Looking Ahead to 2026- Estate Tax Exemption Sunset and Current Planning Opportunities

The estate and gift tax exemption amounts will decrease at the end of 2025. Decreasing the exemption amounts is tantamount to an increase in the tax because more people are impacted by the existing tax. Currently, an individual can make transfers by gift during life, and bequests at death, up to an aggregate of $12.92 million, with that amount increasing to $13.44 million in 2024, without incurring gift or federal estate tax. Similarly, the federal Generation Skipping Tax (GST) exemption is currently $12.92 million, increasing to $13.44 million in 2024. 

On January 1, 2026, these amounts are scheduled to “sunset” and revert back to the 2017 amount of $5 million, adjusted for inflation. Although the time frame for sunsetting may be extended depending on political and economic factors, it would be prudent for people with larger estates to take advantage of the opportunities available now by utilizing the exemption amounts in excess of the projected 2026 exemption amounts, in case the exemptions are reduced as scheduled in 2026 (or possibly changed before then).

In light of the looming reduction of estate and gift tax exemption amounts, consider some of the following opportunities:

• Complete gifts now to use available exemptions, particularly GST tax exemption for gifts into a long-term dynasty trust. In light of the pending decrease of the estate, gift and GST tax exemption amounts and taking into consideration the proposed effective dates, it may make sense for those individuals who have exemptions available to make gifts prior to year-end 2023, and before the uncertainties inherent in election year 2024.
• In connection with making gifts in 2023, giving a fractional interest in the property (such as an interest in an LLC or real estate) may prove beneficial as the value for gift tax purposes may be reduced by certain discounts, such as a discount for lack of control and/or lack of marketability.
• Consider a spousal lifetime access trust (SLAT) to take advantage of the current high gift and GST exemptions, while retaining some access to the trust assets at the spousal level.
• Consider giving to an irrevocable “grantor trust” that includes a power to reimburse the grantor for income taxes paid. A “grantor trust” means the grantor, not the trust, is treated as the owner for income tax purposes. The grantor pays all income taxes attributable to the trust income, which allows the trust assets to grow without reduction for income taxes. Grantor trusts can be drafted to permit a trustee to reimburse the grantor for income taxes paid; however, until recently it was an open question whether such a power in a California grantor trust would cause negative estate tax consequences to the grantor. This is because prior announcements from the IRS stated that a power to reimburse a grantor for income taxes paid does not cause inclusion of the trust in the grantor’s estate if certain requirements are met, including that applicable state law must not subject the trust assets to the claims of a settlor’s creditors. Effective January 1, 2023, the California Probate Code clarifies that a trustee’s power to reimburse the grantor for income taxes paid does not create a beneficial interest that would allow the settlor’s creditors to reach trust assets.
• For those who are charitably inclined, consider charitable planning such as charitable remainder unitrusts (CRUTs) and charitable lead annuity trusts (CLATs).
• For individuals and families who do not have a significant amount of estate and gift tax exemption available but wish to reduce their overall estate, consider a sale to a trust in exchange for a promissory note. If structured properly, since the transaction is a sale, it will not be treated as a taxable gift, and the assets sold to the trust will be excluded from the estate of the grantor/contributor. The note becomes the replacement asset of grantor/contributor, effectively transferring the appreciation on the asset to the trust.
• If you own Qualified Small Business Stock (QSBS), consider gifts to one or more irrevocable trusts to take advantage of substantial exclusions from federal income tax on capital gains. Gifts of QSBS continue to be eligible for the exclusion on gain, and the transferor’s five-year holding period “tacks” to the transferee. The gifted shares to irrevocable trusts that are appropriately structured will be eligible for a separate exclusion (up to the limitation amount) in addition to the exclusion that continues to be available for eligible shares retained by the transferor.
• For individuals who have used their lifetime gift exemption but still have unused GST exemption, consider a late allocation of your remaining GST exemption amount to an existing GST non-exempt trust you have previously created. Alternatively, consider setting up a new two-year grantor retained annuity trust (GRAT) before the end of 2023 so you can apply your unused GST exemption to the GRAT remainder interest prior to January 1, 2026.

