In this Live recording, Brent chats about the state of the tax bills in Washington, DC, an interesting fiduciary liability case involving foreign accounts, how to plan for an uncertain future, and what gifts volatile markets bring for private wealth transfers.
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[Transcript of Episode]
Good morning. This is the Wealth and Law podcast live. Basically, this is a little bit of an experiment because we haven’t done this before. So you have to forgive me if I have any sort of technical issues here. I’ll do my best.
But the intent is to record some of the podcast episodes that I’ll be doing in the future in a live format like this and then to uh hopefully put those up so you could you don’t have to catch them live so you can listen to them during the day or at your leisure whenever you want as separate episodes for the podcast but hopefully we’ll be able to have a little bit of a mix uh so there’s more ways to engage with and listen to the podcast and so this is this is round one of trying to figure out um some way of doing that and basically the podcast is me so if there’s any sort of technical issue or the sound isn’t right or it doesn’t get posted or something doesn’t happen, it’s all me.
This is how it gets done. And that also means that I have technological limitations. So if these sorts of things don’t work, it’s also on me. So, you have to hopefully forgive me for any issues that pop up. Just give you like the brief agenda here this morning, and then I’ll jump into it. I’m going to talk about current events, such as they are, current events that relate to sort of private wealth and tax and things like that, not all the current events.
We can talk about all the current events at a separate moment over drinks. That would be an appropriate time to do that. Then there’s an interesting case, I think, anyways, an interesting case right now out of the federal district court in Idaho about foreign accounts and particularly about the liability of a fiduciary for a deceased person’s foreign accounts and reporting. And then we’ll talk about some of the market volatility and what that means and some of the things that you could probably do to take advantage of some of the market volatility.
And then we’ll hopefully close out by just, I’ll just give you my thoughts on dealing generally with uncertainty, sort of market uncertainties and legal uncertainties. We know right now, for example, that in Congress, they are working on a spending bill to keep the federal government funded. Of course, this happens just periodically, so it’s not really anything new in every single Congress that goes through this same process. I don’t really think that It’s enormous news. They’re always threatening to not fund the government and then cause a shutdown and whichever party happens to be in power is the one trying to fund the government.
Whichever party is not in power is the one threatening to shut down the government. I am not seeing a whole lot of indication that they are going to shut down the government either because the Democrats don’t have enough votes to do it or because some of the Democrats will actually fall in line to keep funding the government because it might not be such a great idea for Democrats who are opposed to firing federal employees, for example, to then furlough a bunch of federal employees because they can’t agree to fund the coffers of the government to pay those employees to do their jobs.
I just don’t see that really happening. I think the really big ticket Item which has gone very silent in the last week or so is the reconciliation bill that may include both immigration reform and the tax bill. And I say may because there’s been some debate. I’m not a hundred percent certain that in Congress, they, as far as I can tell from the news that I’m reading that they are convinced that you’re going to have both things in one bill.
I know that there’s, there’s been some indication that that’s what they wanted to do, but I don’t know that we’ve gotten a final word on that, but let’s just assume that either of the two is going to be true. Okay.
They’re either going to, do the tax bill or they’re going to do immigration or both. I mean, both of these are going to be very big horse trading events because even members of the Republican Party are going to have things on their wish list that they want that are priorities for them that are maybe not priorities for other members of the Republican Party. And the Republicans have a very, very thin majority.
And so They really are going to have to have everybody in line, which means there probably is going to be a significant amount of negotiating. I’m already seeing the news reports come out of industry groups who are heavily lobbying Congress currently in this reconciliation process to make sure that they get the tax benefits they think they deserve. So all of the big ticket industries in the country, including tech and oil and gas, et cetera, are lobbying. And then I have seen some indication that there’s some negotiating going on as you would expect over like the state and local tax deduction, the SALT deduction.
So I think those things are really gonna dominate the news cycle once we get beyond the funding of the federal government, which again, I expect that’s just gonna happen. They’re gonna fund the federal government. There’s not gonna be a shutdown. I’m just not seeing enough of a collective voice advocating for a shutdown to indicate to me that that’s gonna happen, at least from my experience of watching these things play out. tax bill will be interesting and again the the news on the tax bill and the actual details of the tax bill has gone very very quiet in the last few weeks um I don’t think that means they’re doing nothing I think it just means that they’re not sharing there have been a couple of bills introduced to potentially get rid of the federal estate tax but I’m not I’m not convinced that’s a strong likelihood, although I’ve been wrong about these sorts of things in the past, but it doesn’t seem like there’s a huge appetite for that because of the price tag involved and all of the interests trying to get their share of the pot here. It’s a four and a half trillion dollar pot.
