Estate planning services, once considered an optional value-add, are swiftly becoming table stakes for wealth managers.

According to a recent survey of 1,000 clients by (admittedly self-interested) online estate planning platform Vanilla. Fully 80% of respondents answered that they expect estate planning to be integrated into their advisor’s offerings, either directly or through collaboration. More than half view estate planning as a non-negotiable service.

Though 93% believe that it’s imperative to discuss estate planning issues with family, family-focused concerns were only of middling importance to most respondents. “Providing for loved one’s financial security” and “reducing family conflict” ranked third and fourth (out of five) in terms of importance to a plan, respectively. “Protecting assets from probate” and “minimizing estate taxes” topped the list.

There is some dissonance here, though, as the relatively lackluster performance of “softer” concerns in terms of importance to a plan isn’t borne out in respondents answers about their top priorities when leaving a legacy—“Ensuring my family upholds my personal values” was the top response here at 42%, well ahead of “Structuring my finances to preserve long-term wealth” at 34%. Additionally, and perhaps most informatively, “Making sure my family upholds my personal values” was also the consensus most difficult aspect to plan according to 45% of respondents, again comfortably beating out “Structuring my finances to preserve long-term wealth” at 32%. So, avoidance may play a role in the “importance” rankings.

Taxes are a big concern, so it should come as no surprise that nine in 10 respondents are concerned about the impact of taxes on their estates. Overall, 86% of respondents believe that minimizing tax liability is important, and 57% view it as “very important.” Nearly 90% of respondents value tax expertise when selecting an estate planner, with 61% considering it “very important.”

Despite these high levels of concern, less than half (42%) have taken proactive steps to minimize taxes through planning with a professional.

Respondents generally feel willing to embrace online estate planning technology, with 60% answering that they feel comfortable using an online platform for simple estate planning tasks, like creating a will. However, there are caveats; as estate planning becomes more complex (such as choosing trusts, navigating tax implications or addressing family dynamics), respondents are less and less comfortable with an online-only approach. Notably, only 22% were comfortable trusting online-only platforms with planning for tax-efficient wealth transfer strategies.

That said, many simply feel more comfortable working with a person. A whopping 75% answered that they would be more likely to consider an online estate planning platform if it offered personalized support from a live advisor.

Clients increasingly view estate planning as a core element of holistic wealth management, not just a one-time task.  The survey results imply a preference for advisory services that integrate estate planning into broader financial strategies, with concerns around taxes and complicated, often conflicting feelings about legacy driving more personalized and comprehensive estate strategies.

Sophisticated internet scams and fraud are alarmingly on the rise in our country, so much so that The New York Times has an entire series, Swindled Savings, dedicated to it. We are also in the midst of giving season and International Fraud Awareness Week, so sharing some of these stories and tips on protecting yourself and your clients is fitting.

The elderly are a particularly targeted group because they’re more susceptible to falling prey to these ploys. The older demographic is more prone to cognitive decline, less tech-savvy and widely perceived to have the most savings, making them the perfect target. A 2023 Elder Fraud Report released by the FBI found that the Internet Crime Complaint Center received over 880,000 complaints, with potential losses exceeding an astounding $12.5 billion. Losses reported by those over 60 topped $3.4 billion, an 11% increase in reported losses from 2022. There was also a 14% increase in complaints filed by elderly victims. Tech support fraud generated the most complaints; romance, cryptocurrency and investment scams were also among the top reported.

Don’t underestimate these criminals, however. Even the savviest individuals have fallen victim to fraud as scams become increasingly elaborate.

Losing It All

Case in point: the recent New York Times story about Barry Heitin, a 76-year-old retired lawyer who was for months led to believe he was part of a government investigation reminiscent of a scene straight out of a James Bond movie. Sure enough, the “investigation” turned out to be a load of fiction, a fake case fabricated by criminals who used Barry as a pawn to assist them in stealing hundreds of dollars of his own money. To make a long story short, Barry kept making withdrawals from his accounts in what he thought was helping the feds safeguard his money and catch a ring of thieves. Instead, he lost nearly all his savings, approximately $740,000.

Another article in the New York Times fraud series details how a 79-year-old man, Alfred Mancinelli, lost nearly $1 million in savings after falling victim to a romance scam with a criminal pretending to be WWE wrestler Alexa Bliss. The scam also cost him his relationship with his son, who ended up embroiled in litigation with Alfred while trying to stop him from being scammed out of the last of his money.

Scams using Bliss's personality are so prolific that the wrestler had to issue statements on her social media accounts warning fans not to fall for the imposters.

Gone For Good?

Creating urgency and isolating victims from loved ones are trademark tactics used by these sorts of criminals. Barry’s advisor became suspicious when he tried to pull out more than $830,000 from his individual retirement and brokerage accounts. The scammers coached Barry to tell his advisor that he was using the money to buy his children a surprise property in Canada, but his advisor didn’t fall for it. Unfortunately, the scammers came up with a better plan—roll the IRA over to a different institution. The tactic worked. Barry was able to empty the new account in less than two weeks with no questions asked.

