2018 Advanced Estate Planning Survey Course. CHAPTER I Current Events/New Tax Law Issues Rick E. Graves Wilmington

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1 2018 Advanced Estate Planning Survey Course TABLE OF CONTENTS CHAPTER I Current Events/New Tax Law Issues Rick E. Graves Wilmington A. Introduction... I-1 B. Transfer Tax Planning... I-2 1. Still 4, I-2 2. Temporary Use It or Lose It... I-2 C. And Then.The Rest of Advanced Estate Planning... I-4 1. Revocable Trust Funding... I-4 2. Assets Passing Outside the Estate Planning Documents... I-6 3. Unwinding and Modifying for Basis Planning... I-6 4. Portability... I-7 5. Income Tax... I-8 6. Charitable Planning... I-8 D. Closing Thoughts... I-9 CHAPTER II Charitable Giving C. Barton Bart Landess Charlotte A. Contents... II-2 B. Introduction... II-3 1. Overview... II-3 2. Giving Statistics... II-3 3. Assets v. Cash... II-4 C. Nonprofit Status... II-5 1. What is a Charity?... II-5 2. Establishing a Charity... II Maintaining Charitable Status... II Dissolution of a Charity... II-44 D. Differential Tax Benefits and Uses... II Introduction... II Donor Advised Funds... II-46

2 3. Supporting Organizations... II Private Foundations... II Matching Client Interests... II-63 E. Non-Cash Gifts... II Estate Gifts... II Charitable Gift Annuities... II Publicly Traded Securities... II Pre-Sale Gift of Stock... II Private Securities, Real Property & Business Interests... II Charitable Remainder Trusts... II Charitable Lead Trusts... II Bargain Sales... II Life Insurance... II Retirement Plan Assets... II Personal Property... II Savings Bonds... II-84 F. Current Issues... II New Developments... II Gift Opportunities... II IRS Concerns... II-92 G. Conclusion... II-94 CHAPTER III Basis Planning Patrick D. Newton Pisgah Forest A. Basis Planning vs. Estate Tax Planning... III-1 1. Old Paradigm for Tax Planning in Estate Planning... III-2 2. New Paradigm... III-2 B. Major Considerations When Planning an Estate... III-3 1. Are Estate Taxes an Issue... III-3 2. Will the Client move to a State with a State Estate or Inheritance Tax.. III-4 3. Where do the Children or Other Beneficiaries Live... III-4 4. Client s Life Expectancy... III-4 5. Risk of Loss in High Basis Assets... III-4 6. Risk of Legislative Changes in Transfer Tax Laws... III-4 7. Can Liquidity to Pay Taxes be obtained for the Estate Tax... III-4 8. Will the Asset be sold during the Client s Lifetime... III-5 9. Will the Assets be sold by the Heirs... III Consider the Type of Assets... III-5 C. Valuation Discounts... III-6 D. Bringing Assets Back into the Taxable Estate... III-7

3 1. Forcing Irrevocable Trust Assets into the Estate of a Beneficiary... III-7 2. Grantor Trusts with Swap Power to get low Basis Assets Back to the Grantor... III-7 E. Formula General Power of Appointment vs. Trust Protector Authority... III-8 1. Drafting a Formula General Power of Appointment... III-8 2. Trust Protector Granting a Power of Appointment... III-9 F. Leveraging up the Basis Step up... III Double the Step up... III Leverage the Step up with Debt... III-12 G. Reverse Estate Planning... III Reverse Estate Planning with Gifts... III Reverse Estate Planning with Trusts... III-13 H. Basis Shifting with Partnerships... III-13 I. Phantom Estate Tax Exemption under the Tax Cuts and Jobs Act of III-14 J. Credit Shelter Trust or Portability... III-15 K. Basis Compliance... III-15 L. Exhibit A... III-17 M. Exhibit B... III-21 CHAPTER IV Federal Income Taxation of Trusts and Estates Sherwood C. Chris Henderson New Bern A. Introduction... IV-1 B. Origin of Subchapter J in the Internal Revenue Code... IV-1 1. Section 61 Gross Income Defined... IV-1 2. Section 102 Gifts and Inheritances... IV-1 C. Subchapter J... IV-2 1. General Inclusion of Income/Exceptions... IV-2 2. Theory of Subchapter J... IV-2 3. Subchapter J Entity... IV-2 4. Return Filing Requirements and Tax Rates Applicable to Subchapter J Entity... IV-7 D. Definitions... IV Fiduciary Accounting Income... IV Taxable Income of Entity... IV Distributable Net Income ( DNI )... IV-15 E. Simple Trust... IV Simple Trust Defined... IV Section 651 Deduction for Trusts Distributing Current Income Only... IV Section 652 Inclusion of Amounts in Gross Income of Beneficiaries of Trusts Distributing Current Income Only... IV-19 F. Complex Trust... IV-21

