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Martin M. Shenkman Columns

Non-Grantor Trust Planning Tips Benefit Many Clients

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

shenkman martinWhy You Must Understand the New Planning Benefits of Non-Grantor Trusts

The 2017 Tax Act dramatically changed tax planning. In the new tax environment, there are a number of significant income tax saving you can advise clients on how to realize. But for many of these planning ideas you need to understand and use non-grantor trusts. This article will provide background on non-grantor trusts, some of the new complexities and issues introduced by the new 199A Proposed Regulations, and more. You need to understand many of these concepts or your clients could lose out on substantial tax benefits, including:

• 199A benefits by splitting qualified business income (QBI) to avoid the taxable income limitation and the impact of the phase-outs (yes, even with the new Proposed Regs).

• Charitable contribution benefits with a dollar for dollar benefit without regard to the new doubled standard deduction.

• Property tax deduction up to at least another $10,000 despite the tough state and local tax (SALT) limitations imposed by the 2017 Tax Act.

• State income tax savings which are more valuable and important to planning given the tough new restrictions on SALT deductions.

While there are other potential benefits (e.g. net investment income tax savings) this article will focus on just the primary ones above. If you are able to identify further savings using non-grantor trusts for your, all the better.

What is a Non-Grantor Trust

A non-grantor trust is a trust that is treated as a separate taxpayer and which pays its own income tax. Although a non-grantor trust pays its own income tax it has a deduction for distributions made to beneficiaries thereby shifting the income tax burden on income distributed, in simple terms, to the recipient beneficiary. Thus, it is not merely enough to know for planning purposes whether a trust is a non-grantor trust, but also the amount of distributions it makes and other factors. After the 2017 Tax Act the use of non-grantor trusts has been greatly enhanced because of the possibility of such trusts enhancing the income tax benefits above in comparison to the income tax results that would be realized if the taxpayer himself or herself instead reported the tax item directly on his or her own personal return.

How Non-Grantor Trusts can Provide Charitable Deductions Taxpayers Otherwise Could Not Realize

Creative uses of non-grantor trust planning can salvage a charitable contribution deduction for moderate wealth clients who have no particularly need for estate planning in its traditional sense. Practitioners should be alert to educate clients that “estate planning” can be valuable even for those who do not view themselves as wealthy.

Example: Taxpayer is married and makes a $10,000 charitable contribution for the year. Because her standard deduction is $24,000 she realizes no tax benefit from the deduction. Instead she creates a simple non-grantor trust in her state naming her sister as trustee. The trust lists charities and descendants as beneficiaries. The taxpayer gifts $200,000 to the trust which hears 5% or $10,000 which her sister the Trustee donates to charity. The trust realizes $10,000 of income and $10,000 of contribution deduction since as a non-grantor trust it is treated as a separate taxpayer. Trusts do not receive a standard deduction so the full donation is deductible. The taxpayer still benefits from her entire $24,000 standard deduction.

Compare Non-Grantor to Grantor Trusts

It is also important to understand the different between a non-grantor trust and a grantor trust. This is crucial for practitioners not only because of the different tax compliance implications, but because of several important tax and other ramifications. Grantor trusts can have in the trust document a swap or substitution power. In fact, that is the mechanism many grantor trusts use to characterize the trust as a grantor trust. This power enables the settlor who created the trust to swap appreciated assets from the back into his or her name to achieve a basis step-up on death. That is a potentially valuable benefit that may be lost with the use of a non-grantor trust that practitioners should weigh. But that loss is not assured as it may be possible to modify even an irrevocable trust in the future and add to it a swap power, thereby changing its status from non-grantor to grantor. But this is just one of the factors that must be weighed in helping clients assess the potential benefits of using non-grantor trusts.

Grantor trusts also can permit the tax-free sale of assets.

Example: Taxpayer owns a valuable closely held business she started a decade ago in her garage. She sells a minority interest in the business to a trust for a note. One goal is to lock in valuation discounts and another is to freeze future appreciation outside her estate. If that sale were made to a non-grantor trust income tax would be triggered. If made to a grantor trust it would not be.

Grantor trusts can own stock in S corporations. However, if a non-grantor trust holds stock in an S corporation that trust will have to qualify as either an Electing Small Business Trust (ESBT) or Qualified Subchapter S Trust (QSST). The latter present compliance and other complications practitioners should be aware of. If the trust involved does not have the appropriate ESBT or QSST provisions the trust will have to be modified (which will itself present costs and complexities) in order to hold S corporation stock.

Life insurance generally may only be held in a grantor trust. This is because if a trust can use trust income to pay insurance premiums on policies insuring the settlor’s life the trust will be characterized as a grantor trust for income tax purposes.

Non-Grantor Trusts May Permit Saving Property Tax Deductions

This is another potentially valuable planning idea that, just like the charitable planning idea above, can benefit moderate wealth clients. Again, that is a critical point for all practitioners to understand as too often clients and practitioners alike dismiss the importance of “estate” planning without first understanding the valuable income tax benefits the process can provide to clients who are not “wealthy.” To understand how non-grantor trusts might save clients property tax deductions, the limitations of the 2017 Tax Act must first be understood.

The 2017 Tax Act severely restricted the Code Section 164 tax deduction for non-business state and local income, sales and property taxes to $10,000 annually. Both individual and married couples filing jointly get the same $10,000 limit. Married couples filing separately are limited to only $5,000 a year. Also, this $10,000 cap is not indexed for inflation. The bottom line is that many clients will lose most of their property tax deduction. Can practitioners help? In many instances yes. The answer is in the creative application of non-grantor trust planning.

Although some might express concern about the impact of the multiple trust rule in the new 199A Proposed Regulations (discussed below) neither those Proposed Regulations or any other law in any way prevents the use of one non-grantor trust for this purpose. For many clients, salvaging an additional $10,000 of property tax deduction per year will alone justify the planning.

If a portion of the taxpayer’s house is transferred to a non-grantor trust, that trust should be treated as a separate taxpayer and will be permitted to deduct up to $10,000 annually for state and local taxes, e.g. property tax on the home it pays. For this deduction to be realized the trust must earn income at least equal to the property taxes it pays. The trust realizes the property deduction. The individual taxpayer will still have their own $10,000 state and local tax (SALT) benefit and will qualify for his or her full standard deduction. Thus, just as illustrated for the charitable contribution deduction above, this planning idea can provide an additional $10,000 tax benefit each year. If combined with the charitable contribution deduction planning illustrated above, a single non-grantor trust can provide valuable benefits many clients will have lost under the new law.

But just as with so many creative planning ideas there are wrinkles practitioners will need to address. For example, no home sale exclusion under Code Section 121 is available. This might be mitigated by selling the house to the non-grantor trust at inception and obtaining a tax-free step up in basis up to the amount of the exclusion. Alternatively, the trust could in a future year, at least two years before sale, be converted to a grantor trust so that the gain will be included in the taxpayer’s return.

How A Non-Grantor Can Increase 199A Benefits

Practitioners are no doubt by now well familiar with the general concepts contained in Code Section 199A. This new tax benefit enacted as part of the 2017 Tax Act can provide a deduction of up to 20% of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate. The income must be qualified business income (QBI). The activity must be a trade or business as defined under Code Section 162. If that business is a Specified Service Trade or Business (SSTB) further restrictions apply. One of the key limitations on the new 199A deduction is the taxable income threshold. If married taxpayers have taxable income above $315,000 for a non-SSTB then a wage or wage and tangible property limitation may apply to reduce the amount of QBI that can qualify for the 20% deduction. If the business involved is tainted as an SSTB then the 20% deduction is phased out ratably from $315,000 to $415,000 at which point no deduction is available.

After enactment of the law, many commentators speculated that the taxable income threshold could be circumvented in some instances by transferring equity in the business to non-grantor trusts. The basis for this planning idea, which in part or whole still is viable, is that a non-grantor trust is its own taxpayer and as an independent taxpayer would be subject to its own taxable income threshold of $157,500 as if a single taxpayer.

Example: Taxpayer has an SSTB that might qualify for the 199A 20% deduction but her taxable income is over $500,000 so she cannot realize any benefit. The SSTB generates $400,000/year in income. She gifts 30% of the SSTB to three different non-grantor trusts, one for the benefit of each of her children. Each non-grantor trust realizes 30% x $400,000 = $120,000 of income which is under each trust’s $157,500 taxable income threshold for 199A phase out purposes. Each trust might qualify for a full 20% 199A deduction.

The IRS, aware of the planning ideas practitioners were considering, endeavored to attack the above planning with non-grantor trusts in the Proposed Regulations.

How the New Proposed Regs May Inhibit Non-Grantor Trust 199A Planning

On first blush the Proposed Regulations appear to eliminate this planning with non-grantor trusts by promulgating anti-abuse rules attacking the use of multiple trusts. Before examining those rules consider:

• Nothing in the Proposed Regulations suggests that use of a single non-grantor trust is problematic. However, practitioners will have to consider the aggregation and control tests that apply to SSTBs which may restrict splintering an SSTB into SSTB and non-SSTB components, and perhaps gifting part to a non-grantor trust. Thus, the above planning seems to be viable if only one non-grantor trust is created. That could be beneficial to a client. Also, in evaluating the benefits versus costs of such planning consider how many different uses a particular non-grantor trust might provide a particular client (home property tax, charitable contribution, 199A, etc.).

• The Proposed Regulations are merely proposed at the present time and may well change before finalized.

• Many commentators have attacked the Proposed Regulations as exceeding the authority granted to Treasury and also, especially with respect to the multiple trust rules they contain, contradicting the specific provisions of Code Section 643(f) for which they are providing rules.

• Depending on the reading of the Proposed Regulations by some commentators, the planning in the above example, if done properly, may still be viable.

Again, each practitioner should help each client weigh the pros and cons of this planning with each individual client and also caution clients about the potential for an audit, which certainly cannot be quantified.

The preamble to the Proposed Regulations provides: “Section 643(f) grants the Secretary authority to treat two or more trusts as a single trust for purposes of subchapter J if (1) the trusts have substantially the same grantors and substantially the same primary beneficiaries and (2) a principal purpose of such trusts is the avoidance of the tax imposed by chapter 1 of the Code [highlights added].” That language comports with the statute which has a conjunctive three prong test requiring substantially the same grantors and primary beneficiaries and a principal purpose of tax avoidance. Note that as for the tax avoidance being a “principal purpose” if the trust also provides estate tax benefits by using an exemption that is scheduled to sunset, provides important asset protection benefits, etc. will the income tax avoidance be a “principal purpose?”

The last example in the Proposed Regulations deals with the multiple trust rule. After illustrating how trusts can in fact surmount the requirements to avoid having substantially the same primary beneficiary, and thus be respected under the newly formulated multiple trust regulations, the following language appears: “Under these facts, there are significant non-tax differences between the substantive terms of the two trusts, so tax avoidance will not be presumed to be a principal purpose for the establishment or funding of the separate trusts. Accordingly, in the absence of other facts or circumstances that would indicate that a principal purpose for creating the two separate trusts was income tax avoidance, the two trusts will not be aggregated and treated as a single trust for Federal income tax purposes under this section [highlight added].” Thus, the Treasury/IRS are suggesting that if there is a “principal purpose” of income tax avoidance the trusts can be aggregated even if the other two conjunctive requirements of the statute are complied with. That interpretation is clearly contrary to the statute and it is not clear that it could be upheld.


