A device often useful in estate planning goes by the peculiar name intentionally defective grantor trust, or IDGT. The terms of the trust are crafted to prevent the grantor (the wealthy individual who funded the trust) from being considered the owner for purposes of the estate tax. The income tax rules, however, treat the grantor as the owner. Without going into details of how this is beneficial, we can say this is a near-perfect example of having your cake and eating it, too.
IDGTs have been a standard estate planning tool for decades. The answer to one question was not firmly settled, however — until now. There’s a tax rule that adjusts the basis of assets to fair market value at the death of the owner. Does it apply to assets in an IDGT, which are treated as owned by the grantor for income tax purposes but not for estate tax purposes? If so, that would be icing on the cake.
It’s been known for some time that the IRS was preparing guidance on this question. A new IRS ruling on IDGTs has now been published. We expect few will be surprised at the outcome: the IRS says that because these assets are not included in the decedent’s estate, their basis will not be adjusted.
If you want to dig deeper, this article offers more background on the topic.
The IRS is considering the tax treatment of NFTs.
Nonfungible tokens, or NFTs, are perhaps best known for their association with digital artwork such as the famous Bored Apes Yacht Club series. Yet they can be used in other ways, such as to certify ownership of a physical item. The IRS has announced that it plans to offer guidance on certain tax issues related to NFTs.
The concern is whether NFTs should be treated as “collectibles” as that term is defined in the tax law. Collectibles, including stamps, coins (with some exceptions), gems, works of art, and various other items, receive unfavorable tax treatment. A purchase of collectibles within a retirement account will be treated as a distribution from that account, often with painful consequences. The maximum tax rate applied to long-term capital gain is higher for collectibles than for other assets.
The IRS will provide detailed guidance after gathering more information. In the meantime it will use a “look-through analysis.” An NFT will be treated as a collectible if its associated right or asset is a collectible. For example, an NFT that certifies ownership of a gem would be considered a collectible because gems are collectibles. What about bored apes? “The Treasury Department and the IRS are considering the extent to which a digital file may constitute a ‘work of art’” and therefore a collectible.
The NFT market is highly speculative. Most advisors would consider them unsuitable as retirement investments, even apart from any tax problems. This IRS Notice warns that NFTs in an IRA or other retirement account may lead to disaster even without a decline in value.
A new budget proposal from President Biden includes a kind of wealth tax. There’s no need for alarm: it would apply only to taxpayers with more than $100 million in wealth. Besides, there is zero chance Congress will actually pass a budget that includes this provision. It’s there as a way to provoke debate on disparities in wealth and fairness in taxation.
You won’t have trouble guessing which side the Wall Street Journal takes in this debate. The editors believe we are already “soaking the rich.” Their critique of Biden’s wealth tax proposal hinges on language in the 16th amendment authorizing the federal government “to lay and collect taxes on incomes.” It isn’t income, they say, when the market value of your stocks or other assets rises.
Presumably they are aware that an increase in wealth plainly is income according to a definition long used by economists (consumption plus change in net worth). Yet they are saying it isn’t the kind of income that can be taxed under the 16th amendment. For support they rely on a 1920 case, Eisner v. Macomber. (I’m sobered to realize this case, now more than a century in the past, was only 58 years old when I first studied it.)
In Macomber the Supreme Court found that a stock dividend was not income within the meaning of the 16th amendment. Mrs. Macomber held 2200 shares of Standard Oil stock, and her holdings increased to 3300 when the company declared a 50% stock dividend. This event did not put any cash in Mrs. Macomber’s pocket. Nor did it increase her wealth in any way. It merely divided that wealth among a larger number of shares. The transaction had no more economic significance to her than if she exchanged a quarter for two dimes and a nickel.
The holding in Macomber would not apply to Biden’s proposed wealth tax. The crux of the case was that the stock dividend did not alter Mrs. Macomber’s wealth. This would not be true of Biden’s proposed wealth tax. Would such a tax survive a constitutional challenge? The answer to that question is likely many years in the future.
ESG investing is in the news. A political kerfuffle over its use in retirement plans has provoked grousing by conservatives and President Biden’s first veto. Yet there are sound, nonpolitical reasons to take environmental, social and governance factors into account in building an investment strategy.
full article: ESG Investing: Don’t Get Caught Up in the Politics