The foregoing is solely for illustration purposes. You should reach out to your legal advisor before undertaking any tax or estate planning to determine if it is appropriate for your situation.

New Tax Credit Planning Opportunities for Individuals and Families

Beyond the general planning opportunities previously discussed, individuals and families should be aware of certain new tax planning opportunities. In June, the Department of the Treasury and IRS released guidance on Internal Revenue Code (IRC) Section 6418, which provides taxpayers a new way to monetize certain energy tax credits. The guidance included proposed regulations relating to the transferability of tax credits under IRC Section 6418. Specifically, Section 6418 allows for the sale of tax credits solely for cash to unrelated taxpayers, and such payment does not constitute taxable income to the transferor (and is not deductible by the transferee). Prior to the enactment of Section 6418, investors typically accessed renewable energy tax credits by investing in so-called “tax equity” partnerships—which were only workable for more sophisticated investors due to the costs and qualifications under such partnership arrangements. Now, with the new rules, monetization of renewable energy tax credits has been made more accessible to a broader range of investors, including partners of a partnership and individuals. Unfortunately, limitations exist. For one, the “passive activity” limitations, applying to individuals, trusts and estates (but not corporations), make such transferees subject to IRC Section 469, only allowing them to utilize purchased tax credits against tax liabilities associated with passive income generated from other sources.  Additional information can be found here.

IRS Targets on Wealthy Taxpayers

In September, the IRS announced it is focusing on high-income earners to “identify sophisticated schemes to avoid taxes.” Bolstered by its funding from the Inflation Reduction Act (IRA) of 2022 (P.L. 117-169) and equipped with artificial intelligence and machine-learning technologies, the IRS employed three key initiatives. The first “High Wealth, High Balance Due Taxpayer Field Initiative,” committed dozens of revenue officers to focus on taxpayers with total positive income above $1 million and more than $250,000 in recognized tax debt. The second bolstered IRS compliance efforts related to ongoing discrepancies on the balance sheets of partnerships with over $10 million in assets. The third program focuses on monitoring returns for partnerships with greater than $10 billion in assets.

Summary

The IRS is committed to increasing collection of tax revenue, and federal and state governments are more likely to to increase rather than decrease taxes. Advanced planning to avoid taxation makes sense.  It is best to plan now than discover that you have lost planning opportunities, and incurred unnecessary and avoidable tax liability.  

CMS Proposal Embraces Aging in Place; Medicare Would Train Home Caregivers

A new proposal from the Centers for Medicare & Medicaid Services (CMS) offers to support family, friends, and neighbors who care for frail, ill, and disabled seniors. For the first time, Medicare would pay health care professionals to train informal caregivers who manage medications, assist loved ones with activities such as toileting and dressing, and oversee the use of medical equipment.

The proposal, which would ostensibly cover both individual and group training, is recognition of the role family caregivers, also called informal caregivers, play in protecting the health and well-being of older adults. About 42 million Americans provided unpaid care to people 50 and older in 2020, according to a much-cited report.  The proposal is also support for aging in place; by removing real barriers to family caregiving and encouraging family members and friends to take on care-giving roles, the proposal makes aging in place an even more attractive alternative to institutional care.  

“We know from our research that nearly 6 in 10 family caregivers assist with medical and nursing tasks such as injections, tube feedings, and changing catheters,” Jason Resendez, president and CEO of the National Alliance for Caregiving told KFF News. "But fewer than 30% of caregivers have conversations with health professionals about how to help loved ones," he said.  Even fewer caregivers for older adults — only 7% — report receiving training related to tasks they perform, according to a June 2019 report in JAMA Internal Medicine.

