Wills and Trusts

Wyatt, Tarrant & Combs, LLP


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You Are Under Attack!

By Turney P. Berry

Blue ribbon pears at the Kentucky State Fair

Blue ribbon pears at the Kentucky State Fair

Yes, You. If you have an interest in a family business or benefit from a family business – and that is almost all of us  – then you should know that on August 2 the IRS unveiled a proposal specifically designed to increase the taxes paid by family business owners versus the unrelated owners of identical businesses. Family farms, investment companies, real estate investors and developers, every sort of business and business entity are included within the scope of the IRS proposal. Thus you need to take immediate action.

What does this new proposal do? Let’s consider a business with four equal owners that’s worth $10,000,000. The economic reality is that none of those co-owners could sell a one-quarter interest for $2,500,000. Appraisers tell us that minority interests – less than 50% of the vote – in privately held businesses should be discounted by 30% – 40% in a typical situation, although sometimes more or less depending on the facts in the real world.

Now let’s move from the real world to the world of the IRS. If the four owners are unrelated, then real world rules will apply. But if they are family members the Continue reading


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Turney Berry and Jeff Yussman author “How to Lower the High Cost of Dying – Business Succession 101” for Louisville Business First

Turney Berry and Jeff Yussman, members of the Firm’s Trusts, Estates & Personal Planning Service Team, wrote an article that was recently published in Louisville Business First.  The article, “How to Lower the High Cost of Dying – Business Succession 101,” describes how death taxes can be minimized with respect to a family business.

Please click here to read the full article.


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Jeff Yussman to present at the Kentucky Society of CPAs Conference, “CPAs & Seniors”

Jeff Yussman, member of Wyatt’s Trusts, Estates & Personal Planning Service Team, will be presenting at the Kentucky Society of CPAs conference, “CPAs & Seniors.”  He will be speaking on the topic “Special Needs Trust Planning for Families.”

Other topics include:

– What to expect with aging clients and their health
– VA, Medicare, Medicaid
– Estate planning for seniors
– Guardianships, powers of attorney, elder mediation
– Using your business forecasting skills for individual and family life planning
– Building a nice market with older clients
– Social Security planning

Click here to view the full agenda.  Click here to register.


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The New Tax Landscape for A/B Estate Plans

Walter Morris, member of Wyatt’s Trusts, Estates & Personal Planning Service Team and based in the Lexington office, was recently quoted in a Morningstar article on the new tax landscape for A/B estate plans.  The article, “Is Your Estate Plan Obsolete?” discusses how A/B plans work and suggests different options to consider for estate planning.

Click here to view the full article.


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Heckerling 2015

Estate_PlanningEarlier this month over 3,000 estate planning professionals comprised of Attorneys, Financial Planners, CPAs, Trust Administrators and others gathered in Orlando, Florida for the nation’s leading estate planning conference, the Heckerling Institute on Estate Planning.  Now celebrating its 49th year, Heckerling is designed for sophisticated attorneys, trust officers, accountants, insurance advisors, and wealth management professionals who are familiar with the principles of estate planning, but still offers fundamental programs to refresh and reinforce the basic theories underlying the most sophisticated plans. If you were not able to attend this week-long event filled with tax and non-tax planning topics, recent developments and other insightful tidbits of information, the American Bar Association’s Real Property Trust and Estate Section has a group of volunteers who report on each lecture at Heckerling.  These reports are emailed through the RPTE listserve and are available on their website.  One of Wyatt’s associates, Beth Anderson, was an ABA reporter this year, and you can read her reports as well as all the other reports here.


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MAXIMIZING AND MULTIPLYING THE “STEP-UP” IN BASIS – Part II

MAXIMIZING AND MULTIPLYING THE “STEP-UP” IN BASIS – Part II

Swapping Assets with Existing IDGTs

In 2011 and 2012, many individuals made significant taxable gifts, using all or a significant portion of their Available Exclusion Amounts because of the risk of that the exemptions would “sunset” back to 2001 levels.  Many of those gifts were made to grantor trusts.

A common power used to achieve grantor trust status for the IDGT is one described under section 675(4)(C), namely giving the grantor, the power, in a non-fiduciary capacity, to reacquire the trust corpus by substituting other property of an equivalent value.[1]  For income tax purposes, transactions between the grantor and the IDGT will be disregarded.[2]  As such, grantors may exercise the power to swap high basis assets for low basis assets without jeopardizing the estate tax includibility of the assets and without having a taxable transaction for income tax purposes.

