2021 wicpa tax conference

MONDAY, NOV. 15 & TUESDAY, NOV. 16WICPA CPE LIVESTREAM

2021 WICPA TAX CONFERENCEYOUR SOURCE FOR KEY UPDATES & INSIGHTS ON TIMELY ISSUES

The following materials are from the Tuesday afternoon sessions

of the 2021 WICPA Tax Conference held on Monday, Nov. 15

& Tuesday, Nov. 16, including:

• Estate & Succession Planning in 2021: The Good, the Bad & the Ugly

• Legal Updates on Data Privacy, Cybersecurity & Cybercriminal Tactics

• Compensation Reporting: Overview & Simplification Strategies

• Planning for Tax Reform

MATERIALS AT A GL ANCE

2021 WICPA TAX CONFERENCE

VIEW THOUSANDS OF ADDITIONAL IN-PERSON AND ONLINE CPE OPPORTUNITIES AT WICPA.ORG/CPECATALOG

Get started with CPACharge todaycpacharge.com/wicpa

866-362-2081

Client Invoice#0123-A

TOTAL: $3,000.00

Your Client

**** **** **** 9995 ***

PAY CPA

22% increase in cash flow with online payments

65% of consumers prefer to pay electronically

62% of bills sent online are paid in 24 hours

CPACharge is a registered agent of Wells Fargo Bank N.A., Concord, CA., Synovus Bank, Columbus, GA., and Fifth

Third Bank, N.A., Cincinnati, OH.

AffiniPay customers experienced 22% increase on average in revenue per firm using online billing solutions

Trusted by more than 150,000 professionals, CPACharge is a simple, web-based solution that allows you to securely accept client credit and eCheck payments from anywhere.

– Cantor Forensic Accounting, PLLC

CPACharge has made it easy and inexpensive to accept payments via credit card. I’m getting paid faster, and clients are able to pay their bills with no hassles.

+Member Benefit Provider

M&A advisory, capital raising and secondary market advisory services in the United States are provided by Duff & Phelps Securities, LLC. Member FINRA/SIPC. Pagemill Partners is a Division of

Duff & Phelps Securities, LLC. M&A advisory, capital raising and secondary market advisory services in the United Kingdom are provided by Duff & Phelps Securities Ltd. (DPSL), which is authorized

and regulated by the Financial Conduct Authority. Valuation Advisory Services in India are provided by Duff & Phelps India Private Limited under a category 1 merchant banker license issued by the

Securities and Exchange Board of India.

Some things can’t be bought, sold or traded.

Clients have relied on Duff & Phelps to help protect these fundamental ideals for more than 100 years. We deliver objective advice in the areas of valuation, corporate finance, investigations, disputes, cyber security, compliance and regulatory matters, and other governance-related issues.Balancing proven technical skills with deep industry expertise, we help our clients address their most complex business needs.

Learn more at www.duffandphelps.com/services/valuation

For more information, please contact: Daniel Platten: [email protected]

TRANSPARENCY. CONFIDENCE. TRUST.

Accelerate Business Growth with Simplified HR Management Employ, enable and empower your workforce

isolved People Cloud is an intelligently connected human capital management platform designed to transform your organization by:

Providing a single solution to perform everyday HR tasks, eliminating the need for redundant data entries and improving organizational efficiency.

Minimizing risk with nimble software that is built to rapidly evolve with new industry requirements and regulations.

Delivering robust reporting functionality, including real-time labor data that can be used to make informed business decisions.

Offering consumer-grade technology that empowers employees to collaborate, which can improve productivity and engagement.

Streamlining and automating common HR tasks associated with payroll, scheduling, benefits enrollment and more.

Equip your team with isolved People Cloud and make it simple to manage the entire employee journey so more time can be spent focusing on strategic initiatives that impact your business’s bottom line.

Learn more at isolvedhcm.com. Or contact Laura Martin at [email protected] or 314.495.3324.

solutions for tax professionals and businessesTax Credits • Incentives • Cost Recovery

KYLE ERNSBERGER | [email protected] | 877.525.4462 X318 | KBKG.COMLESTER COOK | [email protected] | 877.525.4462 X351 | KBKG.COM

KBKG Midwest ServicesRESEARCH AND DEVELOPMENT TAX CREDITFederal credit worth approximately 10% of every qualified dollar spent on developing brand new or improving existing products, processes, software, and formulae.

EMPLOYEE RETENTION TAX CREDITThe Employee Retention Tax Credit (ERTC) was created as part of the CARES Act to encourage businesses to continue paying employees by providing a credit to the eligible employer for wages paid to eligible employees.

COST SEGREGATIONAny building improvement over $750,000 should be reviewed for proper classification of the individual components for tax depreciation, and retirement purposes.

TRANSFER PRICINGThe cross-border transfer prices of goods, royalties, services, and loans drive how much income tax a multinational company pays by country.

SECTION 45L CREDITNewly constructed or renovated apartments, condos, and tract home developments that meet certain criteria are eligible for a $2,000 credit per unit.

SECTION 179D TAX DEDUCTIONFederal deduction worth $1.80 per square foot of energy-efficient buildings. Available to architects, engineers, design/build contractors and building owners.

REPAIR VS. CAPITALIZATION REVIEWTaxpayers often capitalize major building expenditures that should be expensed as repairs and maintenance such as HVAC units, roofs, plumbing, lighting and more.

IC-DISCThe Interest Charge Domestic International Sales Corporation (IC-DISC) offers significant Federal income tax savings for making or distributing U.S. products for export.

About KBKG MidwestOur Chicago-based Midwest Practice has helped hundreds of Wisconsin companies lower their tax liability by implementing the following services: Cost Segregation, R&D Tax Credit, 45L Residential Tax Credits, 179D Energy Efficient Tax Deductions, International Transfer Pricing, IC-DISC, and Employee Retention Tax Credit. We are always looking to partner with new tax professionals.

Visit KBKG.com for more information.

Act now on the ERTC

benefits befo

re

they expire!

At M3 Insurance, we share your goals AND your world.When you and your insurance partner are working toward the same goals, great things can happen. At M3 Insurance, our team of advisors is invested in your community because they are part of it. And they possess the big picture thinking you rely on to succeed in the world of today. Expert attention from exceptional people. That’s the M3 difference.

COMMON GOALSUNCOMMON PEOPLE

PROPERTY & CASUALTY — EMPLOYEE BENEFITS — M3 FINANCIAL — M3 ELEVATE

Experience the M3 difference at m3ins.comOr call us at:

800.272.2443

Visit northshorebank.com/business or call 262-797-3349 to learn more.

Member FDIC

Experience The Bank of You difference where our dedicated Relationship Manager understands you and your business and offers solutions to help you achieve success.

Look to North Shore Bank’s experienced and local Commercial Banking team to support your business needs. With lending options for purchase, expansion, and acquisition along with the latest in treasury management, you get the financial tools to enhance your day-to-day activities so you can get your money quickly and safely all from a local bank you can trust.

Trusted. Knowledgeable. Local.

Business Ad_Trusted_2021_8.5x11_FNL.indd 1Business Ad_Trusted_2021_8.5x11_FNL.indd 1 10/13/21 5:11 PM10/13/21 5:11 PM

NOW WITH

OPTIONAL CYBER

COMPLETEBUSINESSPROTECTION

LOOKING FOR PROFESSIONAL LIABILITY COVERAGE? OUR PLUS PROTECTION PLAN IS THE ANSWER.

Here’s why.

• Highly Rated Carrier: AXA XL is rated (A+) by A.M. Best —one of the highest you can earn.

• Stacking Deductible Waivers: Get up to $50,000 of your deductible waived through early resolution, settlement through arbitration/mediation, and/or the use of an engagement letter—that’s real savings!

• Integrated Team: Sales, underwriting, and retention are all under one roof for faster turnarounds to save you time.

• Customer Satisfaction: We’re proud to have a renewal rate of over 90%.*

Plus, ask about additional commercial coverage. We’re a full-service brokerage and we can handle all your insurance needs.

211936-PLA-WICPA-PAD

CONTACT AN INSURANCE SPECIALIST AND LEARN MORE TODAY!

800.619.1914 | pearlinsurance.com/WICPA

AXA XL is a division of AXA Group providing products and services through our four business groups: AXA XL Insurance, AXA XL Reinsurance, AXA XL Art & Lifestyle and AXA XL Risk Consulting. Coverage is underwritten by the following AXA XL companies: Greenwich Insurance Company and Indian Harbor Insurance Company. Not all insurers do business in all jurisdictions nor is coverage available in all jurisdictions. AXA, the AXA and XL logos are trademarks of AXA SA or its affiliates.

*based on 2020 Client Retention Rates

Individuals: • Wealth Management• Investments – Equities & Fixed Income/Bonds• Insurance Reviews• Estate Strategies

• Annuities• 529 Plans Businesses: • Retirement Plans/IRA’s (401(k), SEP, SIMPLE, etc.)• Succession Planning

?

