TAX CUTS AND JOBS ACT (THE “ACT”) – “CLAWBACK”

by Alfred Wheeler

Prior to the passage of the Act, effective January 1, 2018, the individual exclusion from Federal estate, and gift tax was approximately $5,600,000.00.  Under the Act, the exclusion is doubled to approximately $11,200,000.00, per individual.  That increased exclusion, however, “sunsets” on January 1, 2026, when it will revert to the exemption of $5,600,000.00 in effect prior to January 1, 2018.  This Article will discuss the possibility of a “clawback” of the doubling of the exclusion, when the sunset takes place and the exclusion reverts to the pre-existing $5,600,000.00, i.e. will any gifts made between 2018 and the sunset date be “clawed back” to the taxable estate of the donor who passes away after the sunset date.

Discussion

As a result of the increase in the gift and estate tax exclusions individuals have the opportunity to make gifts utilizing the increased exclusion up to approximately $11,200,000.00 per person, without subjecting those gifts to either life time gift tax, or being included in the individual’s taxable estate upon his death.

Of course, where assets are gifted, those gifts would not be entitled to a step up in income tax basis of those assets upon the death of the donor.  Thus, the advisability of such gifts will continue to require an analysis of the potential income tax cost of the loss of that step up in tax basis in case of a sale of any such assets following the death of the donor.

However, utilizing the increased gift tax exclusion during life time, does raise a question as to whether the death of the donor after the “sunset” of the increased exemption, when the exemption reverts to the pre January 1, 2018 amount, will result in some form of “clawback” or recapture of the benefit of the increased exclusion.  Thus, will the IRS in determining the taxable estate of the donor who dies after the sunset date, apply the exclusion at the time of the gift, i.e. when the Act doubling of the exclusion was still in effect, or will it apply the amount of exemption at the time of death, when the exclusion has been “sunset” back to $5,600,000.00, thus, “clawing back” the benefit of the pre sunset exclusion.

To deal with this question, the Act contains a separate provision, which together with a clarifying Conference Committee Report, directs that the Secretary of the Treasury adopt regulations necessary or appropriate to deal with the difference “between the exclusion amount applicable at the time of a decedent’s death”, and that applicable “at the time of any gifts by the decedent.”

What is not clear is whether that provision directs the adoption of regulations requiring the inclusion in the taxable estate of an individual who passes away after the sunset, of the full amount of the gifts made during life, but only allowing the lower exclusion amount in effect following the sunset, in determining the estate tax due i.e. the “clawback” approach.  That approach could result in an additional estate tax in excess of $2,000,000.00, depending on the amount of gifts made during the pre-sunset period.

On the other hand, the non “clawback” approach would only include in the taxable estate of a donor who dies after the sunset dates, pre sunset gifts in excess of the exclusion in effect at the date of gift, i.e. $11,200,000.00.

A related issue is what, if any, regulations will be adopted to deal with the situation where the donor during the pre-sunset period may not have utilized the then full amount of the gift and estate tax exclusion.  It is possible that, in those circumstances, the donor may still have the unused exclusion amount available for gift tax purposes, even after the sunset indeed even after sunset, the unused portion of the pre-sunset lifetime gift tax might be used in calculating the exclusion amount for estate tax purposes.

Clearly, uncertainly exists as to how the Treasury Department will exercise its statutory authority to issue regulations dealing with the sunset and the change of the exclusion amounts.  The IRS has published a so-called 2017-2018 Priority Guidance Plan, in which it indicates that a near term priority in issuing guidance with respect to the Act is “Guidance on computation of estate and gift taxes to reflect changes in the basic exclusion amount”.  Although no specific date with respect to such guidance has been reported, it is expected sometime in 2018.

Obviously, planning now to take advantage of the current increase in the lifetime exemption to $11,200,000.00, leaves uncertainty as what the effect may be following sunset, and how the Treasury would approach its mandate to deal with the different exclusions existing at the date of the gift and following sunset.

