TCJA: Estate & Trust Planning Update

HOST: Welcome to the Cherry Bekaert Tax Beat, a conversation about tax that matters. Welcome to this edition of the Cherry Bekaert Tax Beat podcast. 

Today's topic is an Estate, Gift & Trust update. It is never easy to discuss topics involving your demise or the demise of your loved ones, but it is very important to plan. 

This planning involves how you want your estate treated and, more germane to this conversation, the tax planning implications. It is important to take time at the end of the year to engage in estate planning. 

The extraordinary lifetime exclusion amount is set to expire at the end of 2025. This is bringing a lot of discussion into the field. 

The lifetime exclusion in 2026 may be half of the amount from just one year prior. While there is still some time to deal with this issue, time will go by faster than we know. 

Joining today’s conversation, I have Mike Kirkman, Partner and leader of our Estate, Gift & Trust Services team, and Katie Sims, a Manager with that same team. Mike, how are you doing today?

MIKE KIRKMAN: I am doing good, Brooks. I am glad to be here. 

HOST: Whereabouts are you calling in from today?

MIKE KIRKMAN: I am calling in from Charlotte, North Carolina. 

HOST: And Katie, how are you doing?

KATIE SIMS: I am doing great. I hope everyone else is as well. 

HOST: Where are you calling in from today?

KATIE SIMS: I am calling from Charlotte, North Carolina as well. 

HOST: As always, joining me today is my partner in crime, Sarah McGregor. Sarah, how is life treating you?

SARAH MCGREGOR: Life from the center of the tax universe here in Greenville, South Carolina, is all good. 

HOST: Who do you like for the national football championship? I want to get you on record right now. 

SARAH MCGREGOR: It is very hard for me to pull against an SEC team. In this case, I am going to go with Michigan. 

HOST: I did not ask who you were pulling for; I asked who you think is going to win. It would have been fun if we had more teams this year to get Georgia and Ohio State in there, but it is what it is. I feel sorry for our ACC brethren, Florida State. 

Just like the estate tax, we cannot solve the labyrinth of the NCAA selection criteria. Let us move on to today's topic. 

The Tax Cuts and Jobs Act (TCJA) of 2017 brought significant changes to estate and gift tax planning. Under the TCJA, the lifetime exclusion amount was raised to $10 million, adjusted for inflation, and can be ported over to a surviving spouse. 

Nearly $26 million of asset value can be moved from a couple’s estate to beneficiaries free of estate tax when considering inflation adjustments and portability. The next $1 of asset value is hit with a 40% tax. 

Thoughtfully moving assets out of the estate and into ownership control takes planning, time, and attention to detail. This often involves many lawyers and accountants. 

Katie, give us a quick overview of where we are in 2023 and 2024 regarding annual gift and estate exclusions. 

KATIE SIMS: For tax year 2023, the gift tax annual exclusion amount is $17,000 per person. In 2024, that amount will rise to $18,000. 

For the lifetime gifting and estate tax exclusion, for taxpayers dying in 2023, the amount is $12,920,000 per person. In 2024, that amount will rise to $13,610,000 per person, or roughly $27.22 million combined for married couples. 

HOST: There are two more years before the TCJA provisions expire. Why is it important to address planning now?

KATIE SIMS: It is very important to start planning now because at the strike of midnight on December 31, 2025, the estate and gift tax lifetime exclusion will sunset from $13.6 million to an estimated $7 million per person. 

This is a drastic difference for taxpayers who previously thought they were nowhere near the lifetime exemption amount. They may need to analyze their estate and start planning for these changes now. 

It is important to start now rather than later because many of these plans require outside assistance. This includes updating corporate or operating agreements and drafting documents like wills or trusts. 

With any gifting, we also need to consider valuations for adequate disclosure. Each of these action items requires time to execute and a team of people to help. 

With so many taxpayers affected by this sunset, it is important that we get started as soon as we can. 