Let us help you ADD VALUE to your practice & clients during busy season

Do you have clients who are unhappy with their investments or investment advisor? Do you have clients who need a comprehensive plan? Maybe you’d just like a resource to help with investment related questions?

There are no costs or obligations for these review services — CALL US TODAY!

James K. Schneider, CFP®First Vice President - InvestmentsWICPA member20800 Swenson Drive, Suite 200Waukesha, WI 53186262-798-3759 • [email protected]

Kenneth J. Schneider, MBAManaging Director - Investments20800 Swenson Drive, Suite 200Waukesha, WI 53186262-798-3730 • [email protected]

We’re available and happy to help. We offer our resources and will arrange initial consultations for free with no obligations.

Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.

ACCOUNTING ADVISORY TECHNOLOGY

SERVICES TO STRENGTHEN YOUR BUSINESS.

877.279.1900 SIKICH.COM

Our clients utilize a broad spectrum of services to improve performance and achieve long-term, strategic goals. You can too.

I N V E S T M E N T A D V I S O R S

SPECTRUMSPECTRUMSM

Spectrum Investment Advisors now offers more to enhance your

corporate benefits package.

FINANCIAL WELLNESS

Introducing GuideSteps, an exclusive financial wellness program designed to help combat the negative effects of financial stress in the workplace.

www.GuideSteps.com

800.242.4735

Spectrum Investment Advisors, Inc. is an SEC registered investment adviser located in Mequon, WI. Registration with the

SEC does not imply a certain level of skill or training.

*PricewaterhouseCoopers. “PwC's 10th Annual Employee Financial Wellness Survey.” 2021.

401(k) | 403(b) | 457 | PROFIT SHARING | PENSION

and now

FINANCIAL STRESS TAKES A TOLL ON EMPLOYEES.

Having a personalized financial wellness program can not only lessen employees’ financial stress, it might also*

Reduce Insurance Premiums

Reduce Turnover

Increase Productivity

To learn more about our Tax Section, please contact Robert Mathers at [email protected].

vonbriesen.com/tax

The Tax Section of von Briesen & Roper, s.c. is your resource for tax situations ranging from the

traditional to the most complex including: State and Federal Voluntary Disclosures, FBAR/Foreign

Issues and State Tax Nexus Studies. Our knowledge and experience have positioned us to be your

trusted solution on unique tax matters. The bottom line? We get results.

YOUR TRUSTED TAX SOLUTION

Milwaukee • Madison • Neenah • Waukesha • Green Bay • Chicago • Eau Claire

It shouldn’t take a six-by-six barn beam crashing through your bedroom wall to find out who you can trust.

And that’s the Silver Lining®.

BUT SOMETIMES IT DOES.

To find out more about the Silver Lining and a special discount on home and auto insurance

just for members of the WICPA, contact this official supplier of the Silver Lining.

Professional Insurance Programs at (414) 277-0154 or [email protected]

Or to find an agency near you, visit thesilverlining.com.

12:30 – 1:20 p.m.

Estate & Succession Planning in 2021: The Good, the Bad & the UglyBradley Kalscheur, J.D., CPA, Partner, Michael Best & Friedrich LLP

1

Estate and Succession Planning in 2021: The Good, the Bad & the Ugly

Bradley KalscheurMichael Best & Friedrich [email protected]

WICPA Tax Conference November 16, 2021

Overview

2

1. Introduction

2. Proposed Changes (and What Was Not Included)

3. Planning Ideas

• Spousal Lifetime Access Trust (SLAT)

• Grantor Retained Annuity Trust (GRAT) and Installment Sale to IDGT

• Charitable Lead Trust (CLT)


2

Federal Estate And Gift Tax System – Current State

3

• At death, total value of assets owned by decedent is subject to estate tax• 3 basic rules:

- Transfers To Spouse (Who Is A U.S. Citizen) Are Tax-Free- Transfers To Charities Are Tax-Free- Other Transfers in Excess of the Basic Exclusion Amount ($11,700,000 in 2021) Are Taxable

• Top estate and gift tax rate is 40%• Assets receive a full-basis step up (or step down)


Estate and Gift Tax Changes Proposed in “Soft” Infrastructure Reconcilation Bill

4

• Reduced federal estate and gift tax exemptiona) Current Law: $11.7mm per person, sunset 12/31/2025b) House Bill: Would reduce this to $5mm (inflation-adjusted)

i. Applicable to Gift, Estate, and Generation-Skipping Transfer Taxesii. With inflation adjustment -- $6.02mm per person (projectediii. Applicable after 12/31/2021

3

Estate and Gift Tax Changes – cont’d

5

• Restricting Valuation Discountsa) House Bill: Eliminate discounts for transfers of certain closely held business interests

i. Applies to the transfer of “nonbusiness assets” held by an entity ii. “Nonbusiness assets” = held as passive assets to produce incomeiii. Direct transfer of nonbusiness assets with discount applied to remainder


6

• Eliminating Gift Tax Advantage of Grantor Trustsa) Current Law: Tax-free gift for payment of income taxes, but completed gift for gift tax purposesb) House Bill: Major reforms to this area

i. Require payment of gift tax on the income taxes paid + include grantor trusts in gross estate on death ii. Generally, distributions made from a grantor trust would be treated as a gift. This includes the “deemed

transfers” on termination of the grantor trust status of the trust.iii. Exceptions – (i) transfers to grantor’s spouse and (ii) support obligations

4


7

• Eliminating Advantages of Sales to Grantor Trusts under new Section 1062a) Common planning strategy is a sale to an IDGTb) Grantor trusts are treated as disregarded for tax purposes, so the “grantor” is treated as individually owning

the assets.c) Under the House Bill, this would be treated as a sale for income tax purposes, triggering gain.


8

• New Section 2901a) Assets in grantor trusts would be included in the grantor’s estate at deathb) Distributions from grantor trusts during grantor’s lifetime are treated as a taxable gift (subject to adjustments

for prior gifts)c) Conversion of a grantor trust to a non-grantor trust during the grantor’s lifetime is treated as a taxable gift

(subject to adjustments for prior gifts)

5


9

• Types of Trusts impacted by changed to grantor trust rulesa) Irrevocable life insurance trustsb) Grantor retained annuity trustsc) Spousal lifetime access trustsd) Qualified personal residence trusts

• Exception for grantor trusts that are wholly revocable by the grantor.

Notable Proposals Not Included in Reconcilation Bill

10

• No Repeal of Tax-Free Step-up in Basis at Deatha) Current Law: After death, beneficiary takes a FMV basis in propertyb) Green Book: Sought to eliminate income tax-free component

i. Treated death as a recognition eventii. Beneficiary would still take FMV basisiii. Ex: Decedent possessed property with FMV of $250,000 and AB of $50,000 at time of death. Decedent

would have been treated as having a $200,000 gain. Beneficiary takes $250,000 basis.

6

Notable Proposals Not Included – cont’d

11

• No Federal Rule Against Perpetuities for Dynasty Trustsa) Current Law: Assets may continue to appreciate tax-free in trust indefinitelyb) Green Book: Forced recognition of unrealized appreciation by trust, partnership or other non-corporate entity

IF no recognition in last 90 yearsi. Testing period Jan. 1, 1940 – December 31, 2030ii. Would also have treated transfers from trust as a recognition event


12

• No Change to Per Donee Exclusiona) Current Law: Each person may gift $15,000 to each other person per year

i. Ex: Two grandparents have 3 children and 8 grandchildren and max this out for 15 years. They would have made tax-free gifts of $4,950,000 [$15,000 * 2 (each grandparent) * 11 (number of individuals) * 15 (number of years)]

ii. Still have $22mm+ exemptionb) No mention in Green Book or House Bill

7


13

• No Minimum Term Restrictions on GRATsa) Current Law: No prescribed minimum term of years

i. Generally, should be 2 years.ii. Basic strategyiii. Ex: Transfer to trust of $1,000,000 marketable securities with annual annuity payments of $505,000. At the

time of the gift, the AFR is 1%, but the securities actually grow at 8%. A. Year 1: Taxable gift of $5,050 [(((($1,000,000 * 1.01) - $505,000) * 1.01) - $505,000)].B. However, assets actually remaining = $116,000 [(((($1,000,000 * 1.08) - $505,000) * 1.08) - $505,000)].

iv. Net transfer of $100,950 not subject to taxb) No mention


14

• No Gift/Death Recognition Eventsa) Current Law: Transfers by gift and at death are not income-tax recognition eventsb) Green Book: All death and lifetime transfers would be income-tax recognition events

i. $1mm lifetime exemption; portabilityii. Exceptions for TPPiii. $250k exclusion for residencesiv. Donee Basis

8

What Actions Should Clients Consider?

