In 2019 we saw several taxpayer-friendly cases and regulations issued that may have an impact on you, your family business, or your estate plan. The following is a brief highlight of some of these taxpayer wins and planning opportunities:
Final regulations, issued on November 12, 2019, provide that the benefit of the temporary increase in the gift and estate tax basic exclusion amount would not be clawed back on the taxpayer’s subsequent death after 2025. The final regulations largely adopted the proposed regulations, issued in November, 2018, with some limited changes in response to public comment.
The final regulations also clarify that the increase in the basic exclusion amount for the first-to-die spouse will increase the deceased spouse’s unused exclusion available to the surviving spouse, if the death of the first spouse occurs prior to 2026. This unused exclusion is fixed at the first spouse’s death and will not be reduced if the surviving spouse lives into 2026. However, the surviving spouse’s own exclusion will be reduced if he or she lives into 2026. The final regulations did not address the generation-skipping transfer tax.
Two court decisions, one in a Federal District Court (Kress) and one in the Tax Court (Jones), represent a significant affirmation of the appraisal community’s practice of tax-affecting the valuation of an interest in a business conducted in a pass-through entity. “Tax-affecting” refers to the step in the valuation of interests in a closely-held business that seeks to adjust for certain differences between passthrough entities and C corporations. The court’s acceptance of the tax-affecting valuation method represents a victory for owners of pass-through entities.
Qualified Opportunity Fund Regulations
On April 17, 2019, the IRS and Treasury issued their much anticipated second set of proposed regulations under Internal Revenue Code, Section 1400Z-2, Special rules for capital gains invested in opportunity zones. While some questions remain unanswered, the proposed regulations provide much-needed guidance for investors, fund managers, developers, and sponsors pertaining to qualified opportunity zone business (QOZB) property, the treatment of tangible leased property, Section 1231 gain, the 90-percent asset test, and more. The guidance is generally taxpayer-friendly and provides the flexibility that businesses and investors were seeking.
The proposed regulations identify a nonexclusive list of eleven events that cause inclusion of a deferred gain. With particular regard to estate planning matters, the guidance clarifies that a transfer of an investment by means of a gift and charitable contribution will trigger an inclusion event. Transfers by reason of death are not considered a triggering event. Likewise, a transfer by a taxpayer to a grantor trust is not an inclusion event. The guidance explains that for federal income tax purposes, the owner of a grantor trust is treated as the owner of property in the trust. Thus the owner’s interest is not reduced, as the taxpayer is simply transferring to himself or herself. If the grantor trust later switches to a non-grantor trust, except for reason of death, then the change in status will be deemed an inclusion event.
199A Final Regulations
For tax years ending after February 8, 2019, the IRS and Treasury released final regulations under Sections 199A and 643. The final regulations added or amended a number of significant rules, including relaxing rules that treated certain businesses as specified service trades or businesses (SSTB) because of a relationship to an SSTB, and allowing relevant pass-through entities, such as partnerships and S corporations, as well as individual taxpayers, to aggregate eligible trades or businesses. Given the complexity of determining the qualified business income deduction, taxpayers should carefully consider the rules contained within the final regulations. Also, as noted in the preamble to the final regulations, a number of areas still remain where detailed guidance has not been provided.
The Trusts and Estates Group of Johnston Allison Hord encourages you to contact your attorney to schedule a meeting to discuss how recent federal tax changes may impact you, your family business planning, and your personal estate planning.