This year’s premier conference for estate planning professionals was best described as a sea of calm after recent years of turbulence: The week was delightfully boring, and pleasantly repetitive, and enjoyably dull.

The experts who gathered at Heckerling 2023 (or the 57th Annual Heckerling Institute on Estate Planning, as it’s officially known), had no major legislative changes (actual or threatened) to distract them. Instead, they were focused on the tried and true planning techniques they’ve been developing since 2017, which overall are working quite well.

If there were an informal theme song for the conference, piped in like elevator music, it would have been the Grateful Dead’s anthem with the legendary refrain “Just keep truckin’ on …”

That said, there were plenty of new developments and the usual plethora of technical details, that known playground of the devil, that kept everyone attending the daily sessions and then talking over cocktails at night. The Heckerling printed materials (if anyone bothers to print them these days) are in the thousands of pages. That means any succinct summary requires a view from the highest of high altitudes—the tax-law equivalent of a Chinese spy balloon. Here is my 2023 report as witnessed from the balloon over Heckerling.

Basic Training
The conference theme was basic “blocking and tackling” and began with a fundamentals program called “Using and Misusing the Marital Deduction.” To call this presentation thorough is to understate its relentlessness: The materials were 187 pages long and provided everything you would ever want to know on the marital deduction. As we all know, the marital deduction is a cornerstone of estate planning and it’s a great topic to know really well. This kicked off the theme for the week—get your fundamentals of estate planning in order.

Alert: A key issue and a chronic “mistake” is the failure to elect portability in a timely manner so that a widowed spouse can benefit from the deceased spouse’s unused lifetime exclusion amount. A late portability election is available only if the decedent was not required to file a federal estate tax return—but these days that means almost everyone, and as a result the IRS has been inundated with requests for private letter rulings.

The IRS clearly does not want any more PLRs on this issue and has provided automatic relief—most recently, under Revenue Procedure 2022-32—extending the automatic consent period for a portability election to five years from the death of the first spouse. Five years is a strangely long time, and it creates interesting complications. For example, what happens if a surviving spouse has made taxable gifts without taking into consideration the deceased spouse’s unused lifetime exclusion amount? Lots to think about.

The Sweet Spot
Heckerling 2023 also offered a provocative presentation on estate planning for the “middle rich,” people whose aggregate wealth falls in a band on either side of the lifetime exclusion amounts—near or above $12.92 million in 2023 for single individuals and $25.84 million for married couples. This group was obviously much larger back when the lifetime exclusion amounts were $5 million for singles and $10 million for married couples, but when the exemption was doubled in 2018 and subsequent inflation adjustments were made (including a whopping $860,000 adjustment for 2023) it temporarily dropped lots of people in the lower and middle echelons of the “middle rich.” However, a married couple with a $25 million estate may (for the moment) have no federal estate tax exposure yet still need good estate planning. And once the lifetime exclusion amount drops after 2025 back to the $5 million-plus-inflation calculation (the current guesstimates place the reset at $6.8 million to $7 million per taxpayer), lots of people will rejoin the middle rich ranks with a vengeance. (For these reasons, the so-called “2025 Planning” is already a burgeoning cottage industry.)

Alert: Regulations issued in 2019 (and amended in 2022) allow taxpayers who utilize the full available lifetime exclusion amount before 2025 to retain that benefit even when the lifetime exclusion amount drops down to half the amount in 2026. These regulations, which prevent the IRS from “clawing back” the benefits of the higher lifetime exclusion amount, are called the “anti-clawback” regulations and are why the “middle rich” should pragmatically include taxpayers with wealth in the $15 million to $25 million range: Even if they don’t have a current federal estate tax, they may want to exploit these anti-clawback rules before the end of 2025. For obvious reasons, “2025 Planning” could well morph from a cottage industry into a veritable industrial park by the end of 2025.

My fearless prediction is that unless the law changes, December 31, 2025, will eclipse December 31, 2012, as the craziest single day in estate planning history.

Corporate Transparency Act Steps Out of the Shadows
By far the biggest cocktail discussion topic at Heckerling was the “new” Corporate Transparency Act. It was actually enacted in 2021 but was initially overlooked by most people during the panic over the Biden tax proposals (now officially the world’s biggest nothingburger). But because the legislation is slated to take effect on January 1, 2024, it is stepping out of the shadows with a vengeance.

The act is most succinctly described as “FATCA for the little guy.” Like the Foreign Account Tax Compliance Act (FATCA), the Corporate Transparency Act requires reporting of highly sensitive personal information to the U.S. government. But whereas FATCA forced large foreign financial institutions to report bank and financial accounts opened offshore by U.S. citizens (secret foreign accounts were always pretty much ground zero for tax and other financial fraud) the Corporate Transparency Act has a different focus: It applies to U.S. domestic business entities formed under the laws of any state (this includes all corporations, LLCs, and all other “similar entities” that are created by a filing with a secretary of state or otherwise required to register to do business), and it requires these U.S. businesses to report confidential information about their actual or beneficial owners to the Financial Crimes Enforcement Network.

Tellingly, the law exempts any company with a physical U.S. presence that employs more than 20 people and has gross receipts over $5 million, so it really is only for the “little guys.”

The Corporate Transparency Act is both massive and intrusive. The Financial Crimes Enforcement Network estimates a staggering 32.6 million entities will file reports in 2024, and then about five million entities will have to file reports every year after the first year. The information will go into a large database that can only be accessed by authorized governmental workers. Given the endless leaks of confidential information by the federal government in recent years, this is not terribly reassuring.