15

• Use remaining gift tax exemption before year end- Either to a grantor trust or non-grantor trust- How to use existing grantor trusts

• Use Trustee power to divide current trust into grantor/non-grantor separate trusts• If retaining as single grantor trust, value assets in trusts as of date of enactment of law changes

What Actions Should Clients Consider? – cont.

16

• Irrevocable life insurance trusts- Make gifts now to satisfy future premium payments

• Need to be concerned about overfunding the policy (versus the trust) in any one year• Income tax issues related to reclassification of the policy as a modified endowment contract (MEC) if the

grantor would ever want to take money out of the policy during lifetime, either by a distribution or a policy loan

- Use existing value of policy to continue to pay premiums or reduce death benefit to one that can be satisfied by assets in trust

- Take out a policy loan and use proceeds to make gifts for future premiums- Terminate grantor trust status- Let policy lapse

9


17

• Make additional transfers to existing IDGTs- Gift/sell while discounts are still available- Outstanding promissory notes with IDGTs

• Use exemption to gift• Have the trust pay them off


18

• Long-Term GRATS

• Consider swapping high basis assets for low basis in a grantor trust- Some debate on whether an asset swap under the substitution rule would be treated as a new “contribution” to

the trust after enactment

• Consider decanting from one grantor trust to another grantor trust (Query whether tax attributes of old trust would carry over to new trust)

10


19

• Terminate grantor trust status- If done after date of enactment not as a result of the grantor’s death, may cause a recognition event- If trust owns S corporation stock, timing of ESBT or QSST election- Spouse as beneficiary/trustee

• Section 677(a)(1) causes grantor trust treatment if the grantor’s spouse may have income distributed to him/her without the approval or consent of any adverse party

• May need to eliminate spouse as a beneficiary• May need to create a method by which any distributions to spouse require the consent of adverse parties


20

• Portability election on death of first spouse

• Consider impact of reduced exemption amount on formula clauses


11

Accelerating Charitable Efforts (ACE) Act

21

• Introduced by Chuck Grassley (R-IA) and Angus King (I-ME) on June 9, 2021; effective date would be tax years beginning after 12/31/21

• Purpose of the ACE Act is to reform private foundations and ensure that donor advised funds (DAFs) make resources available to “working charities” in a “reasonable period of time.”- Divides DAFs into variety of categories, including qualified and nonqualified DAFs, with different tax

consequences depending on whether the sponsoring charity is a geographically limited community foundation focusing on four or fewer states or a DAF sponsor with a national or issue area focus

- Modifies the rules applicable to private foundations, exempting from the annual 1.39% excise tax those foundations with a limited duration or which make distributions in excess of 7%

- Modifies public support rules for public charities by no longer treating DAF distributions as support from a public charity


Planning Ideas

22

Spousal lifetime access trusts (SLATs)

Grantor retained annuity trusts (GRATs)

Installment sales to IDGTs

Charitable lead trusts (CLTs)


12

Spousal Lifetime Access Trust (SLAT)

WICPA Tax Conference November 16, 2021 23

Example – John and Jane Smith

24

• John and Jane Smith, mid-60’s, one child• Have each used $4,000,000 of their gift and GST exemption ($7,580,000 remaining)• Want to have access to assets after transfer• Combined net worth of $35,000,000:

- Marketable securities $10,000,000- Rental real estate held in an LLC $10,000,000


13

Spousal IDGTs to Utilize Lifetime Exemption in 2021

25

• Each spouse creates a trust for the other spouse that is structured as an IDGT• Creator cannot be Trustee• Dynasty Trust by allocating GST exemption to transfers• Transfers are effective for gift and estate tax purposes• Trust is ignored for income tax purposes (“defective”)

- “Alter-ego” of the grantor and all income reported on grantor’s return- Payment of IDGT’s income taxes by grantor is not treated as additional gift (Revenue Ruling 2004-64)


Reciprocal Trust Doctrine Issues

26

• If provisions of two trusts are too similar, IRS may invoke the reciprocal trust doctrine• Must structure trust to avoid:

- John and Jane create the trusts at different times- Different assets with different values go into each trust- Consider having different trustees, both initial and successor- Have differing powers of appointment at death in each trust- Have differing distribution considerations in each trust (one considers other available resources and one does

not)


14

Family Limited Liability Company (FLLC)

27

• Basics- Retain Control- Transfer at Discounted Value- Senior Member Retains Voting Interest (Class A) and Assigns Non-Voting Interest (Class B)

• $10,000,000 of marketable securities in LLC- John retains 10 Class A units (1%)- John gives 990 Class B units (99%) to Spousal IDGT for Jane- Value of Class B units discounted to $7,425,000 due to 25% valuation discounts for marketable securities LLC

• $10,000,000 of real estate in LLC- Jane retains 10 Class A units (1%)- Jane gives 990 Class B units (99%) to Spousal IDGT for John- Value of Class B units discounted to $6,435,000 due to 35% valuation discounts for real estate LLC


Spousal IDGT Example (John creates trust)

28

JOHNSMITH

(Grantor)

After death of Jane

JOHN SMITH2021

Irrevocable Family Trust

Lifetime Trust for Child

Gift of $7,425,000 of marketable securities LLC (undiscounted value of $10M

• Transfer to Trust uses lifetime gift tax exemption• Allocate GST exemption to gifts• Gifted assets and appreciation are removed from

Settlor’s estate• Discretionary distributions to Jane, children and

other descendants of John for specified purposes• Jane has special power to appoint assets at death• Independent Trustee


15

Spousal IDGT Example (Jane creates trust)

29

Gift of $6,435,000 of marketable securities LLC (undiscounted value of $10M

• Transfer to Trust uses lifetime gift tax exemption• Allocate GST exemption to gifts• Gifted assets and appreciation are removed from

Settlor’s estate• Discretionary distributions to John, children and

other descendants of Jane for specified purposes• Consider not having John as a beneficiary or

limiting access to income and principal • John is Trustee

JANE SMITH (Grantor)

After death of John

JANE SMITH2021

Irrevocable Family Trust

Lifetime Trust for Child


Grantor Retained Annuity Trust (GRAT) and Installment Sale to IDGT


16

GRAT Basics

31

• Irrevocable Trust• Retain Annuity for Term of Years• Remainder Passes to Children• Key - Outlive Term• Creator can be Trustee• Creator is Taxed on Income


GRAT Leverage

32

• Gift = Remainder Interest• Apply Discounts to Contributed Assets• Works Well in Low Interest Environment• Current IRS Rate 1.4% (November 2021)• Can you outperform IRS Rate?


17

Candidates for GRAT

33

• Minority Business Interest• Fractional Interest in Real Estate• FLP/LLC Interests• High Cash Flow or Appreciating Asset• Owner Wants for Retain Cash Flow for a Period of Years


Sale of Assets to an IDGT

34

• Advantages- Use of discounts- Interest rate paid on note- Grantor obligated to pay the income tax liability- Value of promissory note is “frozen”

• Client funds trust for children with assets to use as down payment on purchase of additional assets (gift)

• Client sells assets to trust in exchange for a promissory note paying interest at lowest allowable rate.• Trust is ignored for income tax purposes, so no recognition of gain on sale of stock to trust and

income recognized on interest received from trust.• After termination of trusts, children own assets outright after repaying note.


18

IDGT Basics

35

• Hurdle Rate = AFR- November 2021 AFR’s: short-term 0.22%; mid-term 1.08%; long-term 1.86%- Interest Only

• Revenue Ruling 2004-64• Life Insurance Funding• Creator cannot be Trustee• Dynasty Trust


Comparisons of GRAT to IDGT

36

• Complexities of implementation of GRAT vs. IDGT• Legal risks and uncertainties

- GRATs viewed as more “statutory” than IDGT- Questions about GRATs remain

• How small can remainder in a GRAT be?• How short a term may a GRAT last?• Effect of improper administration of a GRAT?

- Questions remain for IDGTs• Are trust assets included in estate if grantor dies while the note is outstanding?• Effect if IDGT is not administered properly• Is gain recognized by IDGT on appreciated assets?


19

Comparisons of the economics of GRATs and IDGTs

37

• Choosing the “best” assets• IDGT may produce superior economic results if total return exceeds IRC §7520 rate• Examples


Less Common Twists and Alternatives.

38

• Self-Cancelling Installment Note (“SCIN”) for Healthy Clients.- Affordable “premium,” due to low interest rates.- Provides longer stream of income for grantor, but estate tax savings upon early death.- Does not require use of estate tax exclusion.

• Private Annuity.- Affordable due to low interest rates.- Provides income for grantor for life, but estate tax savings upon early death.- But, “buyer” must be able to demonstrate ability to pay the annuity.


20

Charitable Lead Trust (CLT)


What is a Split Interest Trust?

