Death and Taxes: House Bill Eliminates “Death” Tax in 2024

On November 2, 2017, the U.S. House of Representatives’ Ways and Means Committee released its proposal for tax reform via the Tax Cuts and Jobs Act. The House’s draft legislation contains a number of provisions that, if enacted, would significantly change the wealth transfer landscape, including the total repeal of the estate and generation-skipping transfer taxes as of January 1, 2024.

Under the proposal, commencing on January 1, 2018, the individual lifetime gift and estate tax exemption amount will be doubled to $10 million ($20 million for married couples), indexed for inflation—$11.2 million per person in 2018 ($22.4 million for married couples). This increase in the exemption amount also applies to the generation-skipping transfer tax.

The draft legislation calls for a total repeal of the estate and generation-skipping transfer taxes as of January 1, 2024, while preserving the ability of beneficiaries to obtain a basis adjustment as to inherited property. Although the gift tax is set to remain in place, a reduction in the rate from 40% to 35% is provided for. Similarly, the annual exclusion—scheduled to increase to $15,000 per individual in 2018 ($30,000 for married couples who elect to split their gifts)—looks certain to survive.

This post was written by the Tax, Estate Planning & Administration  of Jones Walker LLP., © 2017
For more Family, Estates & Trusts legal analysis, go to The National Law Review

The Best Housewarming Gift for the Unmarried Couple: An Estate Plan

“Thinking too long about doing something is often the reason it never gets done.” 
–Everyday Life Lessons

In recent years, a growing number of Americans are deciding to cohabitate instead of getting married or remarried. Often, individuals of all ages, state they do not need an estate plan, either because they are not married or because they do not have children. These are not reasons to avoid preparing your estate plan and, in fact, are often more reason to ensure your estate is in order. Although this article will not discuss everything that unmarried cohabitating couples should have in place, it is a decent starting point for a conversation with your partner and, eventually, an estate planning attorney.

Estate plans are important for a devoted unmarried couple, because without an estate plan, you have no input into major healthcare and financial decisions for your partner.

Medical Decisions

You have been together for years or even decades, but if you are hospitalized, can your partner speak on your behalf and make decisions for your care and well-being? Sadly, no. Failure to have a valid Health Care Power of Attorney in place may result in a courtroom battle between your partner and family. A Health Care Power of Attorney is a document whereby you name an Agent to act on your behalf if you are unable to make reasonably informed medical decisions for yourself. Undertake an honest discussion with your partner concerning your wishes. Topics to discuss include organ transplant during life, removal of life sustaining treatment, burial arrangements, organ donation and religious limitations. Your wishes will be explicitly stated within the Health Care Power of Attorney, which your named Agent must follow to the best of their abilities.

Real Property and Holding Title

Throughout your relationship, you may have purchased a home (or several homes, depending on your lifestyle). Consider this scenario: you both paid half of the down payment for the home, and you each pay half of the monthly mortgage payments, but because your partner had a better credit score, the home is only titled in his or her name. If your partner dies without a Last Will and Testament that leaves the property to you, that property is not yours, and unless you purchase it for fair market value, you will have to vacate the home. If your partner did have a valid Last Will and Testament, it could provide that the home be distributed directly to you. Other options include your partner recording a Beneficiary Deed, which states that when he or she dies, the property passes to you by operation of law; another option is that your partner could deed the property to be held in both your names, as joint tenants with right of survivorship. Be aware that such a transfer may have gift tax implications and may affect your mortgage. Discuss these matters with your attorney before proceeding.

Distribution of Your Assets

By living together, you have likely acquired mutual possessions and one of you may have supported the other for a period of time, e.g. during graduate school, through loss of employment or through a disability. Because of this, there may be assets that you both believe are shared, even if they are in the sole name of one partner.

estate tax planning non us citizensIf you do not have a valid Last Will and Testament, your estate is considered intestate. An estate that passes through intestate succession means your assets will be distributed according to Arizona law. In this scenario, the following persons will receive your assets: first your legal spouse, then your children, siblings, parents, grandparents and finally, if none of the foregoing are then living, to issue of your grandparents. If you want to leave anything to your partner, you must execute a Will that provides for the distribution of your estate to him or her. There are also other options you can discuss with your attorney, such as beneficiary designations and language that provides for transfer on death of the assets.

You may also want to consider leaving your partner as your beneficiary on a life insurance policy or on any retirement accounts. At the very least, be aware of who is named as your beneficiary on your policies and accounts and be sure those are your wishes.

Although seeking the advice of an attorney is important, start the conversation at home, informally.

