Author: Michele Braverman

The Deceased Spouse’s Unused Exemption Amount: a Spouse’s Final Gift

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Spouses often work together to build wealth for themselves and their children. Congress recognized this by enacting the gift and estate tax portability election as part of the 2010 Taxpayer Relief, Unemployment Insurance Reauthorization, and Job Creation Act and making it permanent in the American Taxpayer Relief of 2012, providing married couples with a relatively simple way to potentially shield much more of their wealth from federal gift and estate taxation. You are familiar with your clients’ accounts and property, and your advice is essential to help your married clients decide if they should take advantage of the portability election.

What Is Portability of the DSUE?

In 2023, the federal estate tax exclusion amount is $12.92 million for individuals and $25.84 million for married couples, and only gross estates that exceed these amounts are subject to estate tax. Due to the unlimited marital deduction, married couples with large estates are usually able to avoid estate taxes at the death of the first spouse. However, at the death of the surviving spouse, their estate, including the amount that they inherited from their spouse, will be subject to estate taxes if the gross estate of the second spouse to die exceeds the estate tax exclusion amount. Prior to the enactment of the portability election in 2010, in the absence of complex planning, for example, forming a credit shelter trust with the deceased’s accounts and property equal to their remaining lifetime exclusion amount, the unused exclusion amount of the first spouse to die was lost, meaning that the couple’s children would inherit less of the couple’s wealth at the second death because only the second to die’s remaining lifetime exclusion amount  was available to reduce the estate tax that had to be paid. The portability election allows the surviving spouse to add the deceased spouse’s unused exclusion (DSUE) amount to their own exclusion amount to reduce or eliminate estate tax liability when they die.

What Is the Process for Electing Portability?

To take advantage of portability of the DSUE amount, after one spouse dies, the surviving spouse must file an estate tax return (Form 706) and make a portability election that allows the DSUE amount to be applied to the surviving spouse’s subsequent transfers during life or at death. Portability must be elected properly or it will be ineffective, so clients should be encouraged to seek the help of a tax professional. 

If the deceased spouse’s gross estate exceeds the basic exclusion amount, a federal estate tax return must be filed within nine months of the date of death (although a six-month extension is available). To take advantage of the DSUE amount, the executor of the deceased spouse’s estate must elect portability and compute the DSUE amount on the timely estate tax return. No extension of time to elect portability is available in this situation.

Even if the deceased spouse’s estate does not exceed the basic exclusion amount and the executor is not otherwise required to file an estate tax return, an estate tax return must be properly and timely filed to elect portability. Treas. Reg. § 20.2010-2(a)(1) provides that in such cases, the due date of an estate tax return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension. 

In 2017, the IRS provided a simplified method for obtaining an extension of time to be used instead of the private letter ruling process that was available for a period extending to the second anniversary of the decedent’s date of death. In July 2022, the IRS issued Revenue Procedure 2022-32, which extends the time for estates that are not otherwise required to file an estate tax return under I.R.C. § 6018(a) to make a portability election under I.R.C. § 2010(c)(5)(A) from the second to the fifth anniversaryof the decedent’s date of death and allows a simplified method for obtaining the extension. Using the simplified method, an executor who wants to elect portability and has not yet filed an estate tax return—and was not required to do so under I.R.C. § 6018(a)—only needs to file a “complete and properly prepared” estate tax return (Form 706) that states at the top that it is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” The five-year deadline and simplified process make it easier and less expensive for the surviving spouse to take advantage of their deceased spouse’s unused exclusion amount, and in some cases, this could reduce or even eliminate federal estate taxes upon the death of the surviving spouse.

Why Should You Advise Clients to Elect Portability?

Although preparation of the estate tax return may seem like an unnecessary expense for clients whose estates are not currently subject to estate tax, keep in mind that the surviving spouse’s wealth could grow substantially before their death, and the DSUE amount could be used to shield wealth that otherwise would be subject to estate taxes. In addition, although the current estate tax exemption amount is historically high, it is scheduled to be reduced by half at the end of 2025, so in only a few years, many more estates will be subject to estate tax liability unless the law is changed. In addition, some states have their own estate or inheritance taxes applicable to estates of a much lower value. 

We Can Help

Portability is an important and valuable strategy to minimize your clients’ estate taxes. Please contact us if we can help your clients to determine if they should take advantage of a portability election, especially in light of the sunset of the doubled gift and estate tax exemption amount at the end of 2025.

Spring Break Checklist

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After a long, cold winter, many of us—from the young and to the more mature—are ready to make plans for spring break. As your clients’ trusted advisor, you can provide valuable reminders to clients who will travel to take advantage of warmer weather and those who will enjoy their spring break at home. 

