• Internal Revenue Service Chief Counsel issues guidance on gift tax consequences of adding a tax reimbursement clause with beneficiaries’ consent—On Dec. 29, 2023, the IRS Chief Counsel’s Office released Memorandum 202352018, stating its position that the modification of a trust to add a tax reimbursement clause could constitute a taxable gift.  

In that case, the grantor established an irrevocable trust for the benefit of his child and further descendants. The trust was structured as a grantor trust so all trust income was taxable to the grantor. Neither state law nor the trust mandated or authorized the trustee to reimburse the grantor for such income tax liability attributable to the trust. The trustee petitioned for a modification of the trust terms to provide the trustee with discretionary power to distribute income and principal to reimburse the grantor for income tax liability attributable to the trust. The beneficiaries consented to the modification pursuant to state law, and the court approved it.

The IRS ruled that the modification gave the grantor a beneficial interest in the trust. Under prior rulings (notably Revenue Ruling 2004-64), the trust instrument could mandate reimbursement of the grantor or give the trustee discretionary authority to reimburse the grantor without creating a gift by the beneficiaries. There’s no gift in these scenarios outlined in Rev. Rul. 2004-64 because the reimbursements are being made pursuant to the original terms of the trust. However, here, the beneficiaries consented to a modification. The modification was a relinquishment of a portion of the beneficiaries’ interest in the trust and therefore was a gift to the grantor. The ruling noted the same result would apply if the state law gave the beneficiaries a right to object to the modification, and they failed to do so.

This Chief Counsel Memorandum (CCM) leaves open several issues. First, how is the gift measured? How can one predict the amount of future gains, losses and income that will be realized by a trust, let alone how much of the tax will be reimbursed to the grantor in the trustee’s discretion? Citing Treasury Regulations Section 25.2511-1(e), the CCM states if the donor’s retained interest isn’t susceptible of measurement on the basis of generally accepted valuation principles, the gift tax is applicable to the entire value of the property subject to the gift. Does this mean the gift is the full value of the trust? Even if it isn’t, would Internal Revenue Code Section 2702 apply to treat it as a gift of the entire trust value?

• U.S. Supreme Court to resolve split over estate tax valuation—The Supreme Court has agreed to consider a dispute regarding the valuation of a closely held business for estate tax purposes when the company received life insurance proceeds to redeem a deceased shareholder’s stock.

In Connelly v. IRS, No. 21-3683 (8th Cir. 2023), brothers Michael and Thomas Connelly owned a Missouri corporation . The corporation obtained life insurance on each brother so that the corporation could use the insurance proceeds to redeem the shares of a brother on his death. Following Michael’s death, the business used $3 million in life insurance proceeds to redeem his shares. The estate tax return valued Michael’s stock at $3 million. The IRS disagreed, arguing that the fair market value of the company must be increased by the amount of the life insurance proceeds and valuing Michael’s shares at $5.3 million. Michael’s estate took the position that the life insurance proceeds don’t add value to the company because that value was immediately offset by the company’s obligation to redeem. The U.S. Court of Appeals for the Eighth Circuit held in favor of the IRS, likening the use of the insurance proceeds to redeem shares to “moving money from one pocket to another” and noting that such proceeds increased the value of the remaining shareholder’s equity.  

The Eighth Circuit case created a potential split with other circuits, including the Eleventh Circuit, which held in Estate of Blount v. Commissioner, 428 F.3d 1338 (2005) that a closely held business’ obligation to redeem shares offsets the life insurance proceeds used in that redemption. The Supreme Court’s decision to accept review may resolve the current split among the circuits.  

• Revenue Procedure provides new options for tax-exempt organization registration—Rev. Proc. 2024-5 is the expected annual update that the IRS issues each year regarding procedures for issuing exempt organization (EO) determination letters.

New this year, the IRS may now issue EO determination letters to tax-exempt organizations seeking to change the paragraph under which they qualify for tax-exempt status. This applies to organizations currently recognized as described in IRC Section 501(c)(3) that seek recognition as described in a different paragraph of Section 501(c). Previously, the IRS wouldn’t issue a determination under this circumstance.

If an organization wants to be recognized as tax exempt under a different category described in Section 501(c)(3), it must:

Show that it distributed its assets to another Section 501(c)(3) organization or government entity; and

Demonstrate that it meets the requirements for the Section 501(c) status in the new category.

The new determination letter will be effective as of the submission date of the application.

As a trusted advisor, it’s essential to understand how to support your clients best when they inherit artwork. The experience can be exciting and overwhelming for them, as they hope for a valuable inheritance but fear it may be worthless. Like on “Antiques Road Show,” where people discover the true worth of their possessions, your clients will turn to you for guidance.

When clients inherit artwork or other collectibles, a significant portion of their net worth becomes tied to tangible personal property. According to a recent Barclay’s Wealth Insight Report, these treasure assets can account for up to 10% of a client’s wealth in the U.S. and 20% globally, particularly for mid-tier clients. Your role as an advisor is to help your clients strike a balance between their existing investments, legal and financial planning, and the specialized planning required to manage these unique assets.

While you may assist with executing specific instructions from your clients regarding selling, purchasing, or donating items, your responsibilities go beyond that. You may also track the collection on their balance sheet, arrange financing for acquisitions and maintenance, and provide overall support in handling the newly inherited collection.

By providing your expertise and guidance, you can help alleviate the emotions and uncertainties of inheriting artwork, ensuring your clients feel confident and supported throughout the process.

The primary concern for your clients lies in their lack of knowledge regarding the actual value of inherited artwork and collectibles. Unlike stocks, bonds, or real estate, determining the value of these items is not readily accessible. Before seeking expert opinions on their worth, it is crucial to assist your clients in adjusting to their newfound ownership of artwork. This involves three essential steps: 1) creating an inventory of the collection, 2) streamlining the collection through aggregation, and 3) establishing a foundation for managing your client’s collection. These steps are necessary to prevent underselling rare pieces or investing a significant amount in items with legal ownership or other defects.