How to Start

Have a casual conversation with your partner to discuss the basics.  These topics will likely require multiple conversations.  If you are not sure how to start, go straight to the source.  Many attorneys charge a one-time flat fee for an initial consultation. You will want to find an attorney with whom you are both comfortable and, preferably, that you will use in the preparation of your documents. When you are satisfied with your decisions, engage the attorney and get drafts started.  Review the drafts with your attorney in his or her office and then take the drafts home to read and digest alone. Take your time. Be sure to ask any questions and voice any concerns; this is why you are paying the attorney. Throughout the process, it is important to remember that most estate planning documents can be revised if your circumstances or living arrangements change.

If it is important to you, discuss your plan with your family so they do not feel left out of important decisions.

Acceptance by Family and Friends

There is a chance some of your family or friends may not agree with your lifestyle or the decision to live together. Attempt to inform your friends and family that your desire is for your partner to be the lead in making decisions on your behalf, and that the two of you have discussed it and made each other aware of your personal wishes. Doing so may also avoid potentially costly and time-consuming legal battles should you become incapacitated or die.

Take the first step and work your way through it. Although it may seem overwhelming initially, the process should only take a couple of months. Once finished, you will both be able to sigh with relief knowing these issues have been resolved.

This post was written by Amber Hughes Curto and Amy K. Povinelli  of Ryley Carlock & Applewhite, A Professional Corporation.

The ERISA Fiduciary Advice Rule: What Happens on June 9?

This is an update on the upcoming effective date of the “fiduciary rule” or “fiduciary advice rule” (the “Rule”) that was issued under the US Employee Retirement Income Security Act of 1974 (ERISA). The Rule was published by the US Department of Labor (DOL) in April, 2016. The purpose of the Rule is to cause a person or entity to become a “fiduciary” under ERISA and the US Internal Revenue Code of 1986 (the “Code”) as a result of giving of certain types of advice involving investment of assets of employee benefit plans, such as 401(k) or pension plans, or of individual retirement accounts (IRAs) and receiving compensation for that advice.

calendar hundred daysThe Rule was originally intended to become effective April 10, but in April the DOL extended (the “Extension Notice”) the effective date of the Rule for 60 days (until June 9), and provided for reduced compliance obligations under the Rule from that date through the end of 2017 (the “Transition Period”). The effective date for Prohibited Transaction Exemptions (PTEs), both new and amended, that are related to the Rule also was extended until June 9, and further transitional relief was provided with respect to certain of those PTEs.

In a May 23 Op Ed in the Wall Street Journal, Labor Secretary Acosta announced that the Rule would go into effect on June 9, as provided for in the Extension Notice, and that the DOL would seek additional public comment on possible revisions to the Rule.  He indicated that the DOL “found no principled legal basis to change the June 9 date while we seek public input.”  The DOL also published, on May 23, FAQs on implementation of the Rule and an update of its previously-issued enforcement policy for the Transition Period. Therefore, it is important to review the rules that will go into effect on June 9.

Under the Rule, fiduciary status is triggered by investment “recommendations.” It provides, in general, that if a person (1) provides certain types of recommendations to a plan or its participants and/or beneficiaries, or to an IRA owner (collectively, “Protected Investors”); and (2) as a result, receives a fee or other compensation (direct or indirect), then that person is providing “investment advice for a fee” and therefore, in giving such advice, is a fiduciary to the Protected Investor. Receipt of compensation tied to such recommendations by a person or entity that is a fiduciary could result in prohibited transactions under ERISA and the Code. Under the Extension Notice, the DOL provided simplified compliance requirements under the Rule for the Transition Period.

This post was written by Gary W. HowellAustin S. LillingGabriel S. MarinaroRichard D. MarshallAndrew R. SkowronskiRobert A. Stone of Katten Muchin Rosenman LLP.

Estate Tax Planning for Non-United States Citizen Spouses: QDOT-ting I’s and Crossing T’s

estate tax planning non us citizensIndividual and corporate citizens from countries around the world have moved to North Carolina and contributed materially to our state’s economic, educational, and cultural growth. Foreign direct investment (“FDI”) in North Carolina generally surpasses $1 billion annually, which boosts our state’s private sector employment by hundreds of thousands of workers. In recent years companies based in Canada, Denmark, Germany, India, Japan, Switzerland, and the United Kingdom, among others, have invested in a range of industry projects “from Manteo to Murphy.”