Methods such as wire transfers to foreign accounts and laundering through cryptocurrency make the money nearly impossible to recover. To make matters worse, the victims often end up owing taxes under a Trump-era tax law that requires fraud victims to pay federal taxes on the money lost. A bill that would reinstate a tax deduction for personal casualty losses has been introduced, but with Trump back in office in January, the bill’s fate remains unclear.

Consumers often bear the burden of losses due to scams or fraud, as they typically authorize the transactions. Barry’s attorney, Robert Rabinowitz, told the New York Times that investment firms are required to “make a reasonable effort” to obtain a trusted contact when accounts are opened or updated so that they can alert someone should they have reason to believe a customer is being exploited. They also can temporarily freeze transactions or disbursements. Proving liability on the institution’s part will likely be an uphill battle.

Protecting Clients

“We have witnessed a range of scams, from criminals impersonating government officials or local authorities to fraudulent Bitcoin investment managers, some with heartbreaking results. It’s imperative to be proactive about these discussions before it’s too late by taking the appropriate actions,” said Elias Crist, CFP, associate wealth advisor at Regent Peak Wealth Advisors.

Some of the measures Crist suggests clients take include:

• Enable a trusted contact person on accounts – or better yet, financial power of attorney – which can empower children to monitor account activity and set necessary guardrails.
• Establish guidelines for account activity “thresholds” and when to intervene.
• Keep external checking accounts at a minimum balance, so in the event fraud occurs, the loss is minimal.

“Discussing these topics may be uncomfortable for some, but the potential consequences of inaction are far more painful,” he adds.

When most people think about Delaware, they think of corporate headquarters and President Joe Biden’s likely new residence. But lost amid the pre-election news cycle this fall was another huge development from the nation’s second-smallest state. Gov. John C. Carney recently signed the Trust Act 2024 into law, which was a watershed moment for the estate planning and wealth management worlds.

Trust Act 2024 enables families to use Delaware trusts to include beneficiary “well-being” and education programs to provide a family legacy and endowment. Further, any family can use these trusts, regardless of income or where they live or own property. This first-of-its-kind statute adds another tool to Delaware’s favorable trust laws, which help affluent families take advantage of historically high exemptions from federal estate and gift taxes until they may be halved at the end of 2025.

Trusts have typically focused on financial management, with a trustee holding duties to invest as a prudent person and to make distributions to beneficiaries based on the common standards of health, education, maintenance, or support. Families making the difficult choice about capturing the bonus exemption in trusts now have Delaware’s new law on their side to provide for a beneficiary’s well-being.

What’s Included?

The new Delaware law provides that beneficiary well-being programs may include seminars, counselors, personal coaches, family meetings, family retreats and short-term university programs. These programs are designed to better prepare each generation of beneficiaries for their inheritance by providing them with financial literacy skills and educating them about their family history, family values, family governance, mental health and well-being and family connections.

Here’s the kicker: The trustee of a beneficiary well-being trust must provide these programs at the trust’s expense. And the law makes it possible to require beneficiary well-being programs as a duty of the trustee. The law also adds to the default powers of a trustee by permitting them to provide these services on a discretionary basis. Many in our profession have been waiting decades for legislation like this to pass because so much estate planning is about giving wealth away, not about preparing the next generation to receive it.

Issues to Consider

Despite these positive developments, Trust Act 2024 has plenty of potential landmines. Here are five issues you and your clients should consider when taking advantage of the new law:

1. Consideration of letter of wishes. This is generally drafted by a trustor to assist fiduciaries in understanding the trustor’s intent regarding the discretionary terms of the trust’s governing instrument, to articulate the trustor’s intent regarding interpreting a governing instrument’s terms or to assist fiduciaries in exercising distribution discretion. Trust Act 2024 amended several statutes to codify the concept of a letter of wishes into Delaware law and to address whether and to what extent a trustee or other fiduciary may consider a letter of wishes and the standard of review applicable to a trustee or other fiduciary for exercising its discretion to consider, or not consider, such writings.  

While this sounds like a great opportunity, crafting these documents requires great skill and a strong command of the language. These letters instruct the future trustees for multi-generational trusts. Communicating the clarity of a settlor’s intent will be worth a great deal to a family. Don’t rush the letter of wishes.

2. Ability to offer services. The Trust Act 2024 allows trustors to create a beneficiary well-being trust that prepares the next generation for the responsibility of receiving and stewarding their family’s wealth. As mentioned above, beneficiary well-being programs allow various courses and educational opportunities to prepare each generation of beneficiaries for inheriting wealth. The focus is on navigating intergenerational asset transfers, developing wealth management and money skills, financial literacy, business fundamentals, entrepreneurship, knowledge of family businesses and philanthropy. The new law is also designed to educate beneficiaries about their family history, family values, family governance, family dynamics and family mental health and well-being.

As an advisor, make sure it’s clear whether you’re equipped to offer any of these services or advice and if your compliance department allows it. If so, make sure you know the costs and that the families you work with know who’s qualified to provide these services.

3. New class of beneficiaries for whom a trustor may appoint as designated representative. Before 2021, designated representatives could only be appointed to represent and bind a beneficiary whose rights to be informed about their interest in a trust were restricted or eliminated under the terms of the trust’s governing instrument. As a result of amendments to the statute in 2021, Section 3339 of the Trust Act 2024 allows the appointment of a designated representative to represent and bind minor, incapacitated, unborn or unascertainable beneficiaries in any non-judicial matter. It also sets forth whom to notify of such appointments.

