Summarizing the 54th Annual Heckerling Institute on Estate Planning

Popular Estate Planning Topics and Innovations Presented By Industry Leaders

13-17 January 2020 @ The Marriot World Center, Orlando, FL

The weeklong 54th Annual Heckerling Institute on Estate Planning included 4,000+ attendees, including Alliance Trust Company of Nevada representatives Lou Robinson (CFO), Jouko Sipila (Managing Director), and Anthony DeMartini (Trust Officer). We have collaborated to compile the below summary covering the highlights from the conference.

Those who are interested in reading the full American Bar Association reports may do so here.

2020, an Election Year With Many Implications

Potential estate planning developments from the upcoming 2020 election was a highly popular topic at Heckerling. The Federal Estate and Gift Tax Exemption that is currently set at $10mm is subject to inflationary adjustments (the 2020 exemption is $11.6mm). However, the exemption raised significantly in 2017 and is set to sunset back to $5mm after December 31, 2025, barring any changes from Congress.

Many speakers, including Managing Director and Senior Fiduciary Counsel at Bessemer Trust, Steve Akers, presented this window of opportunity and encouraged estate planners to take advantage of it sooner rather than later.

Attorney Martin Shenkman (Marty) went even further, stating that it is critical to do the planning now as there may be potentially adverse consequences if estate planners do not take action. Depending on the 2020 election results, it is plausible that changes to the federal exemptions could become effective as early as January 1, 2021 (laws may be signed in 2021, and then retroactively applied to the beginning of 2021). Democratic proposals could reduce the gift tax exemption to a mere $1 million emasculate many estate planning techniques. A key to planning is to assure clients access to funds transferred.

Most practitioners believed that planning done in 2020 would be grandfathered in, which we historically have seen. Otherwise, a constitutional challenge may occur. But it is not worth the risk to many clients.

I reached out to Marty for a brief comment:

“While no one can predict the results of the 2020 or 2024 election, it certainly seems safer for clients of wealth to plan before options may be legislated away.”

Many commentators also encouraged planners to build flexibility into their current estate plans. The framework for selecting the appropriate estate plan is often complicated and is even more challenging, given the uncertainty in the political landscape.

Grantor or Non-Grantor Trusts?

Grantor v. non-grantor trusts was discussed extensively, and the choice for the clients would depend on a variety of factors, including, but not limited to:

  • Client net worth
    • Now v. future
  • Grantor tax bracket
    • Now v. future
  • Beneficiary tax brackets
    • Now v. future
  • Basis of client assets and potential gains
  • State income tax implications
  • The need to swap assets for basis step-up
  • Ability and need to borrow from and installment sales to a trust

The SECURE Act of 2019

While the Alliance Trust team did not consider the SECURE Act to be Heckerling’s primary theme, the Act was discussed extensively at Heckerling 2020. As background, the Act makes considerable changes to retirement planning. Under the old law, a designated beneficiary could “stretch” distributions from a plan over the beneficiary’s remaining life expectancy.

Stretching distributions were particularly beneficial when the designated beneficiary is much younger than the IRA owner. The motivation to stretch distributions was driven by the lower marginal tax rate of smaller distributions, and the delay of the taxes due on those distributions while the funds grow tax-deferred.

The SECURE Act places 10-year caps (for designated beneficiaries) and 5-year caps (for non-designated beneficiaries) on the permitted time to exhaust the plan or IRA assets. There doesn’t seem to be a “quick fix” way to obtain the stretch. Presenters said to take the wait-and-see approach as there might be more guidance from the IRS, and structures could develop over time.

Other presenters mentioned that the Act killed the “stretch IRA.” Clients may spend their IRA funds during retirement due to their lower marginal tax rates, implement life insurance strategies, and leave other assets for their heirs.

Using a The Beneficiary Deemed Owned Trust (BDOT) provision may help in certain circumstances. Although to make sense, it would depend on the marginal tax rate bracket of the beneficiary v. the grantor. Also, leaving an IRA to a Charitable Remainder Trust (CRT) is a possibility.

Kaestner and Fielding Understated?

Speakers also touched on the Kaestner and Fielding trust taxation cases. However, Kaestner and Fielding were not discussed to the extent we expected, as Kaestner was the most significant trust case heard by SCOTUS in nearly a century. Click here to read our analysis on Kaestner and Fielding.

The conference seemed to focus more on federal tax issues rather than state taxes. Or perhaps, since neither Minnesota (Fielding) nor North Carolina (Kaestner) legislatures have acted to update their laws, which were found unconstitutional, some commentators are waiting to find out what the new laws, in fact, even are before focusing on state taxation. (North Carolina Dept of Revenue website still has the pre SCOTUS rules on its website https://www.ncdor.gov/taxes/estate-trusts/general-information)

Around the Globe

International topics were also discussed with many global families looking to migrate assets to the U.S. for a variety of reasons, including political, social, safety, privacy, fear of litigation, and family reasons, to name only a few.

And, how the 2008 Financial Crisis opened eyes across the globe to the need to geographically diversify their wealth. The U.S., with its strict privacy laws, rule of law, and strong democracy, has become an attractive jurisdiction for global wealth.

Trusts with S-Corps: A Cautionary Tale

Trusts with S-Corps were a popular topic as well. Presenters gave guidance to practitioners that while the trusts holding S-corps can be drafted, estate planners must be prudent in order not to invalidate their clients’ S-corp status.

There are two general alternatives:

Qualified Subchapter S Trusts (QSSTs)

QSSTs carry many requirements, including that there must be a sole income beneficiary and that the trust distributes all the income. QSSTs are widely treated as a “disregarded entity” for tax purposes.

Electing Small Business Trusts (ESBTs)

ESBTs are more flexible than QSSTs. However, all income is taxed at the highest marginal income tax rate (for 2020: 37%), leading to an ever-higher federal tax penalty than regular trusts.

Misc Heckerling Topics That We Enjoyed

Special Needs Trusts

Special Needs Trusts came up at Heckerling 2020, and the importance of drafting differences between Self-Settled and Third Person Settled trusts, especially when it comes to distribution language.

SALT Deductions

Speakers also gave SALT deduction structures some attention – though some commentators thought the economic benefits might only be marginal. Still, estate planners should evaluate client situations on a case-by-case basis.

Conclusion

In summary, we found the week to be very productive and informative. The Alliance Trust team wants to thank the esteemed speakers, the attendees, and those who stopped by our booth to say hello.

Feel free to reach out to our business development director, Jouko Sipila, with any questions or to further discuss Heckerling 2020. jsipila@alliancetrustcompany.com

Want us to give you a call?

Let our experienced team help you with your trust needs