Nancy LeaMond, chief advocacy and engagement officer for AARP, after recounting her personal caregiving experience requiring that she and a caregiving son access library videos regarding caregiving, told KFF News , "[u]ntil very recently, there’s been very little attention to the role of family caregivers and the need to support caregivers so they can be an effective part of the health delivery system.” 

Several details of CMS’ proposal have yet to be finalized. Notably, CMS has asked for public comments on who should be considered a family caregiver for the purposes of training and how often training should be delivered.

Many advocates favor a broad definition of who qualifies as a caregiver. Since several people often perform caregiving tasks, training should be available to more than one person. Moreover, since seniors sometimes reimburse family members and friends for assistance, being unpaid should not be a requirement.  Advisors often counsel seniors needing care to make such payments in order to reduce the countable estate for Medicaid eligibility purposes, and to incentive engagement and advocacy for the senior's best interest. 

Other advocates raised their concerns with KFF News:

As for the frequency of training, a one-size-fits-all approach isn’t appropriate given the varied needs of older adults and the varied skills of people who assist them, suggested Sharmila Sandhu, vice president of regulatory affairs at the American Occupational Therapy Association. Some caregivers may need a single session when a loved one is discharged from a hospital or a rehabilitation facility. Others may need ongoing training as conditions such as heart failure or dementia progress and new complications occur, Kim Karr, who manages payment policy for AOTA, told KFF News.

When possible, training should be delivered in a person’s home rather than at a health care institution, suggested Donna Benton, director of the University of Southern California’s Family Caregiver Support Center and the Los Angeles Caregiver Resource Center. All too often, recommendations that caregivers get from health professionals aren’t easy to implement at home and need to be adjusted.

Judith Graham, writing for KFF News reported that some are, nonetheless, skeptical.

For her part, Cheryl Brown, 79, of San Bernardino, California — a caregiver for her husband, Hardy Brown Sr., 80, since he was diagnosed with ALS in 2002 — is skeptical about paying professionals for training. At the time of his diagnosis, doctors gave Hardy five years, at most, to live. But he didn’t accept that prognosis and ended up defying expectations.

Today, Hardy’s mind is fully intact, and he can move his hands and his arms but not the rest of his body. Looking after him is a full-time job for Cheryl, who is also chair of the executive committee of California’s Commission on Aging and a former member of the California State Assembly. She said hiring paid help isn’t an option, given the expense.

And that’s what irritates Cheryl about Medicare’s training proposal. “What I need is someone who can come into my home and help me,” she told me. “I don’t see how someone like me, who’s been doing this a very long time, would benefit from this [training]. We caregivers do all the work, and the professionals get the money? That makes no sense to me.

Of course, concern regarding systemic over-reliance upon institutional care is valid; systems do not reform easily.  There are other reasons for concern, too.  For example, indoctrinated "trainers" may oppose aging in place for some, and may resist non-traditional treatments and therapies in conjunction with or as alternatives to the traditional.  The new cadre of voices and eyes will, no doubt, sometimes over-reach and interfere with individual autonomy and reliance upon family and friends.  The flip side, of course, is that these eyes and ears can report legitimately unsafe, abusive, or exploitative situations providing vulnerable seniors additional protection.       

Regardless, the proposal is a welcome step in the direction of aging of place as a legitimate alternative to institutional care.  No doubt there is more work to be done, including financially supporting home caregivers who could, in many cases cost a fraction of the cost of institutional care, and secure better health outcomes.

If you’d like to let CMS know what you think about its caregiving training proposal, you can comment on the CMS site until 5 p.m. ET on Sept. 11. The expectation is that Medicare will start paying for caregiver training next year, and caregivers should start asking for it then.

Article Largely Based On: Judith Graham, "A New Medicare Proposal Would Cover Training for Family Caregivers," KFF Health News (August 18, 2023, last accessed 8/27/2023).

SSI Application Process Streamlined by SSA

The Social Security Administration (SSA) issued a notice in August 2023 announcing its plan to embark "on a multi-year effort to simplify the Supplemental Security Income (SSI) application process."  