In general where the donor is in a position to take advantage of the increased gift tax and estate tax exclusion, it may still be beneficial to do so.  Even if the IRS were to issue regulations clawingback the amount of the pre sunset exclusion in excess of the post sunset exclusion amount, into the taxable estate, in case of death following sunset, which many do not believe will happen, it would likely be subject to challenge as exceeding its statutory authority. In any event, this will all depend on the structure of the donor’s estate plan, and at a minimum, those individuals in a position to take advantage of the increased exclusion should reexamine their current estate plan.

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NEW JERSEY’S 2018 TAX AMNESTY PROGRAM OFFERS RELIEF TO MANY TAXPAYERS

by Robert J. Alter

On July 1, Gov. Phil Murphy signed into law a tax amnesty measure that offers relief to many taxpayers in a variety of situations and will help bridge the revenue shortfall in the state budget.  It requires the Director of the Division of Taxation to establish a period not exceeding 90 days in duration which shall end no later than January 15, 2019.  Anyone behind on taxes owed for the time period between February 1, 2009 and September 1, 2017 would be eligible to participate, as long as they are not under criminal investigation.

Similar to New Jersey’s prior six amnesty initiatives, the new law provides for complete forgiveness of all penalties and one-half of the balance of accrued interest that is due as of November 1, 2018 in return for nonrefundable payment of the tax and remaining one-half of accrued interest due and a waiver of the right to appeal any liability paid under amnesty.

Additionally, a significant aspect of this amnesty law is that it not only applies to unassessed amounts, but also to amounts currently under audit or being contested with the Division of Taxation, either at its Conference Branch or in the New Jersey Tax Court.

The new law applies to all state taxes administered by the Division of Taxation (e.g., Gross Income, Sales and Use Tax, Corporate Business Tax, Motor Fuels and so on) but does not apply to unemployment-type taxes administered by the Department of Labor.

Specifically, it applies to state tax liabilities for tax returns due on and after February 1, 2009, and prior to September 1, 2017. Consequently, for example, it can be used to obtain relief for a taxpayer’s 2009 through 2016 Gross Income Tax, Corporate Business Tax returns, and for all sales and use tax quarters ending December 31, 2009 through June 30, 2017.

The Division of Taxation has not yet announced starting date for the amnesty period, which must end by January 15, 2019. Thus, the taxpayers will have to make an amnesty payment within the time period established by the Director to take advantage of amnesty relief.

In that regard, in order to be able to comply with the amnesty period tax payment deadline, it would be advisable in many situations for representatives to initiate contact with the Division of Taxation to obtain an agreed-to tax amount figure in time to mail a payment by the end of the amnesty period.

Exceptions and Pitfalls

An important exception to the tax amnesty bill is that it does not apply to any taxpayer who at the time of the amnesty payment is under criminal investigation or charge for any state tax matter, as certified by a county prosecutor or the attorney general to the director, Division of Taxation.

However, this exception is expected to be narrowly interpreted by the Division of Taxation which under the prior amnesty program took the position that this exception to amnesty relief did not apply to a taxpayer who was currently being investigated by its Office of Criminal Investigation, so long as the case had not been referred for prosecution to the Attorney General’s Office.

Consequently, it appears that this amnesty measure, as well, could be used to preclude a criminal tax prosecution in such a situation.

With respect to potential, federal tax collateral consequences, the Division of Taxation has represented in the past that it has no intention of affirmatively providing any information obtained through the amnesty program to the Internal Revenue Service.

In that connection, however, tax representatives must recognize that if the IRS makes a request for amnesty-related data pursuant to the general information-sharing agreement it has with the Division of Taxation, that the division will comply.

Therefore, the risk that an amnesty disclosure will result in a federal tax inquiry should be carefully considered in deciding whether, and how, to make an amnesty filing.

Furthermore, while the good news of the amnesty legislation is the complete forgiveness of penalties and hefty costs of collection fees and one-half of accrued interest, the bad news is that if a taxpayer is eligible for amnesty and fails to take advantage of it, an additional unwaivable 5 percent penalty will be automatically added to the already imposed statutory penalties and interest on any tax liability that would have been subject to the amnesty program.