The new law allows a broader definition of who can be represented in future trust proceedings and grants broad “rights to know” to entirely new trust populations.

4. Effect of virtual representation. Trust Act 2024 also amended Delaware’s “virtual representation” statute to pave the way for designated representatives to represent certain additional beneficiaries virtually when it wasn’t possible to do so before. The new law generally enables a beneficiary to represent and bind minor, incapacitated, unborn or unascertainable beneficiaries whose interests are substantially identical to their interests with respect to a question or dispute -- provided that the representative doesn’t have a material conflict of interest with the represented beneficiary. Again, this allows entirely new classes of beneficiaries, who may be geographically widespread, to be swept up in representation by a single source.

5. Changes to the Uniform Transfer on Death Security Registration Act. Trust Act 2024 adds and amends certain definitions, including clarification that interests in limited liability companies, limited partnerships, statutory trusts and series thereof may be registered in beneficiary form with a TOD or payable on death designation. While there may be better or more appropriate ways to transfer complex assets like LLCs, adding TOD provisions is simpler.

Broad Appeal

A beneficiary well-being trust isn’t just for the ultra-wealthy. It can serve any family that wants its heirs to receive more than just financial benefits from their wealth. Even if a trust doesn’t last indefinitely, subsequent generations may benefit from financial literacy education, pre-inheritance coaching and a better understanding of their family history and values. When you remove all the legalese, I think that’s what the new legislation hopes to accomplish.

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

For the first time in 17 years, and just in time for the “Super Bowl of Tax,” Senate Republicans will have a new leader in Sen. John Thune (R-S.D.). Thune won the support of his colleagues last week after Sen. Mitch McConnell (R-Ky.) stepped down from the party’s helm. It’s tough to imagine a lawmaker better prepared to hit the ground running.

Thune has served as the chamber’s No. 2 Republican since 2019 and was among the “core four” tax writers who drafted the 2017 Tax Cuts and Jobs Act (TCJA) when Republicans controlled both chambers of Congress and the White House. Thune will have an opportunity to immediately draw on his experience in navigating the minutiae of Senate procedure and getting GOP priorities across the finish line.

The Constitution requires tax policymaking to begin in the House. However, under one-party government control, the Senate’s rules will play an essential role in shaping tax legislation next year.

That’s because Republicans are preparing to bypass the chamber’s filibuster rules and avoid having to strike a deal with Democrats by pursuing tax reform via the budget reconciliation process. This plan mirrors how the GOP pursued tax reform in 2017, in which Thune had a front-row seat as the party’s number three. Thune’s background could make navigating the chamber’s arcane reconciliation rules easier, potentially allowing Congress to send a tax bill to President Trump’s desk more quickly.

Setting the Senate’s schedule early next year could nevertheless prove tricky. Thune will also be juggling nomination hearings and votes to staff up a second Trump Administration, and we’ve already seen the President-elect float names to fill cabinet positions who face a complicated path toward being confirmed.

Thune and President-elect Donald Trump have had a frosty relationship at times, with Trump going as far as calling for a primary challenge to Thune in 2020. How the next majority leader handles his relationship with the White House, especially if Trump attempts to directly influence what is and isn’t included in a big tax bill next year, could significantly speed up or slow down the tax-writing process.

Thune’s Priorities

As for his own priorities, Thune has developed a reputation as a measured negotiator who favors pro-growth tax policies. He was the chief architect of the portion of TCJA that changed how pass-through entities are taxed and supports preserving policies like stepped-up basis at death, taxing carried interest as capital gains and eliminating the estate tax.

It remains unclear how aggressively Senate Republicans might try to offset the cost of extending or building upon their 2017 tax cuts. Thune could find some revenue by limiting state and local tax deductions, but broadly speaking, he and his Republican colleagues in the Senate seem less interested than House Republicans in offsetting as much of the cost of extending and expanding on the TCJA.

Thune’s biggest challenge could very well be a less-than-predictable White House agenda, where priorities sometimes enter and leave the conversation as fast as social media posts on a feed. Time will tell if Thune and his leadership team can keep their footing as a second Trump Administration steers our ship of state in 2025 and beyond.

Elias Vetter contributed to this article.

Sophisticated family enterprises often employ legal entities and governance structures to support complex and dynamic economics and decision making regarding investment organization, creditor management, economic incentives and allocations. Administration for these structures requires compliance, which now includes the U.S. Corporate Transparency Act (the CTA). This will likely be managed by a centralized management company, such as a family office or a private trust company (PTC), each a private family management company (PFMC).

Here’s a summary of the necessary steps to comply with the CTA, which went into effect on Jan. 1, 2024, and requires most companies formed or registered before Jan. 1, 2024 to file reports by Jan. 1, 2025. Much has been written about the CTA in the past few months, most of which provides general guidance, background and details of the statute and regulations. We’ll assume the reader is already familiar with the basics and will focus on the process and filing.