Step One: Inventory

Many collectors lack a comprehensive inventory of their assets, and if one exists, it often lacks critical information or is highly cryptic in format incomprehensible to their heirs. Estate inventories are typically focused on minimizing the estate tax value of assets and are seldom complete or adequately detailed. Additionally, confusion arises when artists work in various media, making it challenging to attribute specific artworks to their creators within the collection. Therefore, expert assistance is necessary to describe assets for the inventory accurately.

Step Two: Aggregate

Even when all significant artwork is correctly inventoried, researched, labeled, and stored, your client will likely be faced with many items, sometimes numbering into the thousands. These include not only easily recognizable valuable art, coins, gemstones, jewelry, furniture, and other collectibles but also the associated masses of documents, catalogs, notes, letters, bills of sale, and paperwork. While it may not seem like much, a single piece of paperwork can be crucial in determining the provenance and value of an item. To support your client and their new collections, each with its own set of taxation, provenance, and valuation issues, it is essential to assist them in simplifying these matters.

Taxation: Your client's income from transacting tangible assets is subject to different tax treatment than their investment or ordinary income. How your client handles ownership of the collection will dictate the subsequent income tax treatment when buying or selling tangible assets. In the US, for instance, the IRS recognizes four distinct types of taxpayers based on their role before a transaction: Collector, Investor, Business Investor, and Dealer. By default, the IRS assumes your client is a Collector, imposing the highest capital gains tax and allowing the fewest deductions. However, your client may qualify for an Investor's more favorable tax status. Qualifying as an Investor is not as simple as making a declaration; it requires a well-documented pattern of behavior by your client. With the guidance of a qualified expert, your client can position themselves to obtain the most advantageous tax status.

Recognition: Aggregating the collection involves considering the stability and volatility of pricing and factors such as questionable legality or uncertainty regarding the client's legal ownership of items. Establishing the legal title, or provenance, of artwork and collectibles is crucial for clients to either retain ownership or obtain a fair market value when selling. However, the art market is even more unregulated and opaque than real estate.

Liquidity: The ease of selling an item is another crucial aggregation aspect. Rare or unique items alone may not provide sufficient liquidity; they must also be sought after by those willing to pay for ownership and control. A highly sought-after item can be sold quickly, even if poorly executed or damaged, while a flawlessly executed piece may struggle to find a buyer for months or years.

Premium: Sometimes, clients may inherit items they can only dream of owning unless they are prepared to compete with the most affluent collectors and institutions at auction. These premium items exist in a league of their own and require expert assistance in managing preservation, transfer, or sale.

Step Three: Collection Management

As an advisor, you may have limited or no active involvement in the buying and selling of art and collectibles. However, you still have a crucial role in supporting your clients with effective collection management. To best serve your clients in this aspect, it is essential to assist them in finding professionals with the necessary expertise and experience in managing their collections. Begin by collaborating with your clients to address the following considerations for collection management and planning:

• Does your client have a comprehensive understanding of the buy-sell discipline related to their collection?
• Does your client’s personal representative possess the knowledge to effectively maintain and eventually dispose of artwork within their estate?
• Are there insurance policies or estate funds available to alleviate the burden of administrative and tax costs associated with the collection?
• Do your clients keep comprehensive purchase and sale inventory records?
• Has your client specifically addressed the disposition of any copyrights they may own in their Will?
• Are there specific instructions or restrictions regarding the usage or licensing of collection items?
• Has your client made appropriate arrangements for the maintenance and storage of the collection within their estate?
• Has your client considered the benefits of utilizing split-interest trusts and charitable foundations for effective art management?

With the passing of the Baby Boomer generation, your clients will likely inherit significant collections of artwork and collectibles. Although the collection may not compare with the financial value of their ownership in a family business, emotionally, the possession of artwork can be of very high value. Your role is to support them as the new owners of these collections. To achieve this, you must help them acquire the necessary expertise and experience to inventory their collections properly, streamline management through aggregation, and prepare for the eventual transfer of their collections to future generations.

A recent Chief Counsel Memorandum (CCM) issued by the Internal Revenue Service may have a chilling effect on modifications to all types of irrevocable trusts. CCM 202352018 addressed the gift tax consequences of modifying a grantor trust to add a tax reimbursement clause. The CCM’s conclusion is a departure from precedent and creates many unanswered questions. There’s simply no way to predict how far the IRS might try to extend the reasoning and conclusions in the CCM to other steps taken to modify irrevocable trusts. Practitioners will need to consider these unknown consequences when advising clients, and many practitioners might choose to formally warn clients about this uncertainty.

Modifying Irrevocable Trusts

In the old days, practitioners explained to clients that “irrevocable” trusts were unchangeable. But over the years, several different approaches to modifying irrevocable trusts have become common. This has evolved to the point where estate planners routinely modify irrevocable trusts, although avoiding certain changes to minimize the risk of an unintended tax consequence. The approaches might include decanting, which is merging an existing or old trust into a new one with different terms. All those involved with a trust might agree to modify the trust contractually, under state law, in what’s called a non-judicial modification; a trust protector or powerholder may be able to effectuate certain changes; or a court may be asked to modify a trust agreement.

CCM Background

Here are the facts leading up to the CCM. A grantor established an irrevocable trust for the benefit of his child and descendants, but at the time, the child was the only beneficiary. The grantor retained certain grantor trust powers causing the income of the trust to be taxed to the grantor. An independent trustee was appointed with discretion to distribute income and principal to the beneficiaries.

The trust didn’t include a tax reimbursement clause, and applicable state law didn’t provide authority to the trustee to reimburse the grantor for taxes paid. Tax reimbursement can’t be mandated, or it would cause trust assets to be included in the settlor’s estate.

The trustee petitioned the state court to amend the trust to allow the trustee discretion to reimburse the grantor for the income tax liability, and the beneficiaries consented to the modification.

Was Gift Triggered?

The CCM determined whether the addition of a tax reimbursement clause triggered a gift.