40

• A taxable trust designed to pay a charity a stream of income for a life or for a term of years (Charitable Lead Trust)

• The income stream can be a fixed dollar amount or a fixed percentage of the trust’s value determined annually

• At the end of the term of the CLT, the assets that remain are paid to non-charitable remainder persons (can include grantor and/or grantor’s family members)

• CLTs work better when §7520 rates are lower• CLTs can be created during life or at death


21

Charitable Lead Trust (“CLT”)

41

Grantor CLT

Charitable Beneficiary

Remainder Beneficiary

Assets

IncomeStream

RemainderInterest


What Objectives can a CLT Accomplish?

42

• Reduce gift and estate tax impact on passing property to family descendants (children and/or grandchildren)

• Leverage generation skipping exemption• Grantor and family forgo immediate use of property in exchange for prospect of long-term capital

appreciation that would then be available for children and grandchildren at end of term• Immediately removes value of estate without regard to living out a term


22

Types of Split Interest Trusts

43

Charitable Lead Annuity Trust (CLAT)• Income stream is a fixed dollar amount• Income does not fluctuate• Steady predictable payout• No additional contributions allowed• Sample forms in Rev. Proc 2007-45 and 2007-46

Charitable Lead Unitrust (CLUT)• Income stream is a fixed percentage of the value of the trust

assets• Trust revalued each year (require “qualified appraisal” if

Donor or related or subordinate party serve as Trustee)• Income fluctuates with asset value• Additional contributions allowed• Sample forms in Rev. Proc 2008-45 and 2008-46


Who Can be a Donor?

44

• An Individual, Corporation, Partnership or Trust• Donor characteristics that make donations to charitable trusts beneficial:

- High Income Tax Bracket- Own Assets that are expected to greatly appreciate that donor can part with for some time (CLT)- Desire to Avoid Capital Gains and Estate Taxes- Desire to Contribute to Charity


23

Who can receive trust income and who can be a remainder beneficiary?

45

• Income: Charities for a lifetime (restrictions on who can be used as a measuring life – no “ghoul trusts”) or term of years

• Remainder Beneficiaries: Non-charitable beneficiaries, including- Children- Grandchildren


Who can be a trustee?

46

• Individual- The donor could be the trustee of their own CLT; however, if not administered correctly, tax advantages could

be lost• Corporate Trustee

- Bank or trust company• Charity


24

What are the benefits for the donor?

47

• Defer or avoid capital gains tax on the trust’s sale of the low-basis property• Convert asset to income (i.e. cash flow)• Reduce estate tax• Benefit one or more charities of choice


Income tax deductibility for donations to charity

48

• Type of property donated, identity of donee, and AGI of donee impact the amount deductible• Public charities

- Capital gain property deductible at fair market value; ordinary income property deductible at cost- 60% AGI limitation for ordinary income property; 30% AGI limitation (usually) for capital gain property- Note: CARES Act increased AGI limitation to 100% for taxpayers who itemize in 2021


25

Income Taxation of CLT

49

• Grantor CLT- Current deduction is allowed upon funding, but all income, deductions and credits of the CLT are taxed to the

donor during the term of the CLT- Advantageous if donor has high bracket in year of donation and anticipated lower brackets during term- Also advantageous if CLT is funded with assets that do not produce income (tax exempt bonds or no dividend

yield stock) • Non-Grantor CLT (separate taxpayer from donor)

- No deduction allowed upon funding, but donor is not taxed on assets inside trust- CLT treated as a complex trust for income tax purposes


Gift and Estate Tax Implications

50

• Gift Tax Implications- Present value of remainder interest is gift, and GST exemption may be allocated to the transfer

• Estate Tax Implications- No estate payable on remainder unless it reverts to Settlor at end of term


26

What assets work best?

51

• Publicly Traded Marketable Securities• Investment Real Estate• Closely-Hold Business Stock

- (usually NOT S Corporation Stock)


Bradley J. KalscheurMichael Best & Friedrich [email protected]. 414.225.2763

Questions?

52

1:30 – 2:20 p.m.

Legal Updates on Data Privacy, Cybersecurity & Cybercriminal TacticsJustin Webb, CIPP/US, Chair of the Data Privacy & Cybersecurity Practice and Chief Information Security Officer, Godfrey & Kahn S.C.

1

MILWAUKEE | MADISON | GREEN BAY | APPLETON | WASHINGTON, D.C.

Legal Updates onData Privacy, Cybersecurity, and

Cybercriminal Tactics

Justin P. Webb, CIPP/US | CISONovember 16, 2021

IntroductionChair of Godfrey & Kahn’s Data Privacy &

Cybersecurity Practice GroupG&K’s current CISOExperience handling data breaches of all

sizes and shapes, both legally and technically

2

AgendaThe Threat LandscapeLegal and Regulatory Developments Identity Theft-as-a-ServiceCybersecurity and Privacy Best PracticesConclusion

The Threat Landscape

3

Types of AttacksRansomwareBECWire FraudTax Fraud “Hacking”

Evolution of RansomwareUsed to be that systems were just locked upNow double and even triple ransom

Data TheftCustomer Outreach

Results in an incredible amount of data theftDownstream effects on identity theft and fraudLots of data out there, even if attackers deny

that they sell it

4

BEC is Big BusinessRecent articles describing the BEC universeAttackers lying dormant for weeks/monthsPrimarily resulting from MFA

But not a silver bullet

Engaging in information collection and “Jumping the Stream”

Fraud is Big BusinessJust reading the US Treasury IG/DOJ

reportsFiling false tax returnsSchemes to defraud PPPStealing tax checksForging tax checksPhone/email/social media IRS impersonation

5

No One is ImmuneSlate of recent attacks targeting CPAs/law

firms/professional services firmsAll types of attacks

Failing to protect logins to data sharingBad on-premise security Failure to patch systemsWon’t bore you with statistics, but breaches

are costlyRegulatory environment is getting harsher

Legal and Regulatory Developments

6

CaliforniaCCPA – old newsCPRA – new news

Lots of new requirementsLosing 30-day period to cureExpansion of private cause of action for

breaches with statutory penaltiesPotential loss of exemptions

Virginia and ColoradoJumped on the 2023 bandwagonEach passed privacy laws similar to

CCPA/CPRA, but with major differencesSome cybersecurity audit requirementsOpt-in for certain types of processingSimilar data subject rights with material

differences

7

Safe Harbor ActsCT recently passed cybersecurity safe

harbor stating no punitive damages If you follow recognized cybersecurity

framework

OH has similar law, but it provides an affirmative defense

Regulator Scrutiny Increased focus on cybersecurity controls and ransom

payments Expect FTC to get more intimately involved in data

breaches State AGs focusing on lack of “reasonable security

measures” OFAC ransom payment guidance making people nervous

Could be fined if you pay ransom and have bad cybersecurity Scrutiny of use of cryptocurrency in ransomware and

fraud

8

Identity Theft-as-a-Service

Identity Theft-as-a-ServiceTrafficked information is sold on the “dark

web”Extremely easy to get fake IDs to be used

for establishing financial accountsLots of fake businesses, or individual

impersonationBarrier to entry is not high and lots of money

for the taking

9

Bad Cybersecurity Hygiene is Contributing to the ProblemSimilar passwords across websitesLack of MFA on personal accountsOver-collection of personal informationWebsites like TruePeopleSearch

Disclosing information used to verify identities

Tax Fraud Typical cybercriminals are filing large amounts

of returns – maximizing credits/deductionsOften the same groups that are exploiting

unemployment systemsBuilding processes to automate, especially with

susceptible online servicesUsing calls, texts, social media, etc. to

perpetrate

10

What are you seeing?

Cybersecurity and PrivacyBest Practices

11

Start with Your Personal Life Who do you connect with on LinkedIn? What links are you clicking? Where are you going on the internet? Who is texting you? What’s your email, account, and password hygiene? Are you using products that shield your CC

information? How do you provide sensitive information to others?

Via email?

Business PracticesMFA, MFA, MFARemote desktop is not your friendEDR or bust

Without the above items, no insurance

12

Business Practices (cont’d)Understand file sharing sites like

Dropbox/Box/DriveHow long do links last? Is it properly configured?

Are you adding secondary encryption controls?

Business Practices (cont’d)Practice data minimization

Do you really need that data?Realistic and legally compliant retention policiesWhat’s in your mailbox, and for how long?

13

Business Practices (cont’d)What are you advising clients?

Need to be an advocate for cybersecurity Identify common fraud methodologiesLead by exampleNever be afraid to use scare tacticsBe especially attentive to the elderly

Conclusion It’s not getting better, it’s getting worseThe regulatory and insurance environments

are tighteningData that was never stolen before is now

being taken terabytes at a timeOperate from a zero-trust perspectiveGet your cybersecurity house in order,

starting with your personal life

14


This presentation is intended to provide information on legal issues and should not be construed as legal advice. In addition, attendance at a Godfrey & Kahn, S.C. presentation does not create an attorney-client relationship. Please consult the speaker if you have any questions concerning the information discussed during this presentation.

Justin P. Webb, CIPP/US | [email protected]

Thank You!

2:30 – 3:20 p.m.