Accompanying this foreign investment are individuals who are not United States (“U.S.”) citizens who establish residence here and who are known as “resident aliens” under U.S. tax law. In addition, nonresident, non-U.S. citizens (“nonresident aliens”) sometimes invest in real and personal property situated in our state—everything from vacation homes to ownership interests in North Carolina holding or operating companies. This increased foreign business and personal investment requires heightened attention to the complex Internal Revenue Code (“Code”) requirements applicable to non-U.S. citizens for income and transfer tax purposes.

The corporate and individual income tax issues surrounding such entities and persons have garnered much attention. For example, compliance with the sweeping changes under the Foreign Account Tax Compliance Act (FATCA) continues to affect U.S. citizen and resident alien taxpayers with foreign accounts and other foreign assets. Equally important are the tax issues that impact non-U.S. citizens in connection with transfers of money or property during lifetime or at death. This article is an overview of recurring basic considerations in estate and gift tax planning for non-U.S. citizen spouses. It is not intended to be an exhaustive treatment of this complex area of law, nor is it intended to address income tax planning for non-U.S. citizen spouses.

In general, the U.S. imposes estate and gift tax on the worldwide assets of U.S. citizens and resident aliens. A critical step in the estate planning process is the determination of the citizenship of a client and, if the client is married, that of the client’s spouse. The estate and gift tax implications largely depend on the type of tax, domicile tests, marital status, property ownership and situs tests, and treaty provisions.

With respect to the U.S. estate and gift tax rules, “residence” and “domicile” are threshold considerations that only a qualified tax professional should evaluate. The tests to determine “residence” in the U.S. income tax context are largely objective (e.g., the “substantial presence test”), but determining “residence” for transfer tax purposes is more subjective. For U.S. gift tax purposes, an individual donor is a U.S. resident if the donor is “domiciled” in the U.S. at the time of the gift. For U.S. estate tax purposes, a deceased person is a U.S. resident decedent if the person was “domiciled” in the U.S. at death. U.S. Treasury Regulations define “domicile” as living in a country without a definite present intention of leaving. The determination requires a facts-and-circumstances analysis of one’s “intent to leave” as demonstrated, for example, in visa status, tax returns, length of U.S. residence, social and religious affiliations, voter registration, and driver’s license issuance. Holding a “green card,” (i.e., status as a “lawful permanent U.S. resident” authorized to live and work here), though compelling, is not determinative evidence of U.S. domicile.

Tax treaties between the U.S. and other countries sometimes modify the Code provisions governing the transfer taxation of non-U.S. citizens. The treaties often explain concepts such as domicile, set forth which country taxes certain types of property, and relieve individuals from double taxation. The U.S. has entered into tax treaties with over 70 other countries. However, not all the treaties address estate and gift tax issues, including, significantly, the recent Code provisions regarding portability of a deceased spouse’s unused exclusion (“DSUE”). A recent check of the Internal Revenue Service (“IRS”) website reveals that treaties with at least 19 countries either contain estate and gift tax provisions or are freestanding estate and/or gift tax treaties.

To understand the general estate and gift tax rules applicable to non-U.S. citizen spouses, it is helpful first to review those applicable to U.S. citizen spouses.

The following examples illustrate the general rules relating to lifetime gifts:

EX. 1: LIFETIME GIFT FROM U.S. CITIZEN TO U.S. CITIZEN SPOUSE

Al, a U.S. citizen and resident, is married to Bea, also a U.S. citizen and resident. In 2017, Al Gives Bea $200,000, payable by check.

For U.S. gift tax purposes, Al’s gift to Bea does not trigger U.S. gift tax because Bea is a U.S. citizen spouse. The gift qualifies for the unlimited U.S. gift tax marital deduction applicable to gifts from one spouse to a U.S. citizen spouse.

The result would be the same if Al were a resident alien married to Bea, so long as she is a U.S. citizen. A gift from a resident alien to U.S. citizen spouse also qualifies for the unlimited U.S. gift tax marital deduction.

EX. 2: LIFETIME GIFT FROM U.S. CITIZEN TO NON-SPOUSE U.S. CITIZEN

Al, a U.S. citizen and resident, has an adult daughter, Claire, also a U.S. citizen and resident. In 2017, Al gives Claire $200,000, payable by check.

For U.S. gift tax purposes, $14,000 of the $200,000 qualifies for the U.S. present interest gift tax annual exclusion, while the remaining $186,000 must be reported on a U.S. gift tax return in 2018. Assuming no prior taxable gifts and a U.S. estate tax exemption of $5,490,000 (2017), the $186,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,304,000.

The tax treatment changes if one spouse is not a U.S. citizen.