Do they really want to spend it on getting rid of the estate tax, which is going to be several hundreds of billions of dollars when they can take that money and spend it, so to speak, on something else by just extending the Trump tax changes from the Tax Cuts and Jobs Act in twenty seventeen? That feels like low hanging fruit. And then to negotiate on the edges of anything new, we know that it’s a priority for the White House to have things like no tax on tips. So they’re going to have to find room for that. Another priority of the White House, of course, is to have no tax on Social Security.
So they’re going to have to find room in that four and a half trillion for that. And just extending the current Tax Cuts and Jobs Act provisions is very expensive. So It doesn’t seem like there’s a lot of room for them to wiggle such that they would want to spend it on the estate tax with the estate tax exemption so high that it affects very few people. It just feels like a nominal issue, but we’ll see. We’ll see. Maybe they’ll surprise us.
My expectation is that the estate tax is going to be extended at the current levels, index for inflation, of course. And we’ll just sort of carry on with what we’re dealing with now, which is technically set to sunset at the end of this year. But I don’t think it will sunset. Okay. There is a, I think there’s a very interesting… case out of Idaho that it’s not necessarily interesting in its result. The result is what I would expect it to be, really.
But it’s an interesting illustration of some of the perils that both taxpayers and then their family and the administration of their estate can face when they are owners of foreign accounts so if you have a foreign account as most people know that that or foreign accounts in general it can just be it can be more than one that in the aggregate during the year have a balance of more than ten thousand dollars u.s then you have to report all those accounts on a foreign bank account report or FBAR. And then if you meet other thresholds, you may have to file other forms. There’s the form eight, eighty nine, thirty eight, which is the FATCA disclosure. And there can be a whole host of other things, depending on what’s in that account that you have to file every year. And if you fail to file, then you can be penalized both civilly and criminally.
The civil penalties can be quite high. And in some instances, the IRS is very aggressive in going after taxpayers for failing to disclose these accounts properly and timely. In this case, the decedent was in the CIA and of course had been posted abroad and had foreign accounts that were undisclosed and then died. And that liability, what happens is it falls on the shoulders of the executor or there’s a trustee that’s basically administering the assets it falls on the shoulders of the executor or trustee and now that fiduciary basically steps into the shoes of the deceased person and the liabilities of that deceased person and in addition if now the fiduciary has in essence inherited these foreign accounts and the obligation of disclosure of the foreign accounts, that fiduciary also has to start disclosing the foreign accounts.
And they may have to go back and try to clean up undisclosed foreign accounts to try to avoid the worst of penalties by either utilizing the IRS streamline procedures, or if they can use the delinquent filing procedures, which are for, if you had a reasonable cause for not filing on time, these disclosure statements. And these disclosures, they’re really, the information that gets penalized is just information. It has really nothing to do with tax, although there can be tax owed, but the thing you’re getting penalized for is not filing an information form.
So it can be really harsh, but the fiduciary steps right into that role and they have to take that mantle and then they have to clean up anything that needs to be cleaned up and they have to start complying themselves as if they were the deceased person. And the estate can be held liable for not doing that. And then in this particular case that has come out of Idaho, that’s exactly what has happened. If that fiduciary then has a liability that’s owed to the federal government, they don’t clean it up, but then they distribute the property without paying the federal government first, the fiduciary can be held personally liable for that obligation that wasn’t paid to the federal government.
There’s sort of a federal priority statute that says that. And then if that, of course, the fiduciary transfers assets, now say the estate doesn’t have any assets, the transferees or the beneficiaries of the estate themselves can become liable for the debt that wasn’t paid to the federal government. So all the way around, everybody involved can be left holding the bag, especially when the debtor is the federal government. Because in a normal estate administration, there is a process where you can deal with creditor claims. And if a typical creditor doesn’t make a claim on a timely basis, then they may not be able to get paid. With the federal priority statute, that’s not the way it works.
The federal government takes the position that you cannot cut them off from a debt that’s owed to them without basically paying them or negotiating it away. So word to the wise, this case is an illustration of the challenge that can arise for an estate or a fiduciary that now is dealing with foreign accounts of someone else, the liabilities and the responsibilities for those foreign accounts do not just vanish if they haven’t been properly dealt with during the lifetime of the deceased person or during the administration of the trust, if it is a trust.
So you do have to be kind of careful about that. But that case is relatively recent, but it’s a very good illustration of this issue. It’s kind of a scary one. It comes up from time to time for me. And I wonder about the knowledge or the sort of understanding of some of the executors and trustees in terms of how to deal with these issues and even understanding that the issue exists. So now, now that I’ve told you, I guess, you know, so good or bad. All right. I want to talk a little bit also this morning about the volatility in the market. Of course, markets are down.
