The United States imposes taxes and has legislatures and courts at the national, state and local levels. While there are a large number of taxes to consider, the taxes with which this chapter is predominantly concerned are income taxes (which are paid by individuals, estates, trusts, business and other entities, etc. at the federal, state and local levels) and transfer taxes (i.e., estate, gift and generation-skipping transfer taxes, which are paid by individuals, trusts and estates at the federal and state levels). Rates of taxation, depending upon whether one lives (or is an estate, trust or entity located in) in a state or city that imposes the relevant taxes, can vary dramatically (as will be illustrated in the separate sections below). The laws of estates, trusts and property are largely (though not exclusively) imposed at the state level. The federal legislature is in session and passes new laws every year. Some state legislatures are in session every year, and others meet episodically. Private client litigations can be heard, depending upon the facts and circumstances, in either Federal or state level courts. All lawyers in the United States are permitted to appear in court, though generally only those lawyers who specialize in litigation do.
1 . Tax and wealth planning
1.1. National legislative and regulatory developments
During 2022, COVID-19, the war in Ukraine, global inflation, the Tax Cuts and Jobs Act (TCJA), the uncertainty about the Build Back Better Act (BBBA), the Corporate Transparency Act (CTA), and the Inflation Reduction Act (IRA) dominated the planning landscape.
In our 2021 Year-End Estate Planning Advisory, there was a lot of uncertainty about whether the BBBA would be enacted and, if so, whether it would bring about a change in the estate, gift and generation-skipping transfer (GST) tax exemptions. At the end of the day, while a form of the BBBA passed the House (which form did not include a change to the aforementioned exemption amounts), the BBBA ended up being dead on arrival in the Senate.
The TCJA made significant changes to individual and corporate income taxes, restructured international tax rules, provided a deduction for pass-through income and eliminated many itemized deductions. Most significantly for estate planning purposes, the TCJA temporarily doubled the estate, gift and generation-skipping transfer (GST) tax exemptions. Absent legislative action by Congress, many of the changes imposed under the TCJA — including the increased exemptions — will sunset after December 31, 2025, with the laws currently scheduled to revert back to those that existed prior to the TCJA. Given the uncertain political landscape, practitioners continue to view this temporary increase in exemption amounts as an unprecedented opportunity for valuable estate planning.
While the permanency of the TCJA’s provisions still remains uncertain, the current environment provides a great deal of opportunity for new planning. As the existing tax landscape is still in effect as of the date of submitting this chapter, and looks unlikely to change before the end of 2022, particularly in light of the results of the midterm elections, the following are some key income and transfer tax exemption and rate changes under the TCJA, including inflation adjusted amounts for 2022 and 2023:
- Federal estate, GST and gift tax rates. For 2022, the federal estate, gift and GST applicable exclusion amounts are USD 12.06 million. The maximum rate for federal estate, gift and GST taxes is 40%. For 2023, the federal estate, gift and GST applicable exclusion amounts will be USD 12.92 million. Absent any change by Congress, the maximum rate for federal estate, gift and GST taxes will remain at 40%.
- Annual gift tax exemption. Each year individuals are entitled to make gifts using the “Annual Exclusion Amount” without incurring gift tax or using any of their lifetime applicable exclusion amount against estate and gift tax. The Annual Exclusion Amount is USD 16,000 per donee in 2022. Thus, this year a married couple together can gift USD 32,000 to each donee without gift tax consequences. In 2023, the annual exclusion for gifts will increase to USD 17,000. The limitation on tax-free annual gifts made to noncitizen spouses will increase from USD 164,000 in 2022 to USD 175,000 in 2023.
- Federal income tax rates:
- The TCJA provides for seven (7) individual income tax brackets, with a maximum rate of 37%. The 37% tax rate will affect single taxpayers whose income exceeds USD 518,400 (indexed for inflation, and USD 578,125 in 2023) and married taxpayers filing jointly whose income exceeds USD 622,050 (indexed for inflation and USD 693,750 in 2023). Estates and trusts will reach the maximum rate with taxable income of more than USD 12,950 (indexed for inflation, and USD 14,450 in 2023).
- A 0% capital gains rate applies for single taxpayers with income up to USD 40,000 (indexed for inflation, and USD 44,625 for 2023) or married taxpayers filing jointly with income up to USD 80,000 (indexed for inflation, and USD 89,250 in 2023). A 15% capital gains rate applies for income above this threshold up to USD 441,450 for single taxpayers (indexed for inflation, and USD 492,300 in 2023) and USD 496,600 for married taxpayers filing jointly (indexed for inflation, and USD 553,850 in 2023). The 20% capital gains rate applies above these thresholds.
- The standard deduction was increased to USD 12,000 for single taxpayers (indexed for inflation, and USD 13,850 for 2023) and USD 24,000 for married taxpayers filing jointly (indexed for inflation, and USD 27,700 in 2023).
- The threshold for the imposition of the 3.8% Medicare surtax on investment income and 0.9% Medicare surtax on earned income is USD 200,000 for single taxpayers, USD 250,000 for married taxpayers filing jointly and USD 12,500 for trusts and estates (adjusted for inflation).
- Tax Cuts and Jobs Act. The TCJA, which was signed into law on December 22, 2017 and most of which became effective on January 1, 2018, has proven to have many implications for domestic corporate and individual income tax, as well as federal gift, estate and GST tax, fiduciary income tax and international tax. Since the TCJA’s enactment, various technical corrections have been issued, as has the Internal Revenue Service’s (IRS) guidance on certain aspects of the new tax regime. In light of the TCJA and recent IRS guidance, it is important to review existing estate plans, consider future planning to take advantage of the increased exemption amounts, and maintain flexibility to allow for future strategic planning. Because of the continued importance of the TCJA’s new tax laws, the most significant changes and recent guidance are summarized below.
- Gift, estate and GST exemptions, rates and stepped-up basis. The TCJA retained the federal estate, gift and GST tax rates at a top rate of 40%, as well as the marked-to-market income tax basis for assets includible in a decedent’s taxable estate at death.
