Blueprint for Wealth

Tax Reform Oxymoron - "Permanent" Tax Law Changes

I am always amused when Congress passes “permanent” tax legislation. It’s that kind of “permanency” that has kept tax lawyers like me perpetually employed. Take, for example, the estate tax provisions just enacted as part of the American Taxpayer Relief Act of 2012.  In this new law, Congress proudly announced that the $5 million lifetime estate, gift and generation skipping transfer tax exemption is now a permanent part of the tax law.  Moreover, it is indexed for inflation from 2011 forward, so that the current exemption amount per person is $5.25 million and rising.  Congress also “fixed” the estate, gift and GST tax rate at 40%.

When I looked up the word “permanent” in the dictionary and the thesaurus, I concluded that these legislative changes should be “enduring,” “perpetual” or, at the very least, “long-lasting.” Yet, not more than three months after ATRA 2012 was signed into law by the President, he proposed changing these provisions in his fiscal year 2014 revenue proposals.  Not only would President Obama decrease the lifetime estate and GST tax exemptions to $3.5 million per person and the lifetime gift tax exemption to $1 million, but he also would increase the highest transfer tax rate to 45% (in addition to making many other changes to the estate and income tax provisions that would raise revenues).  Of course, these changes would not take effect until 2018, allowing us to enjoy five years of “permanency.” He also immediately would do away with various advanced estate planning techniques, including eliminating short-term and rolling GRATs, curtailing the use of intentionally defective grantor trust transactions involving closely-held entities, and limiting the duration of perpetual, “dynasty” trusts to 90 years.

When it comes to enacting “everlasting” laws, Congress is no better at keeping a promise than the President.  On March 23, the Senate, in an amendment to the continuing budget resolution proposed by Sen. Mark Warner (D-VA), overwhelmingly voted (80-19) in favor of repealing the estate tax if sufficient revenues can be raised to replace the lost revenue.  While this is not binding on anyone, it clearly signals a sea-change in the way the estate tax is viewed by Democratic Senators, a position that clearly would be supported in the Republican-controlled House.

Of course, all of the estate tax provisions and other “permanent” tax law changes are being reviewed and discussed in closed sessions and open hearings in both the House Ways and Means Committee and the Senate Finance Committee, with an eye toward legislation later this year or early next. Many of the topics under discussion are summarized nicely in the recently-released Joint Committee on Taxation Report on “Present Law and Suggestions for Reform Submitted to the Tax Reform Working Groups.” This report can be found at https://www.jct.gov/publications.html. Not surprisingly, on page 553 of the report, the House Ways and Means Tax Reform Working Group reported that several submissions called for repeal of the estate and gift tax regime, while others supported retaining it.

Given that almost any of the estate tax provisions could be changed later this year, it still makes sense for certain individuals to consider shifting wealth and appreciation out of their estates at a relatively low or no tax cost. For example, if you have rapidly appreciating assets, such as an interest in a closely held business, you could sell a minority interest in the business to a dynasty trust for the benefit of children and future generations in exchange for a long-term promissory note, reduce the amount of your estate subject to estate and GST taxation, and retain control of the business.  While the President has proposed curtailing some of the features of this transaction, there is no certainty that his proposals will be enacted.  Also, if the estate tax is “permanently” repealed, it still may be re-enacted at a later date.  Planning now may avoid problems of “permanent” tax legislative changes in the future.

For more information on tax reform and tax planning, please email me at wayne.zell@ofplaw.com or call me at 703-218-2177.

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Wayne Zell to Conduct Breakfast Briefing for Advisors on May 15th

With the enactment this year of “permanent” estate planning legislation, you may be curious about how estate planners are reacting to the changes and what you need to know to advise your clients.  If you are a certified financial  planner, financial advisor, certified public accountant, insurance agent or other financial professional, you are cordially invited to join Wayne M. Zell, Esq., for an informative Breakfast Briefing on the changes that were – and were not – made to the estate and gift tax laws, and how to guide your clients on their estate planning in light of these changes.  The event will take place at the offices of Odin, Feldman & Pittleman, P.C., from 7:30am-9am, 1775 Wiehle Avenue, 4th Floor, Reston, Virginia 20190.  To register for the event or for more information, please contact Jennifer Wetzel at 703-218-2112 or email her at jennifer.wetzel@ofplaw.com.