Although grantor trusts have been the default planning tool for wealthy clients, in the current tax environment, many clients, even those that may not be “wealthy” may realize income tax benefits from creative uses of non-grantor trusts. Practitioners, especially those who have believed that they did not have to get involved with “estate planning” or who viewed their clients as not being sufficiently wealthy to benefit from estate planning, need to reconsider how important non-grantor trust planning is for their clients.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

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Post TCJA Estate Planning Checklist

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanThe Tax Cut and Jobs Act enacted in late December 2017 transforms estate planning making the CPAs role more important than ever before. Too many practitioners dismiss estate planning in light of the large exemptions (Gee none of my clients are worth more than $22 million!) but that mischaracterizes the planning environment. The following is a checklist of planning ideas to help practitioners get over the “doesn’t apply to my clients” hump and create significant benefit for clients, and great business opportunities for CPAs.

Not Just Taxes

You’ve heard many times, but really estate planning was rarely ever only about estate taxes and for most clients certainly is not only about estate taxes now (but read on). The lessening importance of estate taxes makes this for huge business opportunities for CPAs. Clients will be less likely than ever to meet with their estate planning attorneys. They will not view the cost as worthwhile if there is no likely estate tax savings. That is a terrible mistake but the result is that unless CPAs educate clients about the importance of proper estate planning in the current environment, no one may be doing so. So ramp up your efforts to have estate planning discussions with clients.

Asset Protection is Critical. Every client, not just physician-clients, needs to take prudent steps to protect their assets from lawsuits and claims. Society will not be less litigious then before because of changes in the tax law. Few clients take sufficient steps. Asset protection should start with practical steps like making certain the client has adequate property, casualty and liability insurance. An excess personal liability policy is key to this layer of protection. Practitioners will be surprised at the frequent and significant gaps that can be uncovered in the course of a casual conversation with the client even before an insurance expert is brought in. Most clients hold investment real estate and business operations in separate LLCs. The primary purpose of that is to safeguard their home and savings from attack in the event of a claim. But shockingly many clients hold multiple assets in a single LLC (so a suit on one could jeopardize all assets inside that entity). Many clients never put rental properties or a home-based business into an LLC. Often the investment or business “just got started” and they never took the time to consult with an attorney. Every client should have these concerns and most practitioners can provide considerable help. Without the estate tax driver pushing the clients to meet with an attorney these critical non-tax steps will be overlooked.

Divorce Protection. How many clients worry about their children getting divorced and losing much of their inheritance? All! But most of these clients have wills that leave all inherited assets outright to their children at some age like 30. Why? Because no one explained to them the risks that creates and that with the simple technique of a long term trust the child can be protected. Review the client’s will. Don’t fret that you are not an attorney. It is usually pretty simple to see what trusts are used and if any when they end. Simply updating their wills can provide incredible divorce protection for their heirs. Not a difficult or costly process relative to the benefits involved.

Old Wills Bad Formulas. Many clients need to review their wills (or revocable trusts if that is the primary dispositive document) in light of the tax law changes. Many wills were drafted using formulas to determine how much of the estate passes to a credit shelter trust and how much to a marital bequest (e.g. a qualified terminable interest property or QTIP trust). Many of the formula clauses in old wills just won’t work with the new law. Here’s an extreme example, but don’t assume it is unrealistic many of these have already surfaced.

Example: Grandmother wrote a will when the estate and GST (generation skipping trust) exemption was a mere $1 million. So, she left a bequest outright, no trusts, to her ten grandchildren of equal shares of the GST exemption, the remainder to her children. Conceptually that made sense because it used her GST exemption, and perhaps for $100,000 or less per grandchild she did not want the cost of a trust incurred tenfold. With an exemption over $11 million under the new law, her $10 million plus estate passed all the grandchildren with each grandchild inheriting more than a $1 million unprotected. A disaster. Don’t assume this is so rare that your clients need not worry. Another common scenario might be funding a credit shelter trust for the surviving spouse and children from a prior marriage with the exemption amount. That might have been reasonable if the exemption were a mere $1 million but now the entirety of the estate might end up in that trust. Depending on the distribution provisions, who is named as trustee, and other factors, this could range from a bad result to an unmitigated disaster. Many clients do not understand these issues and merely dismiss the need to go back to their estate planner since they view the exemption as beyond them. Regardless of the fact of their estate perhaps not incurring an estate tax, the change in law may completely undermine their intended dispositive scheme; a non-tax consideration of extreme importance. Practitioners again should not feel uncomfortable at least trying to help clients identify what happens to their estate so that the client can be directed back to their estate planning attorney to confirm if there is in fact and issue an if so resolve it.

Small Estates Bad Planning

For small estates, or simpler situations, some attorneys left assets outright to the surviving spouse. For moderate estates a disclaimer provision may have been included in the will to permit the surviving spouse to direct some of the funds to a credit shelter trust if it was determined after the first spouse’s death that such a trust should be used to save estate taxes. These approaches, while cheap and seductively simple, leave all the estate exposed to remarriage and creditors of the surviving spouse. Those issues are too often ignored or minimized. With longevity and burgeoning elder financial abuse that is a mistake. A better approach for many of these clients is to have a will, post-TCJA, leaving all of the estate to a marital QTIP trust. That trust could even include a right or the surviving spouse to disclaim. With document generation software technology building a better will is not particularly costly. Using an “all to QTIP unless disclaimed to credit shelter” approach gives the surviving spouse protection for lawsuits, future spouse, creditors and predators. That’s important. As to tax planning, for clients that needn’t care about the estate tax, all QTIP assets will be included in the surviving spouse’s estate and thereby qualify for a basis step-up if applicable. The QTIP also creates a range of more sophisticated planning options that are worth having “just in case.” For example, GST exemption can be allocated to the QTIP and those assets can then grow outside the transfer tax system after the surviving spouse’s death if left in long term trusts for heirs (which they should be for the same reasons- protection and flexibility). If the surviving spouse might remarry a disclaimer of any portion of his or her income interest in the QTIP can trigger a current gift thereby using up the deceased spouse unused exemption (DSUE) from the first to die spouse. That could be prudent since the death of the new spouse would eliminate the DSUE from the first or prior spouse. Depending on the changes in the law and other factors that could be useful.

Terminating Old Planning

Many clients have already and will continue to show up at their CPA’s door to seek help unwinding old plans that they view as costly and irrelevant in light of the new exemption amounts. Many clients will seek out their CPAs viewing the process as less costly then returning to their estate planning attorney. CPAs should be very cautious in pursuing any of these “unwinds” without first carefully considering all of the issues and ramifications. Few clients will begin to evaluate these situations beyond the “I don’t need this.” Many clients bought life insurance to pay an estate tax that is likely irrelevant. These clients might seek to terminate the coverage and cancel the trust. Depending on the facts, that old insurance coverage might remain a prudent investment and a ballast to more risky investments the client has in the rest of her portfolio. If the client has a health issue that coverage might never again be obtainable. What if the estate tax exemption lowers to ½ the current level in 2026 as is provided for in the law? What if a future administration, in reaction to the benefits of the wealthy under the current law, revert to an even lower exemption? If the insurance is cancelled and the insurance trust unwound it may be impossible to reconstruct. The cost of keeping the old trust in place is insignificant. The cost of creating it is a sunk cost. Some taxpayers with family limited partnerships (FLPs) or LLCs may seek to liquidate those entities since, after all, they might not need the discounts. Perhaps not but what of the asset protection, management, probate avoidance and other benefits an FLP or LLC might provide? What will your liability exposure be as a practitioner that helps liquidate an entity only to find that the next month the client is subject of a large lawsuit? What of a QPRT (qualified personal residence trust) established when the exemption was a mere $1 million to save estate tax and now the only result is the loss of a step-up in basis and no estate tax savings? Liquidation of the QPRT might sound sensible and simple to the client (just deed the house back to mom, right?) but it could be far from that. What of the liability to the trustee for violating the terms of the trust? What if the beneficiaries of the QPRT differ from the beneficiaries of mom’s will? What if mom has a new boyfriend no one knows about? Again, clients need objective, broad-perspective, analysis not a quick reaction to a change in the law that may yet change again.

Using Temporary Exemptions

While many clients, and even many practitioners, might view the new $11 million exemption as of stratospheric proportions, is it really? First, as noted above, the exemption drops by ½ in 2026. Further, no one has a crystal ball to guesstimate the likelihood of a future administration change the rules to a harsher result than that. So now, many clients of moderate wealth might still benefit by shifting wealth into irrevocable trusts to grow that wealth out of their estates. Before dismissing this need, as many clients already have, consider the growth in the client’s estate by 2026 when the exemption will drop. A not insignificant number of clients might well face an estate tax. Do a projection of the client’s assets growing at a reasonable rate for 10 years. What does that number look like compared to the $5 million (not $10 million) inflation adjusted exemption in 2026?

Income Tax

For a decade or longer the default approach for many irrevocable trusts was to structure them to be grantor trusts taxed to the settlor creating the trust. Now, however, for the first time in a very long time the use of non-grantor trusts might provide valuable income tax savings. Non-grantor trusts that own some of the equity in a client’s business might qualify for a full IRC Sec. 199A 20% business income deduction because the trust’s income may be under the income thresholds mandated under 199A. If a client cannot benefit from charitable contribution deductions, transferring investment assets to a trust and having the trust make the contributions can secure a full income tax deduction since trusts do not have the standard deduction individual taxpayers do. Just be sure the trust meets the requirements of IRC Sec. 642(c) to qualify. The trust will salvage an otherwise lost/wasted contribution deduction and the client will still have their full $12,000 or $24,000 standard deduction. A nice tax savings. Practitioners will be critical to this income tax oriented trust planning. This change in focus is yet another reason that the CPA will prove to be the catalyst to estate planning happening. In many instances estate planning attorneys will not have a strong income tax background and will more than ever need the assistance of the CPA on the planning team.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

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Crowdsource Funding to Help Victims of the Las Vegas Massacre

  • Written by Martin M. Shenkman, Esq., Bernard A. Krooks, Esq., and Jonathan G. Blattmachr, Esq.

mug martin shenkmanOne of the authors just received a call to assist those helping one of the hundreds of victims of the Las Vegas shooting with some questions concerning a crowdfunding effort. What initially seemed like a simple question, which that might help one victim struggling with unfathomable challenges, following an equally unfathomable mass shooting, grew into something more. The questions grew and it became clear that they may affect the hundreds of victims of the Las Vegas shooting and thousands of others, e.g. those devastated by the recent hurricanes, for whom crowdfunding sites have or are being created. The issues are numerous and complex. Some of the challenges to better help those that have used crowdfunding sites may well be dealt with by guidance from the IRS or perhaps Congress. Perhaps the magnitude of the tragedy, and the need for common sense guidance illustrated throughout this article, will motivate quick and compassionate action.

The needs of so many are great. In addition to providing technical guidance to help victims and their advisers, hopefully this article will alert readers of the existence of crowdfunding campaigns they might contribute to, in order to directly help victims.

Despite the substantial sums of money raised annually by crowdfunding sites there seems to be little law, and even less guidance, for those using this vehicle. Some of the issues identified may at least put advisers, the public, and those creating crowdfunding campaigns on notice of steps that might help them achieve their goals with greater success, and some of the questions they should at least consider asking.

The comments following should be viewed at most as “preliminary” because to circulate this quickly to help the many in need, there simply was not time to properly research and evaluate what appear to be a rather considerable number of issues involved.


“Crowdfunding is the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet. [1] Crowdfunding is a form of crowdsourcing and of alternative finance. In 2015, it was estimated that worldwide over US$34 billion was raised this way.”

