Dealing with Digital Assets

Steve Akers’ ACTEC 2019 Annual Meeting Musings suggests the following four planning steps for dealing with digital property:

(1) Prepare a list of digital property, how to access it (list of passwords and let someone know where the list is maintained), and what to do with it;

(2) Back up important data;

(3) Protect valuable data with a strong password and strong encryption; and

(4) Update estate planning documents with provisions giving lawful consent to disclose the contents of electronic communications to fiduciaries.

Estate Planning with Qualified Opportunity Fund Interests

The most recent proposed regulations released in April 2019 [REG-120186-18] (the “New Proposed Regulations”) provide guidance as to the treatment of gifts of Opportunity Zone interests through Qualified Opportunity Funds (“QOF Interests”) to grantor trusts and the implications of transfers at death.

Transfers at Death:

The New Proposed Regulations clarify that the death of a taxpayer owning a QOF Interest is not an inclusion event.  Further, neither the transfer of the qualifying investment to the decedent’s estate, nor the distribution of the qualifying investment to heirs or beneficiaries would be an inclusion event.  But, note that because the transfer to an estate or a beneficiary is not a disposition, there would be income with respect to the decedent.  Because death is not a taxable event, the deferred gains carry over to the successor in interest so that there is no step up in basis at death.  Therefore, the deferred gain continues to be deferred gain in the hands of the beneficiary.  And, for purposes of the qualified opportunity zone (“QOZ”) statute, the decedent’s holding period tacks, and the beneficiary steps into the decedent’s shoes.

For the recipient beneficiary, this means that unless there is an earlier disposition, come December 31, 2026, the beneficiary holding the QOF interest will be responsible for the deferred tax, possibly without the liquidity to pay it.

Gift Tax Consequences:

Giving away your QOF interest generally subjects the interest to immediate taxation.  One exception to this general rule is a gift of the QOF interest to the taxpayer’s grantor trust.  The New Proposed Regulations do not treat a taxpayer’s gift of a QOF interest to the taxpayer’s grantor trust as an inclusion event that would accelerate the deferred capital gains tax.  The answer goes back to good old Revenue Ruling 85-13 which provides that a transaction between a grantor and the grantor trust does not have tax consequences because the same taxpayer is responsible for the taxes.

Further, termination of grantor trust status due to the grantor’s death would not be treated as an inclusion event.  Note, however, that termination of grantor trust status for other reasons would subject the deferred capital gains to tax.

Perhaps the most attractive treatment of the gift of a QOF interest to a grantor trust is that the trust takes the holding period of the grantor.  Therefore, future appreciation after ten (10) years is excluded from income tax if still held in the grantor trust.

What about the GRAT?

Estate planners love GRATs, and, as grantor trusts, they are excellent vehicles for estate planning with QOF interests.  Remember, however, that the remainder beneficiary of a GRAT funded with a QOF interest should be a grantor trust to avoid an inclusion event that triggers tax on the deferred gain.

Angkatavanish, Todd and David Herzig. INSIGHT: Frozen Ozone (Fr-Ozone) Planning–The Newest Flavored Estate Freeze. Bloomberg Law. May 22, 2019.

SECURE Act Passes House; Held up in Senate by Sen. Cruz

The House of Representatives overwhelmingly approved the “Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019” (H.R. 1994).

Under current law, IRA and Qualified Plan assets can be distributed based on the life expectancy of the beneficiary.  The SECURE Act provides, generally, that all IRAs and Qualified Plans must be distributed within ten (10) years of death.  The proposed effective date is December 31, 2019.

Exceptions to the proposed 10-year rule include: (1) rollovers to a surviving spouse; (2) children under majority take over their life expectancy until the age of majority, and then the 10-year rule applies; (3) “disabled” and “chronically ill” beneficiaries may use a life expectancy payout; and (4) an individual not more than ten (10) years younger than the plan participant may use a life expectancy payout.