Wide Range of Uses

Next, it is important for tax representatives to recognize that practically speaking, the amnesty program is not limited to being used to preclude a criminal tax prosecution in a failure-to-file-tax-return situation. It can also be used to resolve Nexus issues, and for example, to shut down ongoing tax audits, since the Division of Taxation is instructing its auditors to re-evaluate going forward with audits when amnesty payments are made.

In addition, the amnesty program can be useful in removing Certificates of Debt — the legal equivalent to money judgments — which have already been docketed by the Division of Taxation for unpaid penalty and interest, as well as saving clients’ money in situations where they have already entered into deferred payment agreements with the Division or its third-party collection representatives to liquidate outstanding tax liability.

Moreover, in some situations it could be used to settle tax disputes in the Tax Court or those pending at the administrative/appeal Conference Branch stage.

Finally, in areas like sales and use tax, it can be used for some tax quarters and not others, thereby reducing overall exposure in tax contests, and especially useful in Nexus situations after the U.S. Supreme Court’s recent rejection of Quill’s physical presence test in the South Dakota v. Wayfair, Inc. case.

Audit Concerns

Although an amnesty payment is nonrefundable, the Division of Taxation retains the right to conduct an audit of any amnesty payment situation, and any additional tax determined by the Division in such a situation would be subject to interest and penalties and, of course, subject to appeal by the taxpayer.

Because of the Division’s expressed policy of not targeting amnesty program situations and processing information obtained through the program through the normal system, however, a taxpayer’s chances of being audited will not be increased by an amnesty program filing.

In view of this amnesty program legislation’s usefulness, and the potential savings it offers, clients with outstanding or potential tax liabilities, as well as those currently contesting an assessment with the Division of Taxation, should be contacted to determine whether amnesty arrangements can be structured.

Reprinted with permission from the July 9, 2018 edition of www.LAW.com© 2018 ALM Media Properties, LLC. All rights reserved.

Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.com.

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Charitable Donations in Exchange for Real Property Tax Credits in New Jersey

by Melissa J. Sgambati

On May 4th, 2018, New Jersey Governor Phil Murphy signed Senate Bill No. 1893 permitting municipalities to issue property tax credits to property owners who donate to one or more charitable funds created by the municipality where the taxpayer’s property is located.

New Jersey property owners may donate up to 90% of their tax bill to their municipality’s charitable fund(s). If the tax credits that result from a charitable donation exceed the taxpayer’s annual real property tax owed, the unused amount of tax credit may be carried forward to subsequent tax bills not to exceed five years.

Under the new law, a municipality establishes a charitable fund or funds, each with a specific public purpose, through an ordinance or resolution of its governing body. Charitable funds may also be used to satisfy property taxes, pay for the cost of establishing the fund and for the tax collector’s ongoing administrative expenses.

The purpose of S-1893 is to potentially allow for a larger itemized deduction on a New Jersey taxpayer’s federal income tax return that exceeds the $10,000 cap on deductions for state and local taxes imposed by President Trump’s tax overhaul bill. It is unclear whether an individual’s potential tax savings resulting from S-1893 will pass muster with the Internal Revenue Service because the taxpayer’s donation may not qualify as a charitable donation under the Internal Revenue Code. Accordingly, there is the potential for back taxes, penalties and interest at the federal level if the taxpayer’s deduction taken pursuant to S-1893 is not accepted. In light of this uncertainty it is best to contact a tax or accounting professional for advice with respect to the application of S-1893.

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Offshore Tax Evasion – IRS to End Offshore Voluntary Disclosure Program

by Robert J. Alter

In Information Release – 2018-52, the Internal Revenue Service announced on March 13, 2018, that it will shut down and end its Offshore Voluntary Disclosure Program (“OVDP”) on September 28, 2018.  Thus, taxpayers with undisclosed foreign financial assets have time to utilize the OVDP before the program closes, but need to act ASAP and consult with experienced tax controversy counsel so that a complete filing submission is made by September 28, 2018.

