Category: Insights

This memorandum explores the complex interplay between the partnership income tax rules of IRC Section 754 governing inside basis adjustments to partnership assets upon the sale of a partnership interest to an irrevocable non-grantor trust in exchange for an installment promissory note governed by IRC Section 453.  If structured properly, such a transaction has the potential to allow families to immediately convert substantially appreciated assets to cash or other diversified assets while deferring income taxes over a long period of time.  This type of planning also may produce significant estate planning benefits by removing post-transfer appreciation from the selling partner’s taxable estate.

Please click here to read Part 4.

Please click here to review Part 3.

Please click here to review Part 2.

Please click here to review Part 1.

This article is Part 3 of a 4-part series exploring various tax issues related to disregarded and regarded intra-family installment sale transactions for estate and income tax planning. Part 1 focused on loans and debt transactions between trusts and their beneficiaries. Part 2 reviewed the income tax rules associated with reportable installment sale transactions under IRC Section 453, including dispositions of reportable installment obligations during life and the rules under Section 691 governing dispositions of reportable installment obligations as a result of death. Part 3 reviews post-mortem tax considerations involving loans between a grantor and their grantor trust that remain outstanding at the time of the grantor’s death when the grantor trust converts to a non-grantor trust.

Please click here to read Part 3.

Please click here to review Part 2.

Please click here to review Part 1.

This article is Part 2 of a 4-part series exploring various tax issues related to disregarded and regarded intra-family installment sale transactions for estate and income tax planning. Part 1 focused on loans and debt transactions between trusts and their beneficiaries. Part 2 reviews the income tax rules associated with reportable installment sale transactions under IRC Section 453, including dispositions of reportable installment obligations during life and the rules under Section 691 governing dispositions of reportable installment obligations as a result of death.

Please click here to read Part 2.

Please click here to review Part 1.

For years, wealthy families and their advisors have utilized intra-family loans and installment sale transactions as part of an overall estate planning strategy to shift wealth tax efficiently between generations.  In fact, installment sales of appreciating assets between grantors and grantor trusts in exchange for promissory notes have become one of the more common estate freeze techniques over the last several decades.  The number of these transactions has exploded largely as a result of the low interest rate environment we’ve experienced since the early 2000’s. Times are changing and interest rates are expected to be higher over the foreseeable future.  Accordingly, we think it’s important for clients and estate planning practitioners to review and reacquaint themselves with many of the income tax rules associated with these transactions to make sure intra-family debt doesn’t produce unintended income tax consequences that could derail the transfer tax benefits sought to be achieved.

This paper is the first of a four-part series that will provide a review of IRC Section 7872, Section 483, and the so-called original issue discount (“OID”) rules, primarily under IRC Sections 1272-1274. Additionally, this part focuses on loans and debt transactions between trusts and their beneficiaries, including the possibility of below market or interest free loans from trusts to, or for the benefit of, their beneficiaries.

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The combination of continued global economic expansion with moderating inflation provided a favorable backdrop for financial markets in the first half of 2023. Corporate earnings results were generally better than expected, which improved investor sentiment toward equities. The US market rally was led by mega-cap technology stocks and fueled by excitement around artificial intelligence. Yet, September was a tough month for risk assets and equities in particular.  Click here to read a brief investment market commentary.

Given the news flow over the past few weeks, accompanied by financial market volatility, we are reaching out with a brief commentary piece to share our perspective. The attached provides a summary of our assessment of the macroeconomic backdrop and current portfolio positioning

In late December, Congress passed a significant omnibus budget bill. Included was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (“Secure Act 2.0”), which contains various retirement and other changes that practitioners and their clients need to be aware of. It provides new incentives for employers to offer retirement plans to their employees and for employees to participate and improve their retirement security.