Tips for Clients Who Are Traveling

1. If your clients are planning a spring break trip, remind them to gather important documents they may need during their travels:

  • Passport. If your clients plan to travel internationally, they will need a valid passport. If they need a new passport or to renew their existing passport, they should plan ahead: routine processing can take six to nine weeks, although expedited, urgent, and emergency processing is available under some circumstances.
  • Health insurance card. Clients should bring their health insurance card with them on their trip. If your clients are traveling within the United States, they should also contact their health insurance company to ask if the state they are visiting is within their plan’s network. If they are traveling to a state outside of their plan’s network, they should ask which services are covered. In general, routine care is not covered in states that are outside of a plan’s network, but emergency services are covered. However, plans may differ, so it is important for your clients to check with their insurance company. 
  • Powers of attorney. If your clients have property, accounts, or a business that need to be monitored or managed while they are away, they should make sure they have a financial power of attorney granting someone they trust the power to take care of their affairs until they return. In addition, clients should consider a power of attorney that authorizes someone they trust to handle emergencies while they are away, for example, repairs and insurance claims in the event of a flooded basement or a roof damaged by hail. The document can specify exactly what the individuals appointed under the power of attorney are authorized to do and the time period during which they may act on your clients’ behalf.
  • Auto insurance information. In general, auto insurance policies cover drivers in all fifty states and sometimes Canada and Mexico. In addition, if your clients have auto insurance, it will cover a rental car. However, there may be some gaps in coverage if their rental car is damaged or stolen. If they do not have auto insurance, they will need to obtain rental car insurance if they plan to use a rental car during their travels. Clients who are traveling abroad will likely need to obtain rental car insurance and an International Driving Permit, which is a document that translates the information on their driver’s license into at least ten languages.
  • Travel insurance. Your clients should also consider obtaining travel insurance, which can include trip cancellations, disruption insurance, or travel health insurance. If your client’s trip was expensive, they could lose a lot of money if they get sick and cannot travel or an incident occurs that prevents the trip from occurring as planned. In addition, if your clients are traveling internationally, their health insurance may only cover emergency care. Travel health insurance may cover out-of-pocket costs that are incurred for medical care. In addition, medical evacuation insurance is available to cover transportation expenses if clients travel to a country whose healthcare is not as good as the care they would receive if they return home or are transported to another location.

2. Remind your clients to make sure that their family members and loved ones have their contact information in case of emergency. Although your clients will likely have their cell phones with them during their travels, some areas, even in the United States, have poor cell phone coverage. As a result, they should provide landline telephone numbers and addresses of the hotels or resorts where they plan to stay during their trip.

3. If you need to be able to reach your clients to discuss important financial matters, make sure you obtain their itinerary and contact information as well. It may provide them peace of mind to know that you will be able to reach them in case an urgent matter arises.

Tips for Clients Who Are Staying Home

If your clients are taking a staycation, they can take advantage of their free time to review their existing financial and estate plans. If they have changed jobs, gotten married, had children, or experienced other life changes, it may be time for an update. If your clients need to update their estate plans, we are ready to help.

Winter Planning for a Great Spring

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Retirement Planning Update

Although we are still in the midst of winter, spring is on its way. It is important to remember upcoming April deadlines for retirement contributions and required minimum distributions (RMDs), but there have also been some recent developments that may impact your retirement planning. 

IRS Proposed Regulations for Required Minimum Distributions

In 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act created a ten-year payout rule for most inherited retirement assets, such that the account must be fully withdrawn by the end of the calendar year that includes the tenth anniversary of the date of the participant’s death. Although many initially believed that no RMDs were required in years one through nine following the death of the plan participant, in February 2022, the Internal Revenue Service (IRS) issued proposed regulations clarifying that RMDs are, in fact, required each year during the ten-year period under many circumstances. This caught many beneficiaries by surprise, especially those who opted not to take distributions in 2021 or 2022 in good faith based on the information they had. 

However, on October 7, 2022, the IRS issued Notice 2022-53, which states that the IRS will not penalize beneficiaries for not taking those RMDs. However, beneficiaries will have to ask for a refund of any excise tax already paid; the IRS will not automatically reimburse it. This relief applies only for the 2021 and 2022 distribution calendar years. In contrast to the February 2022 proposed regulations, which stated that the final regulations would apply to 2022 and later distribution calendar years, Notice 2022-53 also indicated that any final regulations issued by the IRS regarding required minimum distributions will apply no earlier than the 2023 distribution calendar year.

The proposed regulations also clarify the age of majority under the SECURE Act: the child of an employee with an individual retirement account is considered to have reached the age of majority on the child’s twenty-first birthday. However, defined benefit plans that have used a pre-Secure definition of majority may continue to use that definition.

SECURE 2.0 Act 

On December 29, 2022, President Biden signed the $1.7 trillion omnibus spending bill, which included the SECURE 2.0 Act of 2022. SECURE 2.0 increases the age at which individuals must begin taking RMDs from retirement plans from 72 to 73 starting on January 1, 2023, if they reach age 72 after December 31, 2022. Starting on January 1, 2033, for individuals who reach age 74 after December 31, 2032, the date at which RMDs must be taken is increased to age 75. The original SECURE Act, passed in late 2019, increased the age at which individuals must begin taking required minimum distributions from 70 ½ to 72 starting in 2020. 