The CCM noted the specific issue addressed:

What are the gift tax consequences to the beneficiaries when the trustee of an irrevocable trust, with respect to which the grantor is treated as the …, modifies the trust, with the beneficiaries’ consent, to add a tax reimbursement clause that provides the trustee the discretionary power to make distributions of income or principal from the trust in an amount sufficient to reimburse the grantor for the income tax attributable to the inclusion of the trust’s income in the grantor’s taxable income?

The CCM determined that the modification in this case constituted a gift by the beneficiaries to the grantor. The CCM expressly departed from the IRS’ previously articulated position in Private Letter Ruling 201647001 (Nov. 18, 2016) and distinguished a situation in which the tax reimbursement clause was included in the original instrument as addressed in Revenue Ruling2004-64. The CCM also noted that the result would be the same if the state statute provided beneficiaries with a right to object to the modification, and they failed to do so.

Complications Abound

The IRS analysis is limited and creates more questions than answers. First, as the CCM acknowledges, the determination of the value of the gift in such a situation will be difficult to measure. The IRS argues that’s not a good enough reason to avoid gift tax, potentially arguing that the entire value of the property could be subject to gift tax if the interest isn’t susceptible to measurement. This almost certainly doesn’t seem like the correct result.

Low Precedential Value; But High Concerns

It’s important to note that CCM rank low on the IRS’ list of guidance. They’re issued to service personnel to administer their programs, have no precedential value and can’t be relied on by taxpayers. However, they do provide published insight into the Chief Counsel’s position on an issue, and publication often indicates that further guidance should be forthcoming.

The CCM might create a chilling effect on a host of potential transactions and modifications of irrevocable trusts. If there are adverse tax consequences in this case, practitioners now must be cautious that adverse tax consequences could exist in a variety of other situations as well involving decantings, non-judicial modifications, exercise of powers of appointments or actions by trust protectors.

Alternatively, perhaps the trustee in this case should have first decanted to a state that had an express provision authorizing tax reimbursement legislation. But would the IRS have argued that the move, if not objected to by the beneficiaries, also triggered a gift?

Take-Home Message

Even poorly reasoned guidance can be instructive in outlining the IRS’ evolving views. CCM 202352018 creates more questions than answers and potentially, but most significantly, signals that the carefree days of modifying irrevocable trusts require more caution and may not always be feasible. A take-home message for all practitioners is to spend more time evaluating planning options before an irrevocable trust is created to avoid future modifications.

The flurry of legal commentary on the Corporate Transparency Act (CTA) has focused mainly on the arcane rules and confusing exceptions. Because the CTA affects so many clients and the penalties for non-compliance are so severe, we’ll focus on practical action steps you might take to address the CTA.

Gear Up Now!

Failure to file can result in penalties of up to $500 per day (up to $10,000) and possible imprisonment for noncompliance. Rightly or wrongly, clients subject to penalties may blame their professionals. If you serve clients who are potentially subject to CTA reporting, consider these pragmatic options for mitigating your risk:

1. You can’t ignore the CTA. Set a thoughtful policy as to what your firm will or won’t do. Even if you have a firm policy not to file FinCEN Reports, you won’t escape questions.
2. Rather than preparing and filing CTA disclosures, you might only offer consulting services, so that the clients themselves prepare and file their own reports. Such activity isn’t without risk, and you should keep records of advice given to clients.
3. Even when you agree to assist clients with their initial CTA reporting, you should disavow any responsibility for amending the CTA report on the occurrence of an event requiring such an update. Engagement letters could include specific language about the CTA filing requirements, disclaiming responsibility for preparing or advising the client about the CTA other than the information contained within the letter itself or as may be circulated by the firm, unless the client separately engages the firm for this work.1
4. Smaller firms might designate one or two professionals within their practice to handle CTA reporting questions and filings. Larger firms might want to create a CTA committee. The firm should afford any such designated CTA professional with the time and resources to immerse themself in the voluminous regulations and stay current on future Internal Revenue Service pronouncements.
5. Handle CTA issues uniformly and consistently.

Third-Party Filing Services

Reporting companies are required under the CTA to supplement a filing within 30 days of the occurrence of common events, such as when the driver’s license of a beneficial owner expires or when a minor beneficiary of a trust turns 18. A firm may not know or be able to react to such an event, particularly if the beneficial owner isn’t the same individual who works directly with the firm on behalf of the entity.

It may be prudent for larger reporting companies and their beneficial owners to outsource significant CTA filing responsibilities to third-party professional reporting services that can remind them of certain required amendments and help them satisfy the unique reporting obligations under the CTA. Professionals should carefully vet any such services prior to recommending them.

Over-Communicate

Drip information in client communications about the CTA on a regular basis beyond the language in the engagement letter. Consider sending notifications to clients as part of a newsletter and/or possibly footers or attachments to bills. Standard client communications should address CTA requirements any time a new entity is formed. Even snippets of new ideas or reminders may help clients understand this very different new reporting regime.

Advice on CTA Filings

Different clients will contact different advisors for help.

Wealth advisors, who often have the most ongoing contact with clients, should likely educate clients of the existence of the CTA, even if they recommend that the client contact their CPA or attorney.

Clients may be inclined to reach out to their CPA rather than their attorney for advice on CTA reporting, given the similarity between a CTA report and tax returns regularly prepared and filed on their behalf. Tax preparers likely already have experience filing foreign bank account (FBAR) reports, which, like the CTA, are also filed with FinCEN, the Financial Crimes Enforcement Network, a bureau of the U.S. Department of Treasury. Attorneys who don’t regularly file income tax returns and FBAR reports may not have practical experience or the necessary software to file reports with FinCEN.

However, CTA reporting differs materially from the FBAR. While an FBAR has become part of a taxpayer’s regular, annual tax filings, filing deadlines of reports required under the CTA don’t match the typical tax calendar. Clients required to report information generally must do so within 30-to-90 days of the occurrence of an event or a particular date. Additionally, the Internal Revenue Service enforces FBAR compliance, but it doesn’t enforce the CTA.