Compensation Reporting: Overview & Simplification StrategiesDoug Patch, J.D., Shareholder & Tax Team Leader, Godfrey & Kahn S.C.

Timothy Voigtman, J.D., Partner and Tax, Benefits & Estate Planning Practice Chair, Foley & Lardner LLP

1


Partner Compensation Reporting

Milwaukee, WisconsinNovember 16, 2021

Timothy L. VoigtmanFoley & Lardner, LLP

777 East Wisconsin AvenueMilwaukee, Wisconsin 53202

Douglas J. PatchGodfrey & Kahn, S.C.

833 East Michigan StreetMilwaukee, Wisconsin 53202

20608558

2

Overview of PresentationI. Reporting RequirementII. Consequences of Partner rather than Employee TreatmentIII. Use of a DRE Subsidiary as EmployerIV. Planning Solution 1: Employee Holding CompanyV. Planning Solution 2: Retained Interest Holding CompanyVI. Planning Solution 3: Regarded SubsidiaryVII. Planning Solution 4: Employee Leasing Subsidiary

2

3

I. Reporting Requirement LLCs and other partnerships want to reward key service

providers with equity-based compensation. Per Rev. Rul. 69-184, any partner of a tax partnership cannot be

an employee of that same partnership. Partners, therefore, should have any compensation earned by

the partner reported as a guaranteed payment on the partner’s K-1 rather than as wages on form W-2. Even “guaranteed” salary of partners is not subject to withholding. Rev. Rul. 69-184.

As a practical matter, taxpayers and their representatives generally prefer to report compensation as wages on Form W-2 rather than a guaranteed payment on Form K-1.

4


3

5

II. Consequences of Partner Rather than Employee Treatment

Compensation reported as a “guaranteed payment” on a Schedule K-1 is subject to self-employment taxes, which are the responsibility of the partner. On the other hand, compensation paid to an employee is reported on a Form W-2, payroll taxes are split between the employer and the recipient, and the employer is responsible for income and payroll tax withholding.

Employees who are not partners qualify for cafeteria plan benefits but partners do not.

State tax ramifications.

The 20% “qualified business income” deduction under § 199A is limited for high income owners to 25% of wages paid by the business. W-2 wages, but not guaranteed payments, are included in this calculation. If guaranteed payments are mistakenly reported as W-2 wages, the § 199A limit would be calculated improperly.

IRS may argue that incentive equity units which do not receive allocations or distributions until the company are sold should be treated as a deferred compensation plan rather than equity for tax purposes (See, e.g., Rev. Proc. 2001-43, excluding units which do not receive current allocations and distributions from safe harbor). If the Units are treated as a deferred compensation rather than true equity, the holders recognize ordinary income rather than capital gain at exit and the company has an obligation to withhold on proceeds payable to the employees at exit. Further, if the equity ownership is recharacterized as a deferred compensation plan, it will have to be tested for §409A compliance.

6


4

7

III. Use of a DRE Subsidiary as Employer

Can a partnership issue a W-2 to a service provider “employed” at one of the partnership’s disregarded subsidiaries?

Prior to 2016, the regulations lacked clarity regarding whether an individual could be an “employee” and therefore receive a W-2 from a disregarded subsidiary of a partnership: Reg. §301.7701-2(c)(i) provides that a business entity that has a single

owner and is not a corporation is disregarded as an entity separate from its owner; but

Reg. 301.7701-2(c)(2)(iv)(B) provides that an entity that is a disregarded entity is treated as a corporation for purposes of employment taxes. Therefore, the disregarded entity, and not the owner, is the employer of the entity's employees for purposes of employment taxes.

8

III. Use of a DRE Subsidiary as Employer, Cont.

On May 3, 2016, IRS issued temporary regulations to clarify that a disregarded entity doesn’t apply to self-employment tax treatment of any individuals who are partners in a partnership that owns the disregarded entity. TD 9766, 5/3/16.

Preamble provides that regulations never intended to create a distinction between a disregarded entity owned by an individual and a disregarded entity owned by a partnership.

Preamble expressly indicates that regulations do not address application of Rev. Rul. 69-184 to tiered partnerships.

Preamble requested comments when it may be appropriate to allow partners to be treated as employees.

5

9


10

IV. Planning Solution 1: Employee Holding Company

Issuance of Company interests

Individual Employees of the Company

Opco, LLC(the “Company”)

P

[Employee Holding

Company], LLC(“Employee Holdco”)

P

Other owners of the Company

Provision of services

Issuance of Employee Holdco

Interests

Subsidiaries

6

11

IV. Employee Holding Company Certain employees of Opco, LLC (the “Company”) form Employee Holdco, LLC.

The Company issues membership interests to Employee Holdco that are equal in amount to the incentive equity that would otherwise be awarded directly to employees.

The Company continues to employ the individual employees.

Employee Holdco awards its members membership interests that correspond to the amount of incentive equity that they would be entitled to if issued directly by the Company. These membership interests may be subject to vesting or forfeiture provisions that are dependent on continued employment by the Company.

The structure creates some complexity because the operating agreements of the two entities must synch up for issues such as a drag-along, transfer restrictions, grants forfeitures, etc.

12

IV. Employee Holding Company, Cont. There is a technical risk that the issuance of incentive equity to Employee Holdco

will not receive the same tax treatment as is applicable to the issuance of profits interests directly to individuals who are service providers because Employee Holdco is not a service provider to the Company and the individuals do not provide services to Employee Holdco.

If the Units are subject to vesting, should Employee Holdco file a Section 83(b) election?

Who manages Employee Holdco? Non-tax business reason for Employee Holdco?

Service providers are not parties to the Company operating agreement, the Company can better maintain confidential information and records and can better preserve confidentiality regarding the economic arrangement of the portfolio company.

Employee Holdco facilitates a sale of the Company because the manager of the Employee Holdco would control the sale of Employee Holdco’s interest in the Company.

7

13


14

V. Planning Solution 2: Retained Interest Holding Company

Issuance of Company interests

Individual Employees of the Company

Opco, LLC(the “Company”)

P

[Employee Holding

Company], LLC(“Employee Holdco”)

P



Issuance of Employee Holdco

Interests

Subsidiaries

8

V. Retained Interest Holding Company The owners of Opco, LLC (the “Company”) form Employee Holdco, LLC.

The Company issues membership interests to Employee Holdco that are equal in amount to the incentive equity the Company wishes to issue to all employees.


Employee Holdco awards the employee members membership interests that correspond to the amount of incentive equity that they would be entitled to if issued directly by the Company. These membership interests may be subject to vesting or forfeiture provisions that are dependent on continued employment by the Company.

The economic value of any unissued membership interests accrue to the benefit of the other owners of the Company through their ownership in Employee Holdco.

Except for the retained economic value of the other members, this structure works functionally the same as Planning Solution 1.

16

V. Retained Interest Holding Company, Cont.

There is still a technical risk that the issuance of incentive equity to Employee Holdco will not receive the same tax treatment as is applicable to the issuance of profits interests directly to individuals who are service providers because Employee Holdco is not a service provider to the Company and the individuals do not provide services to Employee Holdco.

If the Units are subject to vesting, should Employee Holdco file a Section 83(b) election?

Allows owners of the Company to manage and control Employee Holdco through actual equity ownership.

Same non-tax business reason for Employee Holdco


Employee Holdco facilitates a sale of the Company because the manager of the Employee Holdco would control the sale of Employee Holdco’s interest in the Company.

9

17

VI. Regarded Subsidiary – Corporation, Cont

Issuance of Company Interests

Individual Employees

Holdco, LLC

P



[Blocker Corp], Inc.(“Blocker Corp”)

C

Opco, LLC

P

100%

99.0%

1.0%

Subsidiaries

18

VI. Regarded Subsidiary – Corporation, Cont.

The members create a limited liability company as a holding company (“Holdco, LLC”) which has two subsidiaries: (1) Blocker Corp, Inc., a C corporation (“Blocker Corp”), and (2) Opco, LLC, a partnership for federal income tax purposes (“Opco”).

Blocker Corp is owned 100% by Holdco. The vast majority of Opco (99% in the illustration) is owned by Holdco and a small percentage (1% in the illustration) is owned by Blocker Corp.

The business is conducted in Opco and services are performed in Opco.

The Company awards the individual employees of Opco with Holdco, LLC membership interests, which may be subject to vesting or forfeiture provisions that are dependent on continued employment by Opco.

10

19

VI. Regarded Subsidiary – Corporation, Cont.

Blocker Corp.’s ownership of 1% of Opco causes a portion of Opco’s income to be subject to corporate tax rates (currently, 21% federally) when allocated to Blocker Corp. because Blocker Corp. is a C corporation. This is an additional tax cost of adding a C corporation into a structure that previously included only pass-through entities.

If Blocker Corp. owns too small of an ownership interest in Opco, IRS may argue Blocker Corp.’s ownership may be disregarded.