To maximize the benefits of the swap power, it must be exercised as assets appreciate or are sold over time.  When exercised properly, this can ensure that only those assets that benefit the most from the step-up will be subject to estate inclusion.

If grantor does not have sufficient other assets, repurchase will be difficult – although the donor could borrow cash from a third party.

The income tax consequences if a note is used to repurchase property are uncertain because the trust’s basis in note may equal grantor’s original carryover basis in the asset given to the trust and now reacquired so paying off the note may generate gain).

Because the sudden or unexpected death of the grantor may make a repurchase difficult or impossible, estate planners may want to consider drafting “standby” purchase instruments to facilitate fast implementation of repurchase.

The Obama administration has proposed significant limitations on the ability of grantors to prospectively manage assets that would be includible in the grantor’s estate through the use of this swap power.  Pursuant to the proposal:

If a person who is a deemed owner under the grantor trust rules of all or a portion of a trust engages in a transaction with that trust that constitutes a sale, exchange, or comparable transaction that is disregarded for income tax purposes by reason of the person’s treatment as a deemed owner of the trust, then the portion of the trust attributable to the property received by the trust in that transaction (including all retained income therefrom, appreciation thereon, and reinvestments thereof, net of the amount of the consideration received by the person in that transaction) will be subject to estate tax as part of the gross estate of the deemed owner, will be subject to gift tax at any time during the deemed owner’s life when his or her treatment as a deemed owner of the trust is terminated, and will be treated as a gift by the deemed owner to the extent any distribution is made to another person (except in discharge of the deemed owner’s obligation to the distributee) during the life of the deemed owner.[3]

The proposal would apply to pre-existing IDGTs because it would be effective with regard to trusts that engage in a described transaction on or after the date of enactment

Turney P. Berry

Louisville, Kentucky


[1]§ 675(4)(C) and Rev. Rul. 2008-22, 2008-16 I.R.B. 796.

[2] See Rev. Rul. 85-13, 1985-1 C.B. 184 and PLR 9535026.

[3] Department of the Treasury, Coordinate Certain Income and Transfer Tax Rules Applicable to Grantor Trusts, General Explanation of the Administration’s Fiscal Year 2014 Revenue Proposals (April 2013), p. 145.


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TRANSFER TAX COST VS INCOME TAX SAVINGS FROM “STEP-UP” IN BASIS – Part II

Transfer Tax Cost: State of Domicile, Spending, Time Horizon

By way of example, consider a couple with a relatively large estate, $20 million.  As mentioned above, any number of variables will affect whether and to what extent this couple will have an estate tax problem.  It would be impossible to explore each of the variables separately and in detail, but let’s explore a few important variables: decedent’s state of domicile, time horizon, and spending.  Assume for purposes of this exercise:

  1. 50% of the assets are appreciating (modeled as global equities), and 50% have limited appreciation potential (modeled as fixed income);
  2. The couple has both of their Applicable Exclusion Amounts fully available; and
  3. There is no significant time difference between the deaths of each of them (thereby simplifying the issue of how by-pass/credit shelter trust planning[1] or electing portability under § 2010(c)(5)(A) of the Code would change the overall tax picture).

The variables are:

  1. Domicile in California or New York
  2. Time horizon (date of death of the surviving spouse) of 10 or 20 years.
  3. Spending $600,000 (3% of the initial value), $800,000 (4%), or $1,000,000 (5%), after-tax, grown with inflation.
  4. The following table shows our forecast of the probabilities of a Federal estate tax liability (a gross estate greater than the joint Applicable Exclusion Amounts), if the couple is domiciled in California:[2]
Probability of a Federal Estate Tax Liability

(Current $20 Mil. California Residents)

Spending Year 10 Year 20
3% ($600k) 94% 72%
4% ($800k) 87% 46%
5% ($1 mil.) 74% 22%

Note how spending and time horizon significantly affect whether there is a high or low probability of a Federal estate tax liability.