Complying with the CTA may seem challenging, but with proper preparation and methodic steps, it needn’t be overwhelming. As a starting point, PFMCs should identify an individual(s) (a responsible person) who will gather and monitor:  

1. The identification of reporting companies;
2. Whether any of the CTA’s 23 exemptions to the reporting company definition could apply;
3. Governing documents to identify beneficial owners of each reporting company;
4. Reportable information to be entered on the beneficial ownership information reporting (BOIR);
5. The BOIR (which will then be prepared and filed); and
6. Potential changes for updates in the future. 

For PTCs, a compliance officer might ensure that the company meets all statutory and regulatory requirements for itself and the entities it oversees. The compliance officer would be responsible for ensuring compliance with the CTA.

Family offices would likely have officers and a board of managers or directors. A secretary, chief compliance officer or learning officer might be the responsible person. They would engage with settlors and beneficiaries, as well as those who have management roles, to obtain relevant data and oversee the completion of compliance requirements.

Identify Reporting Companies

Identifying entities that might be reporting companies shouldn’t take long, but this serves as a crucial first step. The designated responsible person within a PFMC should outline which domestic entities were formed via filing with a Secretary of State’s office and which foreign entities have registered to do business with a Secretary of State’s office. PFMCs are typically organized under state law and, therefore, would fall within the reporting company definition. The responsible person should also be able to quickly determine which entities may not be reporting companies if formed by agreement and not by state filing.

Determine if Any Exemptions Apply

If an entity is identified as a potential reporting company, it may be exempt from filing a BOIR if it falls within one of the CTA’s 23 listed exemptions to the reporting company definition. The CTA exempts companies: (1) regulated by a state or federal banking regulator (such as a trust company), and (2) large operating companies, which are those that: (i) employ more than 20 full-time U.S. employees, (ii) have more than $5 million in gross receipts in the prior tax year, and (iii) have an operating presence at a physical office within the United States. In some cases, this can also apply to their subsidiaries. 

Analyze Governing Documents

Each reporting company required to report should:

Identify beneficial owners. This includes:

• Any individuals who either: (1) own, directly or indirectly, more than 25% of the equity interests in a reporting company, or (2) exercise substantial control over the entity (typically individuals in key management roles). This is the greater of the value of their voting rights or the value of their interests. Any options are treated as if exercised. An individual exercises substantial control if that individual: (1) serves as a senior officer of a reporting company, (2) has the power to remove and replace any senior officer or a majority of the board of directors, or (3) directs, determines, or has substantial influence over “important” decisions. 
• Entities formed after Jan. 1, 2024. These entities would report up to two company applicants.

Review governing documents. Trace through books and records that reflect current ownership and management and identify or update historical changes in ownership and management to properly identify and memorialize beneficial owners.

Ask questions. Multiple reporting positions are likely available regarding certain entities, fiduciaries, and management roles. When ambiguities arise, the responsible party should ask questions and contemporaneously memorialize conclusions.

• • Trusts? Family enterprises with a PFMC may hold assets in trust, which affects the ownership and control analysis under the CTA rules. If a trust owns 25% or more of a reporting company, it’s necessary to determine whether any of the individuals who are the trust’s fiduciaries, settlors or beneficiaries are beneficial owners.
  • Who does what? Identifying which fiduciary, director, officer or manager exercises substantial control will be a facts-and-circumstances analysis that will require review of governing documents. 

Isolate and Compile Reportable Information

Once the beneficial owners have been identified, isolate and compile reportable information. This will include:

• For the reporting company: (1) names and trade names, (2) address, (3) state of formation, and (4) tax identification number.
• For each beneficial owner: (1) name and date of birth, (2) address, (3) passport or driver’s license, and (4) picture. A FinCEN identifier is recommended.

Prepare and File the BOIR

Internal protocols are needed to ensure timely compliance with the CTA’s reporting requirements because the CTA imposes an ongoing obligation to update reportable information after the initial BOIR is filed.  Updates are to be made within 30 days of becoming aware of the change.  PFMC personnel would be trained to recognize whether an updated BOIR is required, thus aiding in compliance with the CTA on an ongoing basis.

Avoid Unnecessary Fire Drills

Divorces are often messy affairs, even before the division of financial assets begins. Carving up funds inevitably complicates matters further, especially in high-net-worth divorces. The diversity and value of assets involved introduce new levels of complexity, necessitating careful strategies for protecting wealth.

Wealth managers bring a unique combination of expertise and experience that many matrimonial attorneys may not possess, making their role crucial in high-net-worth divorces. Below are four key insights I have gained from collaborating with wealth managers to achieve the best possible outcomes for our shared clients:

High-net-worth divorces are fundamentally different. High-net-worth divorces present unique challenges that require specialized attention. Unlike typical divorces, which often involve straightforward asset divisions, high-net-worth cases involve a variety of complex asset classes. Wealth managers and divorce attorneys must work together to navigate intricate issues such as business valuations, short selling and put options, cryptocurrency, restricted stocks, deferred compensation and more. These assets require careful handling to ensure accurate valuations and divisions, as errors can have significant financial repercussions for clients.

Equitable does not mean equal. As a matrimonial attorney based in New York, I’ve encountered many clients who mistakenly believe that New York is a 50/50 state where all assets are split equally in a divorce. In reality, New York follows an equitable division approach—which sounds similar but is fundamentally different. Equitable division is not always a 50/50 split. For example, if a divorcing couple began their marriage with minimal wealth and accrued it together over time while raising a family, then yes, it will likely be an equal split of most assets. But say it’s a second marriage, both parties have adult children, and one of the spouses entered the marriage with $30 million while the other had no wealth and did not dedicate significant time to raising children and managing a home. Then the split won’t be 50/50—it will be another percentage the court deems equitable.