Help Las Vegas Massacre Fund Raising Efforts

Clark County Commission Chair Steve Sisolak set up a GoFundMe page or campaign, a private crowdfunding platform, to request charity for those injured in the massacre.[1] The description on the GoFundMe platform stated: “I'm Steve Sisolak, Clark County Commission Chair from Las Vegas. We are raising funds to assist the victims of the tragic Las Vegas shooting. Funds will be used to provide relief and financial support to the victims and families of the horrific Las Vegas mass shooting.”[2] Anyone seeking to help victims can use the link in the footnote to donate, which may not be tax deductible and may have minor but perhaps adverse gift tax consequences, as explained later.

In addition to the above effort, and likely other crowdfunding efforts, to aid all victims of the Las Vegas shooting, crowdfunding campaigns have been created for individual victims as well. For example, there are campaigns on GoFundMe, YouCare, and likely other sites, targeted to help individual victims severely injured in the Las Vegas shooting. Many other campaigns exist to help those devastated by recent hurricanes, as well as other emergencies and disasters.

Enhance Crowdfunding Campaign Results

Clearly the priority for victims, those creating the various campaigns, like Steve Sisolak, the victims’ families and loved ones is raising funds to assist in meeting the unanticipated financial challenges they all face, in addition to the unfathomable human and personal difficulties that has befallen them. In racing to help, it appears that few have given consideration to the various legal, tax and some other issues that not only should be considered, but which might help better achieve the goals of these campaigns. Some of these issues, addressed in this article, include:

• Can the donations be made tax-deductible to the donors to increase the amount of donations and perhaps the number of donors? For donations to benefit victims generally, not specific victims, this might be feasible.

• Can more accountability of the use of the funds donated be provided to increase the likelihood that funds raised are used as intended, and that the victims are protected?

• Can legal structures be provided that safeguard the funds raised for their intended purpose? For example, if the funds are owned by, or given to, a particular victim, will those funds be entirely consumed by medical care costs that, perhaps, Medicaid might otherwise cover? If so, might a supplemental needs trust arrangement be grafted onto the campaign to protect those funds to serve their intended purpose of helping a victim with the many expenses Medicaid will not cover, and preserving some of the funds to help the victims rebuild their lives?

Several other issues are also addressed that may be relevant to those creating crowdfunding campaigns and those hoping to benefit from them.

Crowdfunding Overview

Crowdfunding is the practice of funding a charitable campaign, personal campaign, or even a commercial project or venture, by raising many small dollar amounts from large numbers of people, typically visitors to a crowdfunding internet website. Crowdfunding is also referred to as crowdsource funding. In 2015, it was estimated that worldwide over $34 billion was raised as an alternative financing source using crowdfunding.[3] The sharing economy in 2015 is estimated to be $15 billion and projected to grow to $335 billion by 2035.[4] These dollar figures will transform charitable giving and fundraising in the US and worldwide. Traditional charities are pursuing crowdfunding concepts but, as explained later in this article, traditional charities may have a key role to play in partnering with crowdfunding campaigns that may grow. This is pertinent to the public crowdfunding campaigns to help victims of the Las Vegas shooting as well. But existing charities cannot partner with crowdfunding programs assisting a specific individual as that would have adverse tax consequences to those existing charities.

This modern charitable-type of crowdfunding typically includes the following participants:

• Campaign Organizer (sometimes referred to as “project initiator” in a business crowdfunding context) who proposes the idea and/or project to be funded, and who under the terms of service agreement of the crowdfunding site may have responsibility for the project, and the sole right to withdraw funds (unless the recipient or others are provided that right). A new and important variation on this role will be introduced later in this article, of the campaign organizer as a nominee for a trust or other vehicle to receive the proceeds raised.

• Donors – these are the website visitors, often reached through social media exposures of the campaign. These may be individuals or groups who support the idea, and make donations to the campaign.

• Recipient – the person or group of people (beneficiary) who will benefit from the campaign, e.g. a victim of the Las Vegas shooting.

• Crowdfunding Site – this is the website organization that provides the platform that brings the parties together to launch the funding campaign. The terms of service agreement of the crowdfunding site appear to be the primary, if not only, substantive legal document in most of these arrangements. As will be explored below, most of these contain such generic terms, and sometimes incorrect terms, that they may undermine the intent of the donation campaigns, including those funding help for victims of the Las Vegas shootings. Simple changes to both the platforms and terms of service will be suggested that could be effectuated to enhance the flexibility and success of many campaigns.

• Public Charity Partner – this is a concept that may have loosely or informally been used in some or many instances but which might be formalized and used with greater frequency by those creating campaigns to help the public generally and thereby secure income tax deductions and provide accountability.

The phrase “charitable-like” was used because crowdfunding charitable campaigns often do not conform to what is typically viewed as traditional charitable giving. The sponsors are often not public or traditional charities, the “donations” are often merely “gifts” and not deductible contributions for income tax purposes, and the reporting of the use of funds may be non-existent in contrast to the oversight and reporting requirements of traditional charities. The crowdfunding site terms of service disavow responsibility for the use of the funds raised.

Crowdfunding has been used to fund a wide range projects, payment of medical expenses, funeral arrangements, community-oriented social entrepreneurship projects, and more. With respect to the Las Vegas shootings various crowdfunding sites are now raising monies for all these purposes. There are a tremendous number of campaigns to help victims of recent hurricanes.[5] Certainly, a noble endeavor. Requesting gifts from strangers for medical bills is ubiquitous in the United States. A report by NerdWallet released in 2015 found that $930 million of the $2 billion raised by GoFundMe since its 2010 launch have been related to medical bills.[6] Consider, as discussed in more depth below, that if most of these gifts could have been restructured as tax deductible donations, at even a 20% assumed marginal income tax rate of the donors, that would be nearly $200 million of lost tax benefits. Consider further that these campaigns are created because the US government too often leaves medical and ancillary heath care costs to the individual. However, less than optimal tax planning of many crowdfunding medical campaigns unduly enriches the government coffers by failing to qualify for income tax deductions for donors.

Crowdfunding sites that might be used to raise funds for victims of the Las Vegas massacre and other tragedies might include: YouCaring, GoFundMe, Fundly, Booster, Givetaxfree.org, GiveForward, and others. In addition, people can and do create their own websites to raise funds, perhaps in a comparable manner.

Campaign Description

At the heart of a campaign to raise funds for a victim of the Las Vegas shooting, or any other disaster or cause, is the verbiage on the crowdfunding site or website home page of the campaign. The description of the campaign purpose may be relevant to the tax and legal implications of the campaign, and pertinent to what remedial steps might be feasible. It may be advisable for the campaign organizers to immediately modify some of the descriptions they are currently using to facilitate better results depending on the circumstances of the campaign and particular goals.

Example: Here is an illustrative campaign statement: “We are raising money to cover all expenses related to this tragic event such as traveling, food, hotels, missed work, and caring for [Person’s Name].” Might it be argued that the purpose of the fund was to provide for more than medical care and the failure to fund a supplemental needs trust (explained below) will defeat the campaign’s objectives? Nothing in this description suggests that the intended recipient can directly withdraw funds which may be important to improving the results of the campaign. That is important if a position may be taken, as described below, that the campaign organizer, and not the recipient has so control over the funds. Perhaps, an improvement to this campaign mission statement might be as follows: “We are raising money to cover all expenses related to this tragic event such as traveling, food, hotels, missed work, and caring for [Person’s Name] to the extent not inconsistent with the laws governing supplemental needs trusts in the state of [victim’s home state]. The Campaign Organizer will hold funds as a nominee for such trust.” The rationale for these modifications will be discussed later. This alternative may be better because the funds will be protected, governing programs such as Medicaid may pay medical bills, and the funds raised in the campaign might be preserved to cover expenses government programs will not cover, such as additional therapy, private nursing and more.

Example: Here’s another campaign from a different website: “…after falling victim to the Las Vegas attack. she leaves behind a large, devastated family and four beautiful children. We ask that you donate to help support her family during a time of difficult loss. The money will go towards medical expenses from the United States, funeral expenses and a children's fund for the precious children whom she left behind…we hope that we can take away a small burden for all those involved by giving back to them this way.” Might the portion of funds raised for the victim’s children be better preserved and tax advantaged if gifted to a 529 college savings plan? A discretionary trust (explained below) would better protect the funds for all these purposes, especially the minor children. Perhaps, the mission statement could be modified to read as follows: “…after falling victim to the Las Vegas attack. She leaves behind a large, devastated family and four beautiful children. We ask that you donate to help support her family during a time of difficult loss. All funds collected will be held by the Campaign Organizer, as nominee, and distributed as follows: (1) 80% to a trust to be created for the family and children; and (2) 20% to 529 college savings plans for the children. The trust monies will be used to address medical expenses, funeral expenses, and care for the children left behind…we hope that we can take away a small burden for all those involved by giving back to them this way.” This would provide better protection for the family and children, more accountability, and perhaps that might be used to encourage larger or more donations. Because the campaign is for a specific individual no income tax deduction will be permitted.

Example: The site mentioned above for all victims listed its mission statement on the crowdfunding page including the following verbiage: “Funds will be used to provide relief and financial support to the victims and families of the horrific Las Vegas mass shooting…” What if instead the following were used, and actually reflective of the arrangement made: “Funds will be used to provide relief and financial support to the victims and families of the horrific Las Vegas mass shooting. Funds will be held by the Campaign Organizer as agent on behalf of [existing charity] who will assume responsibility for distribution of funds to victims and local organizations serving them. Because all funds are to be considered those of [existing charity] donors may qualify for an income tax charitable contribution deduction for all gifts.” Might the tax advantages of providing a deduction to donors be facilitated by an existing charity handling the distributions? It does not appear that this could be done for a named individual and yet remain charitable for tax deduction purposes. Might the credibility and accountability of an existing known charity subject to the IRS reporting and other regulations governing charitable organizations enhance the credibility of the campaign and encourage more and bigger donations? The Clark County Commission Chair Steve Sisolak who was behind the GoFundMe page purportedly donated $10,000 himself. This particular campaign is structured as LAS VEGAS VICTIMS' FUND a tax-exempt charity. It appears that many other campaigns are not, but perhaps more could be. At least one-donor to this campaign was surprised to learn after a gift that it was in fact deductible. See the comments below concerning the terms of service of this platform concerning deductibility. If he were in a 35% tax bracket, that could be a forgone $3,500 tax deduction without the recipient qualifying as a charity. The concept introduced above, of a “Public Charity Partner” might solve this issue. It would be helpful for the IRS to provide lenient guidance in this regard, so that existing crowdfunding sites can be revamped and qualify. So long as the funds are held for, and turned over to, an existing qualified charity to be used as provided in the campaign description, there should be no negative implications. Also, increased accountability will be fostered, and the tax deduction rules can be modernized to reflect the burgeoning growth of crowdfunding as a new component of charitable fund raising.

Thus, the details of the campaign terms might have important implications to whether the funds can be better characterized to serve the needs and goals being pursued. Unfortunately, those compassionate family, friends or community members creating the campaigns likely do not have the time or ability to hire advisers to plan the campaign in a more tax or legally effective manner. Perhaps with some general guidance, a modicum of from the IRS leniency (see below, e.g. as to the transition of existing campaign funds to charities, etc.), compassionate legislation from Congress (e.g., a 529A equivalent for the present interest test as discussed later), and a bit more sophistication by the various crowdfunding sites (articles and resources explaining the issues to users), the noble goals of many of these campaigns can be significantly enhanced. The website platforms serving this niche might add explanatory articles about the different options and how to achieve them, albeit disclaiming liability and recommending that each campaign organizer hire legal and tax advisers. However, at least bringing attention to some of the options that campaign organizers might wish to avail themselves of, in a visually obvious way, may do much to improve the results for all, especially those so desperately in need of help.