They basically have erased any gains that we’ve had since the Trump inauguration, which is a very short amount of time. It’s not really a significant amount of time, but the markets have been down. It’s always news when the markets are down, of course, because it’s easy to see red and green numbers on the screen. So it’s very easy to report on. And so it’s everywhere in front of your face. I’m usually not so hyper focused on the day to day activity and ups and downs of the market because it doesn’t really matter. It certainly doesn’t matter for most of my clients, but it can create an opportunity. particularly if you have clients that have positions in some of these companies that are subject to these market swings in a situation like this, where there’s an event happening that is driving the market down, you know, allegedly.
I guess nobody really knows what drives the market. Otherwise, we’d all be billionaires. But the Sometimes these events seem to have a correlation to what’s happening in the market and may, in some sense, artificially be driving the market down.
And you can see this in both equity markets and in, say, the crypto markets right now, where, say, the threat of tariffs are making enough people apparently uneasy that it’s causing the market to go down or it’s changing sentiments or whatnot, but it’s not really important. The important thing is to see this volatility and kind of the drop in the market, because from a planning perspective, then in the private wealth space, it opens up actually opportunities for doing some good planning at, in essence, a discounted rate.
Certainly, you can do grant planning if you have concentrated positions in public companies that are dropping in the market. When the price is low, that’s the right time to do grant planning. And I have some clients in that situation right now where I’m looking at the circumstance in the market thinking, well, maybe we’ll accelerate doing the grant planning that we were going to do say in the next month or two, maybe we’ll push that forward and do it quickly because we’ve got this volatility in the market that we can lean into and take advantage of. In addition, it can be a situation where when you have entities like trusts or say family partnerships that are trying to really grab highly appreciated property to push appreciation across the line.
You can kind of use this as a moment to buy those and push that appreciation across the line. And then in some sort of very more exotic transactions where you might be doing something like a private derivative or sort of private option transactions, if you can peg the price of the derivative or you can peg the price of the option to this lower market rate, then you may be able to shift more assets in the future if the markets go up and now you’re paying off that derivative contract, say to a family trust, or you’re paying off that option contract to a family trust, you may be able to pay it off in shares that have appreciated in value.
So the volatility is not always bad from a planning perspective. It can create some opportunities.
Of course, everything is a risk because you can never guess really properly about what’s going to happen in the future. We just don’t know. when there is some volatility that appears to, in a sort of reasonable best guess, it appears to give you a chance to grab something at a discount and possibly do some planning, it’s oftentimes worth a shot.
And GRATs are really great for that because with the GRAT, you, You either win or nothing happens because if the grant quote unquote fails because the asset doesn’t increase in value sufficiently to beat the hurdle rates that you have to beat in the grant, which is typically just like an interest rate that you need to cover in order to shift value from the grant over to family. If you don’t beat that, then what happens is the assets in the grant just come straight back to the grantor and they’re put back in the position that they were originally.
Well, That’s a pretty good bet. If you’re just trying to shift pieces of the estate off to family without having to use up any of the exemption that’s available from estate tax and gift tax and GST tax for the grantor of the trust, that’s a pretty good option. You can just bet, put something into the grant, see if it works. And if it does work great, you just shifted something off of their balance sheet without using up any of this exemption and If it didn’t work, they’re just gonna get it back and they’re in the same position that they would have been originally.
So it’s sort of no harm, no foul in many cases with those grad transactions. So the volatility really opens up interesting prospects for grad planning in normal circumstances, I’ll say. Again, we don’t know what’s gonna happen in the future. We have no idea what’s gonna happen with the markets and we really don’t even know what’s going to happen with tariffs from day to day, to be perfectly honest.
So that’s always the case. And you always have to go into the planning with that understanding. But if you can use techniques that give you an easy out, like a GRAT gives you an easy out, if you don’t get the result that you want, then you might as well take advantage of it because it’s there.
And I’m seeing that sort of, type of transaction that that sort of capping type transaction which is really what a grad is you’re trying to cap the value of the balance sheet of the grantor um for clients that are sort of in that like thirty to forty million dollar as a couple thirty forty million dollar range where they’re like they’re a little bit over existing exemptions if inflation helps you out in the next few years then you might you know you might catch up with available exemption, but you might not actually want to use up all of their exemption and making big gifts because then they’ll have no money left, then you have to kind of try to find ways to start nibbling away at the edges on that balance sheet to keep things down and maybe not expose too much to estate tax, if at all.
And this, you know, these can be useful ways to kind of try to nibble away at the edges and cap down the balance sheet a bit. So it’s a useful exercise when you have this kind of market volatility to start thinking about who has a balance sheet that fits into this and makes it easy to do the planning. And if a client has or they can purchase publicly traded shares of stock, that’s usually the easiest, especially in the GRAC context.
Finally, I want to just talk a little bit about uncertainty in general because we’re dealing with a lot of it or we have been dealing with a lot of it. And one of the challenges of uncertainty and trying to plan for uncertainty, of course, is that you’re making guesses today that are going to manifest themselves in some very concrete way in the future.