Collaboration during discovery is key. Collaboration between the wealth manager and divorce lawyer isn’t just important—it’s essential. During the discovery process, when financial documents are being shared to paint a full picture, both parties need to be actively engaged. In high-net-worth divorces, this process can run hundreds of thousands of dollars in legal fees alone—decades worth of statements from dozens of different accounts. If either party is not fully engaged, it can cost their client significantly in time and fees. Wealth managers bring crucial institutional knowledge to the table, such as the history of investments and their purposes. For instance, a $2 million withdrawal from a brokerage account a decade ago might seem suspicious, but an informed wealth manager could clarify that those funds were used to purchase a vacation home.

Master the tax nuances. Taxes are a tremendously important issue in high-net-worth divorces and one that wealth managers and attorneys should never leave to the end. Every asset distributed in a divorce carries tax implications. Wealth managers and attorneys must fully understand the implications for every asset class before settlement negotiations begin, as the tax impact in high-net-worth cases can reach millions of dollars. For example, pre-tax employment benefits like retirement or deferred compensation assets cannot be traded against after-tax dollars. It’s not apples to apples. In addition, some assets are not liquid and cannot readily be transferred—for example, restricted stock or an interest in a private equity fund. In those circumstances, creative approaches to equitable division need to be explored.

Working through a high-net-worth divorce is challenging for all parties involved, but it doesn’t have to be overwhelming. With the above strategies, wealth managers and divorce lawyers can be better equipped to navigate the complexities and ensure their clients’ interests are protected.

Gus Dimopoulos, Esq. is managing partner of Dimopoulos Bruggemann P.C., a matrimonial and family law firm based in Westchester County, N.Y. that specializes in high-net-worth divorces. For more information, visit www.dimolaw.com.

On Dec. 3, 2024, in the case of Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-00478-ALM (E.D. Tex.), the U.S. District Court for the Eastern District of Texas issued a nationwide preliminary injunction against enforcement of the Corporate Transparency Act (CTA), and stayed the Jan. 1, 2025 beneficial ownership information (BOI) reporting deadline under the CTA for entities formed prior to 2024. The District Court did not specifically rule that the CTA is unconstitutional, but for purposes of issuing the injunction, concluded that the CTA and the final rule implementing the CTA (the Reporting Rule) are likely unconstitutional because they exceed Congress’ authority. 

Other Court Rulings Didn’t Stop CTA Enforcement

The Texas Top Cop Shop decision was not the first time that a U.S. District Court had issued an injunction against enforcement of the CTA.  Unlike another U.S. District Court decision, however, the Texas U.S. District Court in the Texas Top Cop Shop case did not limit its ruling to the plaintiff, and instead extended its application of the injunction nationwide.  On December 5, 2024, the U.S. Department of Justice appealed the Texas Top Cop Shop ruling to the U.S. Court of Appeals for the Fifth Circuit.  The outcome and timing of this appeal are uncertain at this time.

As a result of the Texas Top Cop Shop ruling, all reporting companies aren’t currently required to comply with the CTA’s Jan. 1, 2025 reporting deadline (or sooner, in the case of reporting companies formed in 2024 required to file within 90 days following formation) pending further orders from the Texas U.S. District Court or the outcome of an appeal.

FinCEN Guidance

On Dec. 7, 2024, in reacting to the Texas Top Cop Shop ruling, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) posted guidance on its website (Beneficial Ownership Information Reporting/FinCen.gov. stating that: (1) it will comply with the Texas Top Cop Shop order enjoining enforcement of the CTA and the reporting obligations imposed thereunder while the injunction remains in effect; and (ii) CTA reporting companies will not be required to file BOI reports and won’t be subject to liability if they fail to do so while the injunction remains in effect. The FinCEN guidance also noted, however, that CTA reporting companies may continue to voluntarily submit BOI reports while the injunction remains in effect,   that other U.S. District Courts have denied requests to enjoin the CTA and that the government “continues to believe—consistent with the conclusions of the U.S. District Courts for the Eastern District of Virginia and the District of Oregon—that the CTA is constitutional.”

Stay Tuned

Given the fluid nature of these events and the possibility of either the Fifth Circuit or the Supreme Court staying the Texas U.S. District Court’s order pending appeal, companies’ reporting obligations could very well change on short notice. 

As the dust settles from the 2024 elections, significant changes loom for tax and estate planning. For business owners, artists, and art collectors, the evolving political and economic landscape necessitates proactive and flexible strategies to protect and grow wealth. Here’s what you need to know to navigate this complex environment.

The Political Shift: Implications for Estate and Tax Planning

The re-election of President Donald Trump and a Republican-led Congress has set the stage for potential tax policy shifts. This administration's agenda includes several tax cuts targeting social security income and tips, alongside other campaign promises. Notably, there’s an unspoken potential to extend provisions under the 2017 Tax Cuts and Jobs Act (TCJA), which includes the bonus estate tax exemption and reduced tax rates, set to sunset in 2026 unless Congress acts.