Note that while the conduit trust worked well under the life expectancy rules, it might not be your best option under the 10-year rule of the SECURE Act.

The House bill eliminated a provision allowing $10,000 in distributions per beneficiary from section 529 educational savings plans to pay for home-schooling and elementary and secondary school expenses.  Cruz objects to that elimination.

Keebler & Associates, LLP, Setting Every Community Up for Retirement Enhancement Act of 2019. CLE presentation through Leimberg Information Services. May 23, 2019.

Chamseddine, Jad and Stephen K. Cooper. House-Passed Retirement Bill Hits Home-Schooling Snag in Senate. Tax Notes Today. May 24, 2019.

Every Student’s Dream: A Billionaire Offers to Wipe Out Student Debt

Billionaire benefactor Robert Smith announced on May 19th that he and his family would establish a grant to pay off student loans for Morehouse College’s entire 2019 graduating class.

If that sounds too good to be true, it might be.  Smith needs to be particularly cognizant of potential income tax consequences to the students whose debt is paid off.  Since the schooling has already occurred, these payments are not scholarships.

The worst treatment for the students would be treatment as forgiveness of indebtedness while their best treatment is if the payments are treated as gifts.

Alexander L. Reid of Morgan Lewis & Bockius LLP suggests that the gift treatment will prevail.

For the sake of the students, I sure hope so.

Stokeld, Fred. Billionaire’s Gift Could Carry Tax Consequences for Students. Tax Notes Today. May 21, 2019.

Is it time to Consider a Tennessee Private Trust Company?

Tennessee is on the short-list of states providing the structure needed for the creation and implementation of private trust companies. See Tenn. Code Ann. § 45-2-2001, et seq.

For families with significant wealth, especially those with wealth in concentrated family business assets, the strategic planning and continuity offered by a private trust company are of the utmost importance.

Key advantages of a private trust company include (1) greater influence over management of family wealth; (2) minimizing trustee designation and succession issues; (3) greater appreciation for a family’s special relationship with heavily concentrated assets; (4) less regulatory oversight than public trust companies; (5) leveraging favorable state trust and tax laws; and (6) providing a training ground for future generations.

The State of Tennessee requires that a Tennessee private trust company has, at a minimum, a phone number, a filing cabinet, and a physical address in Tennessee.  But, private trust companies will also want to be cognizant of activities performed in other states in order to avoid the appearance of doing business in that other state.  For example, Board meetings should occur in Tennessee, as well as administrative and distributive functions, to the extent feasible.

In July 2008, the IRS issued Notice 2008-63, and, to date, Notice 2008-63 is the only guidance we have addressing the transfer tax and income tax consequences of a private trust company serving as trustee of family trusts.  The Notice is a must-read for any practitioner considering involvement in private trust company work, but the main takeaway is as follows: committees in charge of making discretionary distributions and committees in charge of amending governing documents should be independent persons.  An independent person is defined as an individual who is not a grantor or beneficiary of a trust or estate being administered by the private trust company, and who is not a related or subordinate party as defined in Internal Revenue Code § 672(c) as to any grantor or beneficiary of such trust.

LISI Estate Planning Newsletter #2719 (April 18, 2019) at

Tom Petty’s Daughters Sue his Widow for Mismanagement of his Estate

Petty’s daughters, Adria Robin Petty and Annakim Violette, filed a complaint in the Superior Court of California County of Los Angeles on May 15.  The complaint alleges that Tom Petty’s widow, Dana York Petty, is taking advantage of valuable assets for her own personal gain.

Petty Unlimited LLC was established in 2018 to control assets from Petty’s trust following his death in 2017.  According to the complaint, Dana York Petty set up a competing LLC, Tom Petty Legacy LLC as a means of “misappropriating Tom’s life’s work for her own selfish interests.”

York Petty’s lawyer, Adam Streisand, responded to the complaint, describing it as a “misguided and meritless lawsuit.”