Whose Funds are They

Who controls or owns the fund in the campaign? In some instances, this may be a key decision. It may prove advantageous for funds to be held in a campaign to benefit the public (e.g., all victims of the Las Vegas shooting) pending distribution to a public charity for those campaigns seeking income tax charitable contribution deductions. In the case of a campaign for an individual (e.g., a specific victim of the Las Vegas shooting) for the campaign funds to be held in some type of trust to protect the recipient of the campaign. A threshold issue as to whether this will be feasible may in part depend on who owns, or has control over, the funds in the particular campaign. This is critical to determining the tax and legal consequences and what might be done to improve the amorphous status of many campaigns. It would seem that the terms of service agreement on the hosting crowdfunding platform involved would govern. While there may be other possible agreements that govern, they are likely oral arrangements at most, and perhaps only vaguely understood. These other agreements might include an oral agreement between the campaign organizer and the intended recipient, or an implied agreement between the campaign organizer and the donors as to the agreed use of funds. In either of these situations, a court may have to interpret the layman’s verbiage on the campaign page, to identify terms.

The terms of service agreement for GoFundMe provide: “Withdrawing Donations from a Campaign: You, as a Campaign Organizer (or, as applicable, the beneficiary designated by the Campaign) may withdraw Donations to your Campaign at any time up to the full amount of all Donations credited to your Campaign…

If the intended recipient is also the campaign organizer who has power to withdraw, it may be more difficult to maintain that the funds are held by the campaign organizer as a nominee for the intended recipient. Thus, it might be advantageous in all cases for the campaign organizer to be someone other than the intended recipient. If that is not the arrangement on an existing campaign site the current recipient/campaign organizer should replace his or her name with the name of another. Of course, this might make the campaign organizer a fiduciary and thereby create certain duties and liabilities to the recipient. This modification may not be binding on the tax authorities or a governing agency seeking to overturn the restructure of the campaign to fund a trust or pass funds to a public charity. It might be preferable if the funding sites modify their terms of service mandating that if any recipient (beneficiary of the campaign) is also serving as campaign organizer, that they must resign and name someone else. At least in that manner the action will be dictated by a third party, not by the actions of the individual controlling the funds. Acknowledgement by the IRS and other appropriate authorities that such a transition may be ignored for tax or means testing (explained below) would be helpful in this regard. The various crowdfunding platforms might suggest in the templates used to organize campaigns that the campaign organizer be someone other than the intended recipient.

Issues When Funding for a Group of Victims or an Individual Victim

While some of the preceding discussions have mentioned various considerations of a campaign and how they differ for public versus individual recipients, the following summary by each may provide additional clarity.

Funding for a group endeavor, like the general crowdfunding site for Las Vegas victims on GoFundMe started by Steve Sisolak noted above, are different then the issues that might face a crowdfunding effort for an individual. The group of individuals that may receive assistance is called a “charitable class.” This group must be large enough, or sufficiently indefinite, that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. For example, a charitable class could consist of all the individuals in a city, county or state. This charitable class is large enough that the potential beneficiaries cannot be individually identified and providing benefits to this group would benefit the entire community.[7] For group efforts that meet the above requirement (like those benefiting all affected by the Las Vegas shooting), the consequences seem to be as follows:

• Income tax deduction to donor – these campaigns may meet the requirements necessary for an income tax deduction, and may be able to partner with an existing charity to achieve that result. For the charitable contribution deduction to be available the existing qualified charity generally must be given full control and authority over the use of donated funds.

• Income tax inclusion to the recipient - Payments that individuals receive under a charitable organization’s program because of a disaster or emergency hardship are considered to be gifts and may be excluded from gross income of the recipient, but qualification for this should be reviewed.[8] Special tax treatment is also provided for qualified disaster relief payments made to victims of a qualified disaster, regardless of the source.[9]

• Gift tax – For a group campaign, (e.g., anyone adversely affected by the Las Vegas shooting) there is no specific individual beneficiary, so that there but be an issue that the donation does not constitute a present interest gift if the beneficiaries cannot be ascertained. However, whether or not the campaign is structured to qualify for the income tax charitable deduction, it may also not qualify for a gift tax charitable contribution deduction.[10] It would be helpful for the IRS to provide guidance confirming such gifts for the public at large are not subject to the gift tax since under current law these “donations” may still subject the donor to a gift tax filing obligation. Perhaps permitting gifts to crowdfunding campaigns to qualify as a gift of a present interest (explained below) would suffice without creating much room for abuse. Partnering with an existing qualified charity might also solve the issue qualifying the donation for the gift tax charitable contribution deduction.

• Protection of funds raised – If the funds are turned over to an existing charity the infrastructure and procedures of the partnering charity would provide significant assurance that the goals of the campaign, so long as consistent with the goals of the partnering charity, will be achieved. Similarly, for individual recipients the use of a trust may help safeguard the money raised.

Funding for a particular individual, such as a crowdfunding site for a specific Las Vegas victim, faces different issues then a crowdfunding effort for the general public. For individual efforts, like those illustrated above, the consequences seem to be as follows:

• Income tax – there can be no income tax deduction. The law on this is evaluated in more detail below.

• Gift tax – The potential for gift tax issues arise because of a specific individual being the ultimate recipient. This is because the gift cannot meet the gift tax charitable contribution requirements, and in many instances, will not qualify as a gift of a present interest to avoid gift tax reporting by the donor. Several of the possible gift tax implications are discussed below, along with some specific points on which guidance from the IRS might be useful.

• Protection of funds raised – Because an individual is being benefited, the potential for an existing charity to partner with respect to the disbursement of funds and accounting may not be viable, so other options will have to be considered to provide accountability. Further, for an individual (or family), the use of a trust to safeguard the funds may be advisable. The nature and type of trust will depend on the circumstances. If the recipient requires medical care, as do may survivors of the Las Vegas shooting, funds could be applied in that matter, but that may dissipate all of the funds. Alternatively, it may be beneficial if those funds could be held in a vehicle that does not disqualify the person from means-tested government benefits such as Medicaid, so that Medicaid pays for the medical care and the funds raised are preserved for purposes that Medicaid will not cover that may be essential to the healing process. For non-medical campaigns, a trust that permits discretionary distributions for the various purposes of the campaign may be beneficial.

Funding for a particular individual, such as a crowdfunding site for a specific Las Vegas victim, faces different issues then a crowdfunding effort for the general public. For individual efforts, like those illustrated above, the consequences seem to be as follows:

• Income tax – there can be no income tax deduction. The law on this is evaluated in more detail below.

• Gift tax – The potential for gift tax issues arise because of a specific individual being the ultimate recipient. This is because the gift cannot meet the gift tax charitable contribution requirements, and in many instances, will not qualify as a gift of a present interest to avoid gift tax reporting by the donor. Several of the possible gift tax implications are discussed below, along with some specific points on which guidance from the IRS might be useful.

• Protection of funds raised – Because an individual is being benefited, the potential for an existing charity to partner with respect to the disbursement of funds and accounting may not be viable, so other options will have to be considered to provide accountability. Further, for an individual (or family), the use of a trust to safeguard the funds may be advisable. The nature and type of trust will depend on the circumstances. If the recipient requires medical care, as do may survivors of the Las Vegas shooting, funds could be applied in that matter, but that may dissipate all of the funds. Alternatively, it may be beneficial if those funds could be held in a vehicle that does not disqualify the person from means-tested government benefits such as Medicaid, so that Medicaid pays for the medical care and the funds raised are preserved for purposes that Medicaid will not cover that may be essential to the healing process. For non-medical campaigns, a trust that permits discretionary distributions for the various purposes of the campaign may be beneficial.

The IRS has stated: “Individuals can also help victims of disaster or hardship by making gifts directly to victims. This type of assistance does not qualify as a tax-deductible contribution since a qualified charitable organization is not the recipient. However, individual recipients of gifts are generally not subject to federal income tax on the value of the gift. If you make a gift directly to an individual, you are not subject to federal gift tax unless the total gifts made in a year exceed the annual exclusion amount.”[11]

Tax Issues Generally

While the dollars solicited in many campaigns are modest, the dollars involved across the spectrum of all charitable-type crowdfunding sites is significant. Considering the aggregate funds involved, it is surprising that some crowdfunding sites appear to provide limited guidance to visitors, donors, those creating campaigns or those benefiting as to the tax consequences. For example, the GoFundMe terms of service states: “Taxes: It is your responsibility to determine what, if any, taxes apply to the Donations you receive through your use of the Services. It is solely your responsibility to assess, collect, report or remit the correct tax, if any, to the appropriate tax authority.” Givetaxfree.org provides an FAQ page with more helpful information then some sites.[12]

While every campaign is different and the crowdfunding websites are not in the business of providing tax advice, the inclusion of helpful articles to at least inform users might be beneficial. It is unlikely that many users even are aware of the possible tax issues for the various types of campaigns. This is also why guidance from the IRS providing some practical leniency and updating policies to reflect the realities of the crowdfunding phenomena are important. This is especially so in the wake of the Las Vegas tragedy, and the many recent devastating hurricanes, when so many are trying to help and be helped without nary an inkling of the tax implications.

Income Tax Issues

The Terms of Service from the website YouCaring provide as follows:YouCaring does not verify whether any beneficiary organization advertised as a nonprofit actually has tax-exempt status by the U.S. Internal Revenue Service or any state agency. We encourage you to double-check on the tax-exempt status of any organization claiming to be a nonprofit before donating to a Fundraiser.” The GoFundMe terms of service have a different statement which, in some instances may be incorrect, but which should not change the determination of whether or not a particular donation is deductible: “As used in this Agreement, the term "Campaign" does not refer to a Charity, and you acknowledge that contributions to Campaigns are not deductible under your jurisdiction’s applicable tax laws and regulations.”

Some might be tax deductible depending on who is the recipient and, as suggested above, some campaigns might be able to partner with an existing charity to secure deductions and other benefits. A more helpful approach would be to advise visitors (and in a more prominent way then buried in a lengthy terms of service agreement) that campaigns for the general public’s welfare if appropriately conducted under the auspices of qualifying charity may permit donations to be income tax and gift tax deductible.

More guidance, and a matching page for public charities wishing to assist with specific causes, could provide a more favorable result. Perhaps, crowdfunding sites might even provide contact information and links for campaign organizers to public charities willing to adopt campaigns within the ambit of their mission statements. It may be, as discussed above, that the funds could be directed to such a charity and thereby permit donors income tax deductions where there would otherwise be none.

No Income Tax Deduction to Donors Benefiting Identified Individual

Seemingly, the only tax authority on any matters pertaining to crowdfunding is a single IRS private letter ruling that held that “donations” to a crowdfunding site to benefit a particular individual were not tax deductible since they were not for public benefit.[13] More detail on the IRS reasoning is discussed below. This is largely a summary of known law on this particular issue and suggests that any crowdfunding campaign to benefit a particular individual will not qualify as a charity and donors will not receive an income tax deduction.

If the recipient of the campaign is not a qualifying charity, then the donee/recipient will not qualify as a tax-exempt organization[14], and the donors will not be permitted to deduct contributions.[15] This was the rationale for suggesting that campaigns endeavoring to help the public at large (e.g., helping all victims of the Las Vegas shooting), partner with existing charities to secure an income tax deduction.

The facts in the PLR were as follows: The fundraising website indicates that those involved are a small group of people supporting D's daughter and family as she brings inspiration to children battling cancer. They sell merchandise such as t-shirts and wristbands on the website. The site provides a link for a crowdfunding site specifically for D's daughter. The IRS determined that this was for the benefit of a specific individual and not the general public and would not qualify as a charity.

