The IRS released Revenue Procedure 2021-45 which announces the increase in 2022 of the estate, gift and generation-skipping transfer tax applicable exclusion amounts from $11.7 million to $12.06 million.  The applicable exclusion amounts currently remain scheduled to expire on December 31, 2025, which would result in a reduction in the exclusion amounts to $5 million (adjusted for inflation).  However, there is always a possibility that new law will be passed that could adjust these exclusion amounts sooner.

In addition, in 2022, the gift tax annual exclusion amount for gifts to any person (other than gifts of future interests to trusts) will increase to $16,000, while the gift tax annual exclusion amount for gifts to a non-citizen spouse will increase to $164,000.

The New York basic exclusion amount will also increase in 2022 from $5.93 million to $6.11 million.

The Connecticut estate and gift tax applicable exclusion amount will increase from $7.1 million to $9.1 million in 2022.  This amount remains scheduled to meet the federal estate and gift tax exclusion amount in 2023.

We have had several matters recently with “Accidental Americans” – that is, non-US persons who became US tax residents by staying in the US for a sufficient number of days.

This frequently happens in an understandable way, and involves a non-US person who has family in the US. The non-US person comes to visit his or her family in the US for some period of time every year. He or she may stay for a few months at a time. With covid, medical or other reasons, he or she may have stayed for a longer period of time recently. And then, at some point and usually unwittingly, the non-US person satisfies the “substantial presence” test for US tax residency.

The “substantial presence” test is a day count test.  If a person is present in the US for 183 days or more in a calendar year, then he or she meets the substantial presence test and is treated as a US tax resident for US income tax purposes.

Also, if a person is present at least 31 days during the current calendar year, and those days, plus 1/3 of the days present during the preceding calendar year, plus 1/6 of the days present during the second preceding calendar year is equal to or greater than 183 days, then the person also meets the substantial presence test.

There are possible exceptions to the substantial presence test.  The exceptions include (1) the “closer connection” test, (2) the “exempt individual” test and (3) the “treaty tie-breaker” test.  These tests are not described in detail in this post.

The substantial presence test is important because a person who is a US tax resident must pay US tax on all of his or her worldwide income (subject to a credit for foreign taxes paid), whereas a non-US person is only taxed on his or her US source income.  Being subject to US tax on worldwide income can be an unwelcome surprise for an Accidental American.  One consequence of this test is that, if a person is in the US every year (eg, seasonally), he or she should be present for fewer than 121 days each year to avoid the rule.

In addition, a US tax resident also must comply with relatively complex tax reporting requirements for his or her foreign assets.  These include:  (1) foreign bank account reports (Form FinCen114) to report foreign bank accounts, (2) Form 8939 to report “specified foreign financial assets,” (3) Form 5471 for “controlled foreign corporations and (4) other possible reporting forms.

The penalties for not filing these information returns can be substantial.  On the other hand, the penalties can be abated if the taxpayer has “reasonable cause” for the non-filing.

Becoming an Accidental American also can mean exposure to state income tax.  For example, a non-US resident who spends sufficient days in New York also may owe New York income tax on his or her worldwide income.

Individuals in this type of situation should consult a tax professional to review their tax residency issues carefully.

On June 12, 2021, New York’s new Power of Attorney law (A.5630-A/S.3923-A) went into effect.  As a reminder, the law simplifies New York’s Power of Attorney form and implements penalties for improper rejection of a New York Power of Attorney by third parties.  A Power of Attorney that was executed under a prior version of the law remains effective and does not need to be re-executed at this time.  Here is a link to our previous article with a substantive outline of the specific changes to the law.

This short article outlines the requirements for starting an active business in a qualified opportunity zone (“QOZ”).

The US tax legislation that created QOZs was enacted in early 2018, and is intended to encourage long-term investment in economically distressed communities.  The IRS issued two substantive sets of proposed regulations outlining rules for QOZ investments (in October, 2018, and April, 2019), and finalized the regulations in December, 2019.  Investors and entrepreneurs are still absorbing these rules.  Nevertheless, the tax benefits from a successful QOZ investment in an active business can be substantial.  These primarily include (1) a deferral of tax on the amount of gain that is reinvested into a QOZ investment until 2026, and (2) the ability to sell a QOZ investment held for 10 years on a tax-free basis.

Real estate has been the main focus for QOZ investors, and a cottage industry in QOZ real estate investments has emerged.  In addition, an entrepreneur who is starting a new business would do well to consider whether he or she can locate the new business in a QOZ and comply with complex rules to qualify as a QOZ business.