Click Here to Read the Full Article

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Budget Proposal Announced By New Jersey Governor Phil Murphy

by John P. Beyel

On March 13, 2018, Governor Murphy presented his budget address for Fiscal Year 2019.  It has been said no one would eat a sausage if you watched it being made.  The same can be said of the legislative process.

Between this address and July 1st when the budget for Fiscal Year 2019 is to be in place, there may a number of changes to what was presented.

First, a quick comment upon what was not said.  Even though Candidate Murphy had stated that he would not modify New Jersey’s decision to rescind its Estate Tax, some had speculated it might reappear in some form.  While no one expected to see the exemption revert to the $675,000 level effective for persons who died before December 31, 2016, some adjustments were anticipated.  That still may occur, but was not a point raised in the Governor’s address.

The Governor has proposed a budget of $37.4B.  He has proposed an increase in school related funding.  A goal is to expand pre-K funding statewide.  As a first step in plans to make community college tuition free for all students, over the next year Governor Murphy proposed an additional investment of $50M in community colleges.

The Governor has proposed raising the state property tax deduction from its current level of $10K to $15K.  He has proposed creation of a new Child and Dependent Care Tax Credit for middle class and working families.

The budget also contains other proposals for new programs or expansion of existing programs.

The Governor has proposed reinstating the sales tax rate in New Jersey at 7%.  On the revenue side, the Governor has proposed a “millionaire’s tax” upon those who have taxable income in excess of $1M.  He contemplates such a tax would raise approximately $765M.  He also proposed closing a “loophole” which benefits hedge fund managers.  He believes that doing so will generate an additional $1M.

The Governor also favors legalization of marijuana.  It is not clear that the Legislature will support this concept or, if legislation is enacted the amount of the revenue which might be realized.

In concluding, the Governor declared as his goal the desire to build a stronger and fairer New Jersey.

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Pass Through Deduction Under Tax Cuts and Jobs Act (the “Act”)

by Alfred Wheeler

General

A.  Under the Act a new deduction is introduced effective for tax years beginning after December 31, 2017, available to individuals, trusts, and estates. The deduction is equal to 20% of “qualified business income” from income earned directly by the taxpayer, and income from so-called pass through entities.  Pass through entities are essentially defined as partnerships (including limited liability companies or other entities treated as partnerships for tax purposes) and S corporations, where the taxable income or loss of the entity is generally reported by its partners or shareholders.  Qualified business income also includes certain dividends from real estate investment trusts and other defined entities (including certain cooperatives and publicly traded partnerships).  Unless it is extended by Congress, the deduction expires for tax years beginning after December 31, 2026.

B.  In general, the pass through deduction is limited to 20% of the taxpayer’s taxable income with certain adjustments. Thus, where a taxpayer has reduced taxable income through other adjustments, the benefit of the pass through deduction may be limited.

C.  The benefit of the 20% “flow through” deduction obviously depends upon the taxpayer’s tax bracket. For example, for a taxpayer in a 35% bracket the 20% deduction in effect reduces the tax rate on the taxpayer’s qualified business income, from 35% to 28%.

Qualified Business Income – Exclusion for Services

A.  As indicated, the 20% deduction relates to qualified business income. Generally, qualified business income means income from any trade or business, but it excludes certain service trades or businesses.  Disqualified service trades or businesses include any trade or business in accounting, health, law, consulting, athletics, financial services and brokerage services.  Service trades or businesses also include any business, if the principal asset of the business is the “reputation or skill of one or more of its employees”.