It’s not clear whether CPAs even have authority to interpret CTA reporting requirements under the same grant of authority to advise on federal tax matters under Treasury Circular 230. According to the American Institute of Certified Public Accountants, “providing technical or interpretive advice on CTA may rise to the practice of law.” As a result, accounting firms may have already determined that they shouldn’t provide guidance to clients about the CTA, even though clients will almost assuredly contact their CPAs for guidance. It’s hard to square this conclusion against the reality that tax preparers are often required to review and interpret legal documents, such as trust instruments and entity operating agreements, to prepare tax returns.

Perhaps accounting firms might respond to client inquiries by suggesting that even though the question of whether to report under the CTA appears to be a legal decision for their attorney to sort out, most CTA filings are quite simple. The pragmatic approach for many clients may be filing a report under the CTA that includes every conceivable beneficial owner.

Require FinCEN IDs

To satisfy the CTA reporting requirements, an entity needs to obtain personal information about each beneficial owner. This process could be time- consuming and difficult, particularly when the individuals involved are reluctant to provide such confidential information to the reporting entity. Entities subject to the CTA may be rightly concerned with the onerous requirements to amend whenever beneficial owner information changes.

Practitioners might consider recommending as a default that all reporting companies collect a FinCEN Identifier (FinCEN ID) from each beneficial owner. When beneficial owners obtain and maintain their own FinCEN ID, their private information isn’t accessible to anyone else. The entity won’t need additional information nor will the entity be required to update the CTA report when the information for that owner changes.

Review Existing Status

Encourage clients to review the status of existing entities and trusts as soon as possible. You might warn them that waiting until the end of 2024 could make it impractical for them to obtain information necessary to satisfy CTA reporting requirements.

Entities that aren’t needed might be merged or liquidated before the first CTA filing is made to avoid the need to file.

Consider whether to modify trusts to remove designated persons in various roles, such as loan officers or investment advisors, who may not have been required to act on behalf of the trust. In some cases, clients may have named individuals to serve in these positions without informing them, because these individuals may not have been required to sign the trust instrument when it was originally executed. It could be awkward to request Social Security numbers and obtain copies of drivers licenses from these individuals, which might delay efforts to complete CTA reports in advance of the Jan. 1, 2025 deadline.

You may be able to avoid the issue altogether and simplify CTA reporting requirements by helping clients modify or decant existing trusts to remove powerholders not expected to be needed for the foreseeable future.

Trust Strategy for 2024 and Beyond

When establishing new trusts in 2024 and beyond, incorporate CTA reporting considerations.

Any individual identified as a potential fiduciary could be required to provide a FinCEN ID, so the trust might list that number as part of a standard trust signature block. You might suggest that clients not name as trustee, trust protector or loan holder, any individual who can’t or won’t obtain a FinCEN ID.

To simplify CTA filing requirements, consider moving away from naming different individuals to serve under the trust agreement. Instead, a trust agreement might identify one trust protector with the power to appoint additional fiduciaries, non- fiduciaries and powerholders in the future. When the trust needs someone to serve in one of those positions, the trust protector could then appoint the individuals and obtain a FinCEN ID at that time.

When in Doubt, File!

Even after navigating the CTA and reviewing all of the relevant instruments, it may still be uncertain as to whether a particular person is a beneficial owner required to report.

It’s not always clear whether individuals involved with a business might be considered a “substantial control person” for the purposes of the CTA. Rather than incurring the expense of engaging attorneys to determine whether someone is required to file, businesses might cast a wider net and just file a report treating most, if not all, employees as beneficial owners for CTA reporting purposes. To entice reluctant employees to submit beneficial owner information or obtain their own FinCEN ID, smaller firms might find it less expensive to provide a $1,000 bonus to each potential “substantial control person.” And consider, it may not even be feasible for counsel to make a clear determination, given the myriad of ambiguities in the guidance provided.

Fortunately, there appears to be no penalty or other negative consequences to filing when there’s no requirement. Penalties arise only when someone fails to file when required. So, as stated above, the default answer may be “just file.”

Weathering the Storm

The CTA is upon us, and you need to be certain that you and your clients are prepared to deal with the new reporting regime. Setting a firm policy, confirming that malpractice coverage will apply, designating firm members to handle these matters, ensuring client communications, making changes in legal and administrative documentation and taking other practical steps may help you weather the CTA storm. 

Martin M. Shenkman is a partner at the law firm of Martin M. Shenkman P.C. in Fort Lee, N.J. and New York City, and Joy Matak is a partner at Avelino Law, LLP in Morristown, N.J.

When King Charles III was crowned, he had lived a life full of experiences at the age of 74. His heirs equally have lived their lives and made their own decisions, including his son Harry who has taken up residence in the US.

This decision will impact how Harry’s inheritance will be taxed after his father passes.

In this episode, David Lenok is joined by David Lesperance, of Lesperance and Associates, and Melvin Warshaw, a tax and private client lawyer, in exploring how estate plans work when there are international heirs involved.

Lesperance and Warshaw discuss:

• The pain points of creating an estate plan with international heirs;
• What tax regulations impact international heirs and how their immigration status may impact that inheritance;
• How the US enforces inheritance tax with international heirs;
• Why everyone should be aware of the laws involved in the estate plan – even if they will be dead when it comes into action;
• And more.

Resources:

• Listen to the latest episodes of Celebrity Estates

Connect With David Lesperance:

• LinkedIn: David Lesperance
• Lesperance and Associates

Connect with Melvin Warshaw:

• LinkedIn: Melvin Warshaw
• Melvin Warshaw Practice

Connect With David Lenok:

• david.lenok@informa.com 
• WealthManagement.com
• LinkedIn: David Lenok
• LinkedIn: Informa
• LinkedIn: WealthManagement

About Our Guests:

David Lesperance is one of the world’s leading international tax and immigration advisors. A published author in the field, David’s personal interest in these areas of law grew from his experience working as Canadian immigration and customs officer while studying law. Since being called to the bar in 1990, he has established his expertise with major law firms, his own law firm and as a private consultant. David has successfully advised scores of high and ultra high net-worth individuals and their families, many of whom continue to seek his counsel today. In addition he has provided pro bono advice to many governments on how to improve their Citizenship by Investment, Residence by Investment or “Golden Visa” type programs to better meet the needs of his global clients. David is supported by a team of professionals, some of whom have worked with him since the early 1990s.