Inserting a corporation in the ownership structure may also cause a sale to be tested under § 280G golden parachute rules.

Primary benefit of this structure is simplicity in that all members hold equity at one level.

20

VI. Regarded Subsidiary – Partnership

Issuance of Company Interests


Holdco, LLC

P



Opco, LLC

P

99.0%99.0%

1.0%

Subsidiaries

Blocker, LLC

Other owners

1.0%

11

21

VI. Regarded Subsidiary – Partnership, Cont.

This avoids the economic costs of having a C corporation in the ownership structure.

The disadvantage is having the economic leakage to the outside partner.

22

VII. Regarded Subsidiary – Partnership with Retained Interest

Holdco, LLC

P


Opco, LLC

P

RetainedInterests85%

15%

Subsidiaries

Blocker, LLC


x%

26071305.3

12

VII. Regarded Subsidiary – Partnership with Retained Interest, Cont.

The owners of the Company form a new Holdco LLC (“Holdco”) and new Blocker LLC (“Blocker”). The Company is owned jointly by Holdco and Blocker

The size of the ownership stake of Blocker in the Company is determined by the maximum size of the equity pool to be award to employees (e.g., 15% of total equity).


Blocker awards the employee members membership interests that correspond to the amount of incentive equity that they would be entitled to if issued directly by the Company. These membership interests may be subject to vesting or forfeiture provisions that are dependent on continued employment by the Company.

The economic value of any unissued membership interests accrue to the benefit of Holdco, and therefore, the other owners of the Company through their ownership in Holdco.

Except for the retained economic value of the other members, this structure works economically the same as Planning Solution 1

VII. Regarded Subsidiary – Partnership with Retained Interest, Cont.

This structure avoids the technical tax issue associated with Solution 2, as the equity interest is issued “upstream” from the point of delivery of services, and the ownership interest of Blocker is not contingent on the provision of services (e.g., is a capital interest).

Opco is owned jointly by Holdco and Blocker


Non-tax business reasons for Blocker with retained interest:


Service providers are not parties to Holdco, and do not have access to financial or other information about the identity of Holdco investors.

Blocker facilitates a sale of the Company because Holdco can be the manager of Blocker, and therefore, directly control the sale process.

Permits sale process to proceed without direct involvement of the buyer in the allocation and payout of proceeds.

Facilitates employee recipients to have non-dilutive interests. For example, if an award is for 1% of the economic benefit of the Company, the recipient’s interest does not change if an award is made to another employee or if another employee forfeits awards. Such non-dilutive characteristics can be a feature or detriment based on the underlying business goals.

13

25

VII. Employee Leasing SubsidiaryIndividual

Employees

Holdco, LLC

P


Opco, LLC

P

99.0%100%

Subsidiaries

LeaseCo, LLC

1.0%

Lease Payment

Lease Employees

26

VII. Employee Leasing Subsidiary, Cont.

Opco or Holdco forms a regarded employee leasing subsidiary (“LeaseCo”) to employ the service providers.

If LeaseCo is a corporation, it would be wholly owned by Opco. If LeaseCo is a partnership, it would be primarily owned by Opco or Holdco, with a controlling owner of Holdco owning a small interest.

If LeaseCo is formed as a corporation, some earnings would be subjected to double-tax. If LeaseCo is formed as a partnership, a small portion of the profits of leasing the employees would leak to the minority member of Opco.

This structure is subject to recharacterization by IRS if it lacks non-tax business motives and/or LeaseCo is operated without generating a reasonable profit.

3:30 – 5 p.m.

Planning for Tax ReformRobert Keebler, CPA/PFS, MST, AEP, Partner, Keebler & Associates, LLP

1

© 2011-2021 Keebler Tax & Wealth Education.All Rights Reserved 1

Pending Tax ReformWhat to Know Now to Protect Clients

Drafted October 18, 2021Robert S. Keebler, CPA/PFS, MST, AEP

920‐593‐[email protected]


House Ways & Means Committee Markup:

The Build Back Better Act

2


2021 Tax Reform – IRS Funding & Compliance• The legislation would appropriate nearly $80 billion to the IRS to improve compliance.– Additional funds would be appropriated to Treasury to supervise the IRS and the Tax Court.

– These funds would be available to the through 9/30/2031.– The CBO estimates this would make the IRS’s 2031 budget 90% larger than its current baseline projection and would double staffing.

– The CBO estimates 75% of the money would be used for enforcement and this would increase revenue by $200B over 10‐years.

• The legislation would impose additional reporting requirements for third party network transactions.

https://www.cbo.gov/publication/57444


2021 Tax Reform – IRS Funding & Compliance• The legislation would also impose limitations on pass‐through deductions for conservation easements to curb these syndicated transactions being used as tax shelters.– These new rules would apply after 12/23/2016 generally.

– Or, in the case of certified historic structures after 12/31/18.

3


2021 Tax Reform – Individuals

S MFJ/QW MFS HOH T&E0% $40,400 $80,800 $40,400 $54,100 $2,650 15% $400,000 $450,000 $225,000 $425,000 $12,500 25%

TOP OF EACH CAPITAL GAIN BRACKET

Tables use 2021 figures, except for the new

proposed 35%,39.6%, and 25% thresholds.

S MFJ/QW MFS HOH T&E10% $9,950 $19,900 $9,950 $14,200 $2,650 12% $40,525 $81,050 $40,125 $54,200 - 22% $86,375 $172,750 $86,375 $86,350 -24% $164,925 $329,850 $164,925 $164,900 $9,550 32% $200,000 $400,000 $200,000 $200,000 -35% $400,000 $450,000 $225,000 $425,000 $12,500

39.6%

TOP OF EACH BRACKET

New rate applies

The date the bill is

introduced.



• 3.8% Net Investment Income Tax (NIIT) expansion– Expands the NIIT to cover income derived in the ordinary course of a trade or business for high income taxpayers

– Does not apply to income on which FICA is already imposed

– Applies after 12/31/21

Married Filing Jointly (MFJ) $500,000

Head of Household (HoH) $400,000

Single $400,000

Married Filing Separately $250,000

Estates & Trusts $12,500

Expanded NIIT Threshold

4



• New Section 199A Limitation– Imposes a maximum allowable deduction ‐ I.E. A CAP ON THE AMOUNT CLAIMED

– Applies after 12/31/21



Single $400,000

Married Filing Separately $250,000

Estates & Trusts $10,000

199A Maximum Deduction



• Excess Business Loss Limitation– Section 461(l) limits pass‐through business net losses which can offset non‐business income to $250,000 (or $500,000 MFJ)

– This was added by the TCJA and set to sunset in 2025 (note, the CARES Act modified the effective date)

– This legislation would permanently apply the limitation beyond 2025

5



• New High Income Taxpayer Surcharge– A surcharge equal to 3% of excessive Modified AGI – The AGI threshold is $5,000,000 generally ($2,500,000 MFS)

– The AGI threshold is $100,000 for trusts & estates

– Modifications to AGI include a reduction for investment interest

39.6% 3.8% 3% =+ 46.4%+


2021 Tax Reform – Individuals, Trusts & Estates

• Termination of the Temporary Increase in the Unified Credit– Resets the estate tax exemption to $5,000,000 in 2010 dollars

– In 2022, the exemption will therefore be approximately: $6,000,000

The exemption change will be effective to deaths, GST transfers, and gifts made

after December 31, 2021

6


• Recall:• The TCJA doubled the Basic Exclusion Amount and GST exemption from 2018‐2025 ($10,000,000 in 2011 dollars)

• In 2026 the exemption is set to revert to pre‐TCJA law (5,000,000 in 2011 dollars)

• This legislation will accelerate sunset to 2022

Estate & GST TaxesReview of Current Situation

POTENTIAL

“USE‐IT‐OR‐LOSE‐IT”OPPORTUNITY


Old Exemption$5,850,000

2018 Exemption Increase$5,850,000

2021 Estate Tax Exemption$11,700,0002021 gifts use this

portion of the exemption second.

Lost if not used before the law

changes.

Estate & Gift TaxesExemption Reduction Math – “Use It or Lose It”

2021 gifts use this portion of the

exemption first.

7


2021 Tax Reform – Individuals, Trusts & Estates• 2032A Special Valuation reduction increase:

– 2032A allows a taxpayer to value property used in a family farm or business based on its current use, rather than its highest and best use;

– The amount a valuation can be reduced has been frozen at $750,000 for many years.

– The legislation would increase the allowable reduction to $11,700,000 and index it for inflation.

– The change would apply to deaths after 12/31/21.


2021 Tax Reform – Individuals, Trusts & Estates• Grantor Trusts

– The legislation would add Section 2901, to force grantor trusts to be included in the taxable estate.

– The legislation would also add Section 1062, which would eliminate non‐taxable IDGT sales (and even GRATs).

– These changes will apply to trusts created on or after the date of enactment and transfers on or after the date of enactment to pre‐existing trusts.