And your assumptions today could be wrong, obviously. And so in that scenario, what do you do? How do you do planning? Well, I think sometimes you have to kind of take a two-step approach, I’ll say. Step number one being that you do the planning with an eye towards the long-term, first and foremost.
So you don’t try to guess too much about the short-term, notwithstanding what I just said about the volatility of the market and using GRATs, but you try not to guess too much Um, about the short term, you try to focus more on the long-term planning, um, using reasonable assumptions.
If you, if you have to pick assumptions, then you use, you try to use assumptions that are based on like historic data and not necessarily guessing about the, the vicissitudes of what’s happening currently and the political news and economic news or whatnot. And so that’s sort of the first thing.
The second thing is that then you have to try to build into the structure a lot of flexibility where you can get it. And if you can add in the flexibility, then in anticipation of what could happen in the future, even if it’s some flexibility or some mechanism that you’re not gonna use today, and you have no reason to use today, you build in that flexibility in the plan.
So for example, I do a lot of planning with Q-tip trusts between married people, because with the Q-tip trust, When one spouse dies, I can put assets into the Q-tip trust. I can use the election for this Q-tip trust to create multiple trusts if I want, which is sometimes called a Clayton transaction. And all of that planning can be done after the fact, after the first spouse dies, for example. uh and it’s retroactive to their date of death but you get up to fifteen months to do it because it gets reported on an estate tax return and with an extension and state tax return can we do up to fifteen months after uh somebody dies so we use that fifteen month period to try to build in the flexibility to pick and choose the planning by using this q-tip trust tool that’s available to us and sometimes we only have the Q-tip trust.
Sometimes we don’t even have the Q-tip trust after the first spouse dies. And sometimes it’s a mix of the Q-tip trust and another trust, either called a credit shelter trust or bypass trust that we elect into. And just having that sort of base level flexibility is very, very handy.
And if you use it right, it can give you the ability to do retroactive planning after somebody dies. But to get that option, you have to create the terms in the documents that allow you to have that option in the future. So when I’m talking about long term planning, and then sort of thinking about having tools in the future, that’s really what I mean, you pick the tools that you want in the future today, put those into the documents, you pick the tools that have the most amount of flexibility, you put those into the documents, today.
And then in the future, when something happens, then you wrestle around in the toolkit, so to speak, and you pick out the one that works the best. In in many instances, if you’re going to have planning, for example, that involves irrevocable trusts, then you want to have flexibility in that irrevocable trust document. by permitting trustees to, for example, do a decanting if that’s needed, a decanting being a distribution from one trust to a second trust with slightly different terms, or you have to have someone like a trust protector who has the power to maybe amend the document, and how much amending power you give them is sort of in the eye of the beholder, and you decide what is the right amount for your clients to do that.
But having that flexibility built into the trust structure is important because in the future, there could be circumstances that arise that you didn’t anticipate. And so you don’t necessarily want the whole structure to crumble.
You want to be able to adjust and keep all the best parts of it and then get rid of any parts that might be detrimental in the future. And some of these structures, they’re very powerful. in the way that they operate.
They can have extremely powerful credit protection features to them that you wouldn’t necessarily want to just get rid of. They can have extremely powerful estate and generation skipping transfer tax planning features to them that you may not want to just get rid of. And they can have very powerful income tax planning optionalities to them that you also may not want to necessarily just give up on.
But to have the ability to pick and choose among options in the future, again, you have to build in these tools into the documents today in anticipation of what could happen in the future. So that’s what I’m seeing most of. And frankly, when I’m talking to other practitioners, that’s what I’m hearing from them as well.
They’re trying to anticipate the need to make changes in the future because things are always uncertain, of course, and we can’t predict the future, but it just feels like with the threat to increase or decrease, the estate tax or threats to change rules to certain trust planning structures and tax planning structures, which we get in these federal cycles of who happens to be in control.
In Washington, DC, you need to be as nimble as possible to make sure that you can adequately cover yourself from a planning perspective and have the option to make changes in the future should it be required.
And every client, of course, is different. Every family is different. States do things differently. And so every circumstance has to be really evaluated for its own merits.
I don’t really have perfectly good general advice that will apply across the board. You just keep yourself as flexible as you can. And keep flexibility in mind when you’re thinking about how to do the planning, how to create the structures.
All right, well, I’m going to leave it there. You’ve tolerated me here now for about thirty minutes, but I appreciate anybody joining here for the live events. We’ll keep trying to do these in live fashion. And, um, and then we’ll post them as separate episodes. As I said, I really appreciate it. Really, really appreciate all the comments and, and constructive criticisms that I get. So, you know, keep them coming, put comments in posts, or you just reach out to me directly. Let me know what you think. Um, and we’ll see you next time. Thanks for joining me.
[End of Transcript of Episode]