Melvin Warshaw currently represents U. S. and non-U. S. high net worth individuals, families and companies on a wide range of personal and business tax matters, especially in connection with cross-border income and estate tax planning and compliance in the U. S. He is admitted to practice in the Commonwealth of Massachusetts in the U.S.

Listen to the podcast

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The Celebrity Estates: Wills of the Rich and Famous podcast is available on Apple Podcasts, Android, Stitcher and wherever podcasts are found. 

Antiques Road Show attracts crowds of people eager to have their art, jewelry, furnishings and collectibles appraised. The show’s allure lies in the thrill of discovering that inherited item worth a fortune or the heartbreak of realizing a cherished heirloom is worthless. Your clients’ children will experience these same emotions when they inherit the clients’ collection. Excited yet anxious, the children hope for a valuable inheritance but also feel conflicted about selling anything, unsure of what to do next. Here is some guidance you can give to your clients’ children to help them navigate the complexities of managing a collection.

We specialize in assisting collectors and their families, and we have encountered similar situations with our clients. One client inherited a collection of Americana from his uncle, which included several exquisite pieces of furniture. Surprisingly, the most valuable item turned out to be a greenish pot that had always sat atop the family refrigerator, surpassing the appraised value of the rest of the collection at auction. As a result, the client sold the pot for more than double the worth of the entire collection, allowing us to preserve the remaining pieces within the family.

Another client inherited his father’s coin collection. While most coins held only face or metallic value, there were eleven exceptional coins that far surpassed the rest in worth. Having been informed by their father about the collection’s "best" pieces, they took great care in preserving those coins while selling the others.

When a client’s children inherit a collection, a significant portion of their net worth becomes tied to it. Over time, the collection’s value may increase, representing a substantial percentage of their wealth—up to 10% in the U.S. and 20% globally. Balancing the children’s existing investment, legal, financial and insurance planning with the specialized management required for the collection becomes crucial.

One of the primary concerns my clients have is that their children may not fully appreciate the true value of the collectibles they inherit. Unlike stocks, bonds or real estate, it’s not always easy to find the worth of these items on the internet. To help your clients’ children adjust to owning a collection, there are three essential steps to follow: 1) inventorying the collection, 2) aggregating the assets, and 3) establishing a management plan.

Step One: Inventory

Many collectors do not have an up-to-date inventory of their assets.  For those collectors who do have an inventory, it often lacks critical information or is presented in a confusing manner. Estate inventories tend to focus on minimizing the estate tax value and may not be comprehensive or adequately detailed. Additionally, descriptions of items like photographs can vary from one place to another, making it difficult for inheritors to understand their origins, authenticity and place within the collection. As the expert of the collection, the client’s first step in informing their children is to create a comprehensive inventory.

The format of the inventory doesn’t matter as long as it exists. It can be a spreadsheet, index cards, or a notebook. At a minimum, the inventory should include:

• A list of photographs of the items in the collection, with details such as photographer, subject, location or any other relevant criteria.
• Information about publications where an image of the item is reproduced, including auction catalogs, exhibits catalogs and artists descriptions.
• Dates of creation and acquisition.
• Documentation such as licenses, assignments, copyrights and so on.
• The physical location of each item.
• Names of galleries or dealers along with their contact information.
• Any paperwork associated with the item, such as bills of sale.

Include any references to contractual relationships that may exist, such as consignment agreements, copyrights, distributions and reproduction rights, if your client has allowed their photographs to be reproduced in books or publications. It’s important to note that owning a photograph does not automatically grant copyright ownership, and artists in some countries retain certain rights over the transfer and display of art even after its sale.

Step Two: Aggregation

As your client takes stock of their collection, they’ll realize the sheer volume of items they own. It’s not just valuable items that are easily recognizable, but also the associated mass of documents, catalogs, notes, letters, bills of sale, articles and paperwork. Each piece of paper can be crucial in determining the provenance and value of an item. It’s important for inheritors to understand the significance of these items, each with its own unique tax, provenance and valuation considerations. Simplification is key to achieving this.

The first step towards simplification is to aggregate photographs and their accompanying paperwork. Group similar items together and establish rules or guidelines based on trends in taxes, recognition, liquidity premiums and personal preferences.

The values of certain items in a collection are more susceptible to market forces than others. This could be due to prevailing taste, critical acclaim, provenance and authenticity challenges, cultural significance or changes in laws governing the sale or purchase of certain items. It's necessary to aggregate the collection based on items with stable pricing and those with more volatile pricing, questionable legality or uncertainty surrounding legal ownership. Legal ownership (also known as provenance) of artwork and collectibles is crucial for the inheritor’s ability to either retain the collection or obtain a fair market value when selling it. The antiques and collectibles market is unregulated and complex for newcomers, and without guidance, they may be taken advantage of.

Liquidity: The ease with which inheritors can sell an item also plays a role in aggregation. Merely being rare or unique may not guarantee liquidity; there must also be demand from buyers willing to pay for ownership and control of the item. A highly sought-after item can be sold quickly, even if it’s in poor condition, while a well-preserved and flawless item, albeit less well-known, may languish on the market for months or even years. In many cases, children will inherit a few highly liquid items alongside many illiquid ones in the collection. By aggregating the best, highly liquid items you can negotiate fees, commissions and other costs associated with the sale.

Premium: Your client’s children will inherit items that others can only dream of owning unless they are willing to compete with the wealthiest collectors and institutions at auctions. These premium items can be crucial for preserving the rest of the collection, especially if you have made prior arrangements to mitigate estate taxes during estate settlement. These exceptional items exist in a league of their own; and, you should guide your client’s children toward expert assistance in managing their preservation, transfer or sale. It’s crucial to find trustworthy experts whom they can rely on.