While the federal gift, estate and GST taxes were not repealed by the TCJA, fewer taxpayers will be subject to these transfer taxes due to the TCJA’s increase of the related exemption amounts. Under the TCJA, the base federal gift, estate and GST tax exemptions doubled from USD 5 million per person to USD 10 million per person, indexed for inflation. As noted above, the relevant exemption amount for 2022 is USD 12.06 million per person, resulting in a married couple’s ability to pass USD 24.12 million worth of assets free of federal estate, gift and GST taxes. These amounts will increase each year until the end of 2025, with inflation adjustments to be determined by the chained Consumer Price Index (CPI) (which will lead to smaller increases in the relevant exemption amounts in future years than would have resulted from the previously used traditional CPI). The exemption amount in 2023 will be USD 12.92 million per individual, or USD 25.84 million per married couple. Without further legislative action, the increased exemption amounts will sunset, and the prior exemption amounts (indexed for inflation, using the chained CPI figure) will be restored beginning in 2026.
While the federal estate tax exemption amount has increased, note that multiple US states impose a state-level estate or inheritance tax. The estate tax exemption amount in some of these states matches, or will match, the increased federal estate tax exemption amount. However, in other states, such as Illinois and New York, the state estate tax exemption amount will not increase with the federal estate tax exemption amount, absent a change in relevant state law. Additionally, states may have their own laws that impact planning in that state.
The federal estate tax exemption that applies to non-resident aliens was not increased under the TCJA. Under current law, the exemption for non-resident aliens remains at USD 60,000 (absent the application of an estate tax treaty).
- “Anti-clawback” regulations. While there is uncertainty about whether future legislation will address the sunset, either by extending the new exemption amounts beyond 2025 or changing the exemption amounts further, the IRS has issued guidance on how it will address differences between the exemption amounts at the date of a gift and exemption amounts at the date of a taxpayer’s death (often referred to as a “clawback”). In Proposed Regulations REG-106706-18, the IRS clarified that a taxpayer who takes advantage of the current lifetime gift tax exemption will not be penalized, if the exemption amount is lower at the taxpayer’s death. If a taxpayer dies on or after January 1, 2026, having used more than the statutory USD 5 million basic exclusion (indexed for inflation) but less than the USD 10 million basic exclusion (indexed for inflation), the taxpayer will be allowed a basic exclusion equal to the amount of the basic exclusion the taxpayer had used. However, any exemption unused during a period of higher basic exclusion amounts will not be allowed as an additional basic exclusion upon death. Additionally, the IRS clarified that if a taxpayer exhausted his or her basic exclusion amount with pre-2018 gifts and paid gift tax, then made additional gifts or died during a period of high basic exclusion amounts, the higher exclusion will not be reduced by a prior gift on which gift tax was paid. The IRS issued further proposed regulations in April 2022. In REG-118913-21, the IRS provided an exception to the anti-clawback rule that preserves the benefits of the temporarily higher basic exclusion amount for certain transfers that are includable, or treated as includable, in a decedent’s gross estate under Internal Revenue Code (IRC) Section 2001(b).
- Income taxation of trusts and estates. The TCJA added new IRC Section 67(g), which applies to trusts, estates, and individuals, and provides that no miscellaneous itemized deductions (all deductions other than those specifically listed in IRC Section 67(b)) are available until the TCJA sunsets after December 31, 2025. While the TCJA doubled the standard deduction for individuals, taxpayers that are trusts and estates are not provided a standard deduction. Under the TCJA, trust investment management fees are no longer deductible. After the enactment of the TCJA, there was uncertainty about the deductibility of fees directly related to the administration of a trust or estate (e.g., fiduciary compensation, legal fees, appraisals, accountings, etc.). Historically, these fees had been deductible under IRC Section 67(e) and without regard to whether they were miscellaneous itemized deductions or not. In Notice 2018-61, the Treasury Department (Treasury) issued guidance on whether new IRC Section 67(g) eliminates these deductions. This notice provides that expenses under IRC Section 67(e) are not itemized deductions and therefore are not suspended under new IRC Section 67(g). Note that only expenses incurred solely because the property is held in an estate or trust will be deductible. While the notice was effective July 13, 2018, estates and non-grantor trusts may rely on its guidance for the entire taxable year beginning after December 31, 2017.
New IRC Section 67(g) may also impact a beneficiary’s ability to deduct excess deductions or losses of an estate or trust upon termination. Prior to the TCJA, it was common tax planning to carry out unused deductions of a trust or estate to the beneficiary upon termination, so the deductions could be used on the beneficiary’s personal income tax return. Under new IRC Section 67(g), these deductions are arguably miscellaneous itemized deductions and therefore would no longer be deductible by the beneficiary. Notice 2018-61 notes that the IRS and Treasury recognize that Section 67(g) may impact a beneficiary’s ability to deduct unused deductions upon the termination of a trust or an estate, and the IRS and Treasury intend to issue regulations in this area and request comments on this issue. In the interim, taxpayers should consult with their advisors about whether it would be prudent to engage in planning to utilize (to the extent permissible) these deductions at the trust or estate level.
Finally, the TCJA made a number of taxpayer-friendly changes to the taxation of electing small business trusts (ESBTs). Non-resident aliens are now permissible potential beneficiaries of ESBTs. Also, the charitable deduction rules for ESBTs are now governed by IRC Section 170 instead of IRC Section 642(c), which means that several restrictions imposed by IRC Section 642(c) (e.g., that the charitable donation be paid out of income and pursuant to the terms of the trust) no longer apply. Additionally, an ESBT’s excess charitable deductions can now be carried forward five years, but the percentage limitations and substantiation requirements will now apply.