B.  The exclusion for services income is phased in based upon the taxpayer’s taxable income. Taxpayers with income below a certain level are not subject to the exclusion – for a single taxpayer the limitation on services income does not apply unless the taxable income of the individual is in excess of $157,500, and in the case of a joint return, the limitation does not apply, unless the taxable income on the joint return is in excess of $315,000.  For taxpayers with taxable income in excess of those amounts, the exclusion for services income is phased in, so that the deduction is eliminated entirely for single taxpayers with taxable income in excess of $207,500, and married taxpayers with taxable joint return income in excess of $415,000.

Calculation of the Deduction

A.  As noted, for each qualified trade or business, the deduction is equal to 20% of the qualified business income from that trade or business. However, except for taxpayers with taxable income below certain levels, as discussed below, the deduction is limited under two methods.  The first method, defines qualified business income as 50% of W2 wages paid with respect to the business.  The second method provides that qualified business income is equal to 25% of the W2 wages paid with respect to the business, and a portion of the tax basis of the business, in depreciable property owned by the business.  Thus, for capital intensive businesses, the second method would typically produce better results.

B.  The limitations on the pass through deduction based on W2 wages, or W2 wages and tax basis in depreciable property as discussed above, are phased in, in the same manner as the exclusion of service trades or businesses, depending on the level of the taxpayer’s taxable income. Thus, if a single taxpayer has taxable income not in excess of $157,500, or a married taxpayer has joint return income not in excess of $315,000, the pass through deduction is 20% of qualified business income, without any limitation based on W2 wages or tax basis in depreciable assets.

C.  In determining the 20% deduction, qualified business income does not include investment income, such as capital gains, dividends and interest.

Open Questions and Planning Possibilities

A.  A number of questions with respect of the application of the pass through deduction will need to be clarified. Indeed, the Treasury Department recently advised that guidance with respect to rules for determining whether a pass through entity generates income qualifying for the pass through deduction, is a high priority area.  One area which is likely to receive attention, relates to the exclusion of certain specified service businesses from the benefits of the deduction.  In particular, the treatment as service businesses, if the principal asset of the trade or business is the “reputation or skill of one or more of its owners or employees”, will need to be clarified.

B.  Depending on the nature of the business, to the extent the limitations on the pass through deduction, based upon W-2 wages, or based upon W-2 wages and capital investment, may apply, planning may be available to maximize the deduction. For example, it may be appropriate to increase the amount of W-2 wages paid, by converting independent contractor relationships to employee relationships.

C.  There has been some discussion as to the benefits of operating a business as a C Corp rather than as a pass through S corporation, to take advantage of the new low corporate tax rate – 21% – under the Act, which may be lower than the S corporation shareholders, individual tax rate. However, in many cases the benefit of the lower corporate tax rate may be offset by the pass through deduction available to S corporations shareholders (which is not available to C Corps or their shareholders) and of course, by the additional tax, which may apply, when a C Corp makes distributions to its shareholders.

D.  Obviously, the particular circumstances would need to be examined to determine if operating as a C Corp rather than an S corporation, may be beneficial.

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The Taxation of Crypto Virtual Currencies – IRS Enforcement Initiative

by Robert J. Alter

Data from CoinMarketCap.com shows that the market capitalization for all crypto virtual currencies is currently at approximately 300 billion dollars.  Of that amount Bitcoin’s market share represents about 158 billion dollars, and the second largest cryptocurrency, ethereum/ether has about a 50 billion dollars market share.  Furthermore, virtual currency (ex. Bitcoin, ethereum/ether) trading and the related block chain trading technology platforms have been dominated by retail investors which has played a significant role in pushing cryptocurrencies to record highs in 2017.  In that regard, Coinbase, the world’s largest on line crypto wallet, adds about 100,000 new users every week.

It is estimated that millions of U.S. taxpayer Bitcoin/transactions have occurred, yet the IRS has stated that only 800 to 900 taxpayers had reported their Bitcoin gains from 2013 through 2015 by electronically filing IRS Form 8949 – the IRS form used for reporting sales and other dispositions of capital assets. (https://www.thestreet.com/story/14257905/1/bitcoin-investors-must-report-gains-to-the-irs.html)

Taking notice of what appears to be widespread tax noncompliance, the IRS is pursuing enforcement actions, and the IRS Criminal Investigation Division believes that virtual currency has increasingly become a tax evasion issue.  Consequently, the tax defense community can expect more enforcement actions in the future.