Approximately 8 million people currently receive SSI benefits. SSI benefits are needs based and are reserved for low-income individuals with limited assets. SSI contrasts with Social Security Disability Insurance (SSDI) benefits, which are not needs-based, and are reserved for those who have worked/paid corresponding taxes for the appropriate work quarters, and do not have any associated income or asset limitations

Given that qualifying for SSI is based on financial need, individuals must meet a complex set of criteria and supply a great deal of detailed information to the SSA. The application is time-consuming and cumbersome.  Applicants are often required to provide information that is ultimately unnecessary, and may find that other information.  For seniors and younger people living with disabilities, the difficulties presented when applying for SSI can become a major barrier to access.

First Phase: iSSI

Going forward, the SSA intends to create a fully accessible online SSI application for all. By late 2023, the hope is to put into place the first phase of this initiative, the SSI Simplification Phase I Initiative (iSSI). This initial phase seeks to simplify the SSI application process for low-income applicants who are over age 65 and/or have long-term or permanent disabilities.

By integrating several online portals, the SSA will be able to pre-populate some of the applicant’s information, streamlining the number of basic questions the applicant needs to answer. The system will allow individuals to apply for themselves, or on behalf of a loved one, all without having to visit a local SSA office.

According to the SSA, a greater number of people (including non-U.S. citizens) will be able to apply as a result, and in a timelier manner. In addition, individuals who are starting the SSI application process will no longer need to gather as extensive an amount of paperwork ahead of time, fill out any paper forms, or visit field offices in person.

For further details regarding how iSSI is designed to work, visit the Office of the Federal Register website.

U.S. Supreme Court Rules Tax Foreclosure Sale Surplus Retention Unconstitutional

The elderly are often vulnerable to punitive home foreclosures.  The United States Supreme Court has handed down a decision ruling in favor of an elderly homeowner who lost her real property to a tax foreclosure action. The homeowner, 94-year-old Geraldine Tyler, failed to pay property taxes on her condominium for several years. Hennepin County, Minnesota seized the property through tax foreclosure. The county then sold it for $40,000, reimbursed itself for the approximate $15,000 she owed, and kept the $25,000 excess. A unanimous SCOTUS court ruled that the County violated the Takings Clause of the Fifth Amendment of the United States Constitution. It declined to rule on whether it also violated the Excessive Fines Clause of the Eighth Amendment. See Geraldine Tyler v. Hennepin County, Minnesota, et al., (U.S., No. 22–166, May 25, 2023).

The Court ruled that Hennepin County had the power to sell Ms. Tyler’s home to recover unpaid property taxes, but, it could not take more than it was due. The county’s action constituted a taking in which a government directly appropriates private property for its own use. The idea that government may not take from a taxpayer more than what is due is rooted in U.S. and other legal precedents going back hundreds of years. This is also consistent with the laws of 36 U.S. states and the federal government, which require that excess value be returned to the taxpayer. Hennepin County’s position, fortunately, constitutes the minority position.

Furthermore, this action by Hennepin County harmed Ms. Tyler. Although the tax lien sale extinguished other liens, she remained personally liable for remaining unpaid mortgage debt and HOA fees. If Ms. Tyler had received the $25,000 surplus, she would have been able to satisfy other debts.

The Court considered but rejected the county’s argument that Ms. Tyler abandoned her property by failing to pay her property taxes.  The Court found that Ms. Tyler did not surrender or relinquish all rights to the property. She could have continued to use the property for several years after falling behind on the taxes until the foreclosure process was complete. A failure to contribute to her share of taxes to the government is not equivalent to abandonment sufficient to avoid complying with the Takings Clause. The court reversed the judgment of the Eight Circuit Court of Appeals is reversed.