In the Parker case, the organization was created by the Parker family to aid an open-ended class of victims of coma.[16] However, the organization stated that it anticipated spending 30 percent of its income for the benefit of Wendy Parker, significant contributions were made to the organization by the Parker family, and the Parker family controlled the organization. Wendy's selection as a substantial recipient of funds substantially benefited the Parker family by assisting with the economic burden of caring for her. The benefit did not flow primarily to the general public as required under the tax laws.[17] Therefore, the foundation did not qualify as a tax-exempt organization under IRC Sec. 501(c)(3). Another case reached the same result because a private individual, and not the public, was the beneficiary.[18]

General Gift Tax Considerations

The gift tax is not imposed upon the receipt of funds by the beneficiary of the campaign, rather on the donor. The gift tax is triggered by the donor making a transfer. [19] The gift tax may apply whether the transfer is direct or indirect.[20] So, whether or not the campaign organizer holds the funds for an eventual recipient, or a trust for the eventual recipient, should not affect the gift tax consequences. The donor is also allowed an annual gift tax exclusion for the first $14,000 (2017) if that gift is a gift of a present interest.[21]

Is it an Incomplete Gift?

The terms of service for YouCaring provide: “Donations are made through the third-party payment processor associated with each particular Fundraiser, and YouCaring may not refund your donation to a Fundraiser; however, if you contact us, we will put you in touch with the payment processor for the Fundraiser for which you seek a refund. Any refunds will be given in the third-party payment processor’s discretion and in accordance with their terms of service.”

In contrast, givetaxfree.org provides: “What if I later change my mind and I want a refund, can I have one? No, once you make a donation we are unable to give a refund.”[22]

Does the possibility of a refund make the gift by a donor to a campaign incomplete? Tax law provides that a gift is incomplete if the donor has the power to re-vest beneficial title to the property in herself.[23] Might it be that the gift is incomplete until disbursed from the campaign for the cause indicated? There are thus numerous sources to consider in making this determination: the campaign language itself, the terms of services of the crowdfunding site, the possible terms of service of a separate payment site and state law. State law may vary depending on the terms of service agreement. For example, the Fundly terms of service provide: “These Terms of Use will be governed by and construed in accordance with the laws of the State of California, without reference to its conflicts of laws rules.” What if the terms of service of the payment process provide for different state law?

Is it a Present Interest Gift?

For a gift to or through a crowdfunding site to qualify for the gift tax annual exclusion, it must be a gift of a “present interest” meaning the recipient must have immediate use, possession or enjoyment of the gift This is significant in that a gift of a present interest will obviate the need to file a gift tax return for gifts under the annual exclusion amount, which likely covers most gifts through crowdfunding platforms. A gift of a future interest will not qualify for the annual gift exclusion.[24] If the number of eventual donees, and the values of their interests, cannot be determined, the gift may not qualify as of a present interest. For example, a campaign to benefit a victim of the Las Vegas shooting and her family that was traumatized may not suffice to qualify because it is uncertain how much will be distributed to the family or the victim. If, as discussed below, a trust was the ultimate beneficiary of these funds, a general power of appointment or a so-called “Crummey power” (that is, the right to withdraw the gift from the trust) might resolve the present interest issue. But it would be incredibly complicated, well beyond the means of most users, to comprehend or afford legal help to create these mechanisms. A fairer, simpler and preferable approach would be for the IRS or Congress to create an exception that prevents these tax challenges.

There should be no reason to require gift tax reporting requirements for gifts by strangers to help someone through a crowdfunding site. If the IRS provided an exception to the gift tax present interest requirement, perhaps limited to non-family members, for gifts through such sites, a gift tax return filing and any gift tax liability could be avoided. In most instances, filing a gift tax return would only create filing requirements that would not be complied with, or if complied with then would constitute unnecessary administrative burdens on both the taxpayer and the IRS.

The issue of present interest is also relevant to the suggestion below of the campaign organizer holding the funds raised as a nominee for a trust for the recipient (or in a constructive trust for the recipient). If the recipient had the authority to withdraw funds immediately under either scenario the donations should qualify as a gift of a present interest under IRC Sec. 2503. However, that position may also taint the funds as not being permissible to hold in a supplemental needs trust as the funds may already be deemed in the control of the recipient. It would seem that this would be governed by the verbiage on the campaign page and the terms of service agreement. This is why it was suggested earlier that the campaign organizer may be advised to modify the language on the home or campaign page.

Another situation might be that the campaign organizer may have the right to withdraw the funds donated which generally seems to be case under most default terms of service, if not modified. In that case, might it be argued that, because the campaign organizer can withdraw funds at any time, the gifts are made to the campaign director and hence qualify as a gift of a present interest?

If the campaign organizer can withdraw the funds at any time she might be able to fund an incomplete gift trust (a DING type) with the following provisions:

• Discretionary distributions (for the benefit of the named recipient) so long as such payments are of the type described in IRC 2503(e) which permits payments for medical expenses, and not otherwise covered by insurance and/or state and federal aid programs.

• Discretionary distributions (for the benefit of the named recipient) in addition to those for medical purposes, in accordance with an ascertainable standard (Health, Education, Medical Care and Support), but not to exceed the campaign organizer/trust settlor’s annual exclusion (taking into account any split gift election) each calendar year.

• Discretionary distributions (for the benefit of the named recipient ’s family) in addition for reimbursement of travel and expenses associated with the named recipient’s care but not to exceed the settlor’s annual exclusion (taking into account any split gift election[25]) each calendar year.

• Discretionary distributions (for the benefit of the named recipient family) so long as such payments are of the type described in IRC 2503(e) and not otherwise covered by insurance and/or state and federal aid programs.

• Upon the death of the named recipient, to a charitable organization, e.g. the American Red Cross Southern Nevada Chapter[26] Thus, any remaining amount in trust could fund a charitable gift.

It would seem that if the recipient and campaign organizer are the same person (i.e., someone organized a campaign for themselves) that the position of a present interest would be the correct conclusion.

However, if the campaign organizer is not the intended recipient (e.g., a neighbor or family member that set up the campaign for a friend or loved one) then the campaign organizer would seem to be holding the funds, subject to the terms of service as modified by the terms of the campaign, as an agent, nominee or similar capacity.  The latter interpretation may be essential to support the transfer of the funds from the campaign to an existing charity for a public campaign, or to a trust for a private individuals campaign.

Would a default payment of unused campaign funds over to qualifying public charity trigger involvement by the State attorney general or the IRS? How might that additional complication be avoided? Should it be avoided?

State Tax Considerations Generally

Some possible state tax considerations might be illustrated by Washington State’s taxation website which provides:

“I am an individual using crowdfunding to raise money for a personal project. Do I need to register with the Department of Revenue? If your annual gross income (donation amount and the host fee) from crowdfunding is more than $12,000 then you need to register with DOR. If you are required to collect sales tax on a reward, then you also need to register with DOR… Amounts received for items with no significant value (such as thank you notes, posting a name) aren’t subject to B&O tax. Amounts received as donations (no goods or services provided) aren’t subject to B&O tax or sales tax.”[27]

Sales Tax

While sales tax should not apply in the context of raising funds for charitable purposes it may be an issue in “charitable-like” purposes. In the charitable context, the IRS has provided de minimis rules to avoid tax complications for donors receiving token gifts or benefits and the full amount of the donation made would be deductible.[28] However, it seems clear that the donation to a crowdfunding program to benefit a specific individual is not income or gift tax deductible as a donation to a charity. That might negate the value of these de minimis rules and leave an ambiguous tax result. Thus, if a personal crowdfunding site gives each donor a t-shirt or wrist band, does that become a commercial transaction? This is an area where IRS guidance providing de minimis rules to avoid unwarranted tax complexity to the “donor” and the campaign would be sensible.

In a commercial crowdfunding context, a project may be required to pay sales tax on retail services or tangible personal property given to contributors as a benefit or incentive for the contribution. The sales tax rules are likely based upon where the donor receives the goods or services. To avoid an issue of having to collect sales tax, those creating a campaign might state that if, a service or product is given, and if sales tax is applicable, the donation amount will be deemed to be inclusive of that sales tax. This might be a simple condition for crowdfunding sites to add to their terms of service agreements to avoid the issue for campaigns that might be affected.

Where nothing is given to the donor for the donation/gift it would seem unlikely that to implicate a state sales tax. However, if the donor receives anything of value in return (e.g., a wrist band), an aggressive state tax authority could try to impose a sales tax. Perhaps the state tax authorities might view sitautions such as funding hurricane victims or victims of the Las Vegas shooting compassionately, but if campaigns that are more questionable in terms of purpose or even legitimacy are identified, the state tax authorities may view them differently. Arguably, if the wrist band or other give away is really worthless—perhaps, that could be established by offering one to anyone who requests one even if no donation is made.

Supplemental Needs Trust Background

If the disaster (e.g., hurricane, or shooting victim) will incur substantial medical costs, it may be feasible for that person to qualify for Medicaid or other government benefit programs which may then cover medical costs. If this can be done, and the funds raised in the crowdfunding campaign can be channeled to an appropriately crafted supplemental needs trust, the funds may be preserved to cover other costs Medicaid or other governmental benefit program will not cover. This could have a dramatic positive impact on preserving financial resources to help the recipient. The rules differ from state to state. In some states, the intended recipient of the crowdfunding campaign may need to become eligible for means-tested government benefits. “Means tested” means that the individual with medical issues cannot have more than a certain amount of assets (a very low amount) and a limited amount of income, which varies from state to state. If assets or income exceed the thresholds the special needs individual could lose all benefits. This is why it is critical that the funds generated by the crowdfunding campaign not be deemed those of the recipient. If the campaign organizer is an independent person and neither the campaign nor the platform’s terms of service have given the recipient the right to withdraw funds, that may be feasible. This too is an issue where guidance from government regulators would be helpful, especially if that guidance could show compassion to those suffering and recognize that well-meaning but uniformed people may have created the crowdfunding campaign.

A special or supplemental needs trust (“SNT”) permits the trust to retain assets for the benefit of the recipient/beneficiary while protecting the funds from the state for reimbursement of state-paid medical care so that benefits can be maintained and the quality of life of the beneficiary is enhanced. This type of planning is vitally important because there are many gaps in the benefits that for reimbursement of state-paid medical care.

The value of services provided may amount to millions of dollars over the course of a victim’s lifetime. But vacation, entertainment, extra furnishing, private nursing or extra therapy, the things that might give more joy and meaning to life, or boost recovery, are not provided for by the government. Additional care and alternative medical treatments may also not be provided for by government programs and may be important to the recipient’s recovery. A SNT may provide for the payment of these types of expenses to the extent not provided by government programs. These often increase in importance as the disabled beneficiary ages. The answer to protect the crowdfunding dollars, yet permit Medicaid or other government programs to cover certain costs, may be to establish a SNT that will not jeopardize benefits.

An SNT is a third-party trust is typically established by a parent or other person. This type of trust is funded with assets belonging to a third party. This might fit the scenario of someone other than the intended recipient serving as a campaign organizer and having third-parties, such as the public at large, make gifts to the campaign. This contrasts with a first party trust that is funded with a beneficiary’s own money. The most common example of this is if there is an inheritance that is restructured by the court into a first party trust (that is, one deemed created by the person in need), or if there is litigation resulting in a settlement for the beneficiary. In fact, there may be settlements in any disaster with the owners of facilities where the disaster occurs, the government, or others that benefit victims. In a first party trust, the remaining funds at the beneficiary’s death that are held in the trust must go back to the government to reimburse the government for the cost of care provided. If there is money left in a first party trust after the Medicaid payback, it can go to named beneficiaries, or the beneficiary’s estate, depending on state law. If the amounts are modest a “pooled” supplemental needs trusts might prove more practical.