Wayne Zell to Speak at ACG Breakfast at Tower Club on May 14th

Wayne Zell will participate in a panel discussion on May 14th at 7:30am at the Tower Club in Tysons Corner entitled "Purpose Built Capital Rewards for Owners and Executives."  The seminar is sponsored by the National Capital Chapter of the Association for Corporate Growth and Sagemark Consulting.  The panel will be moderated by Mark Bronfman of Sagemark Consulting, and will include Bob Kipps (KippsDeSanto & Co., Investment Bankers), Ron Gilbert (ESOP Services, Inc.) and Tom Fradette (EVP & CFO, DCS Corporation).  To learn more about the event or to register, please click on the link below.

http://www.acgcapital.org/events/event.aspx?F_d=05%2f14%2f2013&F_y=2013&F_m=5&EventId=5270&

Tax Reform – Housing Provisions (and Everything Else) on the Table

In a previous blog, I noted that Rep. Dave Camp (R-MI)(http:/www.camp.house.gov), Chair of Ways and Means, was pursuing a full-blown effort to reform and simplify the tax code. The Senate Finance Committee, under the leadership of Sen. Max Baucus (D-MT) (http:/www.baucus.senate.gov), is on the same course (although the Senator recently announced that he will not run for reelection in 2014).  Some say tax reform puts us on a collision course with policies that have been embedded in the Internal Revenue Code and our collective psyches for over 60 years in many cases.  Others say that it is about time to simplify and cut the fat out of the Code.

This latest installment on tax reform focuses on proposals to limit tax benefits afforded to the housing industry and home ownership. These benefits include the mortgage interest deduction, the deduction for real property taxes, and the exclusion of capital gains on the sales of principal residences.  The Joint Committee on Taxation estimates that these three provisions alone will cost the federal government over $631 billion in tax subsidies (i.e., lost revenue) between 2012-2017. Most of the so-called housing subsidies benefit taxpayers with incomes over $100,000.  For a copy of the JCT report, visit https://www.jct.gov/publications.html?func=startdown&id=4503. 

Take the mortgage interest deduction, for example.  The ability to deduct mortgage interest on loans of up to $1.1 million (including $100,000 of home equity debt) arguably encourages taxpayers to take on more debt and buy larger homes than they otherwise could afford.  As tax brackets increase, the benefit of the deduction also increases, although under the new tax law known as ATRA 2012, the benefits of itemized deductions for “wealthy” taxpayers are substantially reduced (see my January blog on the tax law changes at http://www.blueprintforwealth.org/2013/01/house-and-senate-pass-fiscal-cliff-relief.html).

Even though Rep. Camp and his Committee recognize the importance of encouraging home ownership, they are launching an aggressive behind-the-scenes push to rewrite the Internal Revenue Code, including the housing subsidies.  While it is unlikely that the mortgage deduction will be repealed in its entirety, the Ways and Means Committee will examine several proposals that would convert the deduction into an income tax credit. 

For example, in the recently released Simpson-Bowles “Illustrative Plan”, the deduction would convert into a 12% credit on up to a $500,000 mortgage, with no credit allowed for a second home or home equity line.  For a copy of the plan, click on the following link: http://www.momentoftruthproject.org/sites/default/files/Full%20Plan%20of%20Securing%20America%27s%20Future.pdf.  A tax credit (instead of a deduction) would benefit lower-income taxpayers who do not itemize or receive significant benefits from itemized deductions, and therefore is arguably more progressive and usable more taxpayers.

In his latest budget proposal, President Obama would cap itemized deductions – including mortgage interest deductions and real estate property tax deductions – for taxpayers in the highest tax brackets.  The proposal would allow taxpayers to reduce their tax liability by no more than 28%.

Ways and Means will be holding hearings on the precise effect of these and other tax reform proposals on taxpayers and the housing industry, as well as the impact of other proposals currently on the table.

What do I think?  I think the tax lobbyists will get rich(er) this summer and fall, protecting the various interests they represent. As for cutting subsidies that encourage home buying, I have mixed feelings.  On the one hand, providing the mortgage interest tax deduction arguably encourages people to incur more debt than they otherwise would incur to purchase a home.  On the other hand, buying a home may be the biggest financial decision most of us face in our lifetimes; if a key incentive in making that decision is changed adversely, one would think that the housing market will be adversely affected as well.  Yet, we have to face the reality of a mounting deficit and an extremely complicated tax Code.  Stay tuned. I will keep you informed of developments as they happen.

For more information on tax reform and tax planning, please email me at wayne.zell@ofplaw.com or call me at 703-218-2177.

Wayne Zell to Speak at HighTower and Carr Workplaces This Week

On April 11, 2013, Wayne will be a keynote speaker at HighTower's 1st Annual Family Wealth Conference, originated by the Pagnato-Karp Group.  He will be covering the changes in tax law unveiled at the beginning of 2013 and prospects for tax reform, as well as planning techniques still available to clients.  This event is by invitation only.