Step Three: The Management of the Collection

Your client has played an active role in buying and selling images and other collectibles. Now, it’s time to manage their collections. As part of this management, you will need to find professionals with the necessary expertise and experience to carry on managing the collection, ensuring its preservation even after your passing. Let’s start by asking your client the following questions:

• Do your children understand the discipline of buying and selling within your collection? Some images may rapidly decline in value after purchase, while others that were initially out of fashion may increase in value, but only temporarily. Your children need to develop a similar discipline in managing the collection. They should know when to hold assets until their value recovers; when to sell to limit losses; and, when to sell some or all of the collection before the market declines. Reviewing the collection with a critical and unbiased eye is crucial, and your children need guidance in understanding when to sell and how to enhance the collection.
• Does the personal representative of your clients know how to maintain and ultimately dispose of any collectibles in your estate? In some cases, a cultural executor such as a private curator, or an expert in the field, may be better equipped than family members to handle the disposition of artwork. It’s important to allocate additional funds for administrative costs in such circumstances.
• Do your insurance policies or funds from the estate provide support in alleviating the burden of additional administrative and tax costs for the collection? Life insurance should be held in a specified Irrevocable Life Insurance Trust designed to provide liquidity to the collection. It should be drafted to allow investments in and loans collateralized by items. Consider not only property and casualty insurance but also title insurance for items of significant value. This helps manage transaction risk and eliminates liability for clients when selling works.
• Have you kept records of your purchases and sales? Ensure that the names of galleries, dealers, auction houses, or other potential buyers or sellers of your collection are easily accessible to your children in case something happens to you. Provenance has become increasingly important, particularly for items coming out of Europe before and after WWII, as well as art originating from countries facing economic and political turmoil, such as Russia in the 1990s or Syria today. Provenance will continue to play a significant role in the valuation of items.
• Have you specifically addressed the disposition of any copyrights you may own in your will? It is unlikely that your children will inherit copyrights, but if you have published images, there may be rights associated with them. Keep in mind that copyrights can be created for images of objects that would otherwise be in the public domain. Additionally, if you plan to donate a specific item to a charity during your lifetime or after your death, remember that the donation does not automatically include the copyrights to the object unless explicitly stated. However, if you gift the same object to an individual beneficiary, the copyrights will be transferred as well. Ensure that your personal representative can locate records of the copyrights, as by law, copyright transfers must be in writing and signed by the copyright owner. Depending on the circumstances, the transfer may also need to be recorded with the US Copyright Office.
• Do you have any specific instructions or restrictions regarding how items may be used or licensed? We all have emotional attachments to our collections, and your children may feel a moral obligation to preserve certain restrictions, such as not selling the items or commissioning new books in the same series. Addressing these restrictions will require significant cooperation with your children and other owners of the images, so it is crucial to clearly and precisely draft these restrictions.
• Have you made arrangements for the maintenance and storage of the collection within the estate? It is important to estimate the total cost of the planned disposition of your collection, equipment, and supplies (including storage, distribution, and conservation) upon your death, even if only in broad terms. For example, shipping a grand piano across the globe may exceed the piano’s value, and the beneficiary may require financial assistance to cover the associated costs. Additionally, when placing images or other items in long-term storage, there is a risk of damage or loss if the storage facility experiences a catastrophe. Proper storage is particularly crucial for photographs, film, and digital files.
• Have you considered the use of split-interest trusts and charitable foundations as effective tools for managing art? A trust, LLC, or Family Limited Partnership can be ideal for managing a collection and its associated copyrights, licensing, and management costs when it is shared among multiple beneficiaries. Alongside a management trust, it is beneficial for your client to be familiar with the use of split-interest trusts (such as CRT, CLT, GRIT, GRAT) for transferring collections between generations.

In National Small Business United, d/b/a National Small Business Association, et al. v. Janet Yellen, et al., Case No. 5:22-cv-01448-LCB (N.D. Ala.), a federal court recently ruled that the Corporate Transparency Act (CTA) is unconstitutional. In a lengthy opinion issued on March 1, the U.S. District Court for the Northern District of Alabama explained that the CTA may be a “smart law” that pursues “sensible and praiseworthy ends,” but it violates the U.S. Constitution. 

The court held that the CTA was authorized neither by Congress’ foreign affairs or taxing powers nor by its powers under the Commerce Clause or under the Necessary and Proper Clause.

CTA Requirements

The CTA is a far-reaching federal law that became effective on Jan. 1. The CTA requires many companies (called “reporting companies”) to disclose information about the individuals who, directly or indirectly, exercise substantial control over them or own or control at least 25% of the ownership interests in them (called “beneficial owners”), as well as about certain so-called “company applicants,” to the Financial Crimes Enforcement Network. FinCEN is a bureau of the US Department of the Treasury that collects and analyzes information to combat money laundering, terrorism financing and other financial crimes.

Court’s Decision

In this decision, the Northern District of Alabama granted the motion for summary judgment brought by the plaintiff National Small Business Association on behalf of its members. An NSBA member who owns two small businesses subject to the CTA is also a plaintiff in this lawsuit. The NSBA is a non-profit corporation that represents and protects the rights of small businesses across the country, including its approximately 65,000 members. The court’s ruling prohibits FinCEN, its employees and other federal agencies from enforcing the CTA against the NSBA’s members. FinCEN confirmed in a March 4 notice that it won’t enforce the CTA against the plaintiffs in this lawsuit (including members of the NSBA as of March 1) while the court’s order “remains in effect.”

CTA Still in Effect for Now

Although the court generally found that the CTA exceeds the Constitution’s limits on congressional power and is therefore unconstitutional, the court’s order doesn’t appear to prohibit FinCEN from enforcing the CTA against entities that aren’t members of the NSBA. It’s expected that the U.S. Department of Justice will appeal this decision and will seek to pause the effect of this decision pending the result of any appeal. In the meantime, the CTA appears to remain in effect for all reporting companies that aren’t NSBA members. Companies that are subject to the CTA (particularly if they were formed in 2024 and have a 90-day window after formation in which to file their initial reports) may find it prudent to continue to comply with the CTA’s reporting requirements until there’s greater clarity on the status of the law.