- Income tax. The TCJA also has implications for married couples who are divorcing or contemplating a divorce. The TCJA changed prior law to provide that alimony payments will not be deductible by the payor and will not be deemed to be income to the recipient. The TCJA also repealed IRC Section 682, which generally provided that if a taxpayer created a grantor trust for the benefit of his or her spouse, the trust income would not be taxed as a grantor trust as to the grantor-spouse after divorce to the extent of any fiduciary accounting income the recipient-spouse is entitled to receive. Due to the repeal of Section 682, a former spouse’s beneficial interest in a trust may cause the trust to be taxed as a grantor trust as to the grantor-spouse even after divorce. These changes to the taxation of alimony and the repeal of IRC Section 682 do not sunset after 2025; they apply to any divorce or separation instrument executed after December 31, 2018, or any divorce or separation instrument executed before that date but later modified, if the modification expressly provides that changes made by the TCJA should apply to the modification.
- Charitable deduction. The TCJA increases the percentage limitation on cash contributions to public charities from 50% of the donor’s contribution base (generally, the donor’s adjusted gross income) to 60%. This 60% limitation applies if only cash gifts are made to public charities. The deduction limitations remain the same for donations of other assets, such as stock, real estate, and tangible property.
- Business entities. The TCJA reduced the top corporate income tax rate to 21%. To decrease the discrepancy in the tax rates between C corporations and pass-through entities, the TCJA also addressed taxation of pass-through entities (partnerships, limited liability companies, S corporations or sole proprietorships) that would typically be taxed at the rate of the individual owners. Generally, new Section 199A provides a deduction for the individual owner of 20% of the owner’s qualified business income (QBI). This deduction has the effect of reducing the effective income tax rate for an owner in the highest tax bracket from 37% to 29.6%. The deduction is subject to numerous limitations and exceptions. Notably, the deduction may be limited for taxpayers over a certain taxable income threshold, USD 163,000 for single taxpayers (indexed for inflation, and USD 182,100 for 2023) and USD 326,000 for married taxpayers filing jointly (indexed for inflation, and USD 364,200 in 2023). For these taxpayers, the deduction may be subject to limitations based on whether the entity is a “specified service trade or business” (an SSTB, which is generally a trade or business involving the performance of services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, or where the principal asset is the reputation or skill of one or more employees), the W-2 wages paid by the business entity, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. The IRS issued Final Regulations on Section 199A on January 18, 2019, followed by a slightly corrected version on February 1, 2019. The IRS also issued Rev. Proc. 2019-11 providing guidance on calculating W-2 wages for the purposes of Section 199A, and Notice 2019-07 providing a safe harbor for when a rental real estate enterprise will qualify as a business for purposes of Section 199A. The rules surrounding the deduction, as well as the Final Regulations, are very complex, and taxpayers should consult with their tax advisors to determine the implications of the Section 199A deduction. Section 199A is effective until December 31, 2025.
- Qualified Opportunity Zones. The TCJA provides federal income tax benefits for investing in businesses located in “Qualified Opportunity Zones.” Opportunity zones are designed to spur economic development and job creation in distressed low-income communities in all 50 states, the District of Columbia, and US possessions. By investing eligible capital in a Qualified Opportunity Fund (a corporation or partnership that has at least 90% of its assets invested in qualified opportunity zone property on two measuring dates each year) that has invested in qualified opportunity zone property in any of these communities, and meeting certain other requirements, investors can gain certain tax benefits, including the deferral or exclusion of existing gain or non-recognition of gain. The IRS issued proposed regulations and Rev. Rul. 2018-29 on October 19, 2018, and a second set of proposed regulations on April 17, 2019 which addressed, among other issues, what transactions would trigger recognition of previously deferred gains. The Qualified Opportunity Zone regime is complex and may impact the tax and estate planning of investors. Taxpayers should consult with their tax and estate planning advisors to discuss the potential tax benefits and implications.
- Gift, estate and GST exemptions, rates and stepped-up basis. The TCJA retained the federal estate, gift and GST tax rates at a top rate of 40%, as well as the marked-to-market income tax basis for assets includible in a decedent’s taxable estate at death.
- Corporate Transparency Act (CTA). Passed into law in 2021, the CTA set out to create a beneficial ownership registry for certain domestic entities and foreign entities doing business in the U.S (i.e., entities that are either created by a filing with a secretary of state in the United States or are required to file a document to do business in a state in the United States). The goal behind the new beneficial ownership registry is to combat tax evasion, money laundering, and other unsavory acts perpetuated through dealings in the United States. Specifically, the CTA requires a Reporting Company (defined below) to file information regarding itself, its Beneficial Owners (defined below), and its Company Applicant (defined below). While enacted on January 1, 2021, practitioners waited for over a year and a half for the Financial Crimes Enforcement Network of the US Department of the Treasury (FinCEN) to publish final regulations regarding the CTA and its reporting requirements. On September 30, 2022, FinCEN issued such final regulations implementing the CTA’s beneficial ownership reporting requirements.
Reporting Companies formed before January 1, 2024 must file their initial reports with FinCEN by January 1, 2025, provided, that such Reporting Companies shall not be required to submit information regarding their initial Company Applicant. Reporting Companies formed on or after January 1, 2024 must file their initial reports with FinCEN within 30 days of formation. Any changes to a Reporting Company’s Beneficial Owners must be reported within 30 days of such change. Failure to comply with the CTA’s requirements may result in stern penalties.
- Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). The SECURE Act was signed into law by President Trump on December 20, 2019 as part of the Consolidated Appropriations Act. Under the prior law, an IRA owner had to begin withdrawing required minimum distributions (RMDs) from a traditional IRA by April 1 of the year following the year the account owner turned 70-1/2. The SECURE Act increased the required minimum distribution age for taking RMDs from traditional IRAs from 70 1/2 to 72. This change is effective for distributions required to be made after December 31, 2019, for individuals who attain age 70 1/2 after that date.
Additionally, the SECURE Act changed the distributions of retirement accounts after the death of an IRA account owner.