EX. 3: LIFETIME GIFT FROM U.S. CITIZEN (OR RESIDENT ALIEN) TO RESIDENT ALIEN SPOUSE

Al, a U.S. citizen, is married to Dot, a citizen of Country X. They live in the U.S. Dot holds a “green card” and does not intend to leave the U.S. In 2017, Al gives Dot $200,000, payable by check.

Dot is a resident alien, so Al’s gift to her does not qualify for the unlimited U.S. gift tax marital deduction. For U.S. gift tax purposes, Al’s gift to Dot is subject to the special present interest U.S. gift tax annual exclusion for lifetime transfers to non-U.S. citizen spouses. In 2017, this special annual exclusion is ,000.

Accordingly, $149,000 of the $200,000 gift qualifies for the special U.S. present interest gift tax annual exclusion, while Al must report as a taxable gift the remaining $51,000 on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the ,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,439,000.

The result would be the same if both Al and Dot were married resident aliens.

The result also would be the same if Al were a nonresident U.S. citizen and Dot were a nonresident alien.

EX. 4: LIFETIME GIFT FROM U.S. CITIZEN (OR RESIDENT ALIEN) TO NON-SPOUSE RESIDENT ALIEN

Al, a U.S. citizen, has a cousin, Eva, a citizen of Country X. Both are U.S. residents. Eva holds a “green card” and does not intend to leave the U.S. In 2017, Al gives Eva $200,000, payable by check.

For U.S. gift tax purposes, Al’s gift to Eva, a non-spouse resident alien, is treated the same as if Eva were a non-spouse U.S. citizen. Thus $14,000 of the $200,000 gift qualifies for the present interest U.S. gift tax annual exclusion, while the remaining $186,000 must be reported as a taxable gift on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the $186,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,304,000.

EX. 5: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM U.S. CITIZEN TO NONRESIDENT ALIEN SPOUSE

Al, a U.S. citizen and resident, is married to Fay, a citizen of Country X. Both are residents of Country X but own personal and real property located in the U.S. In 2017, Al gives Fay $200,000 (payable by check drawn on a U.S. bank).

Al’s gift to Fay, a nonresident alien spouse, does not qualify for the unlimited U.S. gift tax marital deduction. For U.S. gift tax purposes, Al’s gift to Fay is subject to the special U.S. present interest gift tax annual exclusion for lifetime transfers to non-U.S. citizen spouses. In 2017, this special annual exclusion is $149,000.

Accordingly, $149,000 of the $200,000 gift qualifies for the special U.S. present interest gift tax annual exclusion, while Al must report as a taxable gift the remaining $51,000 on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the $51,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,439,000.

EX. 6: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM U.S. CITIZEN TO NONRESIDENT ALIEN NON-SPOUSE

Al, a U.S. citizen and resident, has a cousin, Grace, a citizen and resident of Country X. In 2017, Al gives Grace $200,000 (payable by check drawn on a U.S. bank).

For U.S. gift tax purposes, Al’s gift to Grace, a non-spouse nonresident alien, is treated the same as if Grace were a U.S. citizen. Thus $14,000 of the $200,000 gift qualifies for the present interest U.S. gift tax annual exclusion, while the remaining $186,000 must be reported as a taxable gift on a U.S. gift tax return in 2018. Assuming no prior taxable gifts, the $186,000 reduces the U.S. estate tax exemption available at Al’s death from $5,490,000 to $5,304,000.

EX. 7: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM NONRESIDENT ALIEN TO U.S. CITIZEN SPOUSE

Hope, a citizen and resident of Country X, is married to Al, a U.S. citizen. They live in Country X. In 2017, Hope gives Al real property located in the U.S. worth $200,000.

For U.S. gift tax purposes, Hope’s gift of U.S.-situs real property to Al, a U.S. citizen spouse, qualifies for the unlimited U.S. gift tax marital deduction.

EX. 8: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM NONRESIDENT ALIEN TO U.S. CITIZEN NON-SPOUSE

Ida, a citizen of Country X, has a cousin, Al, a U.S. citizen. They live in Country X. In 2017, Ida gives Al $200,000 (payable by check drawn on a U.S. bank).

Ida and Al are not married. Whether the U.S. gift tax applies to the transfer depends on whether the transferred property is situated in the U.S. The situs rules are complex and are not necessarily the same for U.S. estate tax and U.S. gift tax purposes. Ida’s gift to Al, cash held in a U.S. bank, is considered U.S.-situs “tangible personal property” for U.S. gift tax purposes. Therefore, after utilization of the $14,000 U.S. gift tax present interest annual exclusion available to Ida as a nonresident alien donor, the remaining $186,000 of the $200,000 gift is subject to U.S. gift tax payable in 2018 by Ida as a nonresident alien donor.