SARAH MCGREGOR: I am guessing you, Mike, and the rest of the Estate, Gift & Trust team are already giving up your vacations for the next two years to help clients get ready. 

KATIE SIMS: Gladly. We are quite busy. 

SARAH MCGREGOR: I imagine so. Getting appraisals, attorney time, and your time for planning will become less available as we get closer to that deadline. 

Mike, shifting gears, we saw a number of interesting Tax Court cases this year dealing with estates. Would you like to talk about the Schlapfer case? For reference, that is T.C. Memo. 2023-65.

MIKE KIRKMAN: That is a great lead-in to what Katie mentioned regarding valuations and adequate disclosure. This case focused on what constitutes adequate disclosure on a gift tax return. 

Adequate disclosure is required to provide the IRS with information to determine how a gift valuation was calculated. This can be a qualified appraisal, though it does not always have to be. 

The regulations have five elements dealing with adequate disclosure. The consequence of not having adequate disclosure is that the three-year statute of limitations does not run. 

This means the IRS can come back at any time and adjust the gift amount. While the IRS has always taken a strict approach, the Court held in this case that the regulations should be viewed as a guide rather than a strict checklist. 

In this case, the taxpayer provided information both as part of the return and separately to the service. The Court held this was adequate disclosure, making it a very favorable case for the taxpayer. 

SARAH MCGREGOR: Let us move to the Estate of Cecil case. That is interesting because of the location of the taxpayer. 

MIKE KIRKMAN: If anyone listening has been to the Biltmore Estate in Asheville, North Carolina, they know it is a beautiful place. The Vanderbilt family still owns the property, and it has been in the family for many years. 

This case centered around a valuation issue. The Biltmore is the largest residence in the U.S. Gifts of shares were made to family members, and a valuation was determined. 

The IRS argued the valuation should be based on the liquidation value of the assets, which was approximately $150 to $160 million. However, the taxpayer based the valuation on the cash flow of operations, such as tours, shops, and the winery. 

The Tax Court agreed with the Biltmore family because there were significant restrictions on the ability to sell the property. The valuation difference was over $100 million. 

Importantly, both the IRS and the taxpayer's experts agreed that if basing valuation on cash flow, it should be tax-affected. This means the valuation is net of the income tax on the property’s actual income. 

SARAH MCGREGOR: So, if operations turned out $10 million a year and the tax effect was 40%, the valuation is based on the net $6 million rather than the gross $10 million. That is very helpful. 

MIKE KIRKMAN: Absolutely. It was a nice win for the taxpayers. 

SARAH MCGREGOR: Katie, while we are talking about trusts, what sort of planning should people consider? Is there still an ability to make changes after year-end?

KATIE SIMS: Yes, that is correct. As with any tax year, we want to look at the potential to make distributions to beneficiaries either by year-end or within the first 65 days of the next taxable year. 

Trusts reach the highest tax bracket at only $14,450 of taxable income for 2023. We encourage trustees to make distributions to beneficiaries in lower tax brackets if applicable. 

For trusts that grant substitution powers, we can look at swapping assets of equivalent value. Swapping low-appreciation assets for high-appreciation assets can help move assets back into the estate to receive a step-up in basis upon death. 

Additionally, for rapidly appreciating assets, it may be appropriate to swap them for assets that have leveled off or declined in value. This removes highly appreciated assets from the estate. 

Finally, sitting down to review existing trust agreements annually is a great practice. This ensures your trusts are still in line with your original goals, as life and tax laws change quickly. 

SARAH MCGREGOR: Children grow up, there are new grandchildren, and education needs change. What was a good trust provision three to five years ago might not be suitable now. 

KATIE SIMS: Definitely. 

HOST: Mike, let us go to one of our favorite topics: SLATs. We could spend a whole podcast on them, but give us a quick overview of what they accomplish. 

MIKE KIRKMAN: A SLAT is a Spousal Lifetime Access Trust. As Katie mentioned, the exemption is at an all-time high of over $13 million. 

