Experts have started to calculate the inflation adjustments to key estate and gift exemption amounts for 2018.  Note that these are not the official figures to be released by the IRS, but should be used as a guide.  The IRS will officially release the numbers later this year.

For an estate of any decedent dying during calendar year 2017, the applicable exclusion was increased from $5.45 million to $5.49 million.  This change increased not only the applicable exclusion amount available at death, but also a taxpayer’s lifetime gift applicable exclusion amount and generation skipping transfer exclusion amount.  This means a husband and wife with proper planning could transfer $10.98 million estate, gift and GST tax free to their children and grandchildren in 2017.  The projected 2018 adjustment to the applicable exclusion will increase from $5.49 million to $5.6 million which means that a husband and wife with proper planning could potentially transfer $11.2 million estate, gift and GST tax free to their children and grandchildren in 2018.

For 2017, the estate, gift and GST tax rate remains the same at 40% and the gift tax annual exclusion remains at $14,000.  For gifts made in 2018, the projected gift tax annual exclusion will be adjusted to $15,000 (up from $14,000 for gifts made in 2017).

The New Jersey Estate Tax repeal will be effective as of January 1, 2018.  The current $2 million exemption which increased on January 1, 2017 is set to be eliminated as of January 1, 2018.  Keep in mind that the New Jersey Inheritance Tax is still in effect. This is a tax imposed on transfers to beneficiaries who are not spouses, parents, children or grandchildren (i.e., nieces, nephews, siblings, friends, etc.) New Jersey Inheritance Tax rates start at 11% and go as high as 16%.

The New York exclusion amount was changed as of April 1, 2014.  Beginning April 1, 2014, the exclusion has increased as follows:

•           $2.0625 million for decedents dying between April 1, 2014 through March 31, 2015;

•           $3.125 million for decedents dying between April 1, 2015 through March 31, 2016;

•           $4.1875 million for decedents dying between April 1, 2016 through March 31, 2017;

•           $5.25 million for decedents dying between April 1, 2017 through December 31, 2018.  Beginning in 2019, the exclusion would be indexed for inflation, and equal to the Federal exclusion.

In 2017, the gift tax annual exclusion to a non-citizen spouse was increased from $148,000 to $149,000.  This is projected to increase to $152,000 in 2018.  While gifts between spouses are unlimited if the donee spouse is a United States citizen, there are restrictions when the donee spouse is not a United States citizen.

The US Tax Court recently held that a foreign corporation is not subject to US income tax on the sale of a partnership interest where the partnership conducts a US business.  In so holding, the Tax Court rejected a 26 year old Revenue Ruling (Rev Rul 91-32) that reached the opposite conclusion.  For foreign investors in US businesses (that do not own real estate), this is an important decision.

A foreign investor who owns an interest in a partnership that holds US real estate may be subject to US federal income tax on a sale of that partnership interest under the Foreign Investment in Real Property Tax Act (“FIRPTA”).  For real estate, the IRS has indicated that gain derived by a foreign investor from the disposition of an interest in a partnership is subject to US tax only to the extent it is attributable to US real property interests owned by the partnership.  Regs §1.897-7T(a); Notice 88-72.

In Rev Rul 91-32, the IRS set forth its view that taxation on the sale of a partner’s interest in a partnership can go beyond mere real estate investment and apply to a sale of an interest in a partnership if the partnership is engaged in any US trade or business and has effectively connected income (“ECI”).  In this ruling, the IRS applied the “aggregate” theory of partnership taxation to justify looking through the partnership to its underlying assets in determining the source and character of the partner’s gain.

In July, 2017, the Tax Court issued its decision in Grecian Magnesite, Mining, Industrial & Shipping Co, SA v Comm’r, 149 TC 3The court declined to follow the IRS’s long standing position under Rev Rul 91-32, and held that a non-US person’s gain from the sale of its interest in a partnership engaged in a US trade or business is generally not subject to US federal income tax.

Grecian Magnesite Mining was a privately owned corporation organized under the laws of Greece that sells magnesia and magnesite to customers around the world.  From 2001 through 2008, it was a member of a US LLC that was engaged in the business of extracting, producing, and distributing magnesite in the US.  In 2008, Grecian Mining’s interest in the LLC was completely redeemed, resulting in treating the transaction as a sale or exchange of the membership interest.

The IRS asserted that the capital gain was properly treated as ECI since Grecian Mining was engaged in a trade or business as a result of its investment in the LLC.  Grecian Mining’s position was that the assets of the LLC do not control the character of the gain from a disposition of an interest in the LLC.  The gain should not have been treated as US-source gain and generally cannot be taxed in the US as ECI under the proposition that foreign-source income cannot be ECI except in limited instances that arise from the presence of US real estate under FIRPTA, which only applied to a small part of their gain.