The following table shows our forecast of the probabilities of a Federal estate tax liability (a gross estate greater than the joint Applicable Exclusion Amounts), if the couple is domiciled in New York (specifically New York City):

Probability of a Federal Estate Tax Liability

(Current $20 Mil. New York City Residents)

Spending Year 10 Year 20
3% ($600k) 94% 68%
4% ($800k) 86% 41%
5% ($1 mil.) 71% 18%

Note, the probability of a state estate tax liability is 100% because New York provides for a $1 million exemption per person.  Please also note the probabilities are very similar to the California scenario.  The only difference results from slightly different income tax rates.

While the probabilities of a Federal estate tax liability is interesting data to figure out whether there is likely to be an estate tax liability, the more telling information comes from determining the magnitude of the estate tax liability.  In this context, the total estate tax liability should be couched in terms of an “effective” death tax rate.  In California, the marginal estate tax rate is obviously 40%, but it will only be 40% of the excess value above the joint Applicable Exclusion Amounts at date of death.  Since the “step-up” in basis is based upon fair market value of the assets, the “effective” estate tax cost should be couched in terms of the fair market value of the assets (not just a dollar amount).  For example, if the gross estate is $22 million and the joint Applicable Exclusion Amounts are $12 million at date of death, then the estate tax liability is $4 million (40% × $10 million) and the “effective” estate tax rate is 18.2% ($4 million ÷ $22 million).

The average “effective” estate tax rates (when there is an estate tax liability) for the $20 million California couple, based on our forecasts are:

“Effective” Estate Tax Rate

(Current $20 Mil. California Residents)

Spending Year 10 Year 20
3% ($600k) 16% 11%
4% ($800k) 13% 7%
5% ($1 mil.) 8% 3%

The average “effective” estate tax rates (including New York’s estate tax, but with $2 million of joint state estate tax exemption) for the $20 million New York City couple, based on our forecasts are:

“Effective” Estate Tax Rate

(Current $20 Mil. New York City Residents)

Spending Year 10 Year 20
3% ($600k) 24% 17%
4% ($800k) 20% 12%
5% ($1 mil.) 15% 8%

What then might estate planners do with this type of data, in deciding what to day from a planning standpoint today?  Let’s assume we are dealing with a $20 million couple, spending 3%, and with a joint life expectancy of at least 10 years but likely not 20.  Well, based on the foregoing tables, although the probabilities of an estate tax liability are high, the average “effective” death tax cost is 16% (California) and 24% (New York City).  Whether that liability is too high or too low depends, in large part, on the nature of the types of assets that are likely to be in the estate at date of death.

For example, if it’s likely that a large portion of the estate will be comprised of zero basis long-term capital gain assets, then an “effective” estate tax cost of 16% (California) or 24% (New York) might be a fair price to pay because a taxable sale of that asset without a step-up in basis would cause an income tax liability equal to 37.1% (California income tax rate) and 36.5% (New York City income tax rates) of the value of the assets.  This trade-off becomes even more compelling when the asset is a zero-basis asset that would be taxed at ordinary tax rates but would benefit from a “step-up” in basis, like intangible assets or intellectual property (copyrights and trademarks).  These types of considerations are discussed in more detail in the following section.

When the income tax savings from the “step-up” in basis are sufficient to justify paying the transfer tax cost, the need for ensuring liquidity to pay the transfer tax liability becomes crucial.  While the general trend for the future portends increasingly less transfer tax liability, the need for life insurance (and irrevocable life insurance trusts) continues in this new planning landscape.

Turney P. Berry

Louisville, Kentucky

[1] Generally referring to a trust that is created upon the first spouse’s death, which is not subject to Federal estate tax by virtue of the deceased spouse’s Applicable Exclusion Amount and which is generally created for the benefit of the remainder of the surviving spouse’s lifetime, but is not subject to Federal estate tax in the surviving spouse’s estate.

[2] We are relying upon Bernstein Global Wealth Management’s proprietary analytical tool that marries the benefits of stochastic modeling with our structural model of the capital markets. In each scenario Bernstein simulated 10,000 market scenarios or forecasts for the next 20 years, based initially upon the current state of the capital markets. Bernstein’s proprietary capital markets engine and wealth forecasting model uses proprietary research and historical data to create a wide range of possible market returns for many asset classes over the coming decades, following many different paths of return.  The model takes into account the linkages within and among different asset classes in the capital markets and incorporates an appropriate level of unpredictability or randomness for each asset class.