4 1. Complex Trust Defined... IV Section 661 Deduction for Estates and Trusts Accounting Income or Distributing Corpus... IV Section 662 Inclusion of Amounts in Gross Income of Beneficiaries of Estates and Trusts Accumulating Income or Distributing Corpus... IV-22 G. Special Rules... IV Specific Gifts, Bequests, Etc.... IV Separate Share Rule... IV Sixty-five Day Rule... IV Election to Treat Revocable Trust as Part of Estate... IV Income in Respect of a Decedent ( IRD )... IV Deductions in Respect of a Decedent ( DRD )... IV-31 H. Distributions and Transfers of Property in Kind... IV General Scheme.... IV Section 643(e) Treatment... IV Kenan Concept... IV-33 I. Grantor Trust Rules... IV Background... IV Section 671 Trust Income, Deductions, and Credits Attributable to Grantors and Substantial Owners... IV Section 672 Definitions and Rules... IV Section 673 Reversionary Interests... IV Section 674 Power to Control Beneficial Enjoyment... IV Section 675 Administrative Powers... IV Section 676 Power to Revoke... IV Key Tax Principles Regarding Grantor Trusts... IV Changing Focus of Estate Planning... IV-42 CHAPTER V What Every Estate Planner Should Know About Subchapter K Andrea C. Chomakos Charlotte A. The Basics of Subchapter K... V-1 1. Partnership Formation and Contribution Capital Accounts and IRC 704(b)... V-1 2. Tax Capital Accounts and Outside Basis... V-3 3. Book Tax Differences and IRC 704(c)... V-4 B. Partnership Distributions... V-7 1. IRC 731 Current Pro Rata Distributions... V-7 2. IRC 751 Non-Pro Rata Distributions... V-8 3. IRC 736 Liquidating Distributions... V-8 4. IRC 737 Distributions of Contributed Property... V-9 5. IRC 752 Effect of Liabilities on Distributions... V-10

5 6. Basis Adjustments under IRC V-11 C. Transfers of Partnership Interests... V Transfer of Partnership Interests Adjusted Tax Basis, Gain and Loss Issues... V IRC 754 Election... V IRC 708(d) Technical Terminations... V-18 D. Estate Planning and Administration Issues... V Gift on Formation... V Investment Company Rules... V Single Member LLC Issues... V Annual Exclusion Gifts Present Interest... V Funding Pecuniary Bequests... V Fiduciary Accounting and Tax Distributions under the Uniform Principal and Income Act... V Partnership Owned Life Insurance... V-36 CHAPTER VI Refashioning Irrevocable Trusts: Practical and Tax Considerations for Modifying Irrevocable Trusts Elizabeth K. Liz Arias Raleigh A. Scope Note... VI-1 B. Modification and Termination of Irrevocable Trusts: An Overview of 36C through 36C of Article 4 of NC s Uniform Trust Code... VI-1 1. Overview... VI-1 2. Layout... VI-1 3. Procedure... VI-2 4. Chart... VI-3 C. Decanting to and from Irrevocable Trusts: An Overview of Article 8B of North Carolina s Uniform Trust Code... VI-3 1. Overview... VI-3 2. Concept of Decanting... VI-3 3. General Rule in North Carolina... VI-4 4. Consent by a Beneficiary... VI-5 5. Decanting by Trustee-Beneficiary... VI-5 6. Restrictions on Ability to Decant... VI-5 7. Decanting to a Special Needs Trust... VI-8 8. Exercise of Special Power of Appointment... VI-8 9. Rule against Restraints on Alienation... VI Spendthrift Provisions, Etc.... VI Duty to Decant... VI Duty when Decanting... VI Decanting under Terms of Trust or Common Law... VI Exercise of Decanting Power and Notice of Exercise... VI Court Approval... VI-11

6 16. Limitation on Decanting... VI-11 D. Analysis of the Modification and Termination Statutes... VI Modification or Termination of a Non-Charitable Trust by Consent... VI Modification or Termination of a Trust: Unanticipated Circumstances or Inability to Administer Trust Effectively... VI Modification or Termination of an Uneconomic Trust... VI Reformation of a Trust to Correct Mistakes... VI Modification or Termination of a Trust to Achieve Settlor s Tax Objectives... VI Trust Decanting Compared... VI Tax Consequences of Modification or Decanting... VI-20 E. Charitable Trusts... VI Cy Pres... VI Procedure for Bringing Cy Pres Action... VI-22 F. Representation Issues... VI Basic Principles... VI Representation of Minors... VI Representation of Incapacitated Persons... VI Representation of Competent Persons... VI Other Representation Categories... VI-26 G. Hypothetical Number One Modify Trust Terms to Add Trustee Appointment and Removal Provisions... VI-27 H. Hypothetical Number Two Extending the Term of an Irrevocable Trust... VI-28 I. Hypothetical Number Three Establishing a Special Needs Trust for a Current Beneficiary... VI-29 J. Hypothetical Number Four Terminating a Trust that Qualified for the Marital Deduction... VI-30 K. Hypothetical Number Five Modifying the Terms of a Grandfathered Trust... VI-31 L. Hypothetical Number Six Modifying a Trust to Achieve Step-Up in Basis... VI-32 M. Hypothetical Number Seven Modifying Grantor or Non-Grantor Trusts... VI-33 N. Hypothetical Number Eight Eliminating a Presently Exercisable Power of Appointment... VI-34 O. Hypothetical Number Nine Changing Contingent Remainder Beneficiaries... VI-35 P. Hypothetical Number Ten Changes in Law/Scrivener s Error... VI-36 Q. Hypothetical Number Eleven Explanation of the UTC Representation Rules... VI-37