I. Tax changes, the latest developments.

The Trusts and Estates community is awash with rumors of the tax changes being proposed in Washington. Every day, the inbox is filled with rumors, invitations to webinars on planning opportunities, and the “dire” consequences of some of the proposals.  The lobbyists are more numerous in Washington than people with opinions on the internet. Some examples:

  1. Democrats’ tax plan upends estate planning using trusts with life insurance:

Financial Planning News – Life Insurance, Trusts and Tax Benefits

“The tax plan taking shape in Congress would strangle a strategy widely used by the wealthy to shield their estates from taxes and pass on major wealth to heirs. Specifically, it would erase the long-standing benefit of keeping life insurance in certain trusts, by making its value subject to the 40% estate tax when the policy owner dies. That’s a huge change: Currently, the trusts and their assets aren’t subject to the levy.

What does this mean? Some life insurance policies, when ”owned” by certain types of trusts have the ability to pass the proceeds of the policy to the designated beneficiaries entirely free of estate or gift taxation. This proposal would change that result. Will it become law? Wait and see.

  1. One More Scary Estate Tax Change And New Action Items For Many Affluent Taxpayers

Forbes.com Estate Tax Changes

“Many taxpayers and their advisors have been rushing to establish or fully fund special irrevocable trusts that can both avoid federal estate tax and purchase from or exchange assets with the Grantor at no income tax cost.

“These “Defective Grantor Trusts” can pay for appreciating assets by giving long-term low interest promissory notes, while the Grantor/contributor pays the income tax attributable to the trust income.”

What does this mean? Well, let’s let Forbes describe the concept via an example: “I may have established a trust that has $2,000,000 worth of appreciated stock that I would like to buy back from the trust before my death, so that the stock can get a new fair market value income tax basis when I die. I therefore give the trust $2,000,000 cash or other high basis assets, and the trust transfers the stock to me. . .Under present law, this can be accomplished income tax free; however if the new law is amended to provide for the above then after the date of enactment of the new law, this will be treated as if I sold the stock for $2,000,000 at the time of the sale.”

  1. Estate Tax Law Changes – What To Do Now

Forbes.com Estate Tax Changes

“Under the new rules, the funding of a GRAT after the date that this law would be enacted could cause income tax on the excess of the fair market value of the assets placed into the GRAT over the tax basis of such assets, and the excess value remaining after the GRAT term may be considered a gift when distributed, notwithstanding that Internal Revenue Code Section 2702 provides under present law that no gift results when the actuarial value of the annual payments made to the Grantor equals the value of assets placed into the Trust.”

What does this mean? The GRAT, or Grantor Retained Annuity Trust, is a primary vehicle for high net worth individuals to achieve vast income, estate, and gift tax savings. The article describes the reasons and the changes that might remove those advantages.

  1. Lobbyists shielded carried interest from Biden’s tax hikes, top White House economist says


“Fierce lobbying by the private equity industry is the reason the carried interest tax rate is not included in President Joe Biden’s planned tax hikes, top White House economist Jared Bernstein told CNBC on Thursday.

“Biden and congressional Democrats are hoping to pass a sprawling budget, much of which is paid for with revenue from a laundry list of tax changes, including higher rates for the wealthiest Americans and corporations.

“But closing the so-called “carried interest loophole” by taxing private equity profits at personal income rates, instead of at lower capital gains rates, is not on that list.”

What does this mean? It means the lobbyists have already won one. The concept is an easy one to express (or perhaps that merely displays this writer’s ignorance): should the profits of private equity funds be taxed as capital gains (lower) or as regular income (higher)? The CNBC article describes Andrew Sorkin’s shock at this development, “For private equity firms, keeping their tax rate at the lower capital gains level is their top priority in Washington and has been for years. . .The private equity industry has spent millions of dollars on lobbyists to fight any effort to change how it is taxed. And so far, the plan appears to be working. . .The industry has contributed hundreds of millions of dollars to congressional campaigns, $600 million total over the past decade, according to a New York Times analysis earlier this year.”

