53 rd Annual Philip E. Heckerling Institute on Estate Planning January 14-18, 2019 Heckerling 2019 Report #2

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1 53 rd Annual Philip E. Heckerling Institute on Estate Planning January 14-18, 2019 Heckerling 2019 Report #2 Heckerling 2019 University of Miami School of Law Center for Continuing Legal Education Orlando World Center Marriott Resort and Convention Center Orlando, Florida GENERAL INFORMATION ABOUT INSTITUTE: Inquiries/Registration: Philip E. Heckerling Institute on Estate Planning, University of Miami School of Law Center for Continuing Legal Education 1311 Miller Dr., C-423 Coral Gables, FL Telephone: / FAX: Web site: heckerling@law.miami.edu Headquarters Hotel - Orlando World Center Marriott 8701 World Center Drive Orlando, FL Telephone (407) , FAX (407) NOTICE: Although audio tapes of all of the substantive session at the Miami Institute currently are only made available to Institute registrants for purchase, the entire proceedings of the Institute, other than the afternoon special sessions, are published annually by Lexis/Nexis. For further information, visit their Web site at The text of these proceedings is also available on CD ROM from Authority On-Demand by LexisNexis Matthew Bender. For further information, contact your sales representative, or call (800) , or fax (518) , or go to or write to Matthew Bender & Co., Inc., Attn: Order Fulfillment Dept.,1275 Broadway, Albany, NY NOTICE: The content herein is to be used for information purposes only. Neither the Heckerling Institute nor the University of Miami represent or warrant the accuracy or completeness of the information contained in these Reports, and do not endorse the content. Moreover, the views expressed herein do not necessarily reflect the views of the Heckerling Institute or the University of Miami. In no event will the Heckerling Institute or the University of Miami be liable for any damages that might result from any use of or reliance on these Report. This reporting service is brought to you by the ABA-PTL Discussion List Moderators. The URL for the ABA-PTL searchable Web-based Archives is: 1

2 Heckerling 2019 Report #2 As we have done in January for the last twenty-two years, and again with the permission of the University of Miami School of Law, we will be posting daily Reports to this list containing highlights of the proceedings of the 53rd Annual Philip E. Heckerling Institute on Estate Planning that is being held on January 14-18, 2019 at the Orlando World Center Marriott Resort and Convention Center in Florida. A complete listing of the proceedings and the Institute's 2019 brochure are available at and the list of speakers and the Advisor. This Report #2 continues our coverage of the Institute with reports on Tuesday s morning general sessions on section 199A, charitable giving, qualified small business stock, and the different forms of families. The next Report #3 will conclude the coverage of the Tuesday general sessions. General Session 1 Getting The 411 On IRC 199A: Just the Facts Ma am January 15, 2019 Melissa Willms, Davis & Willms, PLLC, Houston, TX Tuesday Morning ABA Reporter: Bruce Tannahill This session was designed to break down Section 199A and clear the fog, not to be an all things Section 199A presentation. Ms. Willms provided an overview of the section and the computations required to determine a taxpayer s Section 199A deduction. She noted that the IRS and Treasury issued proposed regulations with what seems to be lightning speed on August 8, A hearing on the proposed regulations was held on October 16, 2018 and final regulations are being reviewed by the Office of Information and Regulatory Affairs, a subagency of the Office of Management and Budget. SECTION 199A VOCABULARY Section 199A introduced new terms and uses old terms in a new way. The list of terms with definitions that are required to understand the section covers over 10 pages of Ms. Willms outline. The terms include: Aggregated trades or businesses Alternative limitation Applicable percentage Combined qualified business income amount (combined QBI amount) Depreciable period 2