A nonresident alien may use the U.S. gift tax present interest annual exclusion ($14,000), but the Code prohibits a nonresident alien from using the $5,490,000 lifetime U.S. gift tax exemption that is available to U.S. citizens and resident aliens.

EX. 9: LIFETIME GIFT OF U.S.-SITUS PROPERTY FROM NONRESIDENT ALIEN TO NONRESIDENT ALIEN SPOUSE

Al and Jane are married citizens of Country X. In 2017, Al gives Jane real property located in the U.S. worth $200,000.

Al and Jane are married nonresident aliens, so Al’s gift of U.S.-situs real property to Jane does not qualify for the unlimited U.S. gift tax marital deduction. For U.S. gift tax purposes, Al’s gift to Jane is subject to the special U.S. present interest gift tax annual exclusion for lifetime transfers to non-U.S. citizen spouses. In 2017, this special annual exclusion is $149,000.

There is no lifetime gift tax exemption for a nonresident alien’s gift of U.S.-situs property to another nonresident alien. Thus, $149,000 of the $200,000 gift qualifies for the U.S. special present interest gift tax annual exclusion for non-U.S. citizen spouses. The remaining $51,000 of value is subject to U.S. gift tax. It is reportable and payable by Al as a nonresident alien donor on a U.S. gift tax return in 2018.

The examples above illustrate the general rules applicable to gratuitous lifetime transfers of property, or gifts. The following examples illustrate the general rules applicable to transfers at death:

EX. 10: TRANSFER AT DEATH FROM U.S. CITIZEN TO U.S. CITIZEN SPOUSE

Carl, a U.S. citizen and resident, is married to Dawn, also a U.S. citizen and resident. Carl dies in 2017 with a gross estate valued at $7,000,000. His will, revocable trust, and beneficiary designations leave his real and personal property to Dawn.

The U.S. imposes estate tax on the transfer of the taxable estate of every U.S. citizen or resident decedent. The taxable estate is reduced by the value of any property that passes from the decedent to a U.S. citizen surviving spouse. This is called the unlimited U.S. estate tax marital deduction.

Accordingly, the “date of death value” of the property passing from Carl to Dawn, $7,000,000, qualifies for the unlimited U.S. estate tax marital deduction. No U.S. estate tax is due upon Carl’s death. Furthermore, assuming no prior taxable gifts, Carl’s DSUE, $5,490,000 (the applicable amount for 2017), is “portable,” that is, transferable, to Dawn for use upon Dawn’s death in addition to Dawn’s available U.S. estate tax exemption.

The result would be the same if Carl, a resident alien, were married to Dawn, a US citizen.

EX. 11: TRANSFER AT DEATH FROM U.S. CITIZEN TO RESIDENT ALIEN (OR NONRESIDENT) ALIEN SPOUSE

Carl, a U.S. citizen and resident, is married to Evelyn, a citizen of Country X and U.S. resident (i.e., a “resident alien”). Carl dies in 2017 with a gross estate valued at $7,000,000. His will, revocable trust, and beneficiary designations leave his real and personal property to Evelyn.

Absent proper U.S. estate tax planning (i.e., “QDOT” structure described below), and assuming no prior taxable gifts, the property passing at Carl’s death to Evelyn, a resident alien spouse, would NOT be eligible for the unlimited U.S. estate tax marital deduction. Specifically, Carl’s available U.S. estate tax exemption, $5,490,000, would be consumed fully, leaving $1,510,000 subject to U.S. estate tax (top rate of 40%) with the balance passing to Evelyn.

If both Carl and Evelyn were married resident aliens, the result would be the same.

Why QDOT Planning Matters

In Example 11 above, proper planning with a “qualified domestic trust” (“QDOT”) could have preserved eligibility for the U.S. estate tax marital deduction and avoided the onerous U.S. estate tax imposed.

The QDOT is an exception to the non-U.S. citizen spouse exception to the U.S. estate tax marital deduction. The U.S. estate tax marital deduction operates to defer estate tax until the death of the surviving spouse. When Congress enacted the non-U.S. citizen spouse exception to the U.S. estate tax marital deduction (disallowing the U.S. estate tax marital deduction for non-U.S. citizen spouses), it did so to avoid the scenario where a non-U.S. citizen spouse inherits untaxed property then leaves the U.S. for a country without a treaty in place to facilitate the collection of U.S. estate tax upon the surviving spouse’s death.