- The Inflation Reduction Act. On August 16, 2022, President Biden signed the IRA into law. In the estate-planning context, the IRA is significant more for what did not end up in the finalized version, rather than what did. For additional context, it is important to first note what was contained in the BBBA, which passed the House in November 2021. The BBBA contained provisions that would have: (i) decreased the estate, gift and GST tax exemptions; (ii) changed the grantor trust rules to significantly limit the wealth transfer technique of selling assets to an intentionally defective grantor trust; and (iii) eliminated valuation discounts for non-operating business property when valuing ownership interests in privately held companies. The BBBA also had provisions increasing the top marginal income tax rate and the top long-term capital gains rate. None of these proposals made it into the IRA. Additionally, another item missing from the IRA is the elimination of the current SALT limit. The current federal deduction of USD 10,000 for SALT was left in place, but it is important to be reminded that the limit is scheduled to sunset at the end of 2025.
Although estate planners and clients alike are able to breathe a little easier considering what was not in the IRA, it is important to keep in mind that the absence of certain proposals from the IRA does not foreclose the possibility of the next Congress trying to bring provisions similar to the BBBA in future tax-focused legislation.
- Treasury Priority Guidance. On November 4, 2022, Treasury released its 2022-2023 Priority Guidance Plan, which contains 205 guidance projects that are priorities for allocating Treasury and IRS resources during the 12-month period from July 1, 2022 through June 30, 2023. Of these 205 projects, the following 11 were included in the gifts and estates and trusts section:
- Final regulations under §§1014(f) and 6035 regarding basis consistency between estate and person acquiring property from decedent. Proposed and temporary regulations were published on March 4, 2016.
- Guidance regarding availability of §1014 basis adjustment at the death of the owner of a grantor trust described in §671 when the trust assets are not included in the owner’s gross estate for estate tax purposes.
- Regulations under §2010 addressing whether gifts that are includible in the gross estate should be excepted from the special rule of § 20.2010-1(c). Proposed regulations were published on April 27, 2022.
- Guidance on portability regulatory elections under §2010(c)(5)(A).
- Regulations under §2032(a) regarding imposition of restrictions on estate assets during the six-month alternate valuation period. Proposed regulations were published on November 18, 2011.
- Final regulations under §2053 regarding the deductibility of certain interest expenses and amounts paid under a personal guarantee, certain substantiation requirements, and the applicability of present value concepts in determining the amount deductible. Proposed regulations were published on June 28, 2022.
- Regulations under §20.2056A-2 for qualified domestic trust elections on estate tax returns, updating obsolete references.
- Regulations under §2632 providing guidance governing the allocation of GST exemption in the event the IRS grants relief under §2642(g), as well as addressing the definition of a GST trust under §2632(c), and providing ordering rules when GST exemption is allocated in excess of the transferor’s remaining exemption.
- Final regulations under §2642(g) describing the circumstances and procedures under which an extension of time will be granted to allocate GST exemption. Proposed regulations were published on April 17, 2008.
- Final regulations under §2801 regarding the tax imposed on U.S. citizens and residents who receive gifts or bequests from certain expatriates. Proposed regulations were published on September 10, 2015.
- Regulations under §7520 regarding the use of actuarial tables in valuing annuities, interests for life or terms of years, and remainder or reversionary interests. Proposed regulations were published on May 5, 2022.
1.2. Local legislative and regulatory developments
The TCJA made significant changes to the federal income tax, including by limiting the state and local taxes deduction (the “SALT” deduction) to USD 10,000 for jointly filing taxpayers, unmarried taxpayers, and trusts. In response to the cap on the SALT deduction, a number of states implemented workarounds to the SALT deduction limit by allowing residents to “contribute” to state-controlled charitable funds in exchange for SALT credits. Other states began to allow qualifying entities required to file tax returns within the state to make an election to pay a pass-through entity tax (PTET), as opposed to the income tax being passed through to the individuals who own the entity.
This chapter does not provide a detailed, state-by-state analysis of the PTET election or workaround, but rather provides guidance as to the complexity of this now widely accepted strategy. As the PTET appears, for now, to be the sole workaround to the TCJA’s SALT deduction cap, it is crucial for each individual taxpayer and entity to discuss the benefits and potential pitfalls of the election with experienced counsel prior to electing to opt in or out of this tax regime.
Illinois Notary Public Act – implementation still pending
Changes to the Illinois Notary Public Act (the “Notary Act”) were signed into law in July of 2021 as Public Act 102-160.
Electronic Wills and Remote Witnesses Act – Illinois an Early Adopter
On July 26, 2021, Governor Pritzker signed into law the Electronic Wills and Remote Witnesses Act (the “EWRWA”). In contrast to the Notary Act, the EWRWA became effective immediately upon signing. The EWRWA has two main purposes: (i) to allow electronic Wills to be executed in Illinois; and (ii) to provide a mechanism in Illinois for remotely witnessing Wills and other documents.
Illinois Real Property Transfer on Death Instrument Act
As of January 1, 2022, the amended Illinois Residential Real Property Transfer on Death Instrument Act (the “Act”) became effective. The amended Act most significantly expands the scope of the Act to incorporate commercial real estate within the class of real estate that can be transferred via a transfer on death instrument (TODI), as well as provides several updates related to the construction and implantation of TODIs.
Trailer bill for Illinois Trust Code
The Illinois Trust Code (ITC), as modified by the proposed “trailer bill” which was present in 2021, became effective January 1, 2022.
New York State estate taxation
For individuals dying on or after January 1, 2023, the basic exclusion amount will be equal to the federal basic exclusion amount indexed annually, but without regard to the passage of the Tax Cuts and Jobs Act of 2017.
Changes to New York Statutory Short Form Power of Attorney
As of June 13, 2021, New York’s Statutory Short Form Power of Attorney took on a different form. One of several changes that were enacted added a requirement that the principal’s signature be witnessed by two disinterested persons in addition to being notarized.
