As the landscape of estate planning continues to evolve, the 2024 Heckerling Institute provided valuable insights into the nuances that shape this critical aspect of financial planning. From the impact of the Corporate Transparency Act to the implications of Revenue Ruling 2023-2 and the far-reaching effects of the SECURE Act 2.0, estate planners today navigate a complex web of regulatory updates and legal precedents. 

This year's conference delved into pressing issues such as preparing for IRS audits, addressing beneficiary concerns, and the importance of policy valuations, all while dissecting pivotal court cases that underscore the need for meticulous planning. 

1. Talk to your business clients about the Corporate Transparency Act

Initially enacted by Congress in 2021, the Corporate Transparency Act was designed to prevent corruption, money laundering, tax fraud, and terrorist financing by obtaining more information about specific ownership of entities operating in the U.S. market. 

On January 1, 2024, new guidelines went into effect that will require millions of small businesses to file a Beneficial Owner Information Report (BOI) to the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN). The regulations now require virtually all incorporated or organized entities to disclose information about “beneficial owners” who own at least 25% of the reporting entity. Be sure you are discussing this update with your small business owners to ensure they comply with the new requirements.  

2. New guidelines on step-up in basis

Revenue Ruling 2023-2 defines and clarifies which assets receive a step-up in basis when transferred from a decedent to a beneficiary on the date of death. Generally, assets considered part of a person’s gross estate receive a step-up in tax basis at the date of death under Section 1014. However, assets held inside an irrevocable grantor trust, outside of the grantor’s gross estate, do not receive this step-up in basis. By the time the asset reaches the beneficiary, two transfers have occurred:

• A transfer from the grantor to the trust
• A transfer from trust to a beneficiary

As such, there is no direct transfer of ownership from the grantor to the beneficiary. As we discuss in more detail below, this is important to keep in mind for clients who may not have an estate tax planning need and don’t necessarily need to utilize a trust.  

3. The Impact of SECURE Act 2.0

Although implemented in the final week of 2022, the SECURE Act remains a popular topic. The Act aimed to expand coverage, amplify retirement savings, and clarify previous regulations on IRAs and employer-sponsored retirement plans. However, to provide these benefits, the Act did away with some existing provisions, such as eliminating the Stretch IRA, which had extended the tax-deferred status of an inherited IRA by stretching out the required minimum distributions (RMDs) over the life expectancy of the beneficiary.

Life insurance can be an effective alternative for passing on the value of the qualified asset in a tax-efficient manner. By converting the qualified asset into an income stream - either by way of the Required Minimum Distribution (RMD) or a Single Premium Immediate Annuity (SPIA) - the proceeds could be used to purchase a life insurance policy. At the death of the IRA owner, life insurance provides a tax-free benefit to the heirs. This may be a more efficient means of wealth transfer than passing on the inherited IRA and having to liquidate it within ten years.

4. Planning for modest estates

For clients with a modest estate – between $2 million and $20 million as defined by speakers Mickey Davis and Melissa Willms (Davis & Willms, PLLC) – estate tax planning may not be a primary need or concern. However, estate planners naturally tend to plan for estate taxes, which may come at the expense of income tax planning. 

In many cases, preparing for “basis” is more important. As mentioned above, Revenue Ruling 2023-2 essentially removes the advantage of a step-up in basis of an asset belonging to the decedent. In cases where an irrevocable grantor trust is not necessarily needed, keeping the asset within the estate will potentially provide the additional tax advantage of the step-up in basis.

5. Prepare clients for IRS audits

Many estate planning professionals may notice an increase in IRS estate audits due in part to the Inflation Reduction Act and the growth in the number of IRS agents. According to speaker John Porter (Baker Botts, LLP), preparing clients for an audit should start at the estate planning level. 

Ensuring clients have all the necessary documentation can help mitigate potential tax consequences down the road. There is generally no minimum net worth threshold for being subject to an audit, so advisors may want to ensure their clients are set up with a good attorney, regardless of their level of wealth.  

6. Address common beneficiary concerns

Many beneficiaries have concerns about how quickly and efficiently they can access their funds after the policyholder's death. Outlining executor duties, hiring a good estate attorney, and explaining asset distribution timelines can help set the right expectations, ease the burden on family members during a difficult time, and potentially lay the foundation for a deeper client relationship down the road. 

In some instances, incentive clauses can be added to the wording of the trust document that would provide the beneficiary with the trust benefits so long as they achieve certain milestones - graduating college, buying a house, getting married, etc. If these clauses are in place, it is the duty of the trustee to make sure the beneficiary is fully aware of these restrictions.  

7. Establish the importance of policy valuations

Determining the value of a life insurance policy for estate, gift, or income tax purposes can be a difficult task. Larry Brody (Harrison LLC) and Mary Ann Mancini (Loeb & Loeb LLP) discussed how valuations differ not only by the type of life insurance product being considered but also by how the product itself is utilized. 

Whether for charitable planning, retirement planning, or simple personal ownership, clients should leverage qualified professionals and carriers to assist with valuations, which will help minimize potential tax implications. For assistance with valuations, speak with a Modern Life brokerage manager.

8. Court cases

Many familiar court cases were also discussed–some that have been ruled on and some that have yet to be decided. One of the critical cases that kicked off the meeting agenda is Connelly v. United States, which has made it up to the Supreme Court and is still being litigated. The issue at the heart of the case is how corporate-owned life insurance, used to fund the redemption of a deceased owner’s stock, can impact the value of the business and the value of the decedent’s estate.  

In the split-dollar arena, the separate cases of Cahill v. Comm, Levine v. Comm, and Morrissette v. Comm continue to be discussed and utilized as case studies as a blueprint for navigating the intricacies of complex private split-dollar arrangements. Whether it involves intergenerational split dollar (Cahill & Levine) or navigating between loan regimes or economic benefit regimes (Morrissette), these cases are an important reminder about the necessity of careful planning and documentation in ILITs and split-dollar arrangements. 

Cecil v. Commissioner was also front and center. This case involves gift tax valuation of minority interest gifts from the shareholders to their children and grandchildren. The IRS had assessed deficiencies for undervaluing the shares of gifted stock. It was found that the business's cash flows should be “tax affected” –essentially applying a corporate tax rate to pass-through entities to establish a value. The court accepted this notion but made a point of saying that this would not apply to all cases.  

Next steps

Interested in more insights on how Modern Life can elevate your firm? Schedule a 15-minute call.