Petty Unlimited LLC v. Petty, Cal. Super. Ct., No. 19STCV16838, complaint filed 5/15/19.

Vargas, Carolina. Tom Petty’s Daughters Sue His Widow for Mishandling Estate. Bloomberg Daily Tax Report. May 17, 2019.

New Laws for Estate Planners in Tennessee

Probate changes: Tenn. Code Ann. § 30-1-117 adds a new subsection (a)(10) that requires that the petition for probate state any felony or misdemeanor convictions against the proposed personal representative and further state if the proposed personal representative has been sentenced to time in a penitentiary.  Practitioners must also include the name, age, mailing address and relationship of the proposed personal representative to the decedent.  The oath required by Tenn. Code Ann. § 30-1-111 now requires the person taking the oath to swear that he or she has not been convicted of a felony that would, under Tenn. Code Ann. § 40-20-115, statutorily prohibit him or her from serving in a fiduciary capacity.

Changes to the Trust Code: Public Chapter 340 adds the Tennessee Disclaimer of Property Interests Act as Tenn. Code Ann. § 31-7-101, et seq; a new section is added to Title 35, Chapter 15, Part 2 that allows a trustee to petition the court to approve a final accounting and relieve the trustee of any liability for the period of the trustee’s administration of the trust; and Tenn. Code Ann. § 35-15-1301 is added providing for the creation of special purpose entities in Tennessee.

New World of Notarizing: Effective July 1, 2019, the Online Notary Public Act under Tenn. Code Ann. § 8-16-301 allows for the notarization of documents online and the use of electronic signatures.

IRS Identity Theft Letters to Estates or Trusts Require Response

If you, as a practitioner, have received a 6042C letter asking for a copy of the trust agreement and other information already provided to the IRS when you filed the applicable tax return, make sure to respond timely.  Failure to respond will cause the tax return to which the letter relates to be treated as not filed.

The IRS is working to narrow its filters so that fewer letters are sent out in the future when it is clear that identity theft is not a concern.

For more information, visit the IRS website on Understanding your Letter 5263C or Letter 6042C.

Curry, Jonathan.  Unnecessary ID Theft Letters to Estates Still Require a Response. Tax Notes Today. May 13, 2019.

Holding a License rather than a Life Estate as to Real Property Prevents Liability as to Mortgage

John Wesley Lange (the “Decedent”) died testate on July 13, 2014.  The Decedent’s son, Matthew Lange, was named Executor under the Decedent’s Will.  At the time of the Decedent’s death, the Decedent had a partner, Betty Jo Sullivan.  Ms. Sullivan had a son, Jonathan Sullivan.  The Decedent’s Will provides:

I hereby specifically give, devise, and bequeath my real property located at 14905 Highway 70, Huntingdon, Tennessee . . . to my son, Matthew Lange, to be his subject to the rights of Betty Jo Sullivan and Jonathan Sullivan to reside in the home on my property until such time as they abandon that right by failing to reside in the same for a period of 90 days consecutive or they voluntarily relinquish said rights.”

The trial court found that the Sullivans had a license to reside on the Highway 70 property, and that as licensees, the Sullivans were liable for the mortgage, taxes, insurance, and maintenance of the Highway 70 property.  The $27,000 mortgage became due in full on January 26, 2017.

The Sullivans appealed only as to their liability for mortgage payments on the Highway 70 property.

The Court of Appeals held that “As licensees, under Decedent’s Will, [the Sullivans] hold no estate in the Property.  They have no right to lease the Property, or to sell their present interest in same; they also have no right or authority to encumber the Property with a mortgage.  While a licensee may be required to pay a fee for the privilege of use of property [, there are] no cases in Tennessee where a licensee has been charged with the mortgage debt on the property.

Therefore, the Court of Appeals held that the Sullivans are not liable for the mortgage debt.

Lange v. Sullivan, No. W2018-01218-COA-R3-CV (Tenn. Ct App. Apr. 9, 2019).