While significant new taxes targeting the wealthy appear unlikely, uncertainty remains about whether Trump and Congress will expend the political capital needed to make the 2017 laws permanent. Business owners and collectors should be prepared for possible reductions in exemptions and shifts in taxation policies, especially regarding estate and gift taxes.

Planning for Flexibility

We’ve been here before. In 2011, the Bush-era tax cuts were set to sunset, leading many to make irrevocable gifts in anticipation of the estate tax exemption dropping to $1 million. However, Obama and Congress not only prevented the tax laws from sunsetting but made them permanent, leaving many regretting the irrevocable transfers they made. The key takeaway from recent expert webinars and analyses is the importance of "standby planning."

For those hesitant to make substantial gifts now, setting up trusts without immediately funding them but retaining the ability to quickly fund these trusts can provide the flexibility to act swiftly if exemptions are reduced. For example, an irrevocable trust can be minimally funded now, with provisions in place to scale up contributions later. Techniques like using Wandry adjustments (Wandry, T.C. Memo. 2012-88 allows clauses that adjust the funding of trusts based on outside events, such as tax changes) in transfer documents can enable last-minute asset transfers without appraisals, allowing individuals to maximize their exemptions before legislative deadlines.

Leveraging Trust Structures for Artists and Collectors

Artists and collectors often face unique challenges in estate planning, including valuation issues, liquidity constraints, and legacy preservation. Specific trust structures, such as Grantor Retained Annuity Trusts (GRATs), Charitable Lead (CLT) and Remainder Trusts (CRT) offer robust solutions:

• GRATs allow for transferring artwork or other valuable assets at reduced tax costs while retaining income for a period.
• CLTs and CRT can create tax-efficient strategies for those wishing to align their planning with philanthropic goals.

Art as an Asset: Unique Considerations

Art and collectibles represent not only financial assets but also deeply personal investments. To navigate the complexities of managing and transferring these assets:

• Engage specialized appraisers to ensure accurate valuations.
• Consider using purpose trusts or hybrid structures to maintain control over the disposition and use of collections.
• Evaluate selling options to purchase, fractional ownership or leasing arrangements to generate liquidity while preserving ownership benefits.

Asset Protection and Income Tax Planning

With estate tax concerns potentially diminishing under the current administration, advisors recommend focusing on income tax planning and asset protection. Non-grantor trusts can reduce state income tax exposure, while Roth IRA conversions and basis step-up planning offer opportunities to optimize long-term tax outcomes.

For example, business owners might explore opportunities to transfer business interests into trusts structured to maximize the step-up in basis, ensuring efficient wealth transfer to heirs while minimizing tax burdens.

The Importance of Proactive Communication

One consistent message from leading estate planners is the importance of engaging clients early. Advisors should educate clients about the broader benefits of planning beyond estate tax savings. Asset protection, income tax efficiency, and legacy preservation are critical drivers that remain relevant regardless of tax policy changes. Regularly communicating with clients through newsletters, webinars, or direct consultations ensures they stay informed and empowered to make timely decisions.

A New Era of Estate Planning

The post-election environment presents both challenges and opportunities for business owners, artists, and collectors. Flexibility, foresight, and a willingness to embrace innovative strategies will be essential. Whether through standby trusts, creative asset structures, or targeted tax planning, the goal remains clear: to protect and enhance wealth in an uncertain future.

As always, professional advice tailored to your specific circumstances is crucial. Engaging with experts who understand the intricacies of your assets—be it a thriving business or a priceless art collection—can make all the difference in securing a prosperous legacy.

In Private Letter Ruling 202432012 (Aug. 9, 2024), the Internal Revenue Service determined that proposed court modifications of a generation-skipping transfer (GST) tax-exempt trust’s distribution and trusteeship provisions were acceptable under Treasury Regulations Section 26.2601-1(b)(4)(i) and won’t subject the trust to the GST tax.

Court Modifications Requested

On the last to die of settlor and her spouse, the settlor’s will established trusts for her descendants. One such trust created—the trust at issue—is a GST-exempt trust created for the benefit of one of the settlor’s children and such child’s descendants. The trustee of the GST-exempt trust at issue petitioned the court to modify the trust. The court issued an order granting various modifications, pending a favorable tax ruling from the IRS.

Original Trust Terms

The original trust included these terms:

While the child is living, the trustee pays as much of the income as the trustee deems necessary for health, education and support of any class members consisting of the child, the child’s first grandchild and the first grandchild’s descendants. When the child dies, all principal and accrued income shall be distributed to the child’s first grandchild, otherwise the first grandchild’s descendants, provided that a beneficiary’s share shall be added to an existing trust the trustee is then holding for the primary benefit of that beneficiary. The settlor’s will provides that any trust in existence 21 years after the death of the last to survive of settlor and settlor’s descendants living at the time of settlor’s death shall then terminate.

The trustee provisions provide, in relevant part, that no beneficiary may become trustee, and no beneficiary may be appointed with the power to remove trustees.

The state statute provides that the court may modify the trust terms or change the trustee on the trustee or beneficiary’s petition if the order furthers the purposes of the trust.