Two SCOTUS judges also published a concurring opinion addressing Ms. Tyler’s argument that the county’s actions violated the Excessive Fines Clause of the Eighth Amendment. They cautioned that lower courts should not ignore the issue. Actions such as those of Hennepin County may be subject to claims that they violated the Eighth Amendment, where a statutory scheme partially punishes a taxpayer, regardless of whether it is somewhat or primarily remedial. Minnesota’s tax-forfeiture scheme was not solely remedial and had punitive elements. As such, the concurring Justices contend that the Eighth Circuit committed a further error when it dismissed Ms. Tyler’s Eighth Amendment claim, and warned that future courts should not follow suit.

"Do It Yourself" Estate Plans Mean Risk

Attorney Virginia Hammerle has penned an excellent article, entitled, "Assuming Risk of DIY Estate Planning," for the Dallas Morning News, published online at WealthAdvisor. She writes: 

You can build an airplane all by yourself. Buy a kit or go online and download the instructions. A mere 1,400 work hours later, you should have a flying machine ready to carry you and your family into the wild blue yonder.

Aside from crashing and burning, what could possibly go wrong?

You can also do your own estate planning. Buy a set of forms or go online, download the documents, fill in the blanks and sign as indicated. A mere three work hours later, you should have documents ready to carry you through personal emergencies, sickness, dementia and death.

Aside from fiduciary theft, exploitation, guardianship, contested probate proceedings and having your wishes completely disregarded, what could possibly go wrong? [emphasis added]

We will find out. The Texas Supreme Court has just created do-it-yourself will forms.

More specifically, the court has approved four forms, categorized by type of personal situation: single with children, single without children, married with children and married without children. These are fill-in-the-blank documents. They come complete with definitions and instructions.  

The forms apply to only the most straightforward of situations. For example, the form for “single with children” presumes that you are currently single, have children and that, except for specified gifts, want to leave everything to your children in equal shares. If you want an estate plan that is more complicated, then this form is not for you.

The instructions are equally straightforward. If you make a mistake while filling in the will form, then you are instructed to rip it up and start all over again. You are instructed to fill in the information blanks either on the computer or by hand using the same pen to fill in the full form. There are several places in the form where you are directed not to “add, change or delete any words in Section …” with the explanation that the section is “needed for legal reasons.”

The legal reasons, unfortunately, are not explained in the document. You are left to do your own research.

The form contains only basic provisions, and there is no place to add anything else. Still, they are an improvement over what you usually find online, because the court’s forms contain Texas-required language to appoint an independent executor, self-prove your will and leave your entire probate estate to your named beneficiaries.

Fill it out accurately, follow the instructions and you should end up with a valid will, one that contains the bare minimum of language, and probably adequate if you have little or no estate and no family complications.

The forms can be found on the Texas Supreme Court’s website under Administrative Orders, Rules Advisories, 2023, Order 23-9022. The order was released on May 5, 2023.

If you are looking for other DIY planning forms, then visit Texaslawhelp.org. There you will find basic information on common legal issues and bare-bones forms for such things as powers of attorney and directive to physicians.

While you are researching and looking at forms, heed the warnings. The online documents are not a substitute for legal advice. They are suitable for only the simplest of estates and family situations.

You probably would never attempt to build your own plane. Even if you had the time, you likely lack the skill and knowledge. The price of failure is too high. Drafting your own estate planning documents is the same. You don’t want to crash and burn.

Of course, a bar association endorsing DIY planning begs the question, "Why?"  Aside from altruism in the form of a real desire to assist those who are able to help themselves but lack means to seek legal assistance (despite the availability of pro bono and legal aid services) there is self-interest:  busy lawyers are relieved from the burdens of turning away prospective clients unable to pay, and of taking on basic low return matters in favor of more lucrative representation, such as representing families and family members in cleaning up the spectacular mess that results when estate plans "crash and burn."  

For a real life example of how simple Wills can create problems, consider my prior blog article, "Simple Will- Complex Problems: Will Drafter Does Not Help In Case of Undue Influence."

I noted as I read the article online that there appeared an add for an online DIY Will form:

No doubt the Google Ad algorithm did not discern that the content was a warning against employing such strategies.  

For a more humorous take on the same subject, click here.