When the exemption was $600,000, moving it out of an estate was one thing. Moving $13 million is a much larger conversation. 

Wealthy families want to utilize their income stream and assets to enjoy the results of their hard work. A SLAT is a trust created by a donor spouse for the benefit of the other spouse and future generations. 

By moving wealth into a trust where the spouse is a beneficiary, it feels like moving money from your right pocket to your left pocket. The donor spouse indirectly maintains access to the income stream through the beneficiary spouse. 

You must be careful about the Reciprocal Trust Doctrine. If both spouses create identical trusts for each other, the IRS may collapse them, as seen in the Grace case. 

HOST: It is an excellent estate planning technique, and sooner or later, someone might try to put more severe restrictions on it. In this period of high exemptions, I am very enthusiastic about using SLATs. 

Mike, let us discuss the Estate of Hoensheid. 

MIKE KIRKMAN: This was a case where a family wanted to make gifts of closely held stock to a charitable organization, specifically a Donor-Advised Fund (DAF). 

Before the gift was made, there were already plans in place to sell the company. The Tax Court viewed the timing of the gift and the agreement to sell as too close together. 

The Court applied the assignment of income rule. If gifting shares is not done properly before a sale, the transaction can be collapsed. 

In this case, the charitable deduction was disallowed. The income from the sale was passed back to the taxpayer, who had to pay 100% of the income tax on the full sale price. 

If you are contemplating the sale of a company and making a gift, you must do a lot of planning to ensure the details are handled correctly. 

SARAH MCGREGOR: This is a clear example of what not to do. It highlights the importance of doing things early. 

Mike and Katie, we have talked about planning for large estates, but what should those with more modest estates be thinking about?

KATIE SIMS: While we focus on federal thresholds, there are 17 states and Washington, D.C., that have estate or inheritance taxes with much lower thresholds. Staying up to date on your resident state’s laws will help you avoid surprises. 

MIKE KIRKMAN: Even if a taxable estate does not exist today under the $26 million exclusion, that number will drop dramatically unless Congress acts. 

Utilizing planning today will prevent someone from finding themselves in a taxable situation later. With asset growth over a lifetime, even a $7 million exclusion can be exceeded. 

HOST: One last question, Mike. What do you anticipate clients will need help with in the next few years?

MIKE KIRKMAN: The big elephant in the room is the exclusion sunsetting in 2026. You really need to start early because these strategies and valuations do not occur overnight. 

If we wait until the middle of 2025, it will be difficult to find attorneys and valuation experts who are not already extremely busy. 

HOST: Let us move to final comments. Katie, do you have any final words of wisdom?

KATIE SIMS: I advise clients to take advantage of annual gift tax exclusions, charitable giving, and direct tuition or medical expense payments. These are quick ways to move assets out of your estate without requiring complex technical advice. 

MIKE KIRKMAN: I would add that grandparents can fund 529 plans for grandkids. It is not considered a taxable transfer, and you can maximize this by front-loading five years of exclusions at once. 

If you have several grandchildren, you can move a significant amount of money out of your estate through very straightforward techniques. 

SARAH MCGREGOR: We talk about needing time for attorneys and appraisers, but individuals also need time to think about gifting away parts of their estates and letting go of control. 

HOST: For me, I am going to revisit SLATs. If you are concerned about a taxable estate or asset protection from lawsuits or medical catastrophes, but you still want access to that money, SLATs are a beautiful technique. 

That is a wrap on today’s discussion about tax planning for estates, gifts, and trusts. Thank you for listening. 

As a quick disclaimer, we are not providing tax advice on this podcast. Please consult with your tax advisor, hopefully at Cherry Bekaert, regarding your specific issues. 

Check out the firm’s website at cbh.com for the latest guidance. This concludes today’s podcast. Please like, share, and subscribe. 

Thank you, Katie and Mike. Thank you to our listeners for spending your time with us. Have great holidays.