Now’s one of the most critical times in recent history to discuss charitable planning with clients. Fortunately, wealthy clients continue to provide significant donations to charities. Still, the number of households that give to charity has decreased from two-thirds at the beginning of the 21st century to only one-half 20 years later.

While total giving has increased from $450 million in 2019 to $499 million in 2019, the 2023 Giving USA report indicated that in 2022, for only the fourth time in the past 65 years, donations dropped from the previous year. The decrease was 10% when adjusted for inflation.

So why is this such a critical time to talk with clients? For two main reasons:

1. With the markets near record levels and the threat of recession and inflation rate decreased most high-net-worth clients should have confidence that they have plenty to give.
2. Numerous charities are desperate for funding because there’s still a great need among the people and missions they support, and fewer donors are giving.

Some clients have traditionally donated to charities or their donor-advised funds or private foundations toward the end of the year. Still, increasingly, they aren’t waiting and are giving at the time that will maximize their gifts and charitable deductions. Due to the significant growth of many investments, advisors and clients may be considering selling some that have appreciated significantly to rebalance portfolios. Rather than pay considerable capital gains taxes soon after they sell them, this may be an ideal time to donate these to avoid the taxes and receive a significant tax deduction.

Considering today’s world and national events, some clients may not feel confident about the future. Advisors can reassure them that they’ll have plenty of assets for themselves and their families, and by donating directly to charities or establishing a charitable vehicle now, they can have a significant impact both now and in the future.

Though advisors should have the conversation with all clients, here are just a few types of clients who could most benefit:

Baby Boomers

Many wealthy baby boomers think they’ve already gifted enough to their children or want to limit what they’ll give them. Some feel their children have successful careers and don’t need to leave them too much. Others may question what legacy they’ll leave behind, and creating a charitable one can instill a sense of fulfillment. Many clients nearing retirement establish and fund a DAF to receive significant tax deductions upfront, enabling them to make grants during retirement. Others make qualified charitable distributions from their retirement accounts to charities (though not to DAFs or PFs) to fulfill their required minimum distributions and thereby avoid taxes on them.

Millennials

Fewer millennials have gotten into the habit of giving. This may be because not as many millennials attend religious services as in the past, and the standard deduction is now higher than before. Many volunteer, but it’s essential that they begin to give, even at lower amounts, because their donations will grow over time. More millennials are opening DAF accounts through their advisors, at work or on their own because they’re so easy to use, and they receive just one tax acknowledgment letter from the DAF sponsor. Establishing a giving plan early is essential, especially for those who have begun to accumulate wealth.

Clients Without Children

The birthrate in this country has continued to decline, and people are getting married later, while many others never do. As a result, many clients who don’t have children will have to decide what to do with their assets later in life and at death because they often don’t want to leave their assets to distant family members. Most want to avoid significant taxes and, therefore, wish to donate their fortune to charity directly or initially through DAFs. Without the expense of raising children or a need to leave them a considerable amount, this group often decides that giving to charity is the best option during life and at death.

Business Owners

Companies want to be good citizens in their communities, and increasingly, they realize the importance of engaging their employees in their efforts to be philanthropic. Though some have offered matching gift programs and encouraged volunteerism, many companies have formalized their grantmaking in the last several years to attract and retain employees. Additionally, many firms know they may have enjoyed record profits while there’s a great need here and abroad. Company executives have set up corporate DAFs or their own DAF accounts when they’ve received large bonuses or significant compensation. The time to begin this conversation is early in the year because, often, business owners wait until year-end when they realize that they’ve had a banner year. By then, it’s usually too late to initiate a program. Establishing and funding a corporate DAF during good years can enable the company to give consistent amounts during less successful years.

Having charitable planning discussions is helpful to clients, their families, the charities they support and the advisors themselves. Many clients are capable of having a positive impact. Because many have significant assets, they can begin their philanthropic journey or expand it if they started it years ago.

Ken Nopar is the Director, Philanthropic Practice Management for the American Endowment Foundation (AEF). one of the nation’s leading independent donor-advised fund sponsors since 1993 with $7 billion in assets. AEF expands philanthropy by partnering with firms and financial advisors in the financial services industry.

Everyone’s talking about the CPA shortage, but we should be just as concerned about the estate planner shortage. With record numbers of baby boomers (and boomer business owners) retiring, an estimated $30 trillion in wealth will transfer between generations. But that’s not all. As I wrote last month, the Gift and Estate Exemption Clock Is Ticking for 2 Million Families as the generous exemption limits from the 2017 Tax Cuts & Jobs Act will sunset at the end of 2025. That means dozens, if not hundreds, of your clients may suddenly find their estates in the crosshairs of Uncle Sam.

Meanwhile, many original dynasty trusts and generation-skipping trusts drafted a century ago are ending. Those trusts, designed to shield a family’s assets for as long as was legally possible at the time of their creation, are about to disgorge billions of dollars out to heirs. And there’s probably been no planning to prepare the heirs for their windfall.

You’d think estate planners would be licking their chops with all the work likely to come their way. But there just aren’t enough to handle the deluge of cases. Boomers have started aging out of the law profession, just as in most other industries. But no one’s stepping in to take their place. Further, there’s been no knowledge transfer in niche areas like estate planning. Industry consolidation has further reduced the number of available estate planners as seemingly redundant positions following firm mergers are eliminated. Meanwhile, law school admissions continue to decline, and the reduction in estate planning activity in the past decade has further diminished the interest of younger lawyers in estate planning careers.

In many ways, it’s a perfect storm of factors at play. Mass wealth is being transferred, and there are not nearly enough planners to help families manage it. That’s where you come in.