Foreign investors should carefully review their US tax exposure on a sale of a partnership interest before they simply pay tax on their realized gain.  Grecian Magnesite calls into question the validity of Rev Rul 91-32 (though an appeal or non-acquiescence is possible).  A foreign investor should be able to rely on this case to avoid paying tax.  Moreover, foreign investors that have already paid income tax based upon Rev Rul 91-32 may wish to file a refund claim based on this decision.

Anyone who has seen the current Broadway hit Hamilton knows that we are a nation of immigrants. Moreover, many U.S. persons who moved here from elsewhere have parents back in their home country.

When those “foreign” parents pass away and leave assets to their U.S. children, those assets become subject to the U.S. estate tax system in the children’s estates, where ultimately they can be taxed at a 40 percent federal tax rate (plus state estate taxes) when a child dies.

The adverse tax result that follows from foreign parents leaving their assets outright to U.S. children can be avoided with advance planning. Often, foreign parents can incorporate trust planning into their own estate planning documents. If assets pass to a properly structured trust for the benefit of a child rather than outright to the child, the assets in the trust may not be subject to estate tax in the child’s estate.

New York estate tax practitioners often consult with foreign advisors to effectuate this kind of planning, and it is becoming more important given the amount of immigration and investment in the New York area in recent years.

A parent can incorporate this type of trust planning—often called “dynasty trust” planning—in a Will that is valid in his or her home jurisdiction. The Will would include provisions to create the dynasty trust upon the parent’s death. To accomplish this, the U.S. trusts and estates lawyer can work with foreign counsel to (1) confirm that the “home country” law allows such a structure and (2) provide the dynasty trust language that will reflect the client’s goals and satisfy U.S. tax law requirements. For example, the trust can allow the child to be sole trustee of the trust created for his or her benefit, and permit distributions to the child and his or her descendants subject to ascertainable standards (i.e., health, education, maintenance and support) so that the trust assets are not included in the child’s estate. The trust can include powers of appointment and several other tools that allow for greater flexibility in the trust.

As an alternative to including the dynasty trust plan in a foreign parent’s Will, the parent could establish and fund a trust during lifetime to carry out his or her objectives. The U.S. tax practitioner can assist with the U.S. tax advice relating to such a trust.

If established outside the United States, such a trust usually will be structured to be a “foreign grantor trust.” This is a trust that, under the U.S. grantor trust rules (Internal Revenue Code §§671-679), is not treated as a separate taxpayer from the grantor. The trust is disregarded for U.S. income tax purposes, and the foreign grantor reports all items of income, deduction, gain, loss, credit, etc. on his or her own tax return, if any.

It is often simpler to structure this type of trust as a foreign grantor trust, rather than a foreign non-grantor trust that is treated as a separate taxpayer. A foreign non-grantor trust with U.S. beneficiaries has a number of tax reporting requirements, and also can be subject to punitive income tax rules (known as the throwback rules) when funds are distributed to U.S. beneficiaries. Thus, the parent’s trust is often best structured as a foreign grantor trust while the parent is alive. When the parent dies, the trust becomes a non-grantor trust, and the U.S. children generally will move the trust to the United States at that time (pursuant to a “change of situs” provision in the trust) so that it becomes a domestic, U.S.-situs trust.

In order to qualify as a foreign grantor trust, the trust must be fully revocable by the grantor. Internal Revenue Code §§672(f)(1) and (2). (Note that foreign trusts do not qualify as grantor trusts under the same rules as domestic trusts). This is often a desirable structure for U.S. children and their foreign parents. The foreign parent is committing to a structure that he or she can revoke or change at any time, while the U.S. child has the benefit of the parent’s proactive tax planning.

The foreign trust generally will have a bank or trust company acting as trustee in the jurisdiction of choice (e.g., BVI or Cayman Islands). The trust may have a family member named as a “trust protector” who has the right to remove and replace the trustee and make other changes to the trust. The trust may own the stock of an investment company that holds the assets transferred into this structure, and a family member can act as director of the company to manage the investments.

The substantive provisions of the trust permit distributions to children and grandchildren in the discretion of the trustee (which provides an asset protection benefit to the beneficiaries). The trust can continue in this fashion for many generations, and should not be subject to U.S. estate or generation-skipping tax.

As the parent/grantor of the trust is also included as a trust beneficiary, distributions from the trust can be made to the parent during his or her lifetime. In practice, if the parent wants funds in the trust to be distributed to a child, it is often best for the parent to withdraw funds from the trust and distribute them directly to the child. Among other things, this makes the U.S. tax reporting of the gift on a Form 3520 simpler.