3 Excess amount Individual Phase-in limit, amount, or range Qualified business income (QBI) Qualified items of income, gain, deduction, and loss QBI component Qualified property Qualified publicly traded partnership (PTP) Qualified real estate investment trust (REIT) dividends Qualified trade or business Reduction amount Relevant pass-through entity (RPE) Specified service trade or business (SSTB) Threshold amount Total QBI amount Unadjusted basis immediately after acquisition (UBIA) of qualified property W-2 wages On December 19, 2018, the IRS released a draft of the 2018 Publication 535, Business Expenses. Ms. Willms noted that several discrepancies exist between it and the proposed regulations: The regulations require a PTP to report whether it is a SSTB while Pub 535 is silent on this requirement. The regulations explicitly say brokerage services for purposes of SSTB doesn t include life insurance agents or brokers while Pub 535 says it does. Pub 535 says to complete Schedule B on aggregation and keep for your records while the proposed regulations say that the IRS may disallow aggregation if a worksheet is not attached to the return. CALCULATING THE DEDUCTION At its simplest, the Section 199A deduction is the lesser of the combined QBI amount or 20% of taxable income less net capital gains. Determining the combined QBI amount is tricky because modifications may need to be made, depending on the facts. Ms. Willms divides taxpayers into three strata: Stratum I taxpayers whose taxable income is at or below the Section 199A threshold amount of $315,000 for married taxpayers filing jointly and $157,500 for all other taxpayers Stratum II taxpayers whose taxable income is above the threshold amount but within the added Section 199A phase-in range Stratum III taxpayers whose taxable income is above the threshold amount plus the Section 199A phase-in range 3

4 For these purposes, taxable income is reduced by net capital gains, which the speaker referred to as net ordinary income. The computation of the Section 199A deduction depends on which stratum the taxpayer is in. Only taxpayers in Strata II and III are concerned with the rules on SSTBs, W-2 wages, and UBIA. Stratum I these taxpayers simply take 20% of QBI and compare to 20% of net ordinary income and the lesser of the two is the deduction. Stratum II these taxpayers determine net ordinary income. Determining the QBI component goes off the rails because the alternative limitation based on the greater of 50% of W-2 wages or 25% of W-2 wages and 2.5% of UBIA must be computed and the impact of the phase-in of the limit on deductions for SSTB determined. Stratum 3 these taxpayers also start by determining calculate net ordinary income. Anything that s an SSTB is ignored for section 199A purposes. The non- SSTB QBI deduction gets more complicated because you must calculate the alternative limitation. Now determine the QBI component, add 20% of aggregate qualified REIT income and 20% of aggregate PTP income to get the QBI component. Finally, the QBI component is compared to 20% of net ordinary income. REPORTING BY PASS-THROUGH ENTITIES Relevant pass-through entities (RPE), pass-through entities that either operate a trade or business or pass through qualified items from another RPE to an individual, must report information about each trade or business to the individual. The individual s share of QBI is reported to them on a K-1, along with elements. On the K-1, the information is reported in box 20 with a code to indicate type. If there are multiple trades or businesses, each must be reported separately on K-1 or Schedule C. RPEs must determine if a trade or business is an SSTB and report to the owner its determination. One RPE may have both SSTBs and non-sstbs. The individual taxpayer then determines if it matters. TIP OF THE ICEBERG Performing the above calculation may require numerous other calculations. Ms. Willms notes in her outline that Section 199A and the regulations add a new income tax wrinkle for planning involving businesses and their owners. Vince Lackner, president of the Lackner Consulting Group, who has developed software to do the Section 199A calculations and assist with the planning they create, said that it is the most complicated software he has developed in decades of tax and fiduciary software development. 4

5 General Session 2: Qualified Small Business Stock: The Next Big Bang January 15, 2019 Paul S. Lee Tuesday Morning, 9:50 am to 10:40 am ABA Reporter: Scott Hancock Mr. Lee started this session by referring to comments he made at Heckerling in 2018 where he stated that Qualified Small Business Stock ("QSBS") under Section 1202 was going to mature as a planning device for estate planners as a result of the Tax Cuts and Jobs Act of This session covered a brief history of QSBS, calculations of gain under Section 1202, and technical definitions and considerations related to QSBS, and certain final thoughts. Part I History of QSBS Section 1202 was enacted in 1993 and has been amended several times to provide increasing exclusion amounts based on when the stock was acquired. However, after around twenty-five years there is virtually no additional authority for the interpretation of Code Section Two Treasury Regulations exist under Section 1202, but only one is relevant in interpreting Section Mr. Lee alluded to other potential tax advantageous strategies including Section 199A 20% deductions for pass-thru entities, Section 168(k) 100% expensing, and Section 1400Z Qualified Opportunity Zones, and then noted the greater long-term benefit of QSBS under Code Section He believes that owners should consider converting pass-thru entities that would qualify under Section 199A to a C corporation to utilize Code Section 1202, which is permanent, as compared to Section 199A, which is set to expire. Part II Calculation of Gain under Code Section 1202 Mr. Lee next reviewed an example of the gain calculation under Section 1202 on the sale of QSBS with a $5 million basis and FMV of $100 million where a 50% exclusion applied. According to Mr. Lee, the $95 million of gain would be subject to tax as follows: $25 million is Excluded Section 1202 Gain that is not subject to tax, $25 million is Section 1202 Gain subject to a 28% tax rate plus 3.8%, and $45 million is Non-Section 1202 Gain subject to a 20% tax rate plus 3.8%. Part III Technical Definitions and Considerations Mr. Lee next reviewed a number of technical definitions and considerations related to QSBS including Per-Issuer Limitation, Qualified QSBS Shareholder, Qualified Small 5