New York elective pass-through entity tax
Last year, an addition to the New York State Tax Law provided for an elective pass-through entity tax to allow eligible partnerships (including LLCs taxed as partnerships) and S corporations to make an annual election to be subject to taxes at rates equivalent to the current New York State personal income tax rates. Through making this election, a qualifying pass-through entity allows its owners to avoid the USD 10,000 limitation on state and local tax (SALT) deductions and such owners may fully deduct their New York State income taxes on their federal income tax return.
New York not-for-profit organization donor disclosure
In August of 2021, the New York Attorney General suspended the state requirement to collect donor disclosure information in annual filings of not-for-profit corporations. This decision followed the United States Supreme Court striking down a similar statute regarding California donor disclosure requirements.
In November of 2021, an amendment to the New York Executive Law was signed by Governor Hochul changing the donor disclosure requirements of not-for-profit organizations. The amendment prohibits the disclosure to the public of the names, addresses and telephone numbers of contributors to a not-for-profit organization and the amounts contributed by such contributors that are typically reported on financial disclosure reports of certain not-for-profit organizations.
New York - permanent regime. Remote online notarization (RON) is set to go into effect on January 31, 2023. The New York Secretary of State is expected to issue regulations on acceptable methods for authenticating the identity of a remote principal.
New York - temporary regime. Prior to January 31, 2023 and ceasing upon such date, any Notary Public currently registered with the New York Secretary of State may conduct remote ink notarization (RIN).
North Carolina. S.L. 2022-54, signed into law on July 8, 2022, creates a new permanent remote online notarization (RON) law in North Carolina. The law also restored emergency video notarization and remote witnessing, which had previously expired on December 31, 2021, as a stop-gap measure until the RON law is effective.
The year 2022 was lucrative for the Lone Star State. As of August, Texas has enjoyed USD 77.2 billion in tax revenue, a 25.6% increase from the same period last year, attributable to economic growth and record-high inflation. In addition, receipts remitted by the oil and gas mining sector saw an 80% increase due to increased energy prices resulting from inflation and the war in Ukraine. However, with a growing economy and a rapidly expanding job market, voters have begun to feel an economic burden. The housing market is surging, and many residents fear that so too will their already-high property taxes. As such, on May 7, 2022, Texan voters overwhelmingly approved two amendments to the state constitution aimed at lowering the cost of living. Proposition 1 imposed adjustments to school district tax limitations based on school district tax rate compression schedule, cutting school district property taxes for elderly homeowners and disabled homeowners. Proposition 2, which will take effect on January 1, 2023, permanently increased the residence homestead exemption for school districts from USD 25,000 to USD 40,000. Lawmakers estimate a savings of approximately USD175 per year for the average homeowner. Besides Proposition 1 and Proposition 2, 2022 has been largely uneventful by way of legislative updates.
Texas rule against perpetuities
Within the realm of trusts and estates, it is worth noting that last year, in 2021, Texas made sweeping reforms to its statutory rule against perpetuities. Previously, Texas employed the traditional rule (lives in being plus 21 years). Now, however, Texas Trust Code §112.036(c) provides that an interest in a trust must vest “not later than 300 years after the effective date of the trust, if the effective date of the trust is on or after September 1, 2021.” The effective date is the date the trust becomes irrevocable.
1.3. National case law developments
Estate of Levine v. Comm’r, T.C. Memo 2022-158
On February 28, 2022, the Tax Court issued a decision in Estate of Levine v. Comm’r, T.C. Memo 2022-158, which determined the viability of an economic benefit split-dollar transaction that reduced the size of the taxpayer’s gross estate. A split-dollar transaction generally involves two parties who come to an agreement regarding a life insurance policy with such agreement containing the details as to how the parties will pay for the premiums on the life insurance policy and how the insurance benefits will be enjoyed. Ultimately, in an opinion that relied heavily on the specific facts of the case, the Tax Court ruled in favor of the taxpayer on issues regarding IRC Sections 2036, 2038 and 2703.
1.4. Local case law developments
New York State residency
Matter of Obus v. New York State Tax Appeals Trib. 2022, N.Y. Slip. Op. 04206, June 30, 2022. Generally, an individual is a New York resident for tax purposes if that individual: (a) maintains a permanent place of abode in New York; and (b) is present in New York for at least 183 days during the tax year. In Matter of Obus v. New York State Tax Appeals Trib. 2022, N.Y. Slip. Op. 04206, June 30, 2022, a case before the Third Department of New York’s Appellate Division, the Court held that an individual who was domiciled in New Jersey and had a vacation home in New York was not a New York resident for tax purposes even though he spent more than 183 days in New York during the tax year.
Change to audit guidelines. In ascertaining whether an individual has a permanent place of abode in New York for purposes of determining whether a tax filing may be required, the requirement is that such permanent place of abode must have been maintained by the taxpayer for “substantially all of the taxable year.” The previous requirement was a period of at least 11 months. For tax years starting January 1, 2022, “substantially all of the year” will generally mean a period exceeding 10 months, thus shortening the trigger period for a tax filing.
1.5. Practice trends
As can be seen from the preceding and following sections of this chapter, estate planning has become so complicated that it is increasingly being done not just by planners alone, but in conjunction with those who have deep experience in estate and trust administration and in estate and trust litigation.
1.6. Pandemic related developments
The Coronavirus Aid, Relief and Economic Security Act (the “CARES” Act), the Consolidated Appropriations Act, and the American Rescue Plan of 2021
- The CARES Act — signed into law on March 27, 2020 — was a USD 2.2 trillion economic stimulus to counter the adverse economic impacts of COVID-19. The bill provided relief to businesses in the form of loans and tax benefits, and relief to individuals in the form of stimulus checks, unemployment benefits and tax benefits.
- The Consolidated Appropriations Act — a USD 2.3 trillion spending bill (made up of a USD 900 billion fiscal stimulus package and a USD 1.4 trillion government funding deal) — signed into law on December 27, 2020, building on the CARES Act;
- The American Rescue Plan Act of 2021 — a USD 1.9 trillion economic stimulus bill — signed into law on March 11, 2021, building on both the CARES Act and the Consolidated Appropriations Act; and then
- The Infrastructure Investment and Jobs Act – a USD 1.2 trillion bill (USD 550 billion in new spending) signed by President Biden on November 15, 2021.