On April 9, 2013, he will be on a luncheon panel sponsored by Carr Workplaces (8200 Greensboro Drive, McLean, VA) with business planning expert Larry Fox of The Values Group, private wealth manager Jason Fuchs from Wells Fargo Wealth Advisors, and a representative of Carr Workplaces.  The panel will discuss what you should look for in selecting a business planner, lawyer and financial advisor.  For more information, please call 703-462-5450.

Blueprint for Wealth Morphs into Power of Attorney Radio!

Join Jonathan Frieden this Saturday, April 6, 2012 at 10am on 1500AM/820AM, as he hosts Power of Attorney, a 1/2 hour educational program focusing on legal developments that affect businesses and individuals.  Jon will focus on advising listeners in starting up an online business.  Former host of Blueprint for Wealth, Wayne Zell, will be Jon's first guest and will discuss the the correct choice of entity when starting an Internet business.  The show is sponsored by Odin, Feldman & Pittleman, a full-service law firm located near Washington, D.C that provides legal services to individuals and businesses in a variety of industries.  For more information, visit the firm’s website at www.ofplaw.com and www.powerofattorneyradio.com.  The show is streamed live on www.federalnewsradio.com. Wayne Zell will continue podcasting and will return in September as a host of Power of Attorney Radio!

Thomas R. Seneca, Managing Partner at T.M. Wealth Management & Non-Disclosure Agreements This Saturday on Blueprint for Wealth!

Please join Wayne Zell this Saturday, at 10am on March 30^th, for the final episode of Blueprint for Wealth on 1500AM and 820AM.  Wayne's special guest this week will be Thomas R. Seneca, Managing Partner, T.M. Wealth Management.  Thomas will discuss how T.M. Wealth Management utilizes the Yale Endowment Model of investing, which purportedly achieves superior returns by shifting a significant portion of investments away from traditional stocks and bonds into carefully selected hedge funds, private equity, real estate and other alternative investments.  In the first segment of the show, Wayne will talk about non-disclosure agreements and why businesses need them.  Blueprint for Wealth is sponsored by Odin, Feldman & Pittleman, P.C., (www.ofplaw.com), a premier law firm providing high-level counsel for clients of all types and sizes, taking pride in working together with our clients, fully invested in their success.  The show is streamed live on  www.federalnewsradio.com and archived on www.blueprintforwealth.org.  Note that, beginning April 6, Blueprint for Wealth will become “Power of Attorney”, featuring Wayne and other attorneys from Odin, Feldman & Pittleman, P.C.  The show will focus on a broad range of legal developments affecting businesses and individuals, including the current topics covered by Blueprint for Wealth.

Eileen M. Ellsworth, President of the Community Foundation of Northern Virginia & Key Steps to Take When Incorporating Your Business This Saturday on Blueprint for Wealth!

Please join Wayne Zell this Saturday, at 10am on March 23^rd, for Blueprint for Wealth on 1500AM and 820AM.  Wayne's special guest this week will be Eileen M. Ellsworth, President, Community Foundation for Northern Virginia.  Eileen will discuss the various ways the foundation helps support charities operating in the Northern Virginia area.  In the first segment of the show, Wayne will review a checklist of key steps to take when incorporating your business.  Blueprint for Wealth is sponsored by Odin, Feldman & Pittleman, P.C., (www.ofplaw.com), a premier law firm providing high-level counsel for clients of all types and sizes, taking pride in working together with our clients, fully invested in their success.  The show is streamed live on  www.federalnewsradio.com and archived on www.blueprintforwealth.org.  Note that, beginning April 6, Blueprint for Wealth will become “A Matter of Law”, featuring Wayne and more attorneys from Odin, Feldman & Pittleman, P.C. and focusing on a broad range of legal developments affecting businesses and individuals.

Heather Rosen, President of FranNet Virginia & Choosing the Right Entity this Saturday on Blueprint for Wealth!

Please join Wayne Zell this Saturday, at 10am on March 16^th, for Blueprint for Wealth on 1500AM and 820AM.  Wayne's special guest this week will be Heather Rosen, President, FranNet of Virginia.  Heather will discuss trends in franchising, what types of franchises are popular right now and how she matches people with the right franchise.  In the first segment of the show, Wayne will discuss the choosing the right entity for your business.  Blueprint for Wealth is sponsored by Odin, Feldman & Pittleman, P.C., (www.ofplaw.com), a premier law firm focused on providing high-level counsel for clients of all types and sizes and is a committed partner who is responsive to your needs, dedicated to your goals and invested in your success.  The show is streamed live on  www.federalnewsradio.com and archived on www.blueprintforwealth.org.