Existing trusts will be grandfathered and there may be a short window of opportunity

capture significant future tax benefits.

8


Grantor Trusts – Sec. 2901

• Assets in grantor trusts are included in the grantor’s estate (except grandfathered ones).

• Distributions from grantor trusts during the life of the deemed owner are gifts.

• The assets of a grantor trust are deemed to be a gift if the grantor trust status is “turned off.”

• However, the bill provides an adjustment for taxable gifts as to avoid double inclusion.

IDGT

GRAT


IDGT Sales – Sec. 1062

• Deemed ownership disregarded in determining whether a transfer is a sale or exchange:– Exception for fully revocable trusts–Deemed owners expanded to related parties for the purposes of new Section 1062

IDGT

9





10





11




The Build Back Better Act Description

12


IRC § 677. Income for Benefit of Grantor


§ 677. Income for Benefit of Grantor

adverse party

the term “adverse party” means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power

Generally, the interest of younger generations would be adverse to those of older generations.

13


Example

• In 2015 Mary, at age 82, took out $1,000,000 of whole life insurance

• The premium is $65,000 per year for 10‐years; she has three payments remaining in 2022, 2023, and 2024

• This policy is owned by a GST exempt ILIT and is funded annually with a mix of Crummey gifts and lifetime exemption gifts


Example

• Section 677(a)(3) causes the trust to be treated as a grantor trust

• New proposed Section 2901(a)(1) would cause any post‐gift appreciation in a grantor trust to be included a taxable estate

• How can Mary potentially avoid this trap?– Exchange the policy for a new policy– 2021 gifts before enactment to pay future premiums – Borrow money to pay the premiums (variety of options)

Intra‐family loans External loans

14


2021 Tax Reform – Individuals, Trusts & Estates

• Valuation Rules: – The legislation would amend Section 2031 to eliminate valuation adjustments for non‐business assets.

– This is similar to a proposal from Senator Sanders earlier this term.

This provision would apply to transfers after the date of enactment.


Valuation Rules – In General

• Appraisals commonly consider valuation adjustments for:

• Marketability

• Minority interests• Blockage

• Taxes on Built‐in Gain

15


Valuation Rules – New Section 2031(d)

•New General Valuation Rules• The “Non‐business” assets of an entity transferred are valued as if the asset were transferred directly.

• Non‐business assets means any asset not used in the active conduct of a trade or business.

• Certain “Passive assets” can be treated as business assets if used in the active conduct of a trade or business.


Valuation Rules – New Section 2031(d)• “Non‐Business Assets:”

• Held for the production or collection of income, and• Not used in the active conduct of a trade or business.

• Certain “Passive Assets” can be treated as business assets if used in the active conduct of a trade or business:

• Certain hedges• Real property trades or business in which the transferor materially participates

• Additional exception for “reasonably required” working capital.

16


Valuation Rules – New Section 2031(d)• Look‐thru rule:

• Designed to prevent any discount for non‐business assets held in a lower‐tier entity

• 10% ownership interest threshold• The upper‐tier entity is treated as if directly owning its ratable share of the lower‐tier entity’s assets


Valuation Rules

Before Enactment After Enactment

Gross Value $10,000,000 $10,000,000

Marketability Adjustment (2,000,000) (0)

Minority Interest Adjustment (1,200,000) (0)

Net Value $6,800,000 $10,000,000

Estate Tax @ 40% $2,720,000 $4,000,000

Example

17


Valuation RulesExample/Summary

OperationTrade or Business

Owned byMarketabilityDiscount

Subtract out Non‐Business Assets

Automobile Dealership

Yes Family Members

Yes Yes

Apartment Building –Material Participation

Yes Family Members

Yes Yes

Triple Net Lease Real Estate – No Material Participation

No Family Members

No N/A – entire enterprise treated as a non‐business asset


2021 Tax Reform – Retirement Plan Limits• Contribution Limits for Taxpayers with Large Balances – New Sec. 409B– Annual additions (any contributions) are prohibited if the taxpayer has an excessive balance, effective after 12/31/21.

– However, the limit would only apply to taxpayers with AGI in excess of the following thresholds:



Single $400,000Married Filing Separately $400,000

Contributions to High Balance Plans Limited All figures would be adjusted annually

for inflation.

18


2021 Tax Reform – Retirement Plan Limits• Contribution Limits for Taxpayers with Large Balances –New Sec. 409B– This applies to a tax year when total defined contribution plan and IRA accumulations exceeds $10,000,000 (the applicable threshold) on 12/31 of the prior year.

– Rollovers would not be considered an addition– Accounts acquired by death or divorce or separation would not be considered an addition

– Additional reporting requirements imposed on accounts in excess of $2,500,000

– Section 4973(i) is added to impose a 6% excise tax


2021 Tax Reform –MEGA RMD

• Increased RMD for High‐income Taxpayers with Large Balances – New Sec. 4971(e)

– An additional minimum distribution will be imposed on taxpayer’s with large retirement account balances after 12/31/21. Page 684, lines 6‐8.

– It will apply when total defined contribution plan and IRA accumulations exceed $10,000,000 (applicable dollar amount) on 12/31 of the prior year. New proposed Section 4974(e)(3)(A); Page 666, line 24 – Page 667, line 8. New proposed Section 409B(b)(a); Page 667, lines 17‐18.

19



• Increased RMD for High‐income Taxpayers with Large Balances – New Sec. 4971(e)

– However, this would only apply to high‐income taxpayers:




"MEGA" RMDs Imposed



• Increased RMD for High‐income Taxpayers with Large Balances – Proposed New Sec. 4971(e):

– 50% Distribution Rule: The new additional minimum distribution would generally be 50% of the amount total accumulations exceed $10M (“the applicable dollar amount”). Proposed New Sec. 4971(e)(1); Page 674, line 17 – page 675, line 23.

– 100% Distribution Rule: In addition, to the extent that the combined balance amount in traditional IRAs, Roth IRAs and defined contribution plans exceeds $20 million, that excess is required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans. Proposed New Sec. 4971(e)(2); Page 675, line 24 – page 676, line 23.

20


2021 Tax Reform –MEGA RMD Ordering Rules• May choose which accounts to take MEGA RMD• But if accounts are over $20M there is a special Roth rule

• If combined balances in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $20M, that excess is required to be distributed from Roth IRAs and Roth designated accounts up to the lesser of:

• (1) the amount needed to bring the total balance in all accounts down to $20 million, or

• (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans.

• Once distribute the amount of any excess required under this 100% distribution rule for accounts over $20M, then may determine which account to distribute for the 50% distribution rule for accounts over $10M


2021 Tax Reform –MEGA RMD & Regular RMD• MEGA RMD is in addition to any other RMD

• Coordination rules under bill say that an individual first takes the regular RMD and then the MEGA RMD

• Regular RMDs will not reduce the amount of the MEGA RMD for a given year, nor does MEGA RMD reduce regular RMD for a given year (account balances are determined as of prior year end)

21


2021 Tax Reform –MEGA RMD Only For Vested Balances• Bill says if the aggregate vested balances to the credit of the payee (whether as a participant, owner, or beneficiary) in all applicable retirement plans exceeds $10M

• So important to note that this only applies to vested balances and unvested balances are not considered for purposes of this distribution rule


2021 Tax Reform –MEGA RMD For Beneficiary of Inherited Account

• Bill says if the aggregate vested balances to the credit of the payee (whether as a participant, owner, or beneficiary) in all applicable retirement plans exceeds $10M.

• This rule applies to a payee as a beneficiary, so this appears to also capture inherited retirement accounts and a beneficiary who inherits a MEGA retirement account would be subject to this MEGA RMD if beneficiary is a high‐income individual

22


2021 Tax Reform –MEGA RMD No 10% Penalty• MEGA RMD would be exempt from 10% premature distribution tax. Proposed new Section 72(t)(2)(I), Page 682 line 19 – page 683 line 4.


MEGA RMD Planning – Income Management• MEGA RMD does not apply if income below threshold even if have over $10M in retirement account balances

• Reduce or eliminate taxable income and only incur tax‐exempt income where possible

• Charitable giving• Oil & Gas Investments• Life insurance• Large defined benefit plan contributions

• $10M threshold applies separately to spouses• If a couple files separately, their income threshold would be $400,000 instead of $450,000, but if a non‐working spouse has a MEGA IRA filing separately may be a way to avoid subjecting the non‐working spouse to this MEGA IRA RMD

23


MEGA RMD Planning – Charity

• IRA QCD is only $100,000• Taxable distribution from IRA and donate the cash to charity

• While the IRA distribution will be included in income, the charitable donation should partially or fully offset the income

• Cash donations are generally deductible up to 60% of AGI, however, for 2020 and 2021 cash donations are deductible up to 100% of AGI

• Clients with MEGA IRAs may want to review taking a distribution in 2021 while the 100% of AGI rule still applies as a way to reduce the value of their IRA to avoid the MEGA IRA RMD in 2022


MEGA RMD Planning – IRA Relocation Life Insurance• Given the SECURE Act’s 10‐year distribution rule for inherited IRAs many clients have been reviewing taking IRA distributions during life to pay for life insurance premiums

• While the IRA distributions are taxable, the life insurance can provide an income and estate tax‐free death benefit, as well as tax‐deferred growth of the cash value while the insured is alive

• If there is a required distribution on MEGA IRAs, clients may review using the after‐tax amount to purchase life insurance because the life insurance can provide tax‐deferred growth and a tax‐free death benefit.