In general, U.S. estate tax would be paid upon actual distributions of QDOT principal to the non-U.S. citizen spouse or upon the death of the surviving spouse. The QDOT enables deferral of the U.S. estate tax, as the exception to the U.S. estate tax marital deduction for non-U.S. citizen spouses does not apply when property passes to a properly drafted QDOT for the surviving spouse’s benefit.

To qualify as a QDOT, the trust must meet four general requirements:

• At least one trustee must be a U.S. citizen or a U.S. corporation;
• No distribution of trust property may be made unless the U.S. trustee has the right to withhold U.S. estate tax payable on account of the distribution;
• The trust must meet security requirements set out in the U.S. Treasury Regulations to ensure the collection of U.S. estate tax; and,
• The decedent’s executor must make an irrevocable election on Schedule M of IRS Form 706, the U.S. estate tax return.

The substantive provisions of a QDOT must meet the requirements of a marital trust intended to qualify for the U.S. estate tax marital deduction. A QDOT is often designed as a Qualified Terminable Interest Property (“QTIP”) martial trust of which the spouse is the sole beneficiary entitled to receive trust income. Other QDOT trust designs meeting the marital deduction requirements are available as well. It is essential that a QDOT is drafted with care. For example, to avoid being deemed a “foreign trust” under U.S. tax law, certain powers should be limited to U.S. persons and the trustee should be prohibited from moving the trust to a country beyond the reach of the U.S. courts.

QDOT planning is most effective when planning for gross estate values around, above, or expected to be above the U.S. estate tax exemption. However, if the date of death value of worldwide property owned by a U.S. citizen or resident is substantially below the U.S. estate tax exemption, then the U.S. citizen or resident may decide to leave such property outright to the non-U.S. citizen spouse, which would consume the decedent’s available U.S. estate tax exemption (illustrated in Example 11 above).

If the date of death value of property passing to the QDOT exceeds $2,000,000 (not adjusted for inflation) (known as a “large QDOT”), then additional requirements apply to secure payment of U.S. estate taxes attributable to the transferred property. At least one U.S. trustee must be a U.S. bank (several of which offer corporate trustee services to North Carolina residents). Alternatively, the U.S. trustee can furnish a bond or a letter of credit meeting certain conditions. These additional requirements also apply to smaller QDOTs where foreign real property holdings exceed 35% of trust assets.

If a decedent’s estate elected QDOT treatment and portability of DSUE on a U.S. estate tax return, then the estate also must report a preliminary DSUE that is subject to decrease as QDOT distributions occur or even modification by tax treaty. The DSUE amount is determined finally upon the surviving spouse’s death or other termination of the QDOT. The intersection of the QDOT rules and portability of unused estate tax exemption requires careful analysis upon filing the estate tax return and thereafter when planning for the non-U.S. citizen surviving spouse during the QDOT administration, including if the spouse attains U.S. citizenship.

Nonresident decedents are subject to U.S. estate tax on the value of U.S.-situs assets valued in excess of $60,000. The Code’s rules applicable to nonresident alien decedents are complex and should be analyzed with care. The analysis may include, for example, the types of U.S. property treated as U.S.-situs property subject to U.S. estate tax, whether any tax treaty modifies U.S.-situs property classification and the taxing jurisdiction, and whether a nonresident alien formerly a U.S. citizen or long-term resident alien is subject to the Code’s “covered expatriate” rules.

The following example illustrates these general rules and assumes no treaty between the U.S. and the foreign country.

EX. 12: TRANSFER AT DEATH OF U.S.-SITUS PROPERTY FROM A NONRESIDENT ALIEN TO A NONRESIDENT ALIEN SPOUSE

Carl, a nonresident alien, is married to Fran, also a nonresident alien. Carl leaves his worldwide assets, including U.S.-situs real and personal property, to Fran. His gross estate is valued at $7,000,000.

A nonresident alien decedent’s U.S.-situs property is subject to U.S. estate tax. Absent proper estate tax planning (i.e., QDOT structure described above), the U.S.-situs property passing at Carl’s death to Fran, a nonresident alien spouse, is ineligible for the unlimited U.S. estate tax marital deduction.

Specifically, Carl’s available U.S. estate tax exemption—only $60,000 for nonresident aliens—would be consumed fully, leaving $6,940,000 subject to U.S. estate tax (top rate of 40%) with the balance passing to Fran.

If Carl, a nonresident alien, were married to Fran—this time a U.S. citizen—the result generally would be the same except the U.S. estate tax marital deduction would apply only to U.S.-situs property.

In either scenario above, Carl’s executor must file IRS Form 706-NA, the U.S. estate tax return for nonresident alien decedents, and pay the U.S. estate tax due.

