Accounting
4 irrevocable trust options as the TCJA deadline looms
For clients waiting to see if Congress will extend or cut the lifetime gift and estate tax exclusion next year, setting up an irrevocable trust now can be a base-covering estate planning option.
The lifetime gift and estate tax exclusion amount is scheduled to drop from $13.99 million per person in 2025 to about $7 million at the start of 2026. While Congress can
Extending all the provisions in the TCJA for 10 years would add an estimated $4.6 trillion to the federal budget deficit.
Alternatively, legislation has recently been introduced to repeal the estate tax entirely. Were it repealed, and noncitizen nonresident investors were no longer subject to U.S. estate tax on their U.S. assets over $60,000, this could make the U.S. a more attractive destination for foreign capital. However, this legislation’s passage is
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Given these uncertainties, clients with federally taxable estates who have not used up all of their lifetime exemption amounts should consider making gifts that use the larger exclusion amount before it has a chance to decrease from about $14 million to about $7 million. Clients could transfer as much as an extra $7 million free of the 40% estate and gift tax.
But clients may be uncomfortable making large gifts, either because they anticipate needing the assets during their lifetime or simply wish to maintain control of their funds.
In such cases, setting up an irrevocable trust now and waiting to fund it until Congress’s willingness to extend the larger exemption amount or to repeal the estate tax becomes more apparent is a viable option. If and when the exclusion amount is reduced, clients can then fund the trust.
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Irrevocable trusts can maximize a client’s remaining lifetime gift tax exemption while preserving assets for descendants, and in some cases, spouses. If the generation-skipping transfer tax exemption is also allocated to an irrevocable trust, the trust can continue for multiple generations, with no estate or GST taxes due at the deaths of the beneficiaries. The amount of the gifted assets, plus any future appreciation, will be removed from the client’s estate.
Financial advisors and CPAs urging their clients to put trust structures in place
It’s also important to consider which assets clients should give. Any assets given to an irrevocable trust would no longer be owned by the donor at death, so the trust would not be entitled to a
Alternatively, clients could make a loan of up to $14 million to family members, or to a grantor trust of which the client’s descendants are beneficiaries, and later forgive some or all of that loan, meaning the loan would be treated as a gift at the time of forgiveness.
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Here are four irrevocable trust structures to consider depending on the client’s circumstances:
Standard irrevocable trust
A client’s lifetime gifts to the trust would use some or all of their gift tax exemptions. The assets contributed to the trust would be removed from the client’s estate, and any future appreciation on those assets would pass to descendants free of estate tax.
Spousal lifetime access trust
If a married client is worried about making substantial gifts because they might need the gifted assets for living expenses later in life, one spouse could give assets to a spousal lifetime access trust —
Irrevocable life insurance trust
An irrevocable life insurance trust, or ILIT, would own a
Grantor trusts
A
The American Institute of CPAs is asking the Treasury Department and the Internal Revenue Service for greater clarity on their
SECURE 2.0, like the original SECURE (Setting Every Community Up for Retirement Enhancement) Act of 2019 includes a
The Treasury and the IRS
The requirement generally applies to 401(k) and 403(b) plans established after Dec. 29, 2022, which is the date when the SECURE 2.0 Act became law, but there are some exceptions for new and small businesses, church plans, and governmental plans.
Based on the recent proposed regulations, the AICPA made several recommendations in its
In determining the employee count for small businesses, the AICPA recommended that the Treasury and the IRS issue final regulations stating that only employees of the plan sponsor are included in the count for purposes of determining status as a small business under Section 414A.
The AICPA also had a comment on the definition of “predecessor employer,” suggesting that the Treasury and the IRS issue final regulations that define the term by reference to Treas. Reg. Section 1.415(f)-1(c)(2) for purposes of Section 414A(c)(4)(A).
“The purpose for our letter is to provide input to Treasury and the IRS in order to further clarify the rules and provide recommendations to help with the implementation of the auto-enrollment provision of the law,” said Kristin Esposito, AICPA director of tax policy and advocacy, in a statement Tuesday.
The Public Company Accounting Oversight Board sanctioned James PAI CPA and its sole owner and partner Yu-Ching James Pai for audit failures.
The PCAOB found that Pai and his firm violated multiple PCAOB rules and standards in connection with two audits of one issuer client, that the firm violated quality control standards, and that Pai directly and substantially contributed to those violations. In the audits, the firm and Pai failed to perform risk assessments and obtain sufficient audit evidence in multiple areas, including revenue and related party transactions.
“Performing appropriate risk assessments and obtaining sufficient evidence are fundamental to an audit, and failure to meet these most basic requirements puts investors at risk,” PCAOB chair Erica Williams said in a statement.
The PCAOB also found that, in the audits, the firm failed to perform engagement quality reviews, obtain written representations from management, comply with requirements concerning critical audit matters and audit committee communications and documentation, and establish a system of quality control.
“Issuing an audit report stating that the audit was performed in accordance with PCAOB standards is a solemn commitment to the investing public, and serious consequences can follow when an auditor fails to meet that commitment,” Robert Rice, director of the PCAOB’s Division of Enforcement and Investigations said in a statement.
Without admitting or denying the findings, Pai and the firm consented to the PCAOB’s order, which:
- Censures Pai and the firm and imposes a $40,000 civil money penalty, jointly and severally, against them;
- Revokes the firm’s PCAOB registration with a right to reapply after three years;
- Bars Pai from being an associated person of a PCAOB-registered firm, with a right to petition the Board to terminate his bar after three years;
- Requires the firm to undertake remedial actions to improve its system of quality control and procedures before reapplying for registration; and,
- Requires Pai to complete 40 CPE hours before seeking to terminate his bar.
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