6 Business Stock and Original Issue, Eligible Gain, Code Section 1045 Rollover, Qualified Small Business, and Active Business Requirement. Per-Issuer Limitation The Per-Issuer Limitation prescribes the maximum gain that can be excluded (or partially excluded) each taxable year. Mr. Lee noted that when a taxpayer acquires QSBS through a contribution of property, the "adjusted basis" for these purposes is not to be less than the FMV. Other issues exist relating to Per-Issuer Limitation such as whether the Per- Issuer Limitation or exclusion is to be applied against eligible gain first. Qualified QSBS Shareholder A Qualified QSBS Shareholder Section 1202 exclusion is available to any shareholder that is not a corporation. Shareholders may benefit from Section 1202 if QSBS is held by a pass-thru entity such as a partnership, S corporation, regulated investment company, or common trust fund. To qualify, the pass-thru entity must meet certain requirements and certain benefit limitations may apply. Qualified Small Business Stock and Original Issue For stock to be Qualified Small Business Stock (QSBS) it must be: Stock in a C corporation issued after August 10, 1993, On the date of issuance, issued by a Qualified Small Business, and Acquired by the taxpayer at its original issue: In exchange for money or other property (other than stock), or As compensation for services provided to such corporation An "original issue" occurs when stock is issued directly from the corporation to a Qualified QSBS Shareholder. However, the "original issue" requirement is not violated by transfers by gift, at death, or in a transfer from a partnership to a partner. Transfers from an S corporation to an S corporation shareholder or from a partner to a partnership are not a permissible. Eligible Gain The Section 1202 exclusion and the Per-Issuer Limitation is applied against "eligible gain", which is any gain from the sale or exchange of QSBS, which has been held by the taxpayer for more than 5 years. Tacking of a transferor s holding period is allowed for permissible transfers, corporation conversions, tax-free exchanges (e.g., Sections 351 and 368), and Section 1045 rollovers. Section 1045 Rollover A taxpayer may defer recognition of gain on the sale of QSBS if certain requirements are met, including acquiring replacement QSBS within 60 days of the original sale. Mr. Lee noted the following planning considerations with respect to rollovers: 6

7 The taxpayer has the option to elect a rollover for each sale, if there is more than one sale of QSBS in a year. The rollover applies based on the amount of sale proceeds used to acquire replacement stock. Separate lot accounting for rollovers is critical to maximize deferral. Basis in the replacement QSBS is applied in the order acquired. Qualified Small Business A Qualified Small Business is a: Domestic C corporation, That meets the aggregate gross asset requirement, which is that o At all times on or after August 10, 1993, o Before the issuance of stock, o Immediately after issuance, and o Aggregate gross assets do not exceed $50 million. Mr. Lee indicated that the aggregate gross asset requirement mean may mean that all times without exception such amount must be below the $50 million amount to qualify. Active Business Requirement To be QSBS, during substantially all of the taxpayer's holding period the corporation must meet the Active Business Requirement. This requirement is met if: At least 80% (by value) of all of the assets are in the active conduct of one or more qualified trades or businesses, and The corporation is an eligible corporation, meaning a domestic corporation with certain exceptions. Part IV Final Thoughts Mr. Lee concluded by highlighting the following as continuing issues: Defining transfers by gift, at death, and other transfers (or non-transfers), Stacking and packing (multiplying and leveraging) the Per-Issuer limitation, QSBS with pre-existing businesses, Inadvertently losing QSBS status, QSBS and carried interest, Reporting QSBS installment sales, and Charitable planning with QSBS and the basis adjustment at death. 7