SECURE 2.0 also allows a surviving spouse to elect to be treated as the deceased employee for purposes of the RMD rules, effective for calendar years after December 31, 2023. As a result, if you are a surviving spouse and your deceased spouse was younger than you, you should consider making the election to delay the date at which RMDs must begin, allowing additional time for tax-deferred growth of your retirement account.

In addition, SECURE 2.0 increases the amount of tax-advantaged contributions older workers can make as they approach retirement age and expands opportunities for retirement savings for longer term part-time workers. You may be able maximize the growth of your retirement accounts by taking advantage of these new opportunities.

The retirement planning landscape has been evolving over the past several years, and we are committed to keeping you up to date on the latest developments and how they will impact your estate plans.

The Deceased Spouse’s Unused Exemption Amount: a Spouse’s Final Gift

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Spouses often work together to build wealth for themselves and their children. Congress recognized this by enacting the gift and estate tax portability election as part of the 2010 Taxpayer Relief, Unemployment Insurance Reauthorization, and Job Creation Act and making it permanent in the American Taxpayer Relief of 2012, providing married couples with a relatively simple way to potentially shield much more of their wealth from federal gift and estate taxation. If you have recently lost your spouse, it is important to consider whether you should take advantage of the portability election.

What Is Portability of the DSUE?

In 2023, the federal estate tax exclusion amount is $12.92 million for individuals and $25.84 million for married couples, and only gross estates that exceed these amounts are subject to estate tax. Due to the unlimited marital deduction, married couples with large estates are usually able to avoid estate taxes at the death of the first spouse. However, at the death of the surviving spouse, their estate, including the amount that they inherited from their spouse, will be subject to estate taxes if the gross estate of the second spouse to die exceeds the estate tax exclusion amount. Prior to the enactment of the portability election in 2010, in the absence of complex planning, for example, forming a credit shelter trust with the deceased’s accounts and property equal to their remaining lifetime exclusion amount, the unused exclusion amount of the first spouse to die was lost, meaning that the couple’s children would inherit less of the couple’s wealth at the second death because only the second to die’s remaining lifetime exclusion amount was available to reduce the estate tax that had to be paid. The portability election allows the surviving spouse to add the deceased spouse’s unused exclusion (DSUE) amount to their own exclusion amount to reduce or eliminate estate tax liability when they die.

How Do You Elect Portability?

To take advantage of portability of the DSUE amount, after one spouse dies, the surviving spouse must file an estate tax return (Form 706) and make a portability election that allows the DSUE amount to be applied to the surviving spouse’s subsequent transfers during life or at death. Portability must be elected properly or it will be ineffective, so it is important to seek the help of a tax professional. 

If the deceased spouse’s gross estate exceeds the basic exclusion amount ($12.92 million), a federal estate tax return must be filed within nine months of the date of death (although a six-month extension is available). To take advantage of the DSUE amount, the executor of the deceased spouse’s estate must elect portability and compute the DSUE amount on the timely estate tax return. No extension of time to elect portability is available in this situation.

Even if the deceased spouse’s estate does not exceed the basic exclusion amount and the executor is not otherwise required to file an estate tax return, an estate tax return must be properly and timely filed to elect portability. Regulations issued by the US Department of the Treasury provide that in such cases, the due date of an estate tax return required to elect portability is nine months after the decedent’s date of death or the last day of the period covered by an extension. 

n 2017, the IRS provided a simplified method for obtaining an extension of time to be used instead of the private letter ruling process that was available for a period extending to the second anniversary of the decedent’s date of death. In July 2022, the IRS extended the time for estates that are not otherwise required to file an estate tax return to make a portability election from the second to the fifth anniversary of the decedent’s date of death and allows a simplified method for obtaining the extension. Using the simplified method, an executor who wants to elect portability and has not yet filed an estate tax return—and was not otherwise required to do —only needs to file a “complete and properly prepared” estate tax return (Form 706) that states at the top that it is “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” The five-year deadline and simplified process make it easier and less expensive for the surviving spouse to take advantage of their deceased spouse’s unused exclusion amount, and in some cases, this could reduce or even eliminate federal estate taxes upon the death of the surviving spouse.

Why Should You Consider Electing Portability?

Although preparation of the estate tax return may seem like an unnecessary expense if your deceased spouse’s money and property are not currently subject to estate tax, keep in mind that your wealth could grow substantially before your death, and the DSUE amount could be used to shield wealth that otherwise would be subject to estate taxes. In addition, although the current estate tax exemption amount is historically high, it is scheduled to be reduced by half at the end of 2025, so in only a few years, many more estates will be subject to estate tax liability unless the law is changed. In addition, some states have their own estate or inheritance taxes applicable to estates of a much lower value. 