ABLE Accounts

There is another approach, albeit it limited, that might be of some use to protect campaign proceeds from adversely affecting government benefits, called an ABLE account. Similar to the discussion of a supplemental needs trust, it may be feasible to have campaign proceeds targeted from inception (and possibly redirected under a nominee, agent or constructive trust theory) to a qualifying ABLE account. A significant limitation on ABLE accounts is that the recipient must be disabled and that disability must have occurred before age 26. There has been some discussion of Congress increasing that age which would make the use of ABLE accounts available to more people. The amount that can be contributed to an ABLE account is limited to the amount of the annual gift tax exclusion, $14,000 in 2017. It is not clear that a crowdfunding campaign could raise more funds, and limit the distributions to the ABLE account to $14,000/year or whether the excess funds held in the crowdfunding campaign would adversely affect the recipient. It would be useful if Congress could clarify and provide leniency on this point as well.

Can Crowdfunding Dollars be Shifted to a Protective Structure?

It may also be feasible to argue that the person, e.g. a neighbor or family member, who sets up the crowdfunding site as the campaign organizer, is holding the funds associated with that account/page as a nominee for the ultimate recipient, or perhaps for a trust to benefit the ultimate recipient. As noted above, the crowdfunding page should be updated to reflect this and ideally the crowdfunding platforms would amend their terms of service and, perhaps, even permit check the box elections for these items to provide clarity to future campaigns. If this is not done, hospital and other long-term care bills will likely wipe-out all of the funds raised for most victims. The campaign organizer might be deemed a constructive trustee of a constructive trust to which he or she will transfer the monies raised once an express or formal trust is created.

In the case of a campaign for someone injured or murdered, whether in a mass shooting or weather related or other event, a supplemental needs trust might be inappropriate. Instead, a fully discretionary trust so that family members could be assisted as well as the victim, payments for travel expenses for relatives, school for surviving children, etc. may all be provided for.

The nature of the relationship between the campaign organizer who can withdraw funds and the intended recipient may be key to determining what can be done for disaster or other victims. The terms of service on GoFundMe provide as follows: “We do not and cannot verify the information that Campaign Organizers supply, nor do we guarantee that the Donations will be used in accordance with any fundraising purpose prescribed by a Campaign Organizer or Charity. We assume no responsibility to verify whether the Donations are used in accordance with any applicable laws; such responsibility rests solely with the Campaign Organizer or Charity, as applicable.”

This is rather typical and to be expected as no crowdfunding platform could reasonably police the actions of every campaign organizer nor be involved in whatever contractual arrangements might exist between the campaign organizer and the intended recipient. It seems most likely that few if any campaign organizers and recipients have any binding agreements and most are likely formed by a loved one or friend merely trying to assist. That might provide a position that the recipient cannot force the campaign organizer to distribute funds to a trust to carry out the purpose and goals set forth in the campaign, if there is no legally binding agreement between the campaign organizer and the recipient.

Requested Guidance from Congress and the IRS

Suggested issues for the IRS to clarify and provide guidance on crowdfunding to help the victims of the Las Vegas massacre, hurricanes, and other matters, are made throughout this article are summarized below. It might be helpful for the IRS to use the ABLE account legislation under IRC Sec. 529A as a model in some respects. To minimize the abuse by family members using a crowdfunding platform to circumvent the gift tax (e.g. avoiding the requirement for gifts meeting the present interest requirement to qualify for annual exclusion treatment) donations by family members, perhaps as defined under IRC Section 267(c)(4) which includes, brothers and sisters (whether by the whole or half-blood), spouse, ancestors, and lineal descendants, would probably be sufficient.

1. Permit public charities to assume responsibility for crowdfunding for emergency situations consistent with that existing charity’s purpose and the campaign description so that donors can qualify for an income tax charitable contribution deduction. As illustrated above, the IRS might establish safe-harbors permitting crowdfunding campaigns that benefit the public at large, e.g. victims of the Las Vegas shooting, to use an arrangement with a “Public Charity Partner” to qualify donors to receive income tax charitable contribution deductions. It would be helpful for the IRS to promptly provide lenient guidance in this regard, so that existing crowdfunding sites can revamp and qualify.

2. Permit gifts to crowdfunding sites, whether for groups or individuals to qualify for either the gift tax charitable contribution deduction or the gift tax present exclusion (perhaps using IRC Sec. 529A as a guide) when funding for individuals. Permitting campaign funds that are paid directly to medical or education providers to qualify as a new exception under IRC Sec. 2503(e) may also provide simplification and certainty.

3. Permit crowdfunding campaigns to be modified within 90-days of launch to clarify the terms of the campaign in a manner not inconsistent with initial statements but which would permit the funds raised to be held in an appropriate trust or other arrangement to accomplish their intended purpose, e.g., a supplemental needs trust if appropriate or a discretionary trust.

Changing Terms of Service to Address Issues

Can a crowdfunding site change its terms of service to address some of the above issues? Likely that would help, but the problem is that the change would need to be retroactive to positively affect the outcome of an existing campaign. The answer may depend on the terms of service. For example, the GoFundMe site terms of service provide: “Any such changes will become effective no earlier than fourteen (14) days after they are posted…”

A step some campaign organizers might consider is to have the crowdfunding site place a hold on funds pending resolution of some of the applicable tax and/or legal issues raised in this article. For example, the terms of service of GoFundMe provide: “Account Holds: From time to time, GoFundMe may place a hold on a Campaign account (a "Hold"), restricting Withdrawals (defined herein) by a Campaign Organizer…(ii) if the funds available should be provided directly to a person other than the Campaign Organizer…

In some instances, the campaign organizer, who otherwise has the power to withdraw funds, might request the crowdfunding site to freeze withdrawals from the account so that the funds can be directed to a preferable receptacle, such as a public charity to support deductions to donors when funding a campaign for the benefit of the general public, or to a supplemental needs trust created for a recipient who has medical needs.

Use of Funds

There seems to be no mechanism addressing how funds on a crowdfunding site are actually used. Considering the dollars raised annually that is quite remarkable. The GoFundMe terms of service provide: “…nor do we guarantee that the Donations will be used in accordance with any fundraising purpose prescribed by a Campaign Organizer or Charity…”

An article about 9/11 victims stated: “Some criminals view national tragedies as an opportunity to take your money. To ensure your charitable impulses aren't taken advantage of, watch out for scams. As MONEY reported after the Pulse nightclub shooting in Orlando, crowdfunding and social media sites have little oversight, and the identities of those soliciting donations on these mediums is hard to verify.”[29]

The government has raised concerns about accountability of crowdfunding sites.[30]

Addressing the issues discussed in this article may, in part, address the accountability issue without the need for what might prove to be debilitating regulations:

• Campaigns for the public good could and should be bought under the auspices of existing tax exempt charitable organizations (e.g. donor advised funds) which would provide income tax deductions to donors and accountability.

• Campaigns to benefit individuals if the funds raised are sufficient could be paid to a trust to administer them thereby providing some accountability in that the trustee would have a fiduciary responsibility to carry out the terms of the campaign.

• Crowdfunding sites could add functionality to permit campaigns to account on line for how the funds are used reporting to the public and donors. This might then become self-selecting with those campaigns agreeing to account creating more public confidence and raising more money.

• Donors may well be more inclined to make a gift to a campaign that demonstrates accountability in real time than those that do not.


While the tragedy of the Las Vegas shooting, and the heartache of recent hurricanes, other mass shootings and problems cannot be erased, much can be done to help those who were victims of these nightmares. Crowdfunding, both for the larger public affected, and even for individuals affected, provides a creative and incredibly efficient means to raise funds. But in planning those fund raises, and administering the funds once raised, much can be done to enhance the benefits and use those enhancements to perhaps to raise even more funds and help more.


[1] Zaid Jilani, “Las Vegas Official Sets Up GoFundMe to Aid Shooting Victims — the Price of No Universal Health Care,” October 2 2017, https://theintercept.com/2017/10/02/las-vegas-shooting-gofundme-health-care/ .

[2] https://www.gofundme.com/dr2ks2-las-vegas-victims-fund October 7, 2017.

[3] https://en.wikipedia.org/wiki/Crowdfunding October 7, 2017, citing Barnett, Chance (June 9, 2015). "Trends Show Crowdfunding to Surpass VC in 2016". Forbes. Retrieved June 29, 2016.

[4] PwC https://www.youcaring.com/c/crowdfunding , October 7, 2017.

[5] See, https://www.gofundme.com/mvc.php?route=category&term=hurricane .

[6] https://en.wikipedia.org/wiki/Crowdfunding October 7, 2017.

[7] https://www.irs.gov/pub/irs-pdf/p3833.pdf .

[8] IRC Sec. 102.

[9] IRC Sec. 139.

[10] IRC Sec. 2522.

[11] https://www.irs.gov/pub/irs-pdf/p3833.pdf , at pg. 24, Publication 3833 (Rev. 12-2014), Department of the Treasury, Internal Revenue Service.

[12] https://givetaxfree.org/how-does-crowd-fundraising-work/?gclid=CKa9sMD45NYCFdOCswodg14KZg .

[13] IRS Letter Ruling 201701021, Oct. 11, 2016. Under IRC Sec. 6110(k)(3), a private letter ruling may not be cited or used as precedent.

[14] IRC Section 501(c)(3).

[15] IRC Sec. 170.

[16] In Wendy Parker Rehabilitation Foundation, Inc. v. Commissioner, 52 T.C.M. (CCH) 51 (1986).

[17] Reg. Section 1.501(c)(3)-1(d)(1)(ii).

[18] Easter House v. United States, 12 CI.Ct. 476, 487 (1987), citing section 1.501(c)(3)-1(d)(1)(ii) of the regulations, aff'd without opinion, 846 F.2d 78 (Fed.Cir.1988).

[19] Reg. §25.2511-2(a).

[20] IRC Sec. 2511(a).

[21] IRC Sec. 2503(b).

[22] https://givetaxfree.org/how-does-crowd-fundraising-work/?gclid=CKa9sMD45NYCFdOCswodg14KZg .

[23] Reg. §25.2511-2(b).

[24] Reg. §25.2503-3.

[25] See IRC Sec. 2513 permitting spouses to elect to treat gifts to others made by of them to be treated as though made by both.

[26] http://www.redcross.org/local/nevada/southern-nevada .

[27] https://dor.wa.gov/get-form-or-publication/publications-subject/tax-topics/crowdfunding October 8, 2017.

[28] Rev. Proc. 90-112, 1990-1 CB 471; Rev. Proc. 92-49, 1992-1 CB 987.

[29] Alicia Adamczyk, “How to Help Victims of 9/11 and Their Families,” Sep 10, 2016, http://time.com/money/4483748/911-charity/ .

[30] SAR Stats Technical Bulletin October 2015,2015ARD 197-6, Internal Revenue Service, Oct. 15, 2015.

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Estate Planning After Tax Reform

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanTax Reform has not been enacted at the time this article is written, but it appears likely that some variation of the House and Senate proposals will be enacted. Because the legislation will so dramatically impact estate planning, it seems worthwhile to go out on the proverbial writing limb and discuss planning points practitioners should consider. Whether or not the estate tax is scheduled for repeal, if the exemption is doubled as is proposed under each bill the practical result for most clients is that the federal estate tax will be largely irrelevant. But that does not mean that planning is irrelevant, only different and for most clients, independent of estate tax. The following are ideas that will hopefully help practitioners transition the estate planning services they provide to clients in light of these changes. Exercise caution to confirm the final outcome of the tax legislation:

Estate Planning Documents

►Old Wills: Client’s wills and revocable trusts need to be reviewed. If the estate tax exemption doubles, or is even repealed at some future date, how will that effect the client’s dispositive scheme? Many clients have never updated their documents and plans to address the ongoing changes of the exemption amount and the consequences for some are minor but for others disastrous. If the client has not reviewed these provisions with their estate planning attorney in recent years this vital issue may have not been considered.