In that regard, on November 29, 2017 the IRS in connection with its investigation of allegedly underreporting of income and failure to pay taxes on crypto currency transactions caused the U.S. District Court for the Northern District of California U.S. v. Coinbase 17-01431 to issue an order enforcing a “John Doe Summons” to the Coinbase virtual currency exchange.  Coinbase, as one of the world’s largest platforms for exchanging virtual currencies, has approximately 5.9 million customers and has facilitated approximately $6 billion exchanged to Bitcoin. The Coinbase summons seeks a wide variety of records including, for example, taxpayer identities for all of its customers who have bought, sold, sent or received crypto currency worth $20,000 or more in any tax year from 2013 to 2015, transaction logs, and correspondence.  Accordingly, taxpayers using virtual currency transactions involving Coinbase who are not in tax compliance should consult experienced criminal tax counsel as soon as possible for advice.

With respect to the substantive tax aspects of crypto virtual currency, the IRS addressed emerging issues of the growing digital economies and how existing fundamental U.S. federal income tax principles apply to transactions using virtual currency to pay for goods or services, or held for investment when it issued IRS Notice 2014-21.

IRS Notice 2014-21 begins by acknowledging that virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, is referred to as convertible virtual currency.  Bitcoin is one example of a convertible virtual currency – Bitcoin can be digitally traded between users and can be purchased for, or exchanged into, U.S. dollars, Euros, and other real or virtual currencies.

The Notice goes on to state that in general, the sale or exchange of convertible virtual currency or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction has tax consequences that may result in a tax liability.

Specifically, the IRS has taken the position for federal tax purposes, that virtual currency should be characterized as property, not as a foreign currency recognized by any government.

Accordingly, when using Bitcoins for example, to purchase products, if the Bitcoin appreciated in value since it was acquired, there may be tax owed on the gain if the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency.

The character of the gain or loss depends on whether the virtual currency is a capital asset in the hands of a taxpayer.  A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer.  For example, stocks, bonds, and other investment property are generally capital assets.  A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer.  Investors and other property held mainly for sale to customers in a trade or business are example of property that is not a capital asset.  Thus, since characterized as property, normal tax consequences flow.  Therefore, if an employer pays an employee in virtual currency the employee must report the fair market value of the virtual currency measured in U.S. Dollars as compensation income as of the date of the virtual currency payment and the employer must report that value on a Form W-2.  Moreover, the fair market value of virtual currency paid as wages is subject to federal employment taxes paid by the employer and income tax withholding (FICA) and FUTA.  Similarly, if virtual currency is received by a business in exchange for goods or services, then any such payments received are reportable as ordinary income.

When a taxpayer successfully “mines” virtual currency (for example, uses computer resources to validate Bitcoin transactions and maintain public Bitcoin transaction ledger), the fair market value of the virtual currency as of the date of receipt is includible in gross income.

Also, if a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment resulting from those activities constitute self-employment income and are subject to the self-employment tax.

As to crypto currency and information reporting requirements, payments made in virtual currency appear to be subject to the same information reporting requirements as payments made in property, real currency or instruments denominated in real currency.  For example, gains and losses attributable to virtual currency transactions may need to be reported on Form 8949 which is attached to Schedule D of Form 1040; payments made by a person engaged in a trade or business to an independent contractor using a virtual currency for the performance of services may require reporting of such payments to the IRS and to the payee on Form 1099 MISC.

Many questions though remain unanswered such as for example, whether virtual currencies need to be reported on FBARs foreign bank account reports – a U.S. taxpayer’s accounts at a foreign binary Bitcoin options exchange or a foreign Bitcoin options exchange could be reportable on an FBAR as a foreign financial account, and on IRS Form 8938, and whether the exchange of crypto currencies can qualify as Section 1031 like exchanges.

