get a second basis step-up years later . Couple this with a DSUE ( a deceased spousal unused exclusion ) election and you have performed income-tax magic while also structuring a pretty reasonable estate plan .
Alert : In its Priority Guidance Plan ( also known as the “ Green Book ,”) the IRS has proposed clarifying that a stepup in basis adjustment will not apply at the death of a grantor trust owner unless the trust assets are included in the grantor ’ s estate . This controversial issue has been around for 20 years , ever since an article published in 2002 argued that assets in a grantor trust should enjoy a stepup in tax basis , even if it ’ s not included in the grantor ’ s estate . The IRS has been notably quiet about the income tax effects of an installment sale to a defective grantor trust , but few , if any , responsible tax attorneys or estate planners think there is a step-up in basis for grantor trust assets if the assets are not included in the grantor ’ s estate . However , a member of Congress has recently made this non-issue into a political issue , so the IRS apparently feels obligated to address it .
GRAT Gyrations The IRS really doesn ’ t like grantor-retained annuity trusts very much . Ironically , GRATs are expressly allowed by statute and not particularly abusive . They are very effective at moving assets out of an estate , they are predictable and lowrisk if set up correctly , and they can be fully funded without making any taxable gifts . But the IRS has been attacking them hard for a variety of perceived abuses .
In one recent U . S . Tax Court case , Daniel R . Baty v . the Commissioner of Internal Revenue , the IRS attacked a contribution of publicly traded stock to a GRAT where the taxpayer used the current market value of the stock , yet as an insider was personally aware of a pending merger / acquisition negotiation that would greatly increase the value . The case was weird from the outset because the IRS essentially argued that the taxpayer should take into account nonpublic information — which would arguably violate federal securities laws ! The IRS eventually conceded .
However , in its Chief Counsel Advice ( CCA202152018 ), the IRS went atomic after a taxpayer used a low valuation of private company stock contributed to a GRAT while being personally aware of a pending acquisition at a higher price . ( Almost incomprehensibly , the same taxpayer later made charitable contributions of stock and used a higher valuation .) Instead of challenging the valuation and making adjustments , the IRS argued that the transaction was not a “ qualified annuity interest ” because the stock was intentionally undervalued , and therefore proposed to disallow the entire GRAT transaction
The 2023 inflation bump to the lifetime exclusion amount of $ 860,000 was slightly shocking but very welcome .
( it cited a federal tax court case called Atkinson v . Commissioner ). Chief Counsel Advice is not binding authority , even on the taxpayer in question , but this CCA raised new and unsettling questions about the potential risks in using GRATs .
Quick Hits There were a number of other hot topic items at Heckerling 2023 .
• The Heckerling consensus was that no major tax legislation is likely until after the 2024 election .
• The 2023 inflation bump to the lifetime exclusion amount of $ 860,000 was slightly shocking but very welcome . The key to planning for the middle rich is to use up these inflation adjustments each year through 2025 .
• If clients want to use up the “ extra ” lifetime exclusion amount before it expires after 2025 , one obvious destination is an irrevocable grantor trust . A key issue for the middle rich is how much to retain and how much to give away . Some parents trust their kids to give it back or otherwise support them in old age , other couples not so much . But a spousal lifetime access trust ( SLAT ) remains a great strategy to “ give it away without giving it away .”
• One speaker talked about using an irrevocable life insurance trust , or ILIT , as a “ test trust ” or “ practice trust ” to get clients comfortable with irrevocable grantor trusts . If you overfund the insurance premiums , you have an instant intentionally defective grantor trust . I am sharing this idea but not endorsing it : ILITs typically generate a lot of commotion , including beneficiary withdrawal powers and issuance of written notices of the withdrawal rights to beneficiaries ( called “ Crummey ” notices after the seminal case approving the structure ) all of which is a royal pain in the butt . Therefore , this author would not look at an ILIT as a good “ training vehicle .” If anything , it is more likely to scare the client than convince the client .
• The latest legislative tweak to retirement accounts , known as SECURE 2.0 , was so new that no one had time to dig into it deeply at the conference . The main observation was frustration that this already too complicated area just got even more complicated .
• Inflation and rising interest rates are the new reality of 2023 . Higher interest rates dramatically impact the estate planning landscape . While GRATs and installment sales are notably penalized , other techniques , such as qualified personal resident trusts , have benefited .
• So long as you don ’ t plan to give away over time more than your lifetime exclusion amount in 2026 ( estimated at $ 6.8 million ) there is no need to be pressured by the 2025 deadline to gift more and take advantage of the anti-clawback provision . On the other hand , if you want to give away the maximum , then sooner ( meaning now ) is better than later , and you can always “ top off ” with additional transfers using the inflation adjustments in 2024 and 2025 .
JOSEPH B . DARBY III , Esq ., is an adjunct professor at the Boston University School of Law and the founding shareholder of Joseph Darby Law PC , a law firm that concentrates on sophisticated tax and estate planning for individuals and businesses .
58 | FINANCIAL ADVISOR MAGAZINE | MARCH 2023 WWW . FA-MAG . COM