We Can Help

Portability is an important and valuable strategy to minimize your estate taxes. Please contact us if we can help you to determine if you should take advantage of a portability election, especially in light of the sunset of the doubled gift and estate tax exemption amount at the end of 2025.

Spring Break Checklist

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After a long, cold winter, many of us—from the young and to the more mature—are ready to make plans for spring break. Here are a few important reminders, whether you plan to travel to take advantage of warmer weather by traveling or enjoy your spring break at home. 

Tips for Traveling

1. If you are planning a spring break trip, gather the following important documents you that may need during your travels:

  • Passport. If you plan to travel internationally, you will need a valid passport. If you need a new passport or to renew your existing passport, you should plan ahead: routine processing can take six to nine weeks, although expedited, urgent, and emergency processing is available under some circumstances.
  • Health insurance card. You should bring your health insurance card with you on your trip. If you are traveling within the United States, you should contact your health insurance company to ask if the state you are visiting is within your plan’s network. If you are traveling to a state outside of your plan’s network, you should ask which services are covered. In general, routine care is not covered in states that are outside of a plan’s network, but emergency services are covered. However, plans may differ, so it is important for you to check with your insurance company. 
  • Powers of attorney. If you have property, accounts, or a business that needs to be monitored or managed while you are away, you should have a financial power of attorney granting someone you trust the power to take care of your affairs until you return. In addition, you should consider having a power of attorney that authorizes someone you trust to handle emergencies while you are away, for example, repairs and insurance claims in the event of a flooded basement or a roof damaged by hail. The document can specify exactly what the individuals appointed under the power of attorney are authorized to do and the time period during which they may act on your behalf.
  • Auto insurance information. In general, auto insurance policies cover drivers in all fifty states and sometimes Canada and Mexico. In addition, if you have auto insurance, it will cover a rental car. However, there may be some gaps in your coverage if your rental car is damaged or stolen. If you do not have auto insurance, you will need to obtain rental car insurance if you plan to use a rental car during your travels. If you will be driving in a foreign country, you may also need to obtain rental car insurance and an International Driving Permit, which is a document that translates the information on your driver’s license into at least ten languages.
  • Travel insurance. You should also consider obtaining travel insurance, which can include trip cancellations, disruption insurance, or travel health insurance. If your trip is expensive, you could lose a lot of money if you get sick and cannot travel or an incident occurs that prevents the trip from occurring as planned. In addition, if you are traveling internationally, your health insurance may only cover emergency care. Travel health insurance may cover out-of-pocket costs that are incurred for medical care. In addition, medical evacuation insurance is available to cover transportation expenses if you travel to a country whose healthcare is not as good as the care you would receive if you return home or are transported to another location.

2. Make sure your family and loved ones have your contact information in case of emergency. Although you will likely have your cell phone with you during your travels, some areas, even in the United States, have poor cell phone coverage. As a result, you should provide your family with landline telephone numbers and addresses of the hotels or resorts where you plan to stay during your trip.

Tips for Staying Home

If you are taking a staycation, you can take advantage of your free time by reviewing your existing financial and estate plans. If you have changed jobs, gotten married, had children, or experienced other life changes, it may be time for an update. If your estate plan is outdated, the people who you want to receive your money and property may not receive it as you intend. You should also regularly review the people you have named as executor, trustee, caregiver for your children, and agent under a power of attorney to ensure that they are still willing and able to fulfill those roles—and that you still have confidence in their abilities to do so. Further, if you have experienced financial changes, such as a substantial increase or decrease in the value or composition of your estate, buying or selling a home or other property, changing jobs, buying or selling a business, or receiving an inheritance, there may be tax and other consequences that could impact your estate plan. Although this may not sound like a relaxing activity for your spring break, you may be surprised at the peace of mind you will gain by ensuring that your estate plan accomplishes your goals and protects your family as you intend.

Give Us a Call

We hope your spring break plans refresh you after a long winter. Regardless of whether you are traveling or staying home, if you need to create or update your estate plan, give us a call to schedule an appointment.

Important Dates to Be Aware of in 2023

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The new year brings with it important dates that may impact your clients’ financial situations and tax deadlines they may need to meet. By providing them with the following information, you can help them plan ahead to avoid financial trouble and avoid penalties for nonpayment or late payment of taxes.

March 6, 2023, is the deadline under the sixty-five-day rule for trust distributions. Under Internal Revenue Code (I.R.C.) § 663(b), distributions made to beneficiaries of nongrantor trusts (and estates) made within sixty-five days of the end of 2022 may be counted as distributions made during 2022. This could be an important tax savings opportunity for your clients, as a nongrantor trust must pay income tax at the trust level on any taxable income it retains. For 2022, a trust is taxed at the maximum rate of 39.6 percent when its taxable income exceeds $13,451, in contrast to individuals, who reach the top tax rate of 37 percent when their income exceeds $539,900. In some cases, the Medicare surtax (net investment income tax) may also apply, meaning that the trust will have an even higher marginal tax rate. As a result, the overall tax savings may be significant when distributions of trust income are made to a beneficiary in a lower tax bracket. An election to treat the distribution as being made in 2022 must be made by the trustee on a timely filed income tax return for the trust.