United States tax law is changing while families and businesses continue to move among countries. Estate planning for non-U.S. citizens is multidimensional and demands attention right here in North Carolina. The QDOT is a powerful U.S. estate tax planning technique to help certain non-U.S. citizen spouses defer taxes and preserve wealth in the face of such change.

© 2017 Ward and Smith, P.A.. All Rights Reserved.

Estate Planning and Client Engagement Letters: Deloitte’s $500 Million Sentence

New York, Estate PlanningAccounting firms very often question the need to include certain provisions intended to limit their liability to their clients and sometimes ask whether the provision is even enforceable. Whether the provision will be enforced is uncertain due to the very limited case law addressing liability-limiting provisions in accountants’ client engagement letters, and there could be variations in enforcement from state to state. Nevertheless, it is important to include the provisions, even if enforcement is uncertain, because the provision might just be accepted and never challenged, thereby serving its purpose, even if a court strikes it down after a legal challenge.

One of the more important liability-limiting provisions is limiting the client’s time to sue the accountant to a fixed period (usually one year) measured from when the services are provided. These provisions serve the dual purpose of shortening the lengthy statute of limitations in some states and defining exactly when that period starts to run. Our provision sets forth that the period starts to run at the time the services are provided rather than when the client knows or should know about a claim, which could be years and sometimes decades later.

A picture may be worth a thousand words, but a similar single-sentence provision in an engagement letter saved Deloitte Tax LLP from having to defend a $500 million malpractice suit filed in New York against the multinational professional services firm. A New York court dismissed the lawsuit and affirmed the validity of the one-year limitations period. However, unlike the provision we generally recommend, the Deloitte provision indicated the one-year period started to run from when “the cause of action accrued.” Since New York law holds that such claims accrue at the time the advice is given, the court held that Deloitte’s provision shortened the time period to sue the accountant to one year from the time the advice was given. In effect, our provision would reach this result even in states that do not have the same highly favorable point of accrual.

Facts of the Case

Deloitte was engaged in 2008 by billionaire William Davidson to modify his estate plan, and Deloitte provided advice until shortly before Davidson’s death in March 2009. Deloitte was then engaged to assist with the administration of the Estate, including providing advice on a variety of tax issues, some of which related to the modifications put in place prior to Davidson’s death.

Not surprisingly, the IRS scrutinized the Davidson Estate filings, but somewhat surprisingly concluded that the Estate owed billions more than was reported on the Estate’s returns. Those conclusions were contested by the Estate, which ultimately settled with the IRS for approximately $500 million in July 2015. Deloitte continued working with the Estate until September 2015, when the Estate brought an action against Deloitte in New York seeking to recover the $500 million paid to settle with the IRS.

The Estate alleged, among other things, that Deloitte was reckless and negligent in the estate planning advice provided to Davidson. Deloitte filed a motion to dismiss the complaint in its entirety, arguing that the claims were time-barred based on the limitations provision in their engagement letter with Davidson. The critical language in the engagement letter stated:

No action, regardless of form, relating to this engagement, may be brought by either party more than one year after the cause of action has accrued, except that an action for nonpayment may be brought by a party not later than one year following the date of the last payment due to the party bringing such action.

New York law provides that parties to a contract can shorten the statute of limitations, so the plaintiffs did not dispute the validity of the provision shortening the statute of limitations to one year. Instead, the plaintiffs argued that the doctrines of continuous representation and equitable estoppel deferred accrual of the causes of action until Deloitte stopped providing services to the Estate. The plaintiffs, focusing on the services Deloitte provided after Davidson’s death during the administration of the Estate and resolution with the IRS, argued that the claims did not accrue until services stopped in September 2015.

The Decision

On August 22, 2016, the Supreme Court of the State New York, New York County dismissed all claims against Deloitte, holding that they were time-barred under the one-year limitations provision in Deloitte’s engagement letter. After confirming that New York law permits parties to shorten the limitations period by contract, the Court focused on “accrual” of the claims, since that is the point from which the one-year period is measured under the engagement letter provision.

For the malpractice claim, the Court pointed to the longstanding New York law holding that a malpractice claim against an accountant based on allegedly faulty tax advice accrues at the time the advice is given, which in this case predated Davidson’s death in 2009 − more than six years prior to commencement of the action. The Court also ruled that the representation of the Estate after Davidson’s death did not save the claims through application of the continuous representation doctrine because the provision in the engagement letter expressly barred any tolling. Finally, the Court ruled that equitable estoppel did not apply because Deloitte did nothing to conceal the Estate’s tax problems.