  1. For a useful review of all the proposed changes to the tax law, see this recent article from The National Law Review: National Law Review

II. More news on the personal impact of inherited wealth

It’s not all about taxes. Too many estate planners give little attention to the costly litigation that can result from planning focused exclusively on tax efficiency instead of family dynamics nor do they discuss with their high net worth clients the personal impact of inherited wealth may have on their families. A recent article from Yahoo Finance describes the efforts made by some very wealthy individuals to provide for their families, but not too much. “You can never be too rich or too thin,” said the late Wallis Simpson (she of Duchess of Windsor and abdicating kings fame). Evidently, Warren Buffett and Kevin O’Leary (two very high net worth individuals) disagree and describe their efforts to make sure their children are secure but not spoiled. Mr. Buffet has a pithy way of putting it:

“After much observation of super-wealthy families, here’s my recommendation: Leave the children enough so that they can do anything but not enough that they can do nothing.”

The article, “Warren Buffet, Kevin O’Leary and Other Millionaires are Concerned About Inheritances” The link:  Finance.com News

Estate planners and corporate trust officers (not to mention trusts and estates litigators) have many horror stories about the harmful impact of inherited wealth or the result of careless planning that fails to avoid litigation. This is not a problem reserved for the high net worth individual. Every parent with a house owned for decades must plan for what happens when he or she dies and the children squabble over the house (one is living there, the others do not want their share of the house frozen in place to support the residential sibling). They also have horror stories of relatively modest estates being consumed by litigation when a sibling is favored over another sibling and the estate plan does not include techniques to minimize the chances of such litigation.

Somewhat along these lines, Open Culture is a fine website that lists free cultural resources on the internet. Here is an entry that discusses the passing of wealth across the generations. Openculture.com Mahatma Gandhis List 7 social sins. It describes the Mahatma Gandhi formulation of the seven “social sins.” Before it does, however, it travels back in time to the first formulation of the seven deadly sins: “[i]n 590 CE, Pope Gregory I unveiled a list of the Seven Deadly Sins – lust, gluttony, greed, sloth, wrath, envy and pride – as a way to keep the flock from straying into the thorny fields of ungodliness. These days though, for all but the most devout, Pope Gregory’s list seems less like a means to moral behavior than a description of cable TV programming.” This list of the seven social sins was published by Mohandas K. Gandhi in his weekly newspaper Young India on October 22, 1925:

Wealth without work.

Pleasure without conscience.

Knowledge without character.

Commerce without morality.

Science without humanity.

Religion without sacrifice.

Politics without principle.

There used to be a saying in the Surrogate’s Court, “blood may be thicker than water, but money is thicker than blood.” We prove that maxim every day as practitioners in Surrogate’s Court.  The estate of the late great Jimi Hendrix continues to be embroiled in a family dispute, this time over the use of his name. The superb guitarist and composer died without a Will, making his father the sole beneficiary of his estate. That did not stop his brother and other family members from attempting to take advantage of the estate that is now valued at $175 million. The article from the Guardian describes the latest skirmish in a trademark dispute: The Guardian.com Jimi Hendrix Family Dispute. If you are interested, here is the recent decision from the Southern District of New York: Casetext.com Hendrix llc v Hendrix

And speaking of Jimi Hendrix, it is gratifying to learn of a famous musician who does not recognize artificial boundaries in music. Violinist Nigel Kennedy canceled a concert at the Royal Albert Hall in London after Classic FM stopped him from including a Hendrix tribute. Again, from The Guardian:

“Violinist Nigel Kennedy has pulled out of a concert at the Royal Albert Hall with only days to go after accusing the radio station Classic FM of preventing him from performing a Jimi Hendrix tribute.

“Kennedy said the “culturally prejudiced” decision amounted to “musical segregation”, with the station he now calls “Jurassic FM” preferring him to play Vivaldi’s Four Seasons in Wednesday’s show.

“He intended to play some Hendrix with Chineke!, an orchestra of young black and ethnically diverse musicians, until he was told the rock star was “not suitable” for the station’s desired audience. Classic FM, which was hosting the event, preferred for him to play Vivaldi’s Four Seasons.” The Guardian.com Music Violinist Nigel Kennedy Cancels Concert

Finally, the late Nat Hentoff, human rights activist, writer, and historian of American Classical music (i.e., Jazz) was passing the Fillmore East one evening when he was shocked to see none other than Duke Ellington leaving the Jimi Hendrix concert. Nat asked Duke, “What are you doing here?” The maestro replied, “man, if it sounds good it is good.” The lesson here, one that Nigel Kennedy would and has approved with regard to musical snobbery, is that if you can’t swing with Oscar Peterson, then you don’t deserve to swing with Johann Sebastian Bach. And vice versa.