April 18, 2023, is the deadline for 2022 individual retirement account (IRA) contributions. Encourage clients who are still working to review their 2022 IRA contributions so they can take full advantage of tax-free or tax-deferred growth, as they are permitted to make contributions for 2022 until April 18, 2023. Due to the high rate of inflation, the limits on contributions to traditional and Roth IRAs will increase from $6,000 in 2022 to $6,500 in 2023. Individuals who are fifty years old or over are permitted to contribute an additional catch-up contribution of $1,000 (unchanged from 2022). In addition, remind older clients to take their required minimum distributions: under the SECURE Act, those who reached age seventy and a half in 2020 or later must take their first required minimum distribution by April 1 of the year after they reach age seventy-two.

April 18, 2023, is tax day. Now that a new year has started, remind your clients to gather the paperwork they need to prepare for filing their income tax returns: W-2s, Forms 1099, records of income from other sources, records of IRA contributions, health savings account contributions, and other items that can reduce their taxable income, as well as documentation that will allow them to take advantage of tax deductions or credits, such as charitable contributions and mortgage interest.

Student loan repayments resume sometime in 2023. To provide relief to students holding eligible federal student loans during the COVID-19 pandemic, the 2020 CARES Act required the US Department of Education to pause loan payments, implement a zero percent interest rate, and stop collection on defaulted loans starting March 13, 2020. The relief was extended by subsequent legislation and administrative forbearance, and in November 2022, the Department of Education instituted another extension of the pause on repayments while Biden’s student loan forgiveness plan is being litigated in the courts. However, in the absence of another extension, the pause on repayments is currently set to end sixty days after the litigation is resolved or sixty days after June 30, 2023, whichever happens first, amid a period of record high inflation. If your clients are among the millions who owe a substantial amount on their student loans, help them create a plan that will enable them to resume payments by helping them determine how much they owe, the size of their payments, how it will affect their budget, and if debt consolidation could be helpful. 

Although the Biden Administration’s plan to forgive up to $10,000 in eligible federal student loan debt for non-Pell Grant recipients and up to $20,000 for Pell Grant recipients was recently struck down by several courts as unconstitutional, if the plan is eventually implemented, be sure to advise your clients that the amount forgiven may be taxable. Although the Internal Revenue Service has indicated that the amount forgiven will not be taxable income at the federal level, it will be taxable in some states.

Your role in helping your clients assess their financial and tax situation and advising them appropriately is critical. If we can help your clients further secure their financial future by creating or updating their estate plan, please give us a call.

New Business Succession Strategy: The Purpose Trust

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The beginning of a new year is when many of us reflect on where we have been and what we would like to accomplish in the future. However, business owners are often tempted to succumb to the tyranny of the urgent and fail to take time to consider the future of their businesses. You can provide a great service to your business-owning clients by encouraging them to think about what they would like their life’s work to accomplish in the future. Those who would like to help make the world a better place for future generations should consider a relatively new and perhaps unfamiliar planning tool: the purpose trust.

What Is a Purpose Trust?

A typical trust is an agreement involving several parties: the grantor, the trustee, and the beneficiary. After the trust is created, the grantor funds it with money or property, and the trustee is responsible for managing those assets as specified in the trust for the benefit of specific named beneficiaries. One exception recognized under the law is a charitable trust that is created for a charitable purpose but has no specific beneficiaries. In recent years, however, some states have enacted statutes that allow the establishment of noncharitable purpose trusts (generally known as purpose trusts). In some states, they can be established only to care for pets or maintain a grave site. However, other states (for example, Delaware, New Hampshire, South Dakota, Utah, and Wyoming) allow purpose trusts for most lawful purposes, as long as they are reasonable, attainable, and do not violate public policy. Because there are no beneficiaries to ensure that the trustee is carrying out the purpose of the trust, the grantor must designate an independent trust “enforcer” who can petition the court if the trustee fails to perform its duties under the trust. The same or a different party could also be appointed as a trust protector who can modify the trust if necessary, for example, to add beneficiaries if the purpose of the trust has ended, change the situs of the trust, or even terminate it. The goal of a purpose trust is different from that of more common estate planning tools in that it is not aimed primarily at minimizing taxes or transferring wealth efficiently (although it may achieve those goals) but instead at ensuring that the grantor’s stated purpose is carried out.