Many such provisions have already expired but some of them remain.
Deferment of social security taxes. The CARES Act allowed an employer to defer paying the employer’s portion of an employee’s social security taxes from March 27, 2020 through the end of 2020. Half of the deferred taxes were due December 31, 2021 (extended to the next business day on Monday, January 3, 2022) and the remaining half is due on December 31, 2022 (again extended to January 3, 2023).
Charitable deductions. The CARES Act and then the Consolidated Appropriations Act temporarily allowed taxpayers claiming the standard deduction to also deduct (as an above-the-line deduction) USD 300 of cash contributions made to qualifying charitable organizations each year (USD 600 for those married filing jointly), but such charitable deductions by taxpayers claiming the standard deduction are no longer allowed beginning in tax year 2022.
Excess business loss limitation. The excess business loss limitation of IRC Section 461(l) prevents taxpayers, such as individuals, trusts and estates, from deducting a business loss in excess of certain threshold amounts, indexed for inflation. This limitation was temporarily repealed by the CARES Act, but returned January 1, 2021. The threshold amounts for the 2022 tax year (for purposes of the excess business loss limitation) are USD 270,000 for single filers or USD 540,000 for those married filing jointly.
Retirement plans and accounts. The CARES Act allowed qualified individuals (including those diagnosed with COVID-19 or experiencing adverse financial effects due to COVID-19) to withdraw up to USD 100,000 from qualified retirement plans in 2020, giving such individuals three years to recontribute the distribution (sometimes referred to as a “coronavirus-related distribution”) to the qualified plan to unwind the taxability of the distribution. The Consolidated Appropriations Act provided a similar withdrawal exemption through June 25, 2021. Accordingly, anyone who received a coronavirus-related distribution is still within the window to recontribute such distribution.
Otherwise, if a qualified individual does not recontribute the distribution to the qualified plan, the distribution is subject to federal income tax, which may be paid ratably over a three-year period or included entirely in income in the year of the distribution. To the extent that any part or all of the distribution is recontributed to the qualified plan during the three-year period, the income to the taxpayer (from the distribution) for the taxable year of the recontribution will be offset, to the extent possible, and any excess may be carried forward to a subsequent taxable year or carried back to a prior year by filing an amended return for that prior year.
2 . Estate and trust administration
2.1. National legislative and regulatory developments
Estate and trust administration in the United States is generally not handled at the national level.
2.2. Local legislative and regulatory developments
Duty in California to notify beneficiaries upon incompetency of last person holding power to revoke trust
Under California law, during the period of time when a trust is revocable, the trustee must provide periodic accountings to anyone who has the power to revoke the trust. In most circumstances, only the settlor holds the power to revoke, in which case the trustee has a duty to account solely to the settlor. During the incompetency of the settlor, prior law was unclear as to whom the trustee was obligated to provide accountings and information.
Effective January 1, 2022, California Probate Code sections 15800 and 16069 were amended to impose a new duty on a trustee to provide periodic accountings to each beneficiary who would be entitled to receive distributions of income or principal after the death of the settlor when either the settlor or the last person holding the power to revoke the trust is “incompetent”.
Revision to California Partition Action
The Uniform Partition of Heirs Property Act (the “Act”) became effective January 1, 2022 and added new sections to the California Code of Civil Procedure governing partition actions for real property held by tenants-in-common under specific circumstances.
Revisions to revocable transfer on death deed requirements and clarification of existing law
Revocable transfer on death deeds are governed by California Probate Code sections 5600 – 5698 and allow a transferor to transfer ownership of real property to a designated beneficiary upon the transferor’s death, while avoiding the probate process and without needing to execute a will or trust. The transfer on death deed is a relatively recent statutory creation, coming into existence in January 2016. While revocable transfer on death deeds are inherently appealing due to the apparent easy avoidance of a costly and time-consuming probate administration or the costs associated with creating a revocable trust, since its enactment, critics of California’s transfer on death deed statutory scheme have argued that the statutory procedures, which did not initially require witnesses or contain notice requirements, were ripe for abuse. The statute also failed to include provisions for correcting mistakes discovered after the death of the transferor. In response to these criticisms, the California Law Revision Commission reviewed the statutes, made recommendations and proposed substantive changes, which passed into law and became effective as of January 1, 2022.
Revisions to Spendthrift Trust Provisions
Assembly Bill No. 1866 (AB 1866) was signed into law on June 21, 2022 and will add a new section to the California Probate Code effective January 1, 2023, clarifying that a trustee’s discretionary authority to reimburse a settlor for income taxes paid by the settlor does not allow a creditor to reach into the trust. The bill adds section 15304 subsection (c) to the California Probate Code, which provides “for purposes of this chapter the settlor shall not be considered to be a beneficiary of an irrevocable trust created by the settlor solely by reason of a discretionary authority vested in the trustee to pay directly or reimburse the settlor for any federal or state income tax on trust income or principal that is payable by the settlor, and a transferee or creditor of the settlor shall not be entitled to reach any amount solely by a reason of that discretionary authority.”
Increase to small estate probate procedures
Assembly Bill 473 added section 890 to the California Probate Code which requires the Judicial Council, beginning April 1, 2022, and every three years thereafter, to adjust the statutory amounts of the property values used to determine eligibility for various procedures to succeed to a decedent’s interest in property without administration.
Amendment of Powers Of Attorney For Health Care Article of the Illinois POA Act
On May 13, 2022, Governor Pritzker signed into law an amended Powers Of Attorney For Health Care Article of the Illinois Power of Attorney Act, to be effective January 1, 2023. The primary change that the amended Article enacts is that, in the amended Illinois statutory short form power of attorney for health care (Form Health Care POA), there is a new provision allowing electronic presentation of a Form Health Care POA as proof of agency.
