November, 2021 Newsletter
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Jim Weller - The Bull's-Eye Is on Trusts
“The House Ways and Means Committee released its tax proposals on September 13. A major focus of the proposals is on wealthy taxpayers paying their fair share of income tax. In that regard, one of the main targets of the tax proposals is trusts.
Rightfully or wrongfully so, trusts are being singled out as one of the means by which the wealthy are avoiding payment of their fair share of taxes. Unfortunately, the tax proposals ignore important non-tax reasons for creating trusts such as asset protection. To coin a moniker from the early 20th Century, the tax proposals are truly ‘trust busters.’
This newsletter will provide perspective on the tax proposals and the potential increased scrutiny that trusts might face because of the recent release of information contained in the Pandora Papers.”
Jim Weller provides members with timely commentary that examines why trusts might come under increased scrutiny.
James P. Weller, JD, LL.M is President of Greenway Capital Advisors, LLC (“Greenway”) in Houston and Las Vegas. Greenway provides an array of administrative and financial reporting services to private trust companies, individual trustees, and family entities. Jim has written estate, trust, and tax planning articles for several professional publications including the ACTEC Law Journal, Leimberg Information Services Inc., the Journal of Practical Estate Planning, and the Journal of Financial Planning. His book titled “Tax-Smart Wealth Planning” was published in 2006. Jim has over 30 years of experience in the trust, estate, and tax planning industry, and he is a member of the State Bar of Michigan.
Here is his commentary:
The House Ways and Means Committee released its tax proposals on September 13. A major focus of the proposals is on wealthy taxpayers paying their fair share of income tax. In that regard, one of the main targets of the tax proposals is trusts.
Rightfully or wrongfully so, trusts are being singled out as one of the means by which the wealthy are avoiding payment of their fair share of taxes. Unfortunately, the tax proposals ignore important non-tax reasons for creating trusts such as asset protection. To coin a moniker from the early 20th Century, the tax proposals are truly “trust busters.”
This newsletter will provide perspective on the tax proposals and the potential increased scrutiny that trusts might face because of the recent release of information contained in the Pandora Papers.
Among the key trust targets of the tax proposals are grantor trusts. These are irrevocable trusts whereby the grantor retains certain powers that causes him or her to be deemed the taxpayer on the income of the trusts.
Currently, under Revenue Ruling 85-13, a grantor can transact with a grantor trust without incurring any income tax consequences. Also, Revenue Ruling 2004-64 provides that the grantor’s payment of income tax on the income of a grantor trust is not considered to be a gift. To carry the benefits of a grantor trust further, the assets of a grantor trust typically are not included in the grantor’s estate for estate tax purposes on the death of the grantor. One of the major exceptions is when the grantor of a grantor retained annuity trust (GRAT) dies during the term of the trust.
Without getting into the specific details of the House Ways and Means Committee tax proposals, suffice it to say that if passed the above-mentioned advantages of a grantor trust will be severely impacted in a negative manner. As has been discussed in several prior LISI Newsletters, this could be the death knell for planning techniques such as GRATs and sales to intentionally defective grantor trusts.
In addition, non-grantor irrevocable trusts (“non-grantor trusts”) will take the following heavy hits from the tax proposals:
- Taxable income retained by a non-grantor trust above $12,500 will be subject to a tax rate of 39.6%. To put the impact of this in perspective, the taxable income of married individuals filing jointly will not be subject to the 39.6% tax rate until it exceeds $450,000.
- Modified Adjusted Gross Income above $100,000 of a non-grantor trust will be subject to a surcharge of 3%.
- With the 3.8% Net Investment Income Tax, the 3% Surcharge, and the 39.6% top tax rate, some non-grantor trusts will be subject to a 46.4% tax rate.
To add insult to injury, the information within the Pandora Papers was recently released. The Pandora Papers reveal that many high profile ultra-wealthy individuals have secretly moved money and assets to various places around the world.
A lot of the focus of the Pandora Papers is on offshore jurisdictions. However, the Pandora Papers also shine light on the top trust-friendly states in the U.S. such as South Dakota.
The end result is that the Pandora Papers could lead to additional scrutiny of trusts in the U.S., particularly those trusts with a situs in the top trust-friendly states which include Alaska, Delaware, Florida, Nevada, New Hampshire, South Dakota, Tennessee, and Wyoming. From the perspective of trust services providers in the U.S., it may become more important than ever that they know their clients and perform a thorough due diligence of prospective clients.
From a scrutiny standpoint, it should be noted that the Corporate Transparency Act (the “Act”) was enacted in the U.S. on January 1, 2021. The Act requires corporations, limited liability companies, and “other similar entities” formed within a state or a U.S. Territory to disclose certain information regarding the beneficial owners. Private trust companies which have become popular with some ultra-wealthy families appear to fall within the disclosure requirements of the Act.
The Treasury has until one year after the date of enactment of the Act to issue regulations. Through the regulations, “other similar entities” could cast a broad net. We will have to wait and see if trusts are caught in that net.
HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
LISI Estate Planning Newsletter #2913 (October 11, 2021) at http://www.leimbergservices.com. Copyright 2021 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.
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