beneficiary surviving spouse individual who is not more than 10 years younger than the participant, the participant's 40-year-old child or a disabled or chronically ill individual? And I'll kind of keep going here. I know we've got a few more slides that are after this. Most of that is just for your information and the slide deck is at everyone's availability, so you can kind of see some of those pieces. But the thing that the secure act also did, or the final regulations, excuse me, is it also provided some additional clarity around planning for trust as beneficiaries of IRAs, right? They had some very complicated set of rules with the proposed regulations that were out there, how secure was initially drafted.

These final regulations gave us more clarity around creating separate accounts within the trust for the benefit of children, for instance. So if I have multiple children and I want that IRA to go into trust for their benefit, the final regs created and provided a path for us to think about from a drafting perspective to make sure we're able to use separate accounts for each of those, the trust that's going to receive the IRA dollars. And that's important because we might have different kinds of beneficiaries or different life expectancies that we can go ahead and leverage and utilize by having those separate accounts set up.

Astrid Garcia: Okay. All right. I'm going to jump in right here. I'll be closing the polls in a few seconds. Just make sure that you've submitted your answer to get full credit back to you.

Derek Dockendorf: Perfect. Thank you, Astrid. Okay, so these are the slides that are the tables that I talked about, right? So it covers just a couple of those categories, right? Real high level with the eligible designated beneficiaries, the individuals and the non-designated beneficiaries, right? Highlighting whether or not this individual, the participant died before or after the required beginning date. So look at those. Natalie Choate, who is a well-known national speaker and covers IRA distributions and all of these nuances did a tremendous job at Heckerling covering this topic in general here. So a couple of the considerations, part of the final regulations that came through is one, there was a change in the overall life expectancy tables that was effective as of 2022. They kind of reset those. So beneficiaries of inherited IRAs, most of the custodians are going back to look at that back in 2022. We want to make sure that that life expectancy was reset at that point.

A big thing keep in mind for surviving spouses is under the final regs, surviving spouses are now able to use the uniform life table instead of the single life table and trying to calculate their own required minimum distributions. Why do we care? Why is that important? Well, that's because we can actually spread out the RMDs that they might have to take, right? A surviving spouse who's aged 73 today under the new life expectancy tables, if they use the single life table, their required minimum distribution factor was 16.3 years, right? So they take the account balance divided it by 16.3 and it gives 'em the required minimum distribution. Now that they're able to utilize the unified lifetime tables, that denominator number went from 16.3 years to 26.3 years, right? So that means they're going to have a smaller RMD that's going to come out at the end of the day when they're having to look at how much of a required distribution do they need to take as the spousal beneficiary of that inherited.

IRA, just one thing to touch on here real quick. One thing that didn't change that for IRA planning in general, more of an income tax consideration, right, is the qualified charitable distributions or Q CDs, right? You saw on the chart that was above that secure and secure 2.0 kind of gave us that graduated required minimum distribution date, right? Started at 70 and a half, went all the way to up to age 75. None of these touched. When a participant can start to leverage their IRA for qualified charitable distributions, that has stayed at age 70 and a half. That gives us a planning opportunity to go ahead and leverage, utilize that IRA to help fulfill that participant's philanthropic intent right before they're having it required to take those minimum distributions so there can be some leverage that we can utilize there, and I believe the amount now that can go to charity directly from your ira I think is 105,000. I've got a hundred there, but I think it's 105,000 for now.

Just a couple more considerations that'll be there for you. The income tax planning is an important piece that we want to go ahead and take a look at as well as what's going to be there for the inherited beneficiaries. And then kind of at the end here, we just had a couple of stray observations that we've noticed throughout the Hecker Link seminar that was there. A couple of 'em here again for your leisure, there's a new consent spot for Form 7 0 9 to be aware of. So if you are doing some of the gift splitting that Scott talked about earlier, there's a new section, new spot that you might have to sign as the consenting spouse to go ahead and sign off on that. You're electing to split those gifts and everything,

Scott Testa: Derek? Yeah. The key is also on that question. Don't take it. Literally check that box. Yes, if you want to split gifts, read the instructions and then there's a couple other nuggets that heckling, they talked about who has to pay rent. This comes up all the time because clients don't like to pay rent even though it's a great estate planning move, and their answer was, yes, you have to pay rent. Here's a situation where you have a gift of a residence to a trust with a spouse's beneficiary and some people take the position. There is a case that says that the other spouse, the donor spouse doesn't have to pay rent because he can live there. Based on that, he's married to the beneficiary of the trust. Again, the speaker say Yes, pay rent. Even if they both take half the residence and put them into trust to continue to pay rent, it's a great move.

Clients don't like it. They also don't like the paying income taxes on grant or trusts, loans. Loans. I think loans are going to be the next hot top at the IRS. I just had a gift tax exam looking into the purpose of the loan and looking to see is it a real loan or is it a gift that it was intended to be forgiven at the outset telling you we're going to see a lot more of these. Make sure that you treat them as real loans. The other issue is that if you're using the 78 72, the interest rates that are in there, they're not market rates. So that may affect issues for gift tax purposes. And there's also 2036 risk if it's a loan from trust as well. Again, make sure they're third party. I bring this up, I was bringing this up at Heckerling, asking people, does anybody know that if you're a victim of a terrorist attack, you have a decedent that's a victim of a terrorist attack, you get reduced rates for state tax purposes.

I have this case that's under exam. The issue is you have somebody who died in 2022 who was on ground 0, 9 11 died of cancer that we claim was as a result of nine 11 and we took the position that there's no estate that nobody's ever heard of this. So just in case you come across that situation, may able to take that position. I was looking trying to find somebody who's done it before because I'm expecting a fight under exam and just trying to look for some experts. But I think we're a couple minutes over at this point and maybe we don't have time to get in a couple of these issues. On the new final consistency regs and their 89 71, there's also new GST exemption allocation relief regs. You can read through the slides if you get the chance, but I think that we're out of time at this point and I know there's some questions on the q and a about the loans. Again, I think that's going to be a hot topic. Anybody else wants to chime in before we sign off?

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