Takeaways

  • Well-drafted engagement letter provisions that shorten or otherwise limit the
    time a client has to commence suit can be strong risk management tools that will be upheld by at least some courts. The strength and enforceability of the provision will vary from state to state, but New York is not unique in holding that these provisions are enforceable.

  • Shortening the time period to commence a suit to as little as one year is possible.

  • If your jurisdiction does not measure accrual from the time the services are provided, as it is in New York, adding language measuring the commencement of the contractual limitation period from the time the services are provided is a possible solution, depending on the law in your state.

  • If drafted properly, the provision can eliminate any tolling or extension of the limitations period based on additional or subsequent services that may be provided.

The purpose of the statute of limitations in the context of professional malpractice is to allow an accounting firm a degree of certainty that past services will not lead to stale complaints in the distant future. Accountants can increase that certainty, limit the future period and protect themselves from stale complaints in the distant future by incorporating a limitation provision into their engagement letters.

For Deloitte, a single sentence in its engagement letter limiting the time period for all claims to one year was worth $500 million.

© 2016 Wilson Elser

November Election and Estate Planning

estate planning november electionsThe Presidential election is around the corner. What does that mean for estate planning? Probably nothing, particularly if the Executive Branch and Congress remain split among the parties. In the past four years, a Democratic President and Republican Congress has resulted in no significant estate tax legislation. Thus, after 10 years or so of uncertainty and change that preceded 2012, there has been an estate planning calm.

It is unlikely the calm changes in 2017 if there is President Clinton and a Republican Congress. Hillary favors the same provisions as President Obama, which are reducing the estate tax exemption from $5 million per person, indexed for inflation, to $3.5 million, and increasing the estate tax rate from 40% to 45%. But as with President Obama, it is unlikely these proposals will go anywhere, unless Democrats take control of the House and Senate.

Conversely, President Trump wants to eliminate the estate tax, similar to former President Bush. Perhaps a big push to eliminate the estate tax would result if large Republican majorities controlled the House and Senate. But even with a Republican President and Congress it is more likely current law, allowing married couples to protect $10.9 million from estate tax, adjusted annually for inflation, would continue.

Of less concern to most, but significant for the relatively wealthy few, is the Obama Administration’s desire to eliminate or reduce advanced planning techniques, such as GRATS, gift/sales to intentionally defective trusts, dynasty trust planning, and intra-family discounting. A new President and Congress may also address these strategies.

Article By John P. Dedon of Odin, Feldman & Pittleman, P.C.

Prince Dies Without A Will; Special Administrator Appointed

Although the quote: “Where there is a will, there is a way” is meant to encourage perseverance, it also seems appropriate in the estate planning realm as a Last Will and Testament can guide surviving family members as to the disposition of assets after a person’s death.  In the case of Prince, the quote is better modified to say: “Where there is no will, there is a messy road ahead.”  As reported earlier this week, Prince’s sister filed an emergency petition asking the court to appoint a special administrator to oversee the initial stages of administering Prince’s estate.  She did so because no Last Will and Testament could be located.  The Court agreed and appointed Bremer Bank, National Association as the special administrator.  The Court’s actions allow Bremer Bank to marshal or gather the assets and preserve such assets until a personal representative or executor can be appointed.  In short, it appears that Prince failed to plan and the laws of Minnesota will now dictate what happens to his estate.

And what does this all mean?  Dying without a Last Will and Testament or a revocable living trust means that a person is intestate and the laws of the state in which they resided at death will spell out who is to receive the assets of the estate.  In Prince’s case, since he had no spouse or surviving children or parents, his siblings, both full and half siblings, are the beneficiaries of his estate under Minnesota law.  Thus, the law of unintended consequences may now apply as Prince may not have wanted his siblings to become the beneficiaries.  He may have wanted to include charity or friends perhaps even other relatives.  But, without a Last Will and Testament or revocable living trust, we will never know what his wishes may have been.

It will also be interesting to see how the administration of Prince’s estate unfolds.  A number of questions will have to be asked and answered, including, but not limited to: Who will end up being the personal representative or executor?  What debts does the singer have?  How will the estate tax be paid (both at the Federal and state level since Minnesota has an estate tax)? What assets will each beneficiary ultimately receive?  Will an agreement be reached amongst the beneficiaries regarding the management and distribution of the assets?  Unfortunately, the process that has begun will be lengthy, likely expensive and may result in the dismantling of a legacy if the process devolves into an ugly court battle. All of which could have been avoided or at least minimized had Prince simply planned.

© 2016 Odin, Feldman & Pittleman, P.C.