The Patagonia Purpose Trust

In September 2022, Yvon Chouinard, the founder of Patagonia, a $3 billion clothing company, transferred the voting stock of the company to a purpose trust designed to further his lifelong goal of fighting the environmental crisis. In a message from Chouinard on Patagonia’s website, he explained that his desire was for the company to continue to pursue its stated purpose: “We’re in business to save our home planet.” After learning that his children were not interested in running the business, he considered his options. Although he could have sold the company and donated the proceeds to other organizations that would continue to pursue the company’s goals, he worried that a new owner of Patagonia would have different values and that his employees would not have job security. The voting stock of the company was transferred to the Patagonia Purpose Trust, which, guided by the family and their advisors, will ensure that the company’s values are pursued and that its profits further their goals. All of the nonvoting stock was contributed to a 501(c)(4) nonprofit organization that will be funded by Patagonia’s dividends, worth an estimated $100 million a year, which it will use in its efforts to protect the environment. Because the business interests were not donated to a charity, the gift will be subject to an estimated $17.5 million in gift tax, and no charitable deduction will be available to Chouinard. However, he will avoid $700 million in capital gains taxes, and when he dies, Chouinard’s estate will avoid substantial estate tax liability.

Why Would a Client Want to Transfer Their Business to a Purpose Trust?

There are a number of reasons why clients who own profitable companies may be interested in a purpose trust as they consider business succession planning. Like the Chouinard family, they can ensure that in addition to providing job security for their employees, the values underlying their business continue to be pursued for many decades into the future. If they do not have children who are interested in running the business, or if their children do not share their values, they can use a purpose trust to require future management to adhere to the purposes set forth in the terms of the trust. Transferring the business to a purpose trust will also ensure that it remains a private company and that the pursuit of profits will never replace the owner’s cherished values as its main goal.

As your client’s financial advisor, you know them well and are aware of their goals for the future of their business and whether they have a desire to use the wealth they have acquired for the benefit of others. You can do a great service for civic-minded clients by informing them about the planning opportunity presented by a purpose trust. Give us a call if we can help you and your clients determine if this opportunity is one they would like to explore.

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1 Yvon Chouinard, Earth Is Now Our Only Shareholder, Patagonia, https://www.patagonia.com/ownership/ (last visited Dec. 12, 2022).

2 David Gelles, Billionaire No More: Patagonia Founder Gives Away the Company, N.Y. Times (Sept. 14, 2022), https://www.nytimes.com/2022/09/14/climate/patagonia-climate-philanthropy-chouinard.html.

3 Patagonia Billionaire Ducks $700 Million Tax Hit by Giving It Up, Bloomberg L. (Sept. 16, 2022), https://news.bloombergtax.com/daily-tax-report/patagonia-billionaire-ducks-700-million-tax-hit-by-giving-it-up.

Will 2023 Be a Good Year for Your Clients?

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Inflation Has Hit the Estate Planning World

The rate of inflation has reached a historic high, but it has also created estate planning opportunities that some of your clients may not have anticipated. Both the annual gift tax exclusion and the lifetime gift and estate tax exclusion amounts are adjusted for inflation each year, so when the rate of inflation is higher, the increases in these amounts are also greater. Now is a great time to remind your clients of the opportunity to take advantage of these tax-saving opportunities.

Annual Gift Tax Exclusion

Clients who are interested in making an outright gift to a loved one can take advantage of the annual gift tax exclusion, which was increased to $17,000 for 2023 (up from $16,000 in 2022), to make tax-free gifts of money or property up to the exclusion amount directly to as many loved ones (including nonfamily members) as they wish. Married couples can each give $17,000 per recipient; for example, they can provide tax-free gifts of $34,000 to each of their children. Annual exclusion gifts do not count against your clients’ lifetime estate and gift tax exemption amount, and the recipients will not owe any income or gift taxes on the amount they receive. Remind your clients that their gifts of money or property must be of a present interest, that is, they must transfer full title with no limitations to avoid disqualifying the gift from eligibility for the annual exclusion. Annual exclusion gifts are a use-it-or-lose-it opportunity each year and do not accumulate from year to year, so the gifts must be made by the end of 2023, or the chance to use the 2023 annual exclusion will be lost.

Lifetime Gift and Estate Tax Exclusion Amount

The basic exclusion amount for decedents dying in 2023 and the generation-skipping transfer tax exemption amount for 2023 is $12.92 million (up from $12.06 in 2022). The increase in the basic exclusion amount means that an individual will be able to transfer an additional $860,000 ($1.72 million for married couples) free of transfer tax liability in 2023. Gifts exceeding the annual exclusion amount will be counted against their lifetime exemption amount. These gifts are considered taxable gifts, but your clients can simply file a gift tax return and use part of their exemption amount as a credit, so they will not owe any gift tax unless the total value of all gifts made exceeds their remaining basic exclusion amount. The lifetime estate and gift tax exemption amount is set to be cut in half in 2026 in the absence of a change in the current law, so time is of the essence for clients who are interested in taking advantage of the current high exemption amount.

Remember the Anti-clawback Regulations

Under 2019 regulations issued by the Internal Revenue Service (IRS), a special rule was adopted allowing an estate to compute its estate tax credit using the greater of the basic exclusion amount (BEA) applicable during a taxpayer’s lifetime and the BEA applicable on the taxpayer’s date of death, ensuring that taxpayers will not be adversely impacted if they take advantage of the increased BEA by making lifetime gifts and then die in a year with a reduced BEA. The final regulations also clarified that the increased BEA is a use-or-lose benefit, available only to the extent that a taxpayer actually uses it by making gifts during the period in which the increased BEA amount is available. 