Modifications Proposed

The court order proposed modifications to the distribution provisions such that property originally passing free of trust to a beneficiary would be retained in a separate trust for the beneficiary’s lifetime. First, any income distribution from the trust to the grandchild or more remote descendant of the child during the child’s lifetime may be retained in a separate trust of which such descendant is the lifetime beneficiary. Second, any distribution of income or principal from the trust to the grandchild or more remote descendant of the child at the child’s death shall be retained in a separate trust of which such descendant is the lifetime beneficiary. Third, the beneficiary of each separate trust shall have a general power of appointment (GPOA) under IRC Section 2041(a)(2), which renders the trust property includible in the gross estate of the beneficiary at their death.

Additionally, the court order proposed various modifications to the trustee removal and succession provisions, including that certain beneficiaries have the power to singularly or jointly appoint co-trustees and successor trustees and that a trustee appointee may not be a beneficiary or related or subordinate party under IRC Section 672(c).

GST Trust Modifications

Treas. Regs. Section 26.2601-1(b)(4)(i) provides the parameters for modifications to a GST-exempt trust. Specifically, the following must apply: (1) the modification must be a judicial reformation or nonjudicial reformation valid under applicable state law, (2) the modification won’t shift a beneficial interest in the trust to a beneficiary occupying a lower generation than those holding a beneficial interest prior to the modification, and (3) the modification doesn’t extend the time for vesting of a beneficial interest past the period provided in the original trust. Mere administrative changes that only indirectly increase the amount transferred won’t be considered a shift of beneficial interest.

IRS Rulings

Turning first to the issue of whether the GST tax would be imposed as a result of the proposed modifications, the IRS determined that the distribution passing to a trust which grants the primary beneficiary a GPOA under Section 2041(a)(2) didn’t trigger the GST tax because the primary beneficiary becomes the transferor at their death. The result is that the proposed modifications to have the distribution pass in trust rather than outright to such beneficiary won’t cause a shift of beneficial interest to a lower generation nor extend the period for vesting beyond what was originally provided in the trust.

Similarly, the IRS ruled that the proposed modifications to the trustee removal and succession provisions are administrative in nature and only indirectly increase the amount transferred. Therefore, these changes to trustee provisions won’t cause the trust to become subject to GST tax.

The IRS further determined that because the trust’s beneficial ownership remained the same after the proposed court modifications, no disposition or transfer subject to gift tax or gain or loss recognition occurred.

Through the years, the U.S. Tax Court has clarified the gift tax consequences of terminating qualified terminable interest property (QTIP) trusts. Two new cases in 2024, Estate of Sally J. Anenberg v. Commissioner and McDougall v. Comm’r, have helped to confirm our understanding of these often complex transactions.

Background on QTIP Trusts

QTIP trusts are popular estate-planning tools that allow grantors to provide for a surviving spouse while maintaining control over the ultimate disposition of assets. When properly structured, these trusts qualify for the marital deduction, deferring estate taxes until the surviving spouse’s death. To qualify, the trust must give the surviving spouse a mandatory right to all income for life, prohibit anyone from appointing property away from the spouse during their lifetime and require a QTIP election on a timely filed estate tax return.

Gift tax considerations for QTIP trusts are intricate and have far-reaching implications. If a surviving spouse makes an inter vivos gift of any portion of their income interest in a QTIP trust, it triggers special gift tax rules under Internal Revenue Code Section 2519(a), treating it as a transfer of all interests in the trust other than the qualifying income interest. (The gift of the qualifying income interest is separately subject to gift tax under IRC Section 2511.) This provision is designed to prevent circumvention of QTIP rules and ensures that the gift is valued at the fair market value of all trust interests minus the value of the surviving spouse’s qualifying income interest. Thus, even partial interest transfers can potentially result in a deemed transfer of the entire trust.

The terminable interest rule forms the foundation of QTIP trust taxation, ensuring that property qualifying for the marital deduction at the first spouse’s death doesn’t escape taxation at the second spouse’s death. This rule and other provisions create a comprehensive system to maintain the integrity of the unlimited marital deduction and ensure that QTIP trust assets remain in the transfer tax system. These assets are either included in the surviving spouse’s estate at death (under IRC Section 2044) or subject to gift tax if disposed of during their lifetime (under Sections 2519 and 2511), effectively preventing tax avoidance while coordinating with the estate tax to avoid double taxation.

 Anenberg: Setting the Stage

Anenberg centered around the termination of a QTIP trust established by Alvin Anenberg for his wife, Sally. On Alvin’s death in 2008, significant assets were placed in a QTIP trust for Sally’s benefit, with Alvin’s children from a prior relationship as remainder beneficiaries.

In 2011, with the consent of all beneficiaries, the trustee petitioned to terminate the trust and distribute its assets to Sally. Following the distribution, Sally gifted some of these assets to trusts for Alvin’s children and sold most of her remaining interests to trusts for Alvin’s descendants in exchange for promissory notes.

Tax Court’s Analysis in Anenberg

The Tax Court rejected the Internal Revenue Service’s position that the QTIP trust termination and subsequent sale resulted in a taxable gift under Section 2519. The court emphasized that a transfer alone isn’t sufficient to create gift tax liability, citing U.S. Supreme Court precedent that defines a gift as proceeding from “detached and disinterested generosity” or similar impulses. The court compared Sally’s interests before and after the trust termination, concluding that she received more than she surrendered as she gained full ownership and control of the assets. The court also found that Sally retained dominion and control over the assets, rendering any potential gift incomplete under Treasury Regulations Section 25.2511-2(c).

