Recent Estate Planning Developments

The 59th Annual Heckerling Institute on Estate Planning, presented by Steve Akers, Sam Donaldson, and Amy Heller, began with a lengthy discussion of recent developments in 2024, including provisions set to expire in 2025 and ones automatically returning in 2026. 

Individual Income Tax Provisions Set to Expire in 2025 

Several individual income tax provisions that expire at the end of 2025, include: 

• Reduced federal income tax rates (top rate is currently 37%); 

• $10,000 limit on the deduction for state and local taxes; 

• 60% charitable gift limitation for cash gifts (will revert to 50%), and  

• The qualified business income deduction.  

Provisions Returning in 2026 

 The provisions that are automatically returning in 2026 are as follows:  

• Higher federal income tax rates (with a top rate of 39.6%); 

• Miscellaneous itemized deductions; 

• Limitation on itemized deductions, and 

• Deductions for interest on home equity indebtedness up to $100,000 and a restored $1 million cap on mortgage debt (increased from its current $750,000 cap).  

Panel members concluded this part of their presentation by referencing the uncertainty about whether the current gift/estate tax exclusion will be extended before the end of 2025 or shrink to half its size ($5 million, adjusted for inflation).  

 Final Regulations Issued in 2024  

Some of the other recent developments discussed included final regulations issued in 2024 on required minimum distributions (RMDs), the late allocation of generation-skipping transfer tax exemption. 

Required Minimum Distributions (RMDs) 

In part, the final regulations on RMDs addressed the interpretation of the 10-year rule and the treatment of any missed distributions from 2021 through 2024. Specifically, if a participant dies after their required beginning date, the designated beneficiary is required to take annual distributions during the 10-year period following the participant’s death, based upon the designated beneficiary’s life expectancy, with any remaining funds distributed to the beneficiary on or before December 31 of the tenth year. According to a footnote in the preamble to the final regulations, makeup distributions are not required even though RMDs should have been paid in 2021, 2022, 2023, or 2024, but were not. 

Basis Reporting and Consistency  

The basis reporting and consistency final regulations made significant changes to the rules. Most importantly, the zero-basis rule was eliminated (under the proposed regulations, an asset omitted from a decedent’s estate tax return would have a zero basis). The final regulations also eliminated the requirement that an individual who inherits property and later transfers it by gift must file Form 8971; this rule now only applies to trustees of a trust that inherit in-kind property and later distribute it.  

Late Allocation of Generation-Skipping Transfer Tax Exemption 

The final generation-skipping transfer tax regulations provide guidance with respect to obtaining an extension of time to make a late allocation of generation-skipping transfer tax exemption, as well as late elections to elect out of the automatic allocation of generation-skipping transfer tax exemption and electing to treat a trust as a GST trust. The extension is obtained through a private letter ruling request and will be granted if: 

1.  the IRS is satisfied that the transferor or executor acted reasonably and in good faith, and 
2. that the extension will not prejudice the interests of the government.  

Furthermore, there is an automatic six-month extension from the due date of the gift or estate tax return to file a supplemental return allocating GST exemption or making any related elections. This extension is available only if the transferor or executor both timely filed the gift or estate tax return and filed a supplemental return within the six-month period. It is not available if the original return was filed late.  

Connelly v. United States 

 Finally, the panel discussed a significant case that the Supreme Court decided on June 6, 2024 –namely, Connelly v. United States, which addresses the effect of corporate-owned life insurance on the valuation of a closely held business. In Connelly, a buy-sell agreement triggered by the death of a company shareholder required the corporate redemption of that shareholder’s shares. This redemption was funded by corporate-owned life insurance on the deceased shareholder’s life. The Court unanimously affirmed a decision of the Eighth Circuit Court of Appeals, holding that corporate-owned life insurance on the life of a deceased shareholder acquired to redeem the deceased shareholder’s stock increased the value of that stock for estate tax purposes. The Court rejected the argument that the corporation’s obligation to redeem the deceased shareholder’s shares offset the value of the death benefit received by the company.