Department of Labor Delays Implementation of the Fiduciary Rule

Last year, the Department of Labor (“DOL”) issued a final rule, expanding the definition of a fiduciary, making many broker-dealers and insurance agents fiduciaries. This rule, issued April 2016, was set to become effective June 2016, but was then delayed until April 10, 2017, with certain provisions delayed until January of 2018. However, President Trump ordered a review of the new rule and the DOL issued another delay, of 60 days, to complete the review. With the delay, the expanded fiduciary definition will become effective June 9, 2017.

Under the rule, a person or firm that is deemed a fiduciary is required to act in the best interests of their clients. This includes an obligation to avoid conflicts of interests, or otherwise receive compensation that creates a conflict between the interests of the fiduciary and the client. The new rule poses several issues for certain professionals that will be deemed a fiduciary under the new rule. For example, sales commissions would be deemed a conflict of interest, creating an especially problematic situation for broker-dealers that engage in principal transactions with clients. However, the DOL recognized the issue and created several principal transaction exemptions, but the exemptions require additional burdensome steps. This issue, among others, are central to the review causing the rule to be delayed.

Despite this delay, and the DOL admitting the review will not be complete by June 9, 2017, the expanded definition of fiduciary will be implemented at the end of the 60-day delay. Therefore, broker-dealers, insurance agents, and others that will now be deemed a fiduciary, should be prepared for the additional requirements on June 9, 2017.

© 2017 Vandenack Weaver LLC
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Unbundling Fiduciary Fees

Recently, the Internal Revenue Service (IRS) issued final guidance on Internal Revenue Code (IRC) Section 67 as it pertains to a 2 percent floor for miscellaneous itemized deductions. This is important to fiduciaries of non-grantor trusts and estates because it will impact what fees can be deducted for the taxable year. The issue stems from several court cases, including a United States Supreme Court case, that placed confusion regarding the generally held notion that all fees and expenses associated with trust and estate administration were deductible.

The specific question pertains to a 2 percent floor and whether administration expenses, in aggregate, must exceed 2 percent of the adjusted gross income prior to being deductible. Before this confusion, a fiduciary could simply bundle all their administration expenses, classify it as such, and not concern themselves with the 2 percent floor. However, the various court interpretations have interjected confusion regarding fee bundling and whether each fee inside the bundle is subject to the 2 percent floor.

The guidance issued by the IRS attempts clarify the problem. Although the expenses can still be bundled, they must be bundled as expenses subject to the 2 percent floor and expenses that are not. This is much simpler in theory than in practice. Determining whether an expense falls into one category or the other remains tricky. Ultimately, this means that all expenses incurred by fiduciaries in the administration of a non-grantor trust or estate must be unbundled and classified. Although the IRS guidance lists specific expenses, it is not an exhaustive list. Unfortunately, there is not a perfect solution to this process and great care must be taken in the classification process.

© 2014 Parsonage Vandenack Williams LLC

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Are There Any Exemptions to the Estate Tax?

There are exemptions to the estate tax. The federal estate tax exemption for 2014 is $5,340,000 and that pertains to each American citizen; therefore, between yourself and your spouse you have over $10,000,000 in exemption. In addition to that, there is a skip generation benefit equal in value which means that you can not only pass down to your spouse and to children, but also down to future generations by use of the skip generation with it.

© 2014 Parsonage Vandenack Williams LLC

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Trusts Can Be Excepted From Passive Activity Losses Related to Real Estate

The IRS has historically argued that trusts are categorically excluded from obtaining an exception to the passive activity rules for rental real estate activities. A recent Tax Court ruling has contradicted this position and indicated that a complex trust engaged in rental real estate activities can qualify for an exception to the passive activity rules.  In determining that the exception was available, the court looked to the activities of the individual trustees and determined that the material participation trust was satisfied. This is an important ruling in the trust income tax regime and creates the opportunity to limit trust exposure to the tax on investment income.

© 2014 Parsonage Vandenack Williams LLC

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IRS Allows Extension of Time to File Estate Tax Returns

The IRS has issued Rev. Proc. 2014-18 to provide relief to certain estates that failed to file a federal estate tax return in order to elect portability of a decedent’s unused exclusion amount for the benefit of the decedent’s surviving spouse.

The Revenue Procedure limits the relief provided to estates of decedents that died during 2011, 2012 or 2013 that failed to file a return within the time required by law to elect portability of unused exclusion amount to the decedent’s spouse. The relief is only available if the estate is not otherwise required to file an estate tax return.

Estates that are not eligible for relief under Rev. Proc. 2014-18 may request an extension of time to make the portability election by requesting a private letter ruling pursuant to the procedures set forth in Rev. Proc. 2014-1.

The full text of Rev. Proc. 2014-18 is available at: http://www.irs.gov/pub/irs-drop/rp-14-18.pdf.

 

© 2014 Parsonage Vandenack Williams LLC

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Government Shutdown Has No Impact on Tax Deadlines

The IRS has issued a notice that the partial shutdown of the federal government does not affect federal tax law requirements.  Taxpayers with six-month extensions to file a return that expire on October 15th are still required to comply with this deadline.  Individuals and businesses are also still required to file tax withholdings and make deposits with the IRS as required.

© 2013 Parsonage Vandenack Williams LLC

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IRS Issues Same-Sex Marriage Guidance

The IRS recently issued Rev. Rul. 2013-17 providing guidance on how the Windsor ruling (finding Section 3 of DOMA unconstitutional) affects tax issues related to same-sex marriage.

First, the IRS announced it will determine marital status based on the laws of the state or country of celebration of the marriage, not the state of residence of the affected persons. Therefore, same-sex individuals who marry in Iowa (or any other state that recognizes same-sex marriages) and live in Nebraska (or any other state that does not recognize same-sex marriages) will be considered married for federal tax law purposes.

Second, the IRS analyzed the use of the terms “husband”, “wife” and “husband and wife” in the Internal Revenue Code (Code) and indicated that it interprets those terms as gender-neutral. This interpretation permits same-sex couples to be, individually and collectively, “husband”, “wife” and “husband and wife”. The IRS will legally recognize same-sex married individuals as spouses, husbands and wives wherever those terms exist in the Code.

Third, the IRS determined that domestic arrangements not legally identified as marriage under state law will not be a marriage for purposes of the IRC. Same-sex partners in a civil union or a domestic partnership are not married for federal tax purposes.

Lastly, the IRS reviewed the timing for applying the Windsor decision. Rev. Rul. 2013-17 applies prospectively from September 16, 2013 forward. In addition, affected taxpayers may rely on the guidance for any open tax year, which will permit amending previously filed returns.

© 2013 Parsonage Vandenack Williams LLC

For more information, contact info@pvwlaw.com