2.3. National case law developments
Estate and trust administration in the United States is generally not handled at the national level.
2.4. Local case law developments
The applicable cases are also relevant for litigation developments so are included in Section 2.2 of this chapter.
2.5. Practice trends
As can be seen from the preceding and following sections of this chapter, estate and trust administration has become so complicated that it is increasingly being done not just by administrators alone, but in conjunction with those who have deep experience in estate planning and in estate and trust litigation.
2.6. Pandemic related developments
Refer to the local legislative developments of this chapter (Section 1.2) for new laws on remote witnessing and remote notarization, all of which were prompted by the pandemic.
3 . Estate and trust litigation and controversy
3.1. National legislative and regulatory developments
Because estate and trust administration in the United States is generally not handled at the national level, litigation tends not to be at the national level.
3.2. Local legislative and regulatory developments
None of note on the litigation front.
3.3. National case law developments
Because estate and trust administration in the United States is generally not handled at the national level, litigation tends not to be at the national level.
3.4. Local case law developments
Circuit split concerning procedure for trust modification
The California legislature created California Probate Code sections 15401 and 15402 in 1986, codifying common law procedures for revocation and modification of California trusts. Prior to the enactment of these sections, California’s common law doctrine held that the power to amend a trust was not a standalone power but rather was derived from the power to revoke a trust, which inherently included a power to modify a trust. Following the enactment of Sections 15401 and 15402, each power has its own statutory authority. However, notwithstanding the seemingly straightforward provision of section 15402, a dispute has developed among California appellate courts concerning the procedure for modifying revocable trusts. It is expected that this split will be resolved by a pending appeal to the California Supreme Court.
United States v. Allison, No. 120CV00269DADHBK, 2022 WL 583573 (E.D. Cal. 2022)
In Allison, decedent created a revocable inter vivos trust approximately two weeks before his death. Defendants, as co-trustees of decedent’s trust, transferred certain assets totaling USD 518,750 to the trust. On or about February 27, 2007, defendants filed an estate tax return on behalf of decedent’s estate. The estate tax return reported that the total gross estate value at the date of decedent’s death was USD 1,663,242. Defendants subsequently transferred and/or distributed all the property of the trust and the estate, and the tax liability reported on the estate tax return — amounting to USD 192,425 — was paid in full.
Three years later, on or about February 9, 2010, defendants, acting as the estate’s representatives and as trustees, executed a Waiver of Restrictions on Assessments agreeing to an immediate assessment of USD 96,808 in additional tax on the estate (the “additional assessment”).
The additional tax assessments related to disallowed deductions or a recharacterization of a payment as a non-deductible transfer. The court found the defendants personally liable under IRC section 6324(a)(2) for the unpaid estate tax liabilities up to the value of property held in decedent’s trust at the time of his death, even though the trust was fully distributed.
Corcoran v. Rotheimer, 2022 IL App (1st) 201374 (June 9, 2022)
In this case, a father (“Father”) owning a beneficial interest in a parcel of land (held by an Illinois land trust) had amended the planned succession of such beneficial interest multiple times over his decades of ownership (most notably changing it from 100% passing to two of his children as joint tenants with rights of survivorship to 100% passing to a limited liability company (an “LLC”) where Father’s revocable trust was the sole member). Importantly, Father’s revocable trust included all three of his children as beneficiaries (rather than just the two children, above) and named the third child as successor Trustee after Father.
Father passed in 2015, and the third child (i.e., the child that receives assets under Father’s revocable trust but not under the previously executed beneficiary designation described above), as Trustee, brought an action for declaratory judgment in favor of Father’s assignment to the LLC. The two children originally designated as beneficiaries (“Original Beneficiaries”) contested this, arguing that the assignment was not in compliance with the land trust’s requirements for valid transfers, including that Father did not file (or “lodge”) such assignment with the land trustee. The trial court granted Trustee’s motion and denied Original Beneficiaries’ motion. Original Beneficiaries appealed.
The appellate court affirmed the Trustee’s motion for summary judgment. The appellate court held that the assignment was not invalidated by Father’s failure to lodge the assignment with the land trustee.
Palm v. Sergi, 2022 IL App (2d) 210057 (June 13, 2022)
In Palm, two spouses each created a revocable trust of which the respective grantor was the sole beneficiary during their lifetime. Under the terms of the two reciprocal trusts, upon the grantor’s death, the surviving spouse was entitled to receive distributions during the surviving spouse’s lifetime, with the remainder to be distributed equally among the grantors’ two children upon the surviving spouse’s death. The spouses’ trusts both named the non-grantor spouse as an initial Co‑Trustee with the grantor spouse.
Husband’s Trust was the owner of shares of stock and eventually sold said shares in exchange for a promissory note in the amount of USD 6,400,000 (the “Note”). Husband, as Co-Trustee of Husband’s Trust, assigned a 20% interest in the Note to Wife’s Trust and payments on the Note were initially deposited 80% to a separate bank account for Husband’s Trust and 20% to a separate bank account for Wife’s Trust.
Subsequently, Husband, unilaterally and in his capacity as a Co-Trustee of Wife’s Trust, redirected the monthly payments on the Note so that 100% of the payments on the Note were deposited into Husband’s personal bank account, including the 20% that formerly went to the Wife’s Trust account. Husband then divested the Wife’s Trust’s interest in the Note to purchase a business interest, without written authorization from Wife as Co-Trustee of Wife’s Trust.
On appeal, the appellate court found that the trial court erred when it found that Husband was authorized to take unilateral actions to divert and use trust assets. The appellate court remanded the case back to the trial court based on lack of evidence in the record to show that Wife had any knowledge of Husband’s unilateral actions and suggested the discovery rule would apply to the date when Wife’s sister and other beneficiaries of Wife’s Trust learned of Husband’s actions.
The appellate court also found Wife’s sister (acting as agent to Wife’s Trust and eventually Co‑Trustee) did, at all times, have standing to sue a former trustee as Wife’s Trust was always the real party in interest. The appellate court indicated that in this case, Wife’s sister as an agent and Trustee, was always acting on behalf of Wife’s Trust and the trust’s beneficiaries.