8 General Session 3: Estate planning and trust management for the brave new world: it s all in the family what s a family? R. Hugh Magill Tuesday Morning January 15, 2019 ABA Reporter: D. W. Craig Dreyer INTRODUCTION Mr. Magill started the presentation by explaining how the typical American family has dramatically changed from a two generation family to typical family today that often spans four generations. He discussed how the generational differences often lead to challenges in estate planning and the allocation of family financial wealth. GENERATION ATTRIBUTES Mr. Magill noted that in order to show the change in generations he resorted to gross generalizations of the various generations from the Traditionalists that formed the basis of many of the estate planning documents we use to the Millennials of today. Traditionalists are shaped by the Great Depression and generally recall listening to the events of D-Day on a radio. One-third of the generation lived on farms. The generation had a strong sense of duty. Institutional commitment was very high. This generation valued paternalism and control which shaped the way they approached estate planning. The Boomer generation is known for Woodstock and are currently retiring in large numbers. Boomers are shaped by the turbulence of the 1960 s, the Vietnam War, and the presidential assassination they watched on a grainy black and white television. The parental model was evolving, but strict obedience gives way to accommodation as women gained time and autonomy. Some traits of the generation include optimism, hardworking, and competitive natures. This generation competed for everything, had clear views of good and bad, and communism versus capitalism. Generation X was the first generation to have a two working parent household, and many lived with divorce. Technology crept into the generation and they often taught parents how to use technology. This was the first generation where kids came home alone and saw pictures of missing children on milk cartons. Generation X is skeptical due to their independence and the pragmatism necessary for their survival. They seek more balance in work and civic lives after watching their parents lives. The Millennial Generation witnessed 9/11, are digital natives, helped elect Barack Obama, and have a broad sense of family. Both parents worked in this generation, but parents were much more involved in kids lives as they had flexibility. Boomers as the parents of Millennials created the helicopter parents. A generation of high self-esteem where everyone got a trophy. They are very culturally and socially aware, but they carry 8

9 an albatross of student loan debt, and entered the job market during the recession of 2008 and They are considered first post-racial and post-gender generation. FAMILY DEMOGRAPHICS Mr. Magill then transitioned to how family dynamics have changed. The average American life expectancy has increased significantly over the years. A twenty-year-old living today is more likely to have a living grandmother than a twenty-year-old in 1900 was to have a living mother. Married households constituted 80% of households in the 1950 s and this has fallen to lower than 50% today. In 1960, fifty-nine percent of year olds were married, and today it is less than eighteen percent. Cohabitation has doubled prior to marriage. Deferment of marriage means different economic and education levels at marriage. Today marriage often comes after cohabitation, children, and financial security. Marriage has many legal benefits and the Supreme Court still recognizes it as both a basic civil right and institution central to our human existence, but the American public favors marriage less than in the past. Many view marriage as becoming obsolete. Today s Generation X and Millennials often view marriage as a capstone experience rather than a cornerstone experience as did the generations of the past. Needless to say, there has been a fundamental change in the way the generations view marriage. CHANGES IN FAMILY STRUCTURES In addition to the change in demographics the family structure has also changed. In 1950 s the prototypical American family was a married heterosexual family with three biological children. Today this is the seventh most common type of American family. The most common household today is a single individual. Family structures are evolving. With the traditional family structure, divorce generally happened only after the children left. Boomers divorce earlier and much more frequently and remarriage with blended families are more common. One-sixth of children today are raised in blended families and 40% of Americans have one or more step-relatives. Today we have blended sex families and adoption of children by a third spouse without the biological spouse giving up parental rights. This is provided for by statute in four states and judicially created in another. So, some children now have a three-parent family that is legally recognized. In addition, today websites match people to raise children who do not wish to marry or cohabitate. Essentially, family by design. These sites have tens of thousands of users. Today there is also the ability to conceive children posthumously. It is a new era of family dynamics enabled in part by extraordinary artificial reproductive technology. ESTATE PLANNING AND TRUST MANAGEMENT FOR A NEW WORLD 9