Unfortunately, the IRS has not issued any further guidance up to date beyond IRS Notice 2014-21, but instead is pursing enforcement actions.  Furthermore, State tax authorities will no doubt adopt the IRS’ characterization of crypto currency as property with resultant state tax consequences and concerns.

If you have invested in, traded, and/or spent convertible virtual currency, we encourage you to contact the Firm.

 

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The New Tax Law – A Good Deal for Estates. . .or Maybe Not so Good

by Frank B. Tracy

Most of the buzz surrounding the new tax law effective this year has been on corporate income tax rate reductions, treatment of pass through entities, limitations on state and local deductions and other higher profile income-tax related changes.  For estates, the one big change is the increase of the Estate, Gift and Generation Skipping Tax exemption to $10 million, $20 Million for married individuals. This is a good thing for very high net worth families, but for the vast majority of Americans, the $5 million plus exemption already in place worked just fine.  The new tax act, however, has another provision relating to trusts and estates which doesn’t work out so well for anybody, and that’s the suspension of the deduction for miscellaneous expenses subject to the 2% floor.

Heretofore, individuals could take as itemized deductions on their 1040 certain miscellaneous expenses to extent they exceed in the aggregate 2% of the taxpayers adjusted gross income. These expenses include employee business expenses, investment management fees, tax preparation fees and many others. In this group of expenses one relating directly to trusts and estates is excess deductions on termination of estates and trusts that can be passed through to estate and trust beneficiaries.

Estates and trusts are taxpayers and must report and pay tax on net income earned or pass that income through to estate or trust beneficiaries.  To arrive at net income estates and trusts may deduct among other items attorney fees and fiduciary fees like executor and trustee commissions.  In the estate context attorney and fiduciary fees are very often the largest expenses of an estate and can exceed income by a wide margin, especially where there are few income producing assets or they have been sold or distributed during the tax year. If this disparity occurs in the final tax year of the estate, the excess deductions can be passed through to the beneficiaries and added to their other miscellaneous expenses and deducted to the extent they all exceed 2% of AGI.  That is until 2018.

Note attorney and fiduciary fees are also deductible against Federal  Estate Tax as well as against estate income, but not both.  An estate must choose between deducting them on the Estate Tax return, or on the income tax return. In past years, when the many more estates were subject to Federal Estate Tax and the estate tax rates were higher, the choice was more often to deduct against estate tax. Now, with increase in the estate tax exemption to $5 million in 2011 and now $10 million, many more estates will deduct these fees against income.  However, the added tax benefit of excess deductions on termination passed through to estate beneficiaries enjoyed by many more of them in recent years, is now, unfortunately, lost.

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The Tax Cuts and Jobs Act is a Major Change to Estate Planning

by Sharon Holland Purtill

The Tax Cuts and Jobs Act is a major change to estate planning.  We encourage you to contact the Firm to review and update your estate plan.  We recommend that clients review their estate plan at least every five years, or sooner if there are changes in your financial or personal life, changes in your relationship with your fiduciaries or beneficiaries, or changes in the state or federal estate tax law.

Federal Estate and Gift Taxes.  On January 1, 2018, the federal estate tax exemption doubled to $11.2M per person ($22.4M for married couples).  The exemptions are set to expire and revert back to $5M per person, adjusted for inflation, after 2025.  Your beneficiaries will continue to receive the benefit of a “step up in basis” to the date of death value on assets included in your estate.  If a new administration is elected after the 2020 federal elections it is possible the exemptions may be reduced back to current levels.  Thus, consideration should be given to utilizing the large estate and gift tax exemptions while they are available.  However, clients must also weigh the potential estate tax savings against the loss of a “step up in basis” at death.  The Act provides for regulations to be implemented to prevent the gifts which utilized the additional exemptions from being “clawed back” at death in the event the exemption sunsets (as it is scheduled to do in 2025).