• Clients who are approaching the MEGA IRA threshold may want to review taking IRA distributions strategically over time to pay for life insurance premiums.

• Owners of MEGA IRAs are going to be high net worth and likely have estate tax concerns, so the life insurance should probably be owned in an ILIT to keep the death benefit out of the client’s taxable estate (keep in mind grantor trust proposals and estate tax proposals).

24


MEGA RMD Planning – Defined Benefit Plans• Small business owners may want to give closer attention to defined benefit plans going forward because defined benefit plans do not fall under this MEGA RMD

• The bill also proposes to increase income taxes on high income taxpayers

• 39.6% top rate• 25% capital gain tax rate• Expanding the 3.8% NIIT to active pass‐thru business income for those who have taxable income over $400,000/$500,000

• Adding a 3% surtax for those making over $5 million• Capping the 199A deduction to $400,000/$500,000

• Large tax deductions from funding a defined benefit plan may be especially beneficial and defined benefit plans are not subject to the MEGA RMD.


MEGA RMD Planning – Roth Conversion in 2021• Complete Roth conversion in 2021 has benefits:Income recognized in 2021, at a lower tax rateNo income recognized in 2022 or otherwise in the futureGrowth on the converted funds is tax free until distribution (e.g. 11/1/21 – 12/30/22)Additional benefit if cash from outside the IRA or qualified account can be used to pay the conversionNo regular RMDs imposed on Roth IRAs“Filling” the $10,000,000 cap with Roth IRAs is substantially more tax‐efficientRoth IRAs are substantially more estate tax efficient

25


2021 Tax Reform – Retirement Plan Limits• Roth Conversion Income Limitations – Amends Section 408A(e)– Before 2010, those with income in excess of $100,000 were prohibited from making Roth Conversions.

– Currently, income limitations remain for Roth contributions; however “backdoor” conversions easily end‐run these limits.

– The bill would eliminate Roth conversions for taxpayers with income in excess of the following thresholds:




Roth Conversion Income Limitation Note, the proposed effective date for this new limitation is

2032.


2021 Tax Reform – Retirement Plan Limits• New Prohibited Investments

– The legislation would prohibit an IRA from holding investments which are only offered to accredited investors (i.e. nonregistered securities).

– This is an attempt at rough justice from Congress in order to prohibit investments that taxpayers use to accumulate huge sums in their retirement accounts.

– IRAs holding such assets after the effective date would deemed to be distributed; however, a 2‐year transition period is provided.

– The effective date would be 12/31/21.

26


2021 Tax Reform – Retirement Plan Limits• IRA Non‐Compliance Statute of Limitations

– Currently, the SOL for valuation related reporting and PTs is 3 years.

– The legislation would extend this to 6 years.– This would apply to taxes to which the current 3‐year period ends 12/31/21.


2021 Tax Reform – Retirement Plan Limits• IRA Self‐Dealing

– Currently, an IRA cannot invest in a business entity in which the IRA owner holds a 50% or greater interest.

– The legislation reduce this threshold to 10% for investments which are not tradable on an established securities market.

– This limit would include direct and indirect interests.– Further, the legislation would change this limit to an IRA requirement (it is currently a PT).

– This change would apply after 12/31/21, with a 2‐year transition period for IRAs already holding such assets.

27


2021 Tax Reform – Retirement Plan Limits• Disqualified Persons

– The bill would clarify that for the purposes of the PT rules, the IRA owner and beneficiary of an “inherited” IRA is always a disqualified person.

– This would apply to transactions after 12/31/21.


2021 Tax Reform – Corporate & International• Graduated corporate rate structure to replace the 21% flat rate:

• New international interest expense limits, new outbound international provisions, new inbound international provisions, BEAT modifications, and various other business tax provisions.

Rate

$0 to $400,000 18%

$400,000 to $5,000,000 21%

$5,000,000 and over 26.5%

Income Brackets

28


Sensible Taxation and Equity Promotion (STEP) Act of 2021

A Detailed Review of Introduced Legislation


Basic Proposal

• Realization of gains at gift – Proposed New IRC § 1261

• Realization of gains at death – Proposed New IRC § 1261

• Repeal of carryover basis for gifts – IRC § 1015 modification

• Repeal of the adjustment of basis to fair market value at death (the step‐up) – IRC § 1014 modification

29


Detailed Proposals

• House Bill– Introduced by Mr. Bill Pascrell (D., Nj.)– 2022 effective date

• Senate Bill– Sensible Taxation and Equity Promotion (STEP) Act

of 2021– Introduced by Mr. Chris Van Hollen (D., Md.)– Retroactive 2021 effective date

• President’s Budget (Green Book)– 2022 effective date

• Very similar proposals


Core Statutory Language

• Senate Language:

IN GENERAL.—Any property which is transferred by gift, in trust, or upon death shall be treated as sold for its fair market value to the transferee on the date of such gift, death, or transfer.

30


Core Statutory Language

• House Language:

IN GENERAL.—Any property which is transferred by gift or at death shall be treated as sold for its fair market value on the date of such gift or death.


Detailed Proposals

• Special Rules for Grantor Trusts –Common to Both Bills– No realization when assets are transferred to a grantor trust

– However, a realization event occurs: If the trust is included in the grantor’s estateWhen distributions are made to beneficiaries If grantor trust status is “turned off”

31


Exceptions to Forced Recognition Under Proposed New § 1261

• Spouses• Certain grantor trusts (e.g. living trust)

• Gifts & bequests to charity• Tangible personal property not used in a trade or business or for the production of income


These exceptions are shared with all three proposals(with some variation in

the details)


Exceptions to Forced Recognition Under New § 139I

• $100,000 gain exclusion for gifts during life

• $1,000,000 gain exclusion for gifts at death

Mom gifts $250,000 of stock to daughter with a basis of $120,000. $30,000 of taxable income is recognized

($250,000 ‐ $120,000 ‐ $100,000)

Mom gifts $2,500,000 of stock to daughter with a basis of $1,200,000. $300,000 of taxable income is recognized

($2,500,000 ‐ $1,200,000 ‐ $1,000,000)


32


Exceptions to Forced Recognition

• The President’s Budget additionally provides:– The $1,000,000 exclusion at death is reduced by any gifts which use the lifetime exclusion

– The $1,000,000 exclusion is portable between spouses

Department of the Treasury (May 2021), General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals (i.e. the Green Book), page 62‐64


Detailed Proposals

• Special Rules for Non‐Grantor Trusts –Common to Both Bills (the budget is unclear regarding distributions)– Recognition event upon transfer to trust– Recognition event upon distributions from trust

Gifts Distributions

33


Detailed Proposals

• Periodic deemed recognition event for Non‐Grantor Trusts – Common to Both Bills & the President’s Budget– House Bill

Deemed recognition event for any property continuously held in trust after a period of 30 years

Any property continuously held in trust for more than 30 years on January 1, 2022 shall ne treated as transferred

– Senate Bill Deemed recognition event for all property held in trust every 21 years All property held in trust on since December 31, 2005 on December 31,

2026 (21 years)– President’s Budget

Deemed recognition event for all property held in trust every 90 years All property held in trust on since January 1, 1940; first recognition date of December 31, 2030


Natural Person

Non‐Grantor Trust

Grantor TrustRecipient

Tax Treatment

NO Forced Recognition

@ Gift

Will the trust be included in the grantor’s estate?

YesNo

Forced Recognition

@ Gift

Forced Recognition @ Gift

The STEP Act of 2021, Proposed New IRC 1261

Is the recipient

the spouse?

Yes No

Charity

34


Natural Person

Non‐Grantor Trust

Recipient

Tax TreatmentNO Forced Recognition@ Death

QTIP Election or Life Estate with a POA for the

Spouse?

YesForced Recognition@ Death

Forced Recognition @ Death

The STEP Act of 2021, Proposed New IRC 1261

Is the recipient

the spouse?

No

No Yes

Charity


Income Tax Planning Ideas

• Gain Harvesting

• Advanced Security Strategies• Charitable Remainder Trusts*

• Charitable Lead Trusts*• Donating Capital Gain Property• Installment Sales

• Opportunity Zones• Section 1031 Exchanges

*The President’s budget proposes a forced recognition event when appreciated assets are transferred to a split‐interest trust.

35


Conclusion

2021 wicpa tax conference

Documents