Proposed regulations released in April 2022 deny the benefit of the special anti-clawback rule to completed gifts that are treated as testamentary transfers for estate tax purposes and are included in the donor’s gross estate (includible gifts). The exception to the special rule, which requires the estate tax credit to be calculated using the BEA applicable on the taxpayer’s date of death (and thus a lower exemption amount after 2025), is likely to apply to grantor retained annuity trusts, qualified personal residence trusts, promissory note transactions, and possibly preferred partnership techniques. However, the anti-clawback rule would continue to apply to transfers includible in the donor’s gross estate where the taxable amount is 5 percent or less of the total amount of the transfer valued on the date of the transfer. The proposed regulations would also claw back gifts into a decedent’s estate made by the decedent less than eighteen months prior to the death of the decedent. 

We Can Help

No one is happy about the high rate of inflation, but you can help your clients turn lemons into lemonade by strategic gifting. Please contact us if we can help your clients determine if they should take advantage of the estate planning opportunities provided by the historic increases in the exclusion amounts, especially in light of the sunset of the doubled gift and estate tax exemption amount at the end of 2025. 

Tax Season Is Just around the Corner

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For everything there is a season, and it will soon be the season for taxes. Although it always seems to arrive too quickly, you will start to receive important tax documents by January 31. Whether you are filing as an individual or administering an estate or trust, you should start to prepare for tax day, April 18, 2023.

Filing as an Individual

Individuals (and married couples) use Form 1040 to file their annual income tax return. Starting in January, watch for the arrival of forms stating the amount of income you earned during 2022. Here are several of the most common forms you may need to complete your Form 1040:

Form W-2, Wage and Tax Statement. If you are a full-time employee or work part-time but are classified as an employee, your employer is required to send you a Form W-2 by January 31, 2023, showing the amount you were paid in wages, tips, and other compensation; the amount withheld by your employer for taxes; and the amount withheld for Social Security and Medicare. This form is not sent to independent contractors or self-employed workers.

Form 1099-NEC, Nonemployee Compensation. If you earned at least $600 in income as an independent contractor, the party or business who hired you must provide you with a Form 1099-NEC (in the past, Form 1099-MISC was used) by January 31, 2023. Form 1099-MISC is still used for prizes, awards, and other income payments, and the business must also provide this to you by January 31, 2023.

Form 1099-INT, Interest Income. Any entity that has paid you interest income of at least $10 must send you a Form 1099-INT by January 31, 2023. This could include banks or other financial institutions. For example, it will be issued for interest paid on savings bonds or savings and checking accounts. You should use this form to report all interest income you have received during the tax year to the Internal Revenue Service.

Form 1099-DIV, Dividends and Distributions. Financial institutions such as banks, credit unions, and mutual funds that have issued you at least $10 in dividends or other distributions must send you a Form 1099-DIV by January 31, 2023. This form supplies you the information you will need to report the income you receive from investments in the form of dividends. 

It is also important to gather and maintain records of IRA contributions, health savings account contributions, and other items that can reduce your taxable income, as well as documentation that will allow you to take advantage of tax deductions or credits, such as charitable contributions and mortgage interest.

Filing as an Executor or Trustee

If you are the executor of an estate or a trustee for a trust, you must report income of more than $600 earned by the estate or trust on Form 1041. If there is a beneficiary who is a nonresident alien, it must be filed regardless of the amount of income earned. However, if the beneficiaries of the estate or trust are entitled to receive the income, they are responsible for actually paying the income tax rather than the estate or trust. A few examples of assets held by an estate or trust that may earn income include mutual funds, rental property, savings accounts, stocks, or bonds. 

The date the return is due depends on whether the estate or trust follows a calendar year or a fiscal year. Calendar year estates and trusts must file the return by April 18, 2023, but fiscal year estates and trusts must file the return by the fifteenth day of the fourth month following the close of the tax year. The executor or trustee can choose whether to use a calendar or fiscal year. Many executors and trustees file a form electing a fiscal year, which begins on the date of the individual’s death and ends on the last day of the month before the anniversary of the date of death, because it allows more time for tax planning. In contrast, if the executor or trustee chooses to use a calendar year, the tax year begins on the date of death and ends on December 31 of the same year.

Executors and trustees must report all distributions of income made to beneficiaries on a Schedule K-1 (1041). In addition, you must send a copy of their respective Schedules K-1 to each beneficiary who has received a distribution of income, and the beneficiaries must report the amount of the distributions on their personal income tax returns. The deadlines for Schedule K-1 are the same as those for Form 1041 and depend on whether a calendar year or fiscal year is being used. Because the beneficiaries need to report this income on their own income tax returns, it is important to send the Schedule K-1 to them as early as possible.