10 Mr. Magill began to discuss the impacts of all these changes on the allocation of financial wealth, evolution of trusts, and how families will collaborate. This applies in multiple areas. For Americans who responded to recent study for people over 50, 42% have no will, and 38% will die without a will. If a respondent had a step-child the rate of intestacy increases to 49%, and if a child had stopped communicating with a parent, the rate of intestacy jumps to 59%. Finally, if a person is divorced intestacy jumps to 62%. Questions arise due to all these changing dynamics that become much more involved. Issues include: to whom, which, how much, when, in what form, and who will serve as surrogates. In the modern family, ages of members of different generations are often only separated by 10- or 15-year increments which changes the model for family planning. Concerns about a step-parent being impediment to a children s inheritance is often an issue with younger spouse and older children. The traditional plan using a life estate must be thrown out the window in many circumstances. How people communicate about wealth has also changed. Older generations usually did not discuss wealth with family members. Today boomers need and want to discuss wealth issues such as wealth sufficiency, expectations about deployment, and lifetime v. testamentary allocation; so an evolution into the design of trusts is occurring. The new process will be less focused on transfer taxes and more on family goals. HOW WILL TRUSTS NAVIGATE THE GENERATIONAL DIVIDE Today trusts must navigate the generational divide between grantors and their beneficiaries. Due to the large divergence it may be better to show actual intent in our trusts. Providing a trust statement purpose has two audiences: first, the trustee who can see the grantor s unique rationale and views on the lifespan of the trust. This also helps instruct the trustee how to use discretionary powers. These statements may also be helpful for trust protectors. The second audience is the beneficiaries. It allows the beneficiaries to see the grantor s intent in a simple statement. With the broad trustee powers, discretionary trusts with sprinkle or spray powers often put the trustee in a problematic position unless the intent is clear. The trustee must also balance the confidences of the beneficiaries with the objective reporting requirements of the trustee. As a general rule, Mr. Magill noted that if people do not live in the same household, they should not share the same trust. In the past, the trustee role was straightforward. Today the reallocation of fiduciary responsibility and statutory powers allow flexibility in design and powers that can fundamentally alter the design of a trust. Today trustees are often put at odds between their fiduciary duties which may conflict with broad authorities given by statue to allow flexibility. Mr. Magill noted that these issues will force us to reevaluate how we proceed with our estate planning and especially our trust design. 10

11 General Session 4: Make Your Charitable Estate Plan Great Again - Charitable Planning with Retirement Accounts: Strategies, Traps and Solutions Christopher Hoyt Tuesday, January 15, 2019, 11:45 12:35 ABA Reporter: Kristin Dittus Christopher Hoyt discussed tax effective charitable giving for this 50-minute session in three (3) main parts with plenty of humor to keep us engaged. PART ONE - Charitable IRA Rollover The 2017 Tax Cut and Jobs Act ( Tax Act ) is expected to reduce the number of households claiming an itemized deduction for a charitable gift from about 37 million in 2017 to 16 million in Instead of itemizing, many households will take the higher standard deduction of $12,000 per person or $24,000 for married couples and lose the tax deduction benefit of their charitable contribution. Of donors who do not itemize, IRA owners who are 70 ½ can achieve the equivalent of a charitable income tax deduction for up to $100,000 of charitable gifts when made from their IRAs. For these taxpayers, all charitable donations up to $100,000 should be made from their IRAs. Every dollar distributed to a tax-exempt charity from the IRA prevents the donor from taking that IRA distribution as income. All donations must come directly from the IRA to qualify. The donor should get a letter from the charity confirming the donation and that they received nothing in return. The donor can set up an IRA through a brokerage account with a check book to avoid the hassle of going through an IRA administrator who may be resistant to writing multiple checks for small values. On the tax return, the taxpayer should include the total distribution to self and to charity and then add the 3 letters QCD next to the taxable distribution to indicate there was a Qualified Charitable Distribution. This only works for donors who are 70 ½ whose IRAs make these distributions, it is not available for distributions from 401(k)s. Some clients may think of donating appreciated stock to charity, but unlike an IRA, appreciated stock gets a step up in basis on death providing a bigger benefit to the inheritor. PART TWO - Income Tax Deductions for Charitable Bequests of IRD: Prof. Hoyt went over several examples to illustrate how gifts are written in the estate plan and how the language used will affect the tax deduction of the gift. Income in Respect of Decedent (IRD) is a payment received after death that would have been taxable income to the decedent. Retirement assets are biggest source of IRD. Allocating retirement assets to charity avoids the payment of income tax on the IRD because charities are generally exempted from paying income tax. The language used to make the gift is important and 11