In re Estate of John W. McDonald III, 2022 IL 126956 (April 21, 2022)
In McDonald, the Decedent prior to his death had been adjudicated disabled and the Decedent’s brother was appointed as the Decedent’s plenary guardian. Following the adjudication and five months prior to the Decedent’s death, the Decedent engaged in a marriage ceremony with Decedent’s alleged spouse. Upon Decedent’s brother filing a petition for letters of administration upon Decedent’s death, the Decedent’s alleged spouse intervened. The Decedent’s brother served as the Decedent’s plenary guardian at the time the claimed marriage occurred, and the Decedent’s brother disputed the legitimacy of the marriage (and therefore, the Decedent’s alleged spouse’s claims to the Decedent’s estate) based on the fact that the marriage was entered into without the Decedent’s brother’s knowledge as guardian, or the knowledge of the probate court under which the Decedent was a ward. The Decedent’s brother argued the marriage was void from its inception because the Decedent was a ward under a plenary guardianship at the time of the ceremony and lacked the capacity to enter into a valid marriage because the probate court never determined the marriage to be in the Decedent’s “best interest” as required by Section 11a-17(a-10) of the Probate Act of 1975 (the “Probate Act”).
The Supreme Court reversed the appellate court’s ruling, holding that under the Probate Act, a ward who wishes to enter into a marriage may do so only with the consent of his guardian.
Providence Bank and Trust Company v. Raoul, 2022 IL App (3d) 210037 (March 4, 2022)
In this case, an appellate court affirmed a trial court’s ruling in favor of the Executor of an estate, who sought to make an Illinois qualified terminable interest property election (QTIP election) on behalf of the estate. The primary points of contention were, in the context of filing an amended Illinois estate tax return: (i) whether a QTIP election first made on an original estate tax return can be modified in an amended return; and (ii) if so, whether such a modified QTIP election is effective when made after the (extended) deadline for the original estate tax return.
On the judicial front, the Texas Supreme Court ruled on whether beneficiaries of a class trust automatically have standing to sue the trustees. In the case of Berry v. Berry (65 Tex. Sup. Ct. J. 997 (2022)), if the beneficiaries are unnamed class beneficiaries, Berry reminds us that such beneficiaries do not have carte blanche standing to sue. Rather, counsel must be sure to specifically lay out the particular purpose for which the beneficiary is suing, as well as the specific interest the beneficiary has in the suit.
3.5. Practice trends
As can be seen from the preceding and following sections of this chapter, estate and trust litigation has become so complicated that it is increasingly being done not just by fiduciary litigators alone, but in conjunction with those who have deep experience in estate and tax planning and in estate and trust administration.
3.6. Pandemic related developments
The federal and 50 states court systems addressed the pandemic in radically different ways. Some closed, and some never closed. Some functioned, remotely, some continue to function remotely, some were always in person, and some have resumed being in person. Almost all are severely backlogged as a result of the pandemic.
4 . Frequently asked questions
1. What is the substantial presence test for the purposes of avoiding worldwide U.S. income taxation?
Individuals satisfy the substantial presence test if they are present in the U.S. for a period of 183 days or more in any given year. If the individual is not physically present in the U.S. for 183 days or more in any given year, but is present in a given year for at least 31 days and the individual’s presence in that year and the two preceding years equals a weighted aggregate of 183 days or more, then the individual is also deemed a resident for that year and is subject to U.S. income tax for such year. An individual will be subject to U.S. income tax on the first day of the year in which the individual meets the 183 days test.
For the purposes of this calculation: (1) each day in the first preceding year counts as only ⅓ of a day and each day in the second preceding year counts as only ⅙ of a day; and (2) partial days in the U.S., such as travel days, count as full days.
By way of example, the following calculation will apply to an individual who has spent 10 days in the U.S. during Year 1, 40 days during Year 2, and 25 days during Year 3:
|By year:||Total day count:||Days left:|
Year 1: ⅙ × 10 = 1.66 days.
Year 2: ⅓ × 40 = 13.33 days.
Year 3: 25 days.
1.66 + 13.33 + 25 = 39.99
|183 – 40 = 143|
Thus, the individual can return to the U.S. in Year 3 and remain for up to 142 days without becoming a U.S. resident for income tax purposes. If the individual returns to the U.S. in Year 3 and stays for more than 142 days, the individual’s residency starting date will be the first day during Year 3 in which the individual entered the U.S. As a general rule of thumb, provided one does not spend more than 122 days in the U.S. in any given year, one will not meet the substantial presence test.
2. How long do I have to give up my green card without expatriation exposure?
Individuals who terminate their long-term permanent residency status (a green card held for at least eight of the 15 tax years preceding expatriation) after June 17, 2008, and who are “covered expatriates”, are treated like citizens who give up their citizenship and are subject to a mark-to-market exit tax on their worldwide property, and certain gifts and bequests that they make after expatriating will also be subject to taxes.
It is therefore of crucial importance for green card holders who are considering giving up their green card to do so effectively before holding the green card for eight years in order to avoid being subject to the onerous expatriation rules, discussed below.
For purposes of determining the eight-year period, any portion of a tax year is considered a full year. By way of example, if an individual obtained a green card on December 1, 2016, and relinquishes the green card on January 1, 2023, the individual will have held the green card for a portion of eight tax years and will therefore be considered a long-term resident. It should be noted that there may or may not be re-immigration consequences to surrendering one’s green card after eight years.
Notably, residence in the U.S. under any other immigration status, such as a work visa, does not count towards establishing one’s long-term resident status for purposes of the expatriation rules.
Moreover, in order to no longer be considered a domiciliary of the U.S., it is not enough to relinquish one’s green card. One must also establish a domicile elsewhere.
For further information, see Katten’s extensive client advisory at www.katten.com/2022-year-end-estate-planning-advisory.