Secure Act 2.0 aims to help employees and their beneficiaries, owner-employees, small businesses, and retirees, and ease costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the new provisions was signed into law by President Biden on December 29, 2022. Highlights of the new legislation are included in this memorandum after a summary of the many new IRS inflation adjustments that apply to various tax items in 2023.

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In addition to a one-page executive summary, our most recent Investment Commentary includes a review of recent financial market results, our assessment of the macro backdrop, and an update on portfolio strategy. Here’s an overview:

• 2022 proved challenging for most asset categories as financial markets battled several headwinds, including high inflation, hawkish central banks, the Russia-Ukraine war, and lockdowns in China.
• The broad equity market sell-off improved valuations, but US stocks may not be adequately discounting the risk of a decline in corporate earnings—although a US recession is widely anticipated by economists. A mild recession within the next 12 months is also our base case assumption, but it’s not a certainty given the strength of the labor market.
• To combat inflation, the US Federal Reserve has pursued one of its most aggressive rate hiking cycles on record. Bond yields have returned to levels not seen since 2008, indicating better forward-looking returns. However, the uncertain macroeconomic environment and geopolitical backdrop suggests that volatility across asset classes will remain elevated.
• Proper portfolio diversification remains as important as ever. In terms of tactical positioning, we maintain a slight underweight position in core/investment grade bonds, but recommend increasing exposure given recent weakness and compelling yields. We continue to target an underweight position in US large cap stocks, but remain fully invested in more attractively valued international stocks. We also continue to target an overweight position in real assets like commodities.

Click here to read the full commentary.

After posting strong gains over the last couple of years, asset prices have stumbled in the first 5 months of 2022 as financial markets digest higher inflation, rising interest rates, and geopolitical uncertainty.  Both stocks and bonds have experienced broad declines while asset categories that benefit from higher inflation, such as commodities, have generated gains.  Financial markets have seen a notable shift from the benign volatility environment observed throughout much of the past several years.  Between January 1, 2022 and May 13, 2022, over 85% of days have seen the S&P 500 trade in at least a 1% daily range.

The economic and geopolitical backdrop remain highly uncertain—therefore market volatility is likely to remain elevated.  As a result of higher commodity prices and tightening monetary policy, economic growth is set to slow. Despite this deceleration, we believe the risk of a near-term (next 12 months) recession is still relatively low given healthy consumer and corporate balances sheets and a strong labor market.

As of the date of posting, corporate profits (as measured by reported earnings) have remained resilient.  Yet, valuations have discounted a good bit of bad news.  According to BCA Research, global equities are trading at less than 16-times forward earnings, which is down from more than 20-times late last year.  Outside of the US, stocks are trading at less than 13-times forward earnings.  We’d also note that some of the forces that have pushed down stock prices may start to abate.  For example, the inflation data has at least become less bad.  In the US, core goods inflation fell by 0.4% month-over-month in April—the first outright decline since February 2021.  And in China, the 7-day average of new Covid cases has fallen by more than half since late April.  China’s domestic production of Pfizer’s Paxlovid anti-Covid drug is also starting to ramp up, which should allow for some easing in lockdown measures later this year.

In the current environment, we continue to believe that proper diversification is as important as ever.  In terms of tactical portfolio positioning, we continue to target an underweight position to core/investment grade fixed income, but recommend adding to municipal bonds given recent weakness and more attractive yields.  We also maintain an underweight to US stocks on valuation concerns while emphasizing higher quality companies.  We advocate adding to emerging markets stock positions given recent weakness and more attractive valuations.  We also continue to target an overweight position to “real assets” like commodities and energy-related stocks given the risk of stickier inflation, but recommend trimming exposures back to targeted weights on recent strength.

Please see the attached presentation that provides our assessment of the market backdrop and shares our views on portfolio strategy going forward.

Although no two states have identical community property laws, one thing is consistent within all community property states: their married residents enjoy a significant income tax advantage (with respect to any appreciated assets) in the form of a decreased capital gains tax on community property sold after the death of the first spouse.

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