12 the taxpayer will not get a deduction unless the governing instrument provides for a gift to charity. The best way to structure a charitable gift is to pay IRD to a charity, using a charitable deduction as backup. The materials include examples of drafting provisions for estate planning documents to accomplish these goals. The executor of the estate can also be given discretion to allocate income as part of the charitable gift. Example 1: If a gift is written as: $10,000 to a charity; pay all income to my child, there WILL be a charitable estate tax deduction on 706, but NO charitable income tax deduction on Example 2: Pay all income of my estate to charity, no other gifts to charity. This specific allocation of income WILL achieve a charitable income tax deduction on the 1041, but no charitable estate tax deduction on the 706. A typical charitable bequest from the estate that does reference a gift of income generally will not get an income deduction. Economic effect independent of income tax consequences: A 2012 regulation provides that a governing instrument that identifies income for the charitable distribution will control only if it has an economic effect independent of income tax consequences. This regulation governs the character of the income distributed and not whether an estate or trust is eligible to claim a deduction at all. The regulation can however cause the amount of the deduction to be less than the amount of IRD transferred to the charity. PART THREE - Income-Based Charitable Bequests Income tax savings can be achieved with income-based charitable bequests. A practitioner may want to include charitable bequests in the income section of the governing instrument to ensure the best deduction is achieved. The document can also provide that all income up to a certain amount will be paid to charity, and if there is insufficient income, the gift can be paid from the principal of the estate. DNI and the two-tier system: Assume $40,000 of DNI. A mandatory payment of $30,000 to sister who is a tier 1 beneficiary will absorb DNI first, and a discretionary payment to daughter as needed for HEMS makes the daughter a tier 2 beneficiary which will absorb the remaining $10,000 of DNI. If we add a charitable gift of $20,000, the charitable income tax deduction falls in Tier 1.5," and will pick up the remaining DNI after tier 1. In this case, there is no DNI left to assign to the tier 2 beneficiary. ==================================================== We also will be posting the full text of each of these Reports on the ABA RPTE Section's Heckerling Reports Website at heckerling-2019/as we have since the 2000 Institute. The Reports from 2000 to 2018 can now be found athttps:// In addition, each Report from 2006 to date can also be accessed at any time from the 12

13 ABA-PTL Discussion List's Web-based Archive that now only goes as far back as January of 2006 and is located athttp://mail.americanbar.org/archives/aba-ptl.html. Our on-site local Reporters who are present in Orlando in 2019 are Joanne Hindel, Esq., a Vice President with Fifth Third Bank in Cleveland, Ohio; Craig Dreyer, Esq., an attorney with the Dreyer Law Firm in Stuart, Florida; Kristin Dittus, Esq., a solo attorney with offices in the Denver, Colorado area, Michael Sneeringer, Esq., an attorney with Porter, Wright, Morris and Arthur, LLP in Naples, Florida, Michelle R. Mieras, Esq., Chief Fiduciary Officer, SVP, with ANB Bank in Denver, Colorado, Beth Anderson, Esq., an attorney with Wyatt, Tarrant & Combs, LLP in Louisville, Kentucky; Patrick J, Duffey, Esq, an attorney with Holland & Knight in Tampa, Florida; Scott M. Hancock, Esq., an attorney with Winstead PC; Edwin P. Morrow III, Esq.,. Eastern U.S. Wealth Strategist for U.S. Bank Private Wealth Management in Cincinnati, Ohio; and David J. Slenn, Esq., an attorney with Shumaker, Loop & Kendrick, LLP, in Tampa, Florida. The Report Editors in 2019 will be Bruce A. Tannahill Esq., a Director of Estate and Business Planning in the Mass Mutual Financial Group in Phoenix, Arizona, He will be ably assisted in those duties this year by Reporter Michelle R. Mieras. Esq. 13