Monthly Archives: November 2024

The election has concluded giving former President and now President-Elect Donald J. Trump control of the White House come January. The Republican Party will have a majority in the Senate. As of the writing of this blog, they have 53 seats with one race uncalled. The Republican Party also leads the Democratic Party in seats in the House of Representatives, now controlling 219 seats with 3 races uncalled. Given these numbers, the newly elected President will have the support of the Senate and the House for legislation he wants to pass. While campaigning, Donald Trump floated several tax policy ideas including extending the expiring Tax Cuts and Jobs Act of 2017 (“TCJA”) changes currently set to occur on January 1, 2026, restoring the unlimited deduction for State and Local Taxes (“SALT”), exempting various types of income from imposition of income tax, and imposing new tariffs on imported goods. Let’s investigate the potential implications for nation’s tax landscape.

If President-Elect Trump extends the expiring provisions of TCJA that will impact the Estate Planning world directly. Trusts and Estate Practitioners may find themselves doing considerably less work than they anticipated. After all, several of us have spent the last two years discussing what would happen should TJCA expire and making suggestions for techniques that those clients could implement in order to utilize the temporarily doubled Applicable Exclusion Amount (“AEA”). The AEA dictates the amount of assets that any individual can transfer during life or at his or her death without imposition of gift or estate tax. Extending or making permanent the provisions of TCJA means even higher AEAs as the years progress. Currently, each taxpayer can pass $13.61 million in assets to any non-spouse without imposition of tax. On January 1, 2025, that amount rises to $13.99 million. Spouses can pass an unlimited amount to their United States citizen spouse. Clients may ask Estate Planning attorneys to review and update plans designed to utilize the temporarily doubled AEA as they consider whether the plan continues to work for their circumstances in light of the increased AEA.

Interestingly, Donald J. Trump suggested that he would allow the $10,000 SALT limitation enacted under the TCJA to expire. The SALT deduction allows taxpayers who itemize their deductions to deduct certain income taxes paid at the state and local levels. TCJA capped the deduction at $10,000. This limitation will impact those living in states with high-income taxes. Residents of those states were unhappy with enactment of the cap, some even going so far as to move to other states to avoid paying income taxes without an offsetting deduction at the federal level. Removing that cap benefits those taxpayers living in high-income states. While this doesn’t directly impact Estate Planning, practitioners in states with high state income taxes may see more clients as former residents move back or as new residents arrive.

Finally, in addition to leaving the income tax brackets as they exist now, Donald J. Trump expressed a desire to exempt Social Security benefits, tips, and overtime pay from income taxation. He also suggested creating a loan for automobile loan interest and a tax credit for family caregivers. Finally, he suggested the enactment of tariffs on foreign goods. While the potential tax implications of each of those exceed the scope of this article, many of these income tax provisions have broad applications and affect more than just the wealthiest of individuals.

Obviously, the proposals that President-elect Donald J. Trump decides to enact will determine the impact on our tax planning landscape, possibly for years to come. At this moment, it’s hard to predict whether any of these proposals will come to fruition. It’s easy to make promises when campaigning, it isn’t always as easy to enact legislation keeping those promises. Sometimes other priorities appear or the incoming administration encounters roadblocks. In this case, Donald J. Trump enacted the original legislation on which he campaigned which might mean that it’s given higher priority than other issues. Further, he has the benefit of a House and Senate aligned politically which theoretically means fewer barriers to passage. No matter what happens in the coming months, count on me to keep you informed.

Charitable gifts offer a great opportunity to reduce income tax liability. When a taxpayer makes a charitable contribution, typically they get an offsetting charitable income tax deduction. Unfortunately, that offsetting deduction doesn’t always end up reducing the total tax burden. To take a charitable income tax deduction, the taxpayer needs to itemize their deductions. If the charitable contribution and other itemized deductions don’t exceed the standard deduction amount, then it makes sense to take the standard deduction and forego the itemized deductions.

Let’s look at an example. Assume that Charlie Charitable has taxable income of $100,000 each year. He files as a single taxpayer with a standard deduction of $14,600 (in 2024). He has $10,000 of state and local taxes (an itemized deduction and the most one could take as a deduction for such taxes under current law). In addition, he makes a charitable contribution each year of $2,500 to his alma mater. His itemized deductions would be $10,000 plus $2,500 = $12,500, i.e., less than the standard deduction amount of $14,600. It doesn’t make sense for Charlie to itemize his deductions since they would be less than the standard deduction he could take without itemizing.

If Charlie Charitable spoke with an advisor, he would discover that by making several years’ worth of charitable contributions in one year, he would increase his charitable deductions to an amount exceeding the standard deduction amount. Charlie could refrain from making charitable contributions in the “off” years and simply take the standard deduction amount. Charlie likes that idea and decides to make a charitable contribution of $10,000 in 2024. That raises his itemized deductions to $20,000. This saves him the tax on $20,000 (his itemized deductions) less $14,600 (the standard deduction) = $5,400. Assuming he’s in a combined state and federal bracket of 40%, that would result in savings of above $2,160. In the “off” years of 2025, 2026, and 2027, he’d take the standard deduction amount each year and the strategy would not impact his taxes in those years. In 2028, he could repeat the large charitable contribution for another itemized deduction.