Federal Gift Tax Annual Exclusion.  The federal gift tax annual exclusion is $15,000 per recipient for 2018 (increased from $14,000 due to an adjustment for inflation).  There is an unlimited gift tax marital deduction for U.S. citizen spouses.  The annual exclusion for gifts to non-citizen spouses is $152,000 for 2018.

State Estate and Gift Taxes.  States that impose their own estate tax will not be affected by the Act.  Clients in Connecticut must consider the impact of the state gift tax (the only state with a gift tax).

  • Connecticut Estate and Gift Tax: The Connecticut estate and gift tax exemption rose to $2.6M in 2018.  The exemption is scheduled to rise to $3.6M in 2019 and then match the federal exemption in 2020.   In addition, beginning January 1, 2019, the cap on the maximum estate tax imposed on the estates of decedents dying on or after January 1, 2019, and the maximum gift tax imposed on taxable gifts made on or after January 1, 2019, will lower from $20M to $15M.
  • Massachusetts Estate Tax: The Massachusetts estate tax exemption remains at $1M per person.
  • New Jersey Estate and Inheritance Tax: Effective January 1, 2018, New Jersey eliminated its estate tax, but the inheritance tax remains in effect.  Transfers to spouses, children and grandchildren will remain inheritance tax-free, however, any transfers to a sibling, aunt/uncle, niece/nephew, friend, etc., would be subject to the inheritance tax.
  • New York Estate Tax: The New York Estate Tax exemption is $5.25M for 2018 and it is scheduled to match the federal exemption starting January 1, 2019.

Update Your Estate Planning Documents:  Many estate plans provide for the creation of a Family Trust (or Credit Shelter Trust) upon the first spouse to die.  In older estate plans, the formula for funding that trust may continue to reference funding it with the maximum amount that can pass free of federal estate tax.  The doubling of the federal estate tax exemption could result in significant state estate tax.  In newer plans, the funding formula may have been based upon the maximum state estate tax exemption.  With the larger state estate tax exemptions this may no longer be necessary or a desired result.  Estates below the state and federal exemption may be suitable for a simplified estate plan.  Clients should contact the Firm to review and update their estate plans.

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New Jersey Court Recognizes ‘Wrongful Prolongation of Life’ Cause of Action

by Melissa J. Sgambati

New Jersey’s Advance Directive for Health Care Act (the “Act”) guarantees the right of an individual to make decisions regarding his or her healthcare.  But what happens if those decisions and wishes are ignored?  Morris County Superior Court Judge W. Hunt Dumont recently recognized a cause of action for wrongful prolongation of life against a Defendant hospital, doctor, and several nurses, for their alleged failure to follow a patient’s healthcare wishes.

Suzanna Stica was admitted to the hospital after complaining of breathing problems. She had signed “do not resuscitate” and “do not intubate” orders ahead of her admission.  Despite those orders, the Defendants resuscitated Ms. Stica after she went into cardiac arrest. She lived an additional six months before she ultimately passed away.  During that time, Ms. Stica was intubated, had difficulty breathing, was confined to a wheelchair, suffered from depression and dementia, and had trouble speaking.

The court explained Ms. Stica’s wishes were “simply ignored” by the hospital and its staff.  “Ms. Stica lived an additional six months in a diminished condition that included unwanted pain and suffering,” and the Defendants “violated Ms. Stica’s fundamental right to refuse unwanted medical treatment.”

The court held that its ruling was a logical extension of the New Jersey Supreme Court’s 1979 ruling in Berman v. Allan, which recognized the doctrine of wrongful birth.  New Jersey, the court explained, has taken a leadership role in recognizing patients’ rights regarding treatment options.  These rights include “a well-established right to reject lifesaving treatment.”

By denying the Defendants’ motion for summary judgment, the court extended a legal cause of action against those who ignore a person’s decisions regarding his or her healthcare.  To ensure that your healthcare decisions and end-of-life wishes are properly integrated into your estate planning instruments, or if you have any questions regarding this recent ruling, we encourage you to contact the Firm.

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