As the executor or trustee, you should gather and maintain records of your fees, fees paid to professionals such as lawyers or accountants, administrative expenses, and distributions to beneficiaries so you can report them on Form 1041 to support tax deductions you claim for the estate or trust.

We Can Help

It is crucial to consider the implications of income taxes for estate planning and administration, whether you are an individual who needs to create or update your own estate plan or if you are administering an estate or trust. Please give us a call if you have any questions about how income taxes should affect your planning or administration decisions.

New Business Succession Strategy: The Purpose Trust

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The beginning of a new year is when many of us reflect on where we have been and what we would like to accomplish in the future. If you are a business owner, you may be tempted to succumb to the tyranny of the urgent and fail to take the time to consider the future of your business. However, it is important to think about what you would like your life’s work to accomplish in the future. If you would like to help make the world a better place for future generations, you should consider a relatively new and perhaps unfamiliar planning tool: the purpose trust.

What Is a Purpose Trust?

A typical trust is an agreement involving several parties: the grantor, the trustee, and the beneficiary. After the trust is created, the grantor funds it with money or property, and the trustee is responsible for managing the money and property as specified in the trust for the benefit of specific named beneficiaries. One exception recognized under the law is a charitable trust that is created for a charitable purpose but has no specific beneficiaries. In recent years, however, some states have enacted statutes that allow the establishment of noncharitable purpose trusts (generally known as purpose trusts). In some states, they can be established only to care for pets or maintain a grave site. However, other states (for example, Delaware, New Hampshire, South Dakota, Utah, and Wyoming) allow purpose trusts for most lawful purposes, as long as they are reasonable, attainable, and do not violate public policy. Because there are no beneficiaries to ensure that the trustee is carrying out the purpose of the trust, the grantor must designate an independent trust “enforcer” who can petition the court if the trustee fails to perform its duties under the trust. The same or a different party could also be appointed as a trust protector who can modify the trust if necessary, for example, to add beneficiaries if the purpose of the trust has ended, change the situs of the trust, or even terminate it. The goal of a purpose trust is different from that of more common estate planning tools in that it is not aimed primarily at minimizing taxes or transferring wealth efficiently (although it may achieve those goals) but instead at ensuring that the grantor’s stated purpose is carried out.

The Patagonia Purpose Trust

In September 2022, Yvon Chouinard, the founder of Patagonia, a $3 billion clothing company, transferred the voting stock of the company to a purpose trust designed to further his lifelong goal of fighting the environmental crisis. In a message from Chouinard on Patagonia’s website, he explained that his desire was for the company to continue to pursue its stated purpose: “We’re in business to save our home planet.” After learning that his children were not interested in running the business, he considered his options. Although he could have sold the company and donated the proceeds to other organizations that would continue to pursue the company’s goals, he worried that a new owner of Patagonia would have different values and that his employees would not have job security. The voting stock of the company was transferred to the Patagonia Purpose Trust, which, guided by the family and their advisors, will ensure that the company’s values are pursued and that its profits further their goals. All of the nonvoting stock was contributed to a 501(c)(4) nonprofit organization that will be funded by Patagonia’s dividends, worth an estimated $100 million a year, which it will use in its efforts to protect the environment. Because the business interests were not donated to a charity, the gift will be subject to an estimated $17.5 million in gift tax, and no charitable deduction will be available to Chouinard. However, he will avoid $700 million in capital gains taxes, and when he dies, Chouinard’s estate will avoid substantial estate tax liability.

Why Would You Want to Transfer Your Business to a Purpose Trust?

If you own a profitable company, there are a number of reasons why you may be interested in a purpose trust as you consider business succession planning. Like the Chouinard family, you can ensure that in addition to providing job security for your employees, the values underlying your business continue to be pursued for many decades into the future. Especially if you do not have children who are interested in running the business, or if your children do not share your values, the terms of a purpose trust can require future management to adhere to the purpose of the trust. Transferring the business to a purpose trust will also ensure that it remains a private company and that the pursuit of profits will never replace your cherished values as its main goal.

What are your goals for the future of your business? If you have a desire to use the wealth you have acquired for the benefit of others, you may be interested in learning more about a purpose trust. Give us a call if we can help you determine if you would like to explore this planning opportunity.

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1  Yvon Chouinard, Earth Is Now Our Only Shareholder, Patagonia, https://www.patagonia.com/ownership/ (last visited Dec. 22, 2022).

2 David Gelles, Billionaire No More: Patagonia Founder Gives Away the Company, N.Y. Times (Sept. 14, 2022), https://www.nytimes.com/2022/09/14/climate/patagonia-climate-philanthropy-chouinard.html.

3 Patagonia Billionaire Ducks $700 Million Tax Hit by Giving It Up, Bloomberg Law (Sept. 16, 2022), https://news.bloombergtax.com/daily-tax-report/patagonia-billionaire-ducks-700-million-tax-hit-by-giving-it-up.