Another way for Charlie to optimize his charitable deduction would be by using a Donor Advised Fund (“DAF”). Contributions to DAFs give an immediate income tax deduction to the donor while creating a reservoir of assets for distribution to charities in the future. In addition, DAFs provide an opportunity for donors to invest contributed funds and make suggestions regarding which charities should receive the distributions. Donors may change their recommendations regarding the charitable distributions allowing great flexibility coupled with immediate benefits. In our example above, that means that Charlie could continue to make charitable contributions to his alma mater, but Charlie could decide to switch to a different charity altogether. In the interim, Charlie could invest the funds as he determined was appropriate prior to their distribution to a charity.

Donors may combine DAFs with other strategies to produce even better results. For example, if a donor gave highly appreciated public stock to a DAF, the donor would receive an income tax deduction for the full value of the appreciated stock without ever paying tax on the gains. Going back to our Charlie example, assume that Charlie gave $10,000 worth of publicly traded stock in which he had a basis of $1,000 to the DAF. If Charlie had sold the stock, he would have had to pay tax on the $9,000 gain. Assuming a state and federal combined capital gain tax rate of 30%, he’d owe $2,700 on the gain. If he then contributed the proceeds to charity, he’d only have $7,300 to contribute to charity. By giving the appreciated publicly traded stock directly to the charity (or DAF), he increases the amount that he contributes to charity which increases the deduction he receives.

DAFs complement any charitable giving strategy already in effect and provide a great opportunity for those new to charitable giving to discover the benefits it provides. It allows one to maximize the tax benefit from charitable giving while retaining a say over the timing and distribution of the money. 

This blog often focuses on avoiding litigation; more than one blog has detailed ways to make an Estate Plan “litigation-proof” or at least as litigation-proof as possible. Sometimes, though, beneficiaries need to litigate in order to achieve the goals of the decedent. A recent California appellate case, Smith v. Myers (2024) 103 Cal.App.5th 586, highlights just that. Let’s explore a real-life example of how litigation helped ensure proper implementation of a decedent’s plan.

Ernest Myers’ first wife died in 1992 and at that time, he gifted a 45.8% interest in his ranch consisting of two parcels, to his daughter, Kathleen Smith. Seven years later, Ernest married his second wife, Emma. Shortly after marrying Emma, Ernest restated the “Ernest Wilbur Myers 1992 Family Trust” (hereinafter “Trust”). The restatement indicated that Ernest was leaving no further gifts to Kathleen because he had or would provide for her otherwise outside the terms of the trust. The restatement gifted the remaining 54.2% of the ranch to Emma upon his death. The restatement also named Emma to serve as successor Trustee upon Ernest’s death. Ernest later amended the Trust on July 19, 2016 (hereinafter “Amendment”) giving the remaining 52.4% of the ranch to Kathleen and her husband, Bruce, upon his death. According to the Amendment, Emma would continue to receive income from rental units located on the ranch and she would become successor Trustee of the Trust. Interestingly, Ernest died just about a month after executing the Amendment on August 22, 2016.

Nearly 4 years after Ernest’s death, on July 10, 2020, Kathleen and Bruce filed a petition for an order confirming the validity of the amendment and to remove Emma as Trustee of the Trust. Emma countered and argued that Kathleen and Bruce could not seek to confirm the validity of the Amendment because they failed to do so within one year of the decedent’s death and further that the Amendment was procured through undue influence. Emma argued that Kathleen and Bruce were seeking to enforce a promise or agreement with the decedent to distribute a portion of his estate or trust. The court reviewed the terms of the statute that Emma sought to use and determined that she was correct that the statute imposed a one-year statute of limitations on claims based upon a decedent’s declaration to undertake or refrain from undertaking an act when the decedent promised to arrange for the claimant to receive a distribution from an estate, trust or other instrument, but that this was not the case at issue.

The California appellate court affirmed a lower court’s decision that the one-year statute of limitations did not apply to Kathleen and Bruce’s petition. The appellate court examined the statute at issue and determined that the claim at issue was not based upon Ernest’s promise to make a distribution from his estate or trust to Kathleen and her husband. Rather, Kathleen and Bruce were alleging that the Amendment required that the Trustee (Emma) distribute the remainder of the ranch to them, that the Amendment was valid, and that they were entitled to the ranch under the Amendment. Kathleen and Bruce did not allege that Ernest promised to make a distribution or any other allegation that meant application of the statute Emma cited. Ultimately, the court decided that the Amendment posed no obligation on Ernest to distribute the property and made no obligation on the beneficiaries. The Amendment imposed an obligation upon the Trustee to distribute the ranch.

While the case doesn’t indicate whether Emma will continue as Trustee, it made clear that she was obligated to distribute the ranch in accordance with the terms of the decedent’s Trust. It’s a logical conclusion from the case that Emma intended to keep the ranch for herself despite Ernest’s Amendment. It’s unclear why Ernest ultimately changed his mind regarding distribution of the ranch, especially so close in time to his death and sixteen years after his documents gifted it to Emma. It may be that it was a case of undue influence, as Emma alleged, or it simply may be that Ernest changed his mind, which happens often. That’s the beauty of Estate Planning, the decedent may change his mind at any time up until death.  Regardless, this case demonstrates the importance of understanding an Estate Plan and how litigation sometimes becomes a necessary evil.

Finally, on a smaller scale, this case highlights the difference between an amendment to a trust and a promise or agreement by the decedent. It underscores the importance of filing an action timely, especially when enforcing provisions of a Revocable Trust. While I always work to avoid litigation, sometimes, like in this case, it produces the right result. In those situations, it’s good to understand the options that exist. If you have concerns about your rights under an Estate Plan, connect with me. While it’s less expensive and stressful to address the issues while everyone is alive, sometimes litigation is a necessary evil.