►New Wills: These should be rethought if we have a $10 million post-Tax Reform estate tax exemption. Most dispositive schemes were structured to meet tax law requirements that simply will be irrelevant for most clients. So, for new documents the planning should begin with and focus on what the client wishes. But, without the necessity for trusts for tax planning purposes many clients may opt for simple outright bequests. While that is seductive from a cost and ease of handling perspective, it could be damaging for beneficiaries in that the protection afforded trusts will be lost. Thus, practitioners should educate clients about the importance of the continued use of trusts in their documents for non-estate tax reasons. Finally, while it may be a hard sell for many clients considering a $10 million exemption, trusts might still be useful in the event the estate tax laws change again in the future. Many commentators have speculated that in 2020 there may be a revision of the tax laws rolling back the favorable estate tax changes being considered as part of Tax Reform. Thus, however unpleasant clients might find continued tax planning, it may well prove like the old adage, “better safe than sorry.” Thus, including more traditional tax oriented planning in wills, even if the current exemptions seem “out of sight” for many clients might be prudent. If the cost of doing so is nominal, the only downside might be a slightly longer document.

► Existing Credit Shelter Trusts: When a client’s spouse died years ago a bypass or credit shelter trust may have been formed with assets equal to the then federal exemption amount (or the state exemption amount if lower). Many of the wills (or revocable trusts) governing this were created when the federal estate tax exemption was much lower, perhaps $1 million. Does this trust make sense to retain now? If Tax Reform doubles the exemption it may make even less sense to retain as the old credit shelter trust might just keep assets outside the estate missing a basis step up on death. That trade-off, missing out on the basis step up to avoid capital gains tax in exchange for saving an estate tax, may have made sense when the estate was expected to face an estate tax of 50%+. Now, with no estate tax savings but a loss of basis step-up it may be a terrible tax result. For some, it may be feasible to terminate and distribute credit shelter trust assets thereby assuring a basis step up and avoiding future professional fees to administer the trust. Be certain to discuss all the pros and cons with the client before taking action. If the client has health or aging challenges the trust may be a helpful safeguard. If the assets are distributed and the beneficiary receiving the assets is sued or divorced the assets may be lost. Try to educate clients about the pros and cons of retaining existing irrevocable trusts for divorce and asset protection even if they no longer serve their initial estate tax minimization purpose.

► Existing Life Insurance Trusts: Unlike credit shelter trusts there should be no basis step up issues for life insurance trusts (since insurance does not face that issue) but evaluate what clients should do with old life insurance trusts holding life insurance intended to pay an estate tax that may never be relevant. While the simple answer might be cancel the insurance, and terminate the useless trust, that will likely be too simplistic an approach for several reasons. The liquidity the insurance might provide may be useful if the estate includes a family business or real estate holdings. Perhaps the insurance can be repurposed into something else. Might exchanging a life insurance policy for an annuity meet current financial or retirement goals? If so does the trust reasonably permit the distributions necessary to make that feasible if the insurance issues can be resolved? If in fact cancelling the insurance is the right answer there may be several options. The policy might be converted into a paid-up policy at a lower face amount thus reducing the plan which may be more appropriate given the loss of estate tax rationale. Perhaps the policy can be sold into a secondary market?

► Existing Irrevocable Trusts: Bear in mind that trusts that are supposedly irrevocable might be changed in many ways through decanting (merging) under state law into a new trust that has different administrative provisions (investment provisions, C corporation provisions, distribution provisions, etc.). So that an old trust can be updated to the new tax environment by not only changing assets as discussed in preceding paragraphs, but by re-writing many portions of the trust. If you find that this will be useful confer with the client’s estate planner to see how far the re-write can reasonably be taken and the costs involved.

►Powers of attorney: Most forms include gift provisions. A common gift provision is to permit annual exclusion gifts to all descendants. Some even include the right to make gifts for tuition and medical expenses of permissible donees. Is this appropriate or necessary? Most of these forms were created when the estate tax exemption was a mere $600,000. At this juncture that gift provision may be irrelevant for estate tax purposes as the client is unlikely to ever face an estate tax. But it may provide an Achilles heel for elder financial abuse. If so, suggest the client meet with their estate planner and sign new powers of attorney that prohibit gifts.

► New Irrevocable Trusts: New trusts should include more flexibility. The tax laws remain uncertain. Most significantly, with the new high estate tax exemptions clients might well transfer larger portions of their wealth into irrevocable trusts to use as much exemption as they can. This will make sense for wealthy clients that want to lock in the new higher gift tax exemption before a future Congress changes it to a less favorable level. However, this will require that clients have as much access as feasible to the trust assets. Thus, domestic asset protection trusts (“DAPTs”) and spousal lifetime access trusts, in which the client or the client’s spouse respectively are named beneficiaries will be more common.

Income tax planning for trusts might be dramatically affected. For clients living in high tax states, the loss of state and local tax deductions might make it advisable for some new trusts to be structured as non-grantor trusts to avoid high state income taxes that won’t be deductible. The ING trusts, intentionally non-grantor trusts, might not be the optimate approach for many of these clients as they will benefit from using gift tax exemption now to protect that exemption from future adverse legislative changes. This might push for a new type completed non-grantor trust that differs from the more traditional ING approach.

Entity Planning

►C versus S Corporation: The new tax laws, depending on their final form, might change the calculations as to whether particular businesses should be operated as S corporations or C corporations. If the format of the entity is changed be certain that any appropriate changes are made to the client’s estate planning documents. For example, if specific bequests are made in interests in a named entity and that entity changes, the bequest will have to be changed (e.g. the will updated). Also, only certain types of trusts (grantor, QSST, ESBT) can hold S corporation shares so if an S corporation format is opted for the estate planning documents may have to be updated for that as well.

► Pass-Through Entities: It is not clear at the time of this article being written what rules will be adopted as to pass-through entities. The House and Senate proposals are quite different. Practitioners should review and understand the final format and then consider the many options for how planning may be impacted. The key appears to be what steps may be advisable to secure or maximize the lower tax rates potentially available to pass-through entity income. The House version provided that 30% of income deemed to be earned from an active business activity will be taxed at a favorable rate of 25% and 70% of income will be taxed as compensation. This may affect whether a client should be or remain active, retire or take other steps. As to trusts decisions and changes may have to be made to qualify for this benefit. If the trustee is active in the business might that have a different result under the House version than a trust for which the Trustee is inactive? How will directed trusts be treated for these purposes? Might changing trustees to someone who is not active in the business provide a different result?

The Senate version specifically states that the favorable 23% deduction wouldn’t apply to business income earned by trusts and estates. It’s unclear whether the business income would retain its character as business income eligible for the 23% deduction when distributed to a beneficiary. If a trust is a QSST and income flows through to the beneficiary from the trust might that affect the result? Will in contrast income of a business held in an ESBT be trapped at the costlier trust level without benefit of this rule whereas S corporation stock owned outside of a trust would benefit from the lower more favorable tax rate? What this all might mean is uncertain at present. If the Senate version is enacted, it would create a significant tax disadvantage for trust owned businesses. Perhaps some trusts might be dissolved if feasible, but for most the loss of estate tax (assuming repeal does not in fact occur) and asset protection benefits would make dissolution unpalatable. Might pass-through entities owned by trusts structure consulting or other agreements with non-trust owned entities to endeavor to qualify some portion of the income earned for the more favorable tax rate?

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

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Technology and CPA Estate and Longevity Planning

  • Written by Martin M. Shenkman, CPA, MBA, PFS, AEP, JD

mug martin shenkmanEstate planning is a vital service for clients. While historically estate planning may have focused on estate tax minimization planning, for most clients estate taxes are much less of a concern, if any at all. The focus for all but the wealthiest clients is shifting to longevity planning and other non-tax aspects of estate planning. Practitioners can capitalize on this dynamic by modifying practice procedures, implementing new processes and capitalizing on some of the advances technology can offer. In some instances, how estate planning matters should be handled might differ from how other practice areas are handled. Many of the practical points below are simple “off-label” applications of existing software to address some of the unique aspects of the CPA firm’s estate planning clients.

Engagement Letters

Practitioners should periodically review estate planning engagement letters to update them to reflect new ethics rules, changing practices, integration of new technology into their practice, and other factors. For example, if the firm changes its policy on email retention or general document retention, that might be communicated to clients in the estate planning engagement letter. While some practices may destroy documents after a certain number of years, many estate planning documents should be retained indefinitely. From a tax perspective, an estate tax return Form 706 should be retained indefinitely because it can provide vital tax basis data in future years when an asset is sold. But there is another perspective to document retention for estate planning. Practitioner’s meeting notes may be invaluable to demonstrate a client’s state of mind or what the client wished to achieve in terms of his or her dispositive scheme, business succession plan, etc. CPAs will often engage in these discussions and document them. Saving those documents for when they might be needed could be a priceless benefit to the client and his or her family. These considerations may be unique to the estate planning department and it may need different approaches than the firm in general. With technology having effectively reduced the cost of document retention to near zero, this longer duration policy should be evaluated.

Practice Characteristics

A practice that predominantly focuses on a large volume of compliance work for lower wealth clients will have a different emphasis than a boutique firm serving a more limited number of ultra-high net worth clients seeking a different level of service and relationship. The communications, engagement letters and other aspects of administering the estate planning practice must be modified accordingly.

While this is certainly obvious it is common to see practitioners implementing forms they obtain without adequately tailoring them to the characteristics of their client base which may differ significantly from the clients of the person who created the procedure or form.

Communications Generally

As the focus of estate planning shifts from estate tax minimization to longevity planning, client needs and goals are evolving. A client who had been consumed with complex tax minimization strategies may have been more transactional in orientation. Complete the note sale or GRATs and thereafter, a much lower level of service may have been viewed as necessary to maintain that plan: e.g., a grantor Form 1041 for the purchasing trust and an annual note payment. These clients may not have required much communication other than a reminder to submit tax compliance information for the trust and a tickler to remind the client to meet or GRAT payments. In contrast, the later-life planning client will require more hands-on regular work from inception of the engagement and throughout their lives. This might include regular write-up of financial and other transactions, which may evolve into bill paying and more as the client’s health declines. These clients may welcome ongoing communication of ideas and planning thoughts.

For this work to be profitable, many aspects will have to be automated and handled in as routine a manner as possible. It will also be important to educate the clients that the services involved are not merely bookkeeping, but monitoring and higher level value added services that justify the billing rates of a partner overseeing the matter. Different forms of communication may be warranted.

Communications Incorporated into Monthly Billing

Your practice is likely sending out monthly client bills. The cost to process the bills and mail them is a fixed cost. You can use regular monthly billing as a means of communication, not only as a means of billing. For example, footers can easily be added to each month’s bills so that they appear on all client bills or bills of selected clients. These footers can include practice information that will protect the practitioner, as well as planning tips. This can provide a no cost means of communication with clients. Many firms rely on monthly electronic newsletters to communicate with clients. While this is a low cost means of communicating with many clients, is it really effective for the typical estate planning client? Many estate planning clients are much older than other clients of the firm, and many simply do not use email or even if they do are not so facile with it that they will really click through all the links to read a relevant article in an e-newsletter. What is the open rate on your firm’s newsletter? Is that really high enough to rely on as a means of client communication? Adding informative footers to a bill will have a 100% visibility rate (if not you have a receivables issue!). This might include information about new tax developments, suggestions as to steps many clients should consider, a new firm document retention policy or a change in how Social Security is calculated that might affect the client. For example, the following are illustrations of footers to add to the billing program and which could be updated every month so that over the course of any time period every client will receive a range of cautions and planning ideas. Just as important, these will be saved as a permanent record of a communication with the client that might prove protective to the practitioner if a problem later arises. These can be very protective of the practitioner if a client later claims they were not informed of certain planning opportunities or changes in the law.