Basis Basics
Less than 1% of U.S. citizens own more than the applicable lifetime exclusion amount, which means more than 99% of U.S. citizens are not subject to any federal estate tax. That means an important part of “estate” planning is income tax planning—especially making effective use of the step-up in tax basis under Section 1014 of the Internal Revenue Code. An effective “income-tax oriented” estate plan could mean the following: You try to decide which spouse is likely to live longer and put highly appreciated assets (especially including depreciable real estate) into a QTIP-able trust (i.e., a revocable trust that on death will be eligible for a qualified terminal interest property election) for the other spouse, so that the survivor will get a full step-up in tax basis when the first spouse dies. (Note: In community property states, the full step-up happens automatically.) The same assets, thanks to the QTIP election, can then be run through the survivor’s estate to get a second basis step-up years later. Couple this with a DSUE (a deceased spousal unused exclusion) election and you have performed income-tax magic while also structuring a pretty reasonable estate plan.

Alert. In its Priority Guidance Plan (also known as the “Green Book,”) the IRS has proposed clarifying that a step-up in basis adjustment will not apply at the death of a grantor trust owner unless the trust assets are included in the grantor’s estate. This controversial issue has been around for 20 years, ever since an article published in 2002 argued that assets in a grantor trust should enjoy a step-up in tax basis, even if it’s not included in the grantor’s estate. The IRS has been notably quiet about the income tax effects of an installment sale to a defective grantor trust, but few, if any, responsible tax attorneys or estate planners think there is a step-up in basis for grantor trust assets if the assets are not included in the grantor’s estate. However, a member of Congress has recently made this non-issue into a political issue, so the IRS apparently feels obligated to address it.

GRAT Gyrations
The IRS really doesn’t like grantor-retained annuity trusts very much. Ironically, GRATs are expressly allowed by statute and not particularly abusive. They are very effective at moving assets out of an estate, they are predictable and low-risk if set up correctly, and they can be fully funded without making any taxable gifts. But the IRS has been attacking them hard for a variety of perceived abuses.

In one recent U.S. Tax Court case, Daniel R. Baty v. the Commissioner of Internal Revenue, the IRS attacked a contribution of publicly traded stock to a GRAT where the taxpayer used the current market value of the stock, yet as an insider was personally aware of a pending merger/acquisition negotiation that would greatly increase the value. The case was weird from the outset because the IRS essentially argued that the taxpayer should take into account non-public information—which would arguably violate federal securities laws! The IRS eventually conceded.

However, in its Chief Counsel Advice (CCA202152018), the IRS went atomic after a taxpayer used a low valuation of private company stock contributed to a GRAT while being personally aware of a pending acquisition at a higher price. (Almost incomprehensibly, the same taxpayer later made charitable contributions of stock and used a higher valuation.) Instead of challenging the valuation and making adjustments, the IRS argued that the transaction was not a “qualified annuity interest” because the stock was intentionally undervalued, and therefore proposed to disallow the entire GRAT transaction (it cited a federal tax court case called Atkinson v. Commissioner). Chief Counsel Advice is not binding authority, even on the taxpayer in question, but this CCA raised new and unsettling questions about the potential risks in using GRATs.

Quick Hits
There were a number of other hot topic items at Heckerling 2023.

  • The Heckerling consensus was that no major tax legislation is likely until after the 2024 election.
  • The 2023 inflation bump to the lifetime exclusion amount of $860,000 was slightly shocking but very welcome. The key to planning for the middle rich is to use up these inflation adjustments each year through 2025.
  • If clients want to use up the “extra” lifetime exclusion amount before it expires after 2025, one obvious destination is an irrevocable grantor trust. A key issue for the middle rich is how much to retain and how much to give away. Some parents trust their kids to give it back or otherwise support them in old age, other couples not so much. But a spousal lifetime access trust (SLAT) remains a great strategy to “give it away without giving it away.”
  • One speaker talked about using an irrevocable life insurance trust, or ILIT, as a “test trust” or “practice trust” to get clients comfortable with irrevocable grantor trusts. If you overfund the insurance premiums, you have an instant intentionally defective grantor trust. I am sharing this idea but not endorsing it: ILITs typically generate a lot of commotion, including beneficiary withdrawal powers and issuance of written notices of the withdrawal rights to beneficiaries (called “Crummey” notices after the seminal case approving the structure) all of which is a royal pain in the butt. Therefore, this author would not look at an ILIT as a good “training vehicle.” If anything, it is more likely to scare the client than convince the client.
  • The latest legislative tweak to retirement accounts, known as SECURE 2.0, was so new that no one had time to dig into it deeply at the conference. The main observation was frustration that this already too complicated area just got even more complicated.
  • Inflation and rising interest rates are the new reality of 2023. Higher interest rates dramatically impact the estate planning landscape. While GRATs and installment sales are notably penalized, other techniques, such as qualified personal resident trusts, have benefited.
  • So long as you don’t plan to give away over time more than your lifetime exclusion amount in 2026 (estimated at $6.8 million) there is no need to be pressured by the 2025 deadline to gift more and take advantage of the anti-clawback provision. On the other hand, if you want to give away the maximum, then sooner (meaning now) is better than later, and you can always “top off” with additional transfers using the inflation adjustments in 2024 and 2025.

Joseph B. Darby III, Esq., is an adjunct professor at the Boston University School of Law and the founding shareholder of Joseph Darby Law PC, a law firm that concentrates on sophisticated tax and estate planning for individuals and businesses.