Tax Reform - The Next Big Thing

Now that sequestration is a reality, Congress and the President already are moving on to the next big thing. Tax reform appears to be capturing the interest of the Congressional tax writing committees -- the House Ways and Means Committee and the Senate Finance Committee.  Rep. Dave Camp (R-MI), Chair of Ways and Means, announced on March 11, 2013, that he is pursuing a full-blown effort to reform and simplify the tax code. He states that “[t]he current tax code is a nightmare. It’s too complex, too costly and riddled with too many loopholes. Clearly, we need to close loopholes and fix the tax code. It should be simpler and fairer for families and it should help create more jobs and higher paychecks.”  See his press release at http://camp.house.gov/news/documentsingle.aspx?DocumentID=323220.

The question is whether Congress can accomplish the lofty goal of tax reform, given its recent, poor track record in handling the budget deficit? (Tax increases were imposed on the “wealthy” and tax cuts were made permanent in ATRA 2012 - see my previous blog at http://www.blueprintforwealth.org/2013/01/house-and-senate-pass-fiscal-cliff-relief.html#more - and sequestration was allowed to take effect.) The answer lies within the ability and willingness of the President and the Congress to compromise and not only tackle tax reform, but also wrestle with the spending demons that haunt our country. In this author’s humble view, all spending must be addressed, including the hyper-sensitive areas involving “entitlements”, such as Social Security, Medicare and Medicaid. 

These items were on the table when the Joint Select Committee on Deficit Reduction (the “super committee”) unsuccessfully attempted to marry spending cuts with tax increases in November 2011. Now, it appears that Congress is going to brawl over the significant issues the super committee was unable to handle.

Tax reform necessarily will have to deal with corporate tax reform.  In fact, this was the first item on Rep. Camp’s agenda last when tax reform resurfaced.  Many of our trading partners tax their corporations at much lower rates, and only on income earned within their territories. In contrast, our system taxes the worldwide income of corporations. How do our trading partners get away with this? Most likely, foreign tax rates are lower because foreign also assess a form of consumption or national sales tax, known as a value-added tax (“VAT”).  What is the likelihood of our Congress enacting a VAT to enable lower corporate tax rates?  The issue has been debated for decades, and likely will be debated in the wake of recent tax reform, but enactment of a VAT does not appear likely in the near term.

To achieve corporate tax rate reductions, Congress likely will have to raise revenue by eliminating certain subsidies businesses currently enjoy. The largest business tax subsidies include accelerated depreciation for equipment, the ability of multinational corporations to defer their foreign income in certain cases, and various tax accounting deductions and credits.

What about individual tax reform?  The tax code was made even more complex in ATRA 2012 (e.g., now we have 7 individual tax brackets, instead of five before the tax law was amended). How do you really grapple with tax reform without making some very hard choices? Which tax expenditures (i.e., deductions, exemptions, exclusions, credits, etc., and other subsidies and loopholes) will be discarded and which will be retained?

Again, to simplify and reduce tax rates, deductions, exemptions, exclusions and credits will have to be eliminated. The largest single tax subsidy individuals enjoy is the ability to exclude the cost of employer-provided health care from their incomes. Another huge tax subsidy relates to the ability to contribute to qualified retirement plans and defer the earnings until retirement. Yet another subsidy is the ability to avoid income taxation on the inside build-up of cash surrender value in life insurance policies and the further ability to withdraw the appreciation from the policies tax-free before death. If these sacred cows are not on the chopping block, then will Congress further cut back the mortgage interest deduction, charitable contribution deductions, reduced rates on capital gains and dividends, child care credits, and other tax subsidies to pay for meaningful tax reform?

Congress must struggle with these and other questions in the coming months.  As a tax lawyer, you would think I would be opposed to reforming and simplifying the tax code. After all, I make my living finding legal ways to reduce taxes in this byzantine system.  Nothing could be further from the truth. If we can cut the deficit by coupling meaningful spending reductions, including entitlement spending, with tax increases and simplification, I am completely on board with that approach. We all should be. The future of our children and grandchildren depend on making some tough decisions and choices.  Everyone will incur some pain, but the long-term, positive effects on our economy and society will far exceed the short-term sting we must incur from these important choices.

For more information on tax reform and tax planning, please email me at wayne.zell@ofplaw.com or call me at 703-218-2177.

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