The court likened the trust termination to an exercise of a power of appointment in Sally’s favor, noting that appointing QTIP assets to the surviving spouse isn’t treated as a disposition under Section 2519 and therefore doesn’t trigger gift tax. Importantly, the Tax Court distinguished this case from Estate of Kite, in which a QTIP trust termination was part of a scheme to avoid both estate and gift tax. In Anenberg, the value of the distributed assets remained in Sally’s estate for future gift or estate taxation, preserving the integrity of the QTIP regime.

The court focused solely on whether Sally made a gift as a result of the QTIP trust termination and subsequent transactions. It didn’t consider or rule on the potential gift tax implications for the remainder beneficiaries (Alvin’s children and grandchildren).

McDougall: Building on Anenberg with a Twist

The more recent case of McDougall, decided on Sept. 17, further clarified the gift tax treatment of QTIP trust commutations. This case involved Bruce McDougall and his children, Linda Lewis and Peter McDougall, following the death of Clotilde McDougall in 2011.

On Clotilde’s death, her estate passed to a residuary trust in which her husband, Bruce McDougall, held an income interest, and their two children held remainder interests. As the estate’s representative, Bruce elected to treat the trust property as QTIP under IRC Section 2056(b)(7), allowing for a marital deduction on Clotilde’s estate tax return.

In 2016, Bruce and his children entered into a nonjudicial agreement to commute and terminate the QTIP trust, distributing all assets to Bruce. Subsequently, Bruce sold some of these assets to new trusts established for the benefit of Linda, Peter and their children, receiving promissory notes in exchange.

The parties filed separate gift tax returns for 2016, claiming that these transactions resulted in offsetting reciprocal gifts with no gift tax due. However, the IRS challenged this position, issuing notices of deficiency to both Bruce and his children. The IRS contended that the trust commutation resulted both in gifts from Bruce to his children under Section 2519 and in gifts from the children to Bruce of their remainder interests under Section 2511. Importantly, the gifts-from-children-to-parent aspect in McDougall doesn’t appear to have been asserted by the IRS in Anenberg.

Tax Court’s Decision in McDougall

The Tax Court, following its prior decision in Anenberg, ruled in favor of Bruce regarding his potential gift tax liability. The court held that Bruce didn’t make taxable gifts to his children under Section 2501, even if there was a transfer of property under Section 2519 when the QTIP trust was commuted. The court reasoned that Bruce made no gratuitous transfers, and the exchange of trust property for promissory notes didn’t constitute a gift.

However, the Tax Court agreed with the IRS that Linda and Peter made taxable gifts to Bruce of their remainder interests in the trust under Section 2511. The court rejected the taxpayers’ argument that the transactions resulted in offsetting reciprocal gifts, emphasizing that while Section 2519 may deem a transfer, it doesn’t deem a gift from Bruce to his children.

This decision clarifies the gift tax treatment of QTIP trust commutations and highlights the potential gift tax liability for remainder beneficiaries when terminating such trusts early. It underscores the importance of carefully planning and considering gift tax consequences when modifying or terminating QTIP trusts.

Implications for Estate Planning

These recent decisions offer several crucial takeaways for estate planners and QTIP trust beneficiaries:

1. Trust terminations of QTIP trusts that involve a distribution of property solely to the surviving spouse don’t, in and of themselves, appear to trigger any gift tax consequences to the surviving spouse, as demonstrated in both Anenberg and McDougall.
2. The substance of transactions is paramount in determining gift tax consequences. Both cases emphasize the importance of looking beyond the form of the transactions to their economic reality.
3. Careful structuring of subsequent transactions is essential to avoid unintended gift tax exposure. McDougall,  in particular, highlights the need to consider the tax implications of any transactions following the trust termination and demonstrates that remainder beneficiaries of the QTIP trust may be subject to gift tax on the terminating distributions to the surviving spouse because they’re gratuitously relinquishing an interest in trust property without receiving full and adequate consideration for it in money or money’s worth.
4. Remainder beneficiaries may face gift tax consequences when consenting to early trust termination. This aspect of McDougall adds a new dimension to the planning process for QTIP trust terminations.
   • If the QTIP trust has a broad standard for distributions, such as best interests or “as the trustee determines,” a trustee’s exercise of that discretion to distribute assets to the spouse to allow them to engage in lifetime tax planning shouldn’t be subject to question by the remainder beneficiaries.
   • If the standard is ascertainable, such as for health and support, and the trustee nevertheless distributes assets of the QTIP trust to the spouse to engage in tax planning, then the IRS could assert that the remainder beneficiaries made a gift to the spouse by failing to challenge the trustee’s exercise of discretion.

Anenberg and McDougall underscore the importance of considering all aspects of trust terminations, from the initial distribution to any subsequent transactions, and the potential gift tax implications for all parties involved. As the legal landscape continues to evolve, these cases serve as crucial reference points for professionals navigating the complex world of estate planning and QTIP trust terminations.