Opportunity of a Lifetime

Sure, lots of essential accounting work is being offshored to places like the Philippines and India, but you can't offshore legal work quite so quickly. If you’re a wealth advisor or experienced financial planner, advanced planning is a lifetime opportunity. Again, we have massive wealth transfer, with boomers retiring, businesses selling, trusts ending, exemption limits contracting and no one there to catch the opportunity.

Sure, you can stay in your lane, but managing money has increasingly become a commodity business. I know what you’re thinking. “There’s too much of a learning curve involved with estate planning. And even if I spent the time to learn it, people can go online to get basic wills and estate planning documents done.”

Sure, potential estate planning clients can go online and try to save money on attorney fees. However, they must still be proactive about deciding to do advanced planning. They must still figure out how to complete all the steps and execute the planning. If they set up a trust, they must figure out how to put all the proper assets in it. Then, they must file a gift tax return. Take it from me; that’s just not going to happen independently.

You don’t wait until you’ve had a heart attack to go to the doctor. The same goes for advanced planning. Ultimately, it depends on how complex a client’s estate is, their assets, and whether they’ve been married before. But so many factors go into advanced planning; it really shouldn’t be a discussion about cost; it’s an investment in a family’s future. And you don’t want to be a do-it-yourselfer here.

Fewer Americans Have Wills and Estate Plans

Caring.com’s 2024 Wills and Estate Planning Study reports for the first time since 2020, the number of Americans with an estate plan has declined. Today, less than one-third of Americans (32%) have an estate plan, down from 38% a year ago. And why don’t they have wills or estate plans? According to Caring.com, the top reasons were procrastination (43%) and believing they didn’t have enough assets (40%). The misconception that they didn’t have enough assets has risen sharply from 33% in 2022 to 35% in 2023. That’s an education problem you can help solve.

In my experience, people don’t want to talk about dying, much less think about it. Further, they don’t know who to talk to about estate planning. They don’t know who to trust. They don’t understand how it works, so they don’t want to pay for estate planning.

Again, that’s where you come in.

And while you’re at it, there’s another excellent opportunity for you—helping affluent families update their estate plans. Those plans are typically outdated, don’t reflect their current situation, aren’t advanced in any way, don’t eliminate taxes and don’t protect future generations.

Won’t AI and Technology Make Most Estate Planning Obsolete?

I know you may be hesitant to invest the time to learn about estate planning with all the hype around AI automating essential estate planning. I don’t think that’s a valid argument because, in my 40-plus-year career, I have never seen two clients with precisely the same issues and concerns. Proper estate planning is not just about knowing the initial question to ask but also knowing the right follow-up questions to expose the full depth of the issues. Considering the wealth of your clients and the complexity of their lives, automated cookie-cutter approaches to estate planning aren’t likely to cut it any more than a robo advisor can solve their investment needs. Only a competent and experienced advisor can fully understand their goals, objectives, fears and concerns and tailor a plan to address those needs.

Opportunity Awaits
The opportunity of a lifetime won’t wait around forever. When you reflect on your legacy and career, how will you answer the question: “Where were you during the Great Wealth Transfer of the 2020s?”

Randy A. Fox, CFP, AEP,  is the founder of Two Hawks Consulting LLC. He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. 

Recent research indicates a notable decline in estate planning among various demographics, including older Americans, business owners and art collectors. This trend is concerning, given the importance of estate planning in ensuring the orderly transfer of assets and minimizing potential legal and tax complications.

Decline in Estate Planning Among Older Americans

A 2023 Wills and Estate Planning Study by Caring.com highlights a decline in estate planning among older Americans. This trend raises concerns as estate planning is crucial for ensuring one’s wishes are honored and beneficiaries adequately provided for.

Estate Planning Among Business Owners

Estate planning is particularly critical for business owners due to the complexities of transferring business ownership and assets. Despite this, about 85% of successful business owners have estate plans that are more than 5 years old, which could lead to unintended consequences due to changes in tax laws and personal circumstances. This indicates that many business owners may have outdated estate plans, underscoring the need for regular updates to reflect current laws and individual situations.

Estate Planning Among Art Collectors

Art collectors face unique challenges in estate planning, given art assets’ subjective value and illiquidity. It is estimated that only about 10% of ultra-high-net-worth individuals who are avid art collectors have adequately planned for the transfer of their collections. This lack of planning can lead to disputes among heirs or the mismanagement of the collection after the collector’s death

Overall Trends in Estate Planning

The 2024 Wills and Estate Planning Study by Caring.com found a 6% decline in estate planning overall, with a 16% decline among lower-income Americans. Interestingly, young adults aged 18-34 are the only age group whose rate of estate planning has not decreased, indicating a potential shift in attitudes towards estate planning among younger generations.

The Importance of Estate Planning

Estate planning is more than just a legal formality; it’s a strategic process that ensures your assets are distributed according to your wishes, providing financial security for your loved ones and avoiding potential family conflicts. For business owners, it’s about ensuring business continuity and protecting the company from disruptions. For art collectors, it's about preserving the value and integrity of their collections.

Minimizing Taxes and Preserving Legacy

Both groups must navigate complex tax landscapes. Effective estate planning can minimize estate taxes, capital gains taxes and gift taxes, ensuring that the maximum value of the assets is passed on to the beneficiaries. Moreover, estate planning allows individuals to preserve their legacy, ensuring their achievements and values are passed on to future generations.

Philanthropy and Estate Planning

Many business owners and art collectors have philanthropic goals. Estate planning facilitates these intentions, allowing for tax-efficient donations to charitable organizations and ensuring that their generosity continues to make an impact even after they’re gone.

Conclusion

The decline in estate planning among older Americans, business owners, and art collectors is concerning, given the critical role of estate planning in asset management and transfer. Business owners and art collectors face unique challenges that make regular updates to their estate plans essential. The trend of declining estate planning rates, especially among lower-income Americans, highlights the need for increased awareness and accessibility of estate planning services to ensure that individuals across all income levels and professions can effectively manage and transfer their assets according to their wishes. If you have not updated your estate plan or even created an estate plan, now is the time to take action.