The main definitions and applicable rules are summarized below:

  1. A “QOZ Fund” is an investment vehicle formed as a partnership or corporation for the purposes of investing in an eligible QOZ Property. The QOZ Fund is required to hold at least 90% of its assets in QOZ Property.
  2. “QOZ Property” means: (a) QOZ stock, which is original issue stock in a domestic corporation acquired for cash where the corporation is a QOZ Business, (b) QOZ partnership interest, which is any capital or profits interest in a domestic partnership acquired for cash where the partnership is a QOZ Business, or (c) “QOZ Business Property,” which is tangible property used in a trade or business of the QOZ fund, where the original use of the property in the QOZ begins with the QOZ Fund, or the QOZ Fund “substantially improves” the property (generally, a 30 month test to double the value of the property).
  3. A “QOZ Business” is generally an active trade or business where substantially all (ie, more than 70%) of the tangible property owned or leased by the taxpayer (through the QOZ Fund) is QOZ Business Property. In addition, a QOZ Business is a business where:
    1. at least 50% of the total gross income of such trade or business is derived from the active conduct of such trade business within a QOZ (the “50% gross income test”),
    2. a substantial portion of the intangible property of such trade or business is used in the active conduct of such trade or business in the QOZ, and
    3. less than 5% of the average of the aggregate unadjusted tax bases of the property of such trade or business is attributable to nonqualified financial property.

While there was initially significant uncertainty around the 50% gross income test, the Regulations provide more clarity by providing three safe harbor tests.  Based on the Regulations, a QOZ business will satisfy the 50% gross income test if any of the following apply:

  1. More than 50% of the service hours performed for the business by its employees and independent contractors are performed within the QOZ,
  2. More than 50% of the compensation and/or independent contractor expenses for the business are incurred by its employees and independent contractors within the QOZ, or
  3. The QOZ Business locates both tangible property and its management or operations within a QOZ that are necessary to generate 50% of the gross income of the business.

A business that does not meet the safe harbor tests also may meet the 50% gross income requirement based on a facts and circumstances test if, based on all the facts and circumstances, it can demonstrate that at least 50% of the business’ gross income is derived from the active conduct of the business in the QOZ.

The Regulations contain an example of a tech company.  The business is a startup business that develops software applications for global sale and is located in a QOZ.  A majority of the total hours of the startup’s employees and contractors developing software applications are performed in the QOZ.  The example provides that the business would satisfy the 50% gross income test, even though the business makes the vast majority of its sales to consumers located outside of the QOZ.

There are many additional issues for entrepreneurs to consider in starting a QOZ Business, including timing issues to invest capital, valuation issues to satisfy the IRS’ tests, leasing issues if property is leased, related party issues if property is purchased or leased from a related party, and tax reporting issues.  It also may be possible to move an existing business into a QOZ, though this requires careful planning and additional investment.

Note that the state income tax treatment of a QOZ interest may be different than the federal income tax treatment.  For example, New York recently decoupled its tax law from the federal QOZ law with respect to the deferral of gains that are reinvested in QOZ Businesses (although New York appears to have retained the exclusion of gain from taxation on the sale of QOZ Businesses held for more than 10 years).

Despite the complexity of the law, the overall benefits to distressed communities, and the tax benefits, for QOZ Businesses can be substantial.

If you are interested in starting an active business in a QOZ, you should speak with a tax attorney to guide you through the requirements of the QOZ rules.

In a contested estate situation, family members are mad, often fighting mad.  A common client question is, “When are we going to court?”  Perhaps surprisingly, our usual answer to this is, “Only when everything else has failed and you do not have other options.”

Contested estates generally involve a limited number of claims.  These include:

  • A Will or trust is invalid due to lack of capacity, undue influence or coercion.
  • An action for removal of a trustee or executor, usually due to alleged mismanagement of a trust or estate, and/or failure to make distributions.
  • An action for an accounting for a trust or estate.
  • Guardianship for an incapacitated adult (often to try to stop abuse of a power of attorney).

There are some instances where going to court is required or necessary.  For example, there is a specific time period to contest a Will and a court filing is required.  Or, if there is an imminent action that will harm the beneficiaries of an estate (such as selling an important estate asset), the beneficiaries may go to court to seek immediate restraints.  In a recent public example of this, the beneficiaries of the Prince estate (his siblings) went to court to try to remove the corporate executor, Comerica Bank.

However, in many cases, a client is best served by not running straight into court.  Lawsuits are expensive, emotionally draining, and follow very defined rules (regarding discovery and motions, for example).  It is frequently preferable to try to negotiate a resolution with another family member or party in advance of filing a lawsuit.  The threat of the lawsuit often is sufficient to bring parties to the negotiating table.  Negotiation frequently will be effective for the parties to explain their respective positions, and explore whether the dispute can be resolved through an agreement.  Mediation, usually with a retired judge as a mediator, is also an option to consider and much less expensive than a lawsuit.

Here are some examples of recent matters in our office that were resolved without resorting to litigation:

  • A trustee agreeing to resign and a new trustee being appointed.
  • A trustee agreeing to make annual distributions of an agreed-upon amount from a trust.
  • A trustee agreeing to change investment advisors and the investments of a trust to produce more income for a beneficiary.
  • An executor agreeing to sell family real estate and distribute the proceeds to the beneficiaries after years of refusal to do so.
  • A full accounting of a trust for several years, and resolution of alleged improper actions with monetary payments to the estate beneficiaries.

Often, it is inadvisable to rush into court as a first step in a contested estate.  An attorney can be a zealous, even aggressive, advocate for his or her client without commencing a lawsuit.  Attorneys with experience in the area of contested estates can provide guidance as to the best strategy and approach to achieve the client’s goals.