Under certain circumstances, the foreign parent may wish to establish a U.S.-situs grantor trust rather than a foreign trust. This may make sense, for example, if the foreign parent has U.S. assets that will be transferred to the trust.

This article provides just a brief treatment of this issue and of course there are many additional complexities. The trusts and estates practitioner must consider, among other things, (1) whether home country law allows foreign parents to leave assets in this manner, (2) various reporting requirements for foreign trusts with U.S. beneficiaries, (3) trustee selection and fees, (4) numerous drafting issues to build maximum flexibility into long-term trusts, and (5) compliance with U.S. income and estate tax laws. Yet the tax saving opportunity for clients in this situation is substantial, and should be considered by all foreign parents leaving significant assets to U.S. children.

Reprinted with permission from the January 17, 2017 edition of The New York Law Journal© 2017 ALM Media Properties, LLC. All rights reserved.  Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.com

The New Jersey Tax Appeal Filing Deadline is April 3rd.

In the upcoming weeks property owners will be receiving their annual property tax assessment notices (postcards) from the municipal assessor’s office. Receipt of these assessment notices indicates that the time has arrived to determine whether a tax appeal is warranted for the 2017 tax year.  Despite what can best be described as uneven improvement in the real estate market across various commercial segments, the need to carefully evaluate property tax relief opportunities continues as commercial property taxes remain the largest single expense component affecting a property owner’s bottom line. The 2017 tax appeal filing deadline is April 3, 2017, unless a town-wide reassessment or revaluation is in place, in which case the deadline is May 1, 2017.

Consequently, it behooves commercial property owners to review their property tax assessments with experienced professionals now in order to ensure that these assessments are in line with the property’s true value.  Because New Jersey law “freezes” assessments for a period of two (2) years, at levels agreed to between property owners and municipalities in resolution of appeals filed with the County Tax Boards or State Tax Court, or alternatively as a result of judgments reached by these bodies on the merits, the tax appeal vehicle can be an effective means of fixing assessments while the market is trending in an upward direction. In addition, because assessments are generally not disturbed until a town-wide revaluation or reassessment program is implemented (usually every 5-10 years) there is a real prospect that a lower assessment achieved as a result of a successful appeal this year could have real lasting value and actually provide savings to taxpayers for many additional years beyond the two (2) freeze years guaranteed by law.

As a result, there continues to be real opportunities for property owners to realize significant tax savings and lock in present values for the foreseeable future.  Commercial property owners are therefore encouraged to consult with their real property tax professionals to determine if a tax appeal would be warranted in their particular case in 2017.

Please feel free to contact Carl A. Rizzo at crizzo@coleschotz.com or by telephone at (201) 525-6350 with any questions.

 

On October 14, 2016, Governor Christie signed into law a transportation funding bill that also included the repeal of the New Jersey Estate Tax. Here is what you need to know:

  • The New Jersey Estate Tax repeal will be effective as of January 1, 2018. The current $675,000 exemption will increase to a $2 million exemption on January 1, 2017. The Estate Tax will be eliminated as of January 1, 2018.
  • The New Jersey Inheritance Tax is still in effect. This is a tax imposed on transfers to beneficiaries who are not spouses, parents, children or grandchildren (i.e., nieces, nephews, siblings, friends, etc.) New Jersey Inheritance Tax rates start at 11% and go as high as 16%.
  • As part of the new law, there is a tax break for retirees. There will be an increase in the New Jersey gross income tax exclusion on pension or retirement income over four years (in 2020) to $100,000 for couples, $75,000 for individuals, and $50,000 for married taxpayers who file separately.
  • On January 1, 2017, the sales tax will be reduced from 7% to 6.875% and will be further reduced to 6.625% on January 1, 2018.

Now that the repeal has been enacted, is New Jersey an attractive state to die in? We have counseled many clients over the years that moving to Florida could save significant estate taxes. With the New Jersey Estate Tax repeal (effective in 2018), some of the advantages enjoyed by Floridians can now also be enjoyed by New Jersey taxpayers (namely, no estate tax in either state).

However, moving to Florida also saves income tax, as Florida does not impose state income tax. New Jersey still does, so this remains a major advantage when moving to Florida. All income from sources outside New Jersey will not be taxed in New Jersey if you reside in Florida. If you reside in New Jersey, you will still pay state income tax on all income.

Also, if you bequeath assets to beneficiaries who are not descendants and you reside in New Jersey, you still will trigger a New Jersey Inheritance Tax, as this tax was not repealed.

Despite the New Jersey Estate Tax repeal, it is still very important to make sure your estate is in order if you reside in New Jersey. There are significant federal estate tax issues to plan for, and many non-tax issues which need to be considered and properly addressed.