• Aging: As we age cognitive abilities can decline. Studies have shown that from age 60 onward the skills to make financial decisions decline, but our perception of our financial decision making ability does not. That creates a widening gap that those committing elder financial abuse exploit. A CPA firm can write-up your personal financial records and monitor them with periodic reports. This interim step may identify and prevent elder abuse or other costly mistakes. It can also lay the for that firm to take over bill paying if that should become advisable at a later date.

• Trust Administration: The cost of creating an informal accounting each year for a trust when the tax return is prepared may be modest. If a formal accounting is not being prepared, at least consider this lesser step. It will provide better and more understandable information to communicate to beneficiaries who are required to receive notice of trust information and it will preserve records that will make it much more economical to create a formal or court mandated accounting should that be necessary in the future.

• Federal Tax Law Changes: President Trump proposed the repeal of the estate tax. With the Republicans controlling the House and Senate this might in fact be a possibility but there is no certainty what will be done or the impact. If the estate tax is repealed will the gift tax be retained? Will a Canadian style capital gains tax on death be enacted to replace the estate tax if repealed?

• New Jersey Estate Tax Repeal: New Jersey’s estate tax exemption will increase from $675,000 to $2 million in 2017 and be repealed effective January 1, 2018. Articles in the media which suggest taxpayers need to do nothing are dangerously incorrect. While it is possible no action might suffice, the only way to understand the consequences to clients and their loved ones and heirs is to review the plan. Before canceling life insurance or changing the title to assets, talk to advisers. Wills, revocable trusts, insurance trusts, ownership of assets and much more could be effective. For those with smaller estates planning may well be less costly and simpler, but that does not suggest no planning will suffice. [use a state planning specific planning idea appropriate for your client base].

• New Fees and Billing Arrangements: All work and matters are subject to our new 2017 “Billing Arrangements,” and “Additional Engagement and Billing Terms.” This can inform clients of new billing rates, services, etc.

• Text Messages: It is not possible for the firm to maintain a record of text messages. You should assume any text message directed to personnel of this firm will not be received and will not be read. Some practitioners respond to text messages, many find it difficult. In particular, it may not be feasible to secure or save text messages so they will be part of the firms’ permanent document management system. Thus, you might wish to discourage these.

• Annual Review: Every client, entity, and trust requires an annual review to monitor changes in the law, changes in circumstances, annual consents and actions, operations, etc. Failure to participate in an annual meeting, and coordinate all advisers (estate planning attorney, corporate attorney, wealth manager, estate planner, insurance consultant, CPA, etc.), will undermine the planning objectives. Without regular review and maintenance few estate plans will succeed. Use a footer on a regular monthly bill to remind clients of the need to schedule an appointment.

Articles Enclosed with Monthly Billing

Your practice is likely sending out monthly client bills. Consider enclosing with each month’s bill a copy of an article a staff member has published, or if none are available, provide a short planning letter or checklist. This is another almost no-cost means of communicating valuable information. If you can earmark estate planning clients, or better yet, existing clients who could also prospectively become estate planning clients, enclose a short planning piece with each bill. This tactic is low tech, low cost, but effective. This is important since, as noted above, many older clients who are the target of estate planning and later life services are not as comfortable with email communications as other clients. Moreover, few prospective estate and later life planning clients understand the scope of valuable services an independent CPA firm can provide as they age. These regular “tidbits” can help demonstrate that.

Example: Most client powers of attorney include boilerplate gift provisions. Most were done when the estate tax exemption was much lower. Now that the exemption is so high, is there really any tax benefit to a gift provision? Might that gift provision serve as an opportunity for elder financial abuse? While CPAs are not going to prepare a new power of attorney, is anyone advising clients of this issue. There are many simple, practical but important issues that can lend themselves to this type of planning. It can be quite beneficial from a practice development perspective.

Calendar System

CPAs have robust calendaring capability to monitor compliance requirements. Those same abilities can be tweaked to provide valuable help to estate planning clients and to protect the practitioner from claims in the estate planning realm. Save covering emails into the client file to corroborate communications. Use the calendaring system to remind clients of the need for an annual estate planning meeting. Periodic meetings, even if done by a simple web conference to minimize costs (see below) are critical to keep any sophisticated estate plan on track. If a client has complex trusts, regular monitoring is necessary. Merely assuring that a periodic note or annuity payment is made is not sufficient. For other clients an annual or every other year meeting is necessary to assure the planning team is coordinated and to observe changes in the client’s circumstances or abilities. For aging clients regular meetings are vital to the client’s future security. If too many years pass between meetings the opportunities for the practitioner to observe a decline in physical and/or cognitive abilities and provide help may be lost. Those lost opportunities could mean the difference between the client becoming a victim of elder financial abuse or being saved from that tragedy. Periodic meetings may identify new services the client can benefit from. Has the time come for the CPA firm to take over bill paying? Use the calendar system to document efforts to communicate with clients and set up these periodic review meetings. For example, if a client cancels a meeting, do not delete that meeting entry from the calendar. Rather, mark it as “Cancelled by Client.” Perhaps minimize the calendar entry. Consider excluding historical calendar data from document destruction policies. Save calendar data indefinitely.

Example: Searching the client name in a case management system, or even Outlook, can provide a history of meetings and attempted meetings. Mark all client follow-up in the billing system even if as a no charge notation entry to create a history of efforts to communicate with the client.

Example: Administrative staff calling a client to schedule an update meeting should note the call in the billing system “No charge” there is a record of efforts to reach the client. These efforts can all serve as inexpensive practice development tools to garner more work from existing aging clients and help transform a mere 1040 client into a more robust later life planning client. If a child later challenges the CPA for not having helped his or her elderly parent take precautions, these records will demonstrate the efforts made.

Create Schematics of Client Plans

CPAs as a generalization are more adept at using Excel and other programs to create schematics. Few clients really understand the flow of their estate plan. As the sophistication of the plan grows, the likelihood of understanding declines. If the client’s estate planning attorney has not created simplified schematics showing the interrelationship of the many trusts, LLCs and other components of the plan, recommend the client permit the CPA firm to map out the plan. Not only might this demystify the plan, but it will help all the professionals the client works with do a better and more efficient job. Does the investment adviser really understand the nuances of asset location decisions if he or she is not clear on the various trust buckets, which are included in the estate and which are not, which are grantor trusts for income tax purposes, and which are complex trusts?

Use Inexpensive Technology to Boost Communications

While this might sound contradictory to the recommendations above, it is not. Practitioners should use the full array of technology that makes it easy and inexpensive to communicate information to clients and to corroborate that you have done so. An essential piece of information for any estate planning client is a family tree reflecting relationships. Practitioners should also gather email addresses for children, siblings, trustees and other key persons and have the client authorize them to be included in blast email communications. There is no cost to this effort, but informing family and other important people of later life and aging services the CPA firm can provide may well empower that person to be the catalyst to have the elderly client proceed with those services. Frequently, the adult child of an aging parent is the one who encourages the parent to undertake planning. Educating that adult child about the firm’s services may be more effective for practice development than all the direct communications to the client.

Email and Document Retention Policies

CPAs email retention and other policies should be reviewed in the context of estate planning needs, not just as part of an overall firm policy. Bear in mind that, whatever ethical rules or tech company recommendations may be, a challenge to a client’s dispositive scheme may not occur until decades later. The CPA, as the trusted adviser, may well have been intimately involved in the client’s decisions. Often, a long-time CPA has more involvement with these matters over a longer period of time, than the attorney who drafted the documents. Saving emails and file notes that might reflect on or corroborate the client’s wishes might be a vital service to provide the family. Practitioners should be sure these potentially vital communications are not deleted as part of a general document retention policy.

As part of such a policy, what happens to emails or work done at home or on a weekend? This might be a particular challenge for solo practitioners. One firm’s document retention policy includes the following statement: “For efficient identification, retrieval, and deletion of email and other electronic documents pursuant to this policy, attorneys and staff are required to organize and store all business record email and other electronic documents in separate folders designated for each client matter in the firm’s electronic document management system. No firm partner or staff member is permitted to store electronic business records anywhere other than the firm’s electronic document management system.” The key is to be certain all records are in fact saved into the firm system so they can be properly retained (or destroyed). This concern is one of the reasons for cautioning clients not to use text messaging to staff cell phones as a means of communication. It does not lend itself readily to being saved to the firm document management system. That point may warrant inclusion in the form engagement letter. As noted above, it can be added periodically to billing footers as a further reminder. Simply because a practice can legally destroy a file after some set number of years, e.g. six years for a tax filing statute of limitations, does not mean that it should be destroyed, especially in the estate planning context. One firm’s retention/destruction policy: “Unless otherwise specified by the Billing Partner, a destruction date equal to ten years from the date the matter is designated closed will be assigned to all files, with the following exceptions…estate plan, estate administration, files will be permanently retained."

Email Encryption

Confidentiality of client information is vital and many, perhaps most firms, now use portals that provide for encrypted emails, e.g. ShareFile, to transmit documentation with TINs, etc. This can be challenging, especially when practitioners collaborate with the client’s other advisers. Many financial institutions have firewalls that prevent access to the encrypted email portals CPAs use. What can be done in those instances? That does not mean firms should neglect the obvious. Take precautions to protect the physical office facilities, alarm systems, etc.


Collaboration might have been merely a footnote not too many years ago. Today it warrants prominent consideration and is an integral part of many estate planning practices. Estate planning is more complex and intricate considering changing demographics and what seems to be a permanent state of uncertainty as to the tax laws. A client intake form might include an authorization to be certain clients understand the importance of collaborative disclosures and provide the relevant contact at the outset of the engagement. The mere fact that the CPA estate planner has authorization to collaborate does not mean other advisers will do so. Other advisers may refuse to collaborate until they have authorization from the client. CPAs could prepare a letter from the client to all advisers authorizing and directing collaboration that the client can sign and distribute. For the aging client, CPAs may find themselves more routinely collaborating with more than just the client’s attorney and insurance consultant. Care managers, charitable giving officers and other experts might be involved to address the wide range of needs the aging client might have.

Collaborating with the Client’s Estate Planning Attorney

CPAs will often require input and information from the client’s estate planning attorney. Ideally, if collaboration occurs early in the process, while there is no issue of the client’s capacity, the client can authorize this communication. If this is not done, then facilitating the interactions will be more complex as the CPA may be constrained by the various ethical rules that might constrain the client’s attorney (this is all a good reason for regular review meetings as noted above). The attorney’s duty to represent does not end merely because of the client’s disability. See Model Rules of Professional Conduct 1.14(a). An attorney, as far as reasonably possible, is to maintain a normal client-lawyer relationship. An attorney can take protective actions depending on the circumstances. Model Rule 1.14(b). An attorney may reveal confidential information about the client when doing so to the extent reasonably necessary. Model Rule 1.14(c). This is generally limited to situations where the client is at risk for substantial physical, financial or other harm. Therefore, it may be advisable to authorize greater latitude in order for the attorney to take steps you might wish taken in less onerous circumstances.


Practitioners may balk at later life planning services viewing it as unprofitable bookkeeping work. That is a misunderstanding. While bookkeeping and bill paying may be involved, there is much more. The most valuable component of the services is not the routine or lower level bookkeeping or bill paying, most of which can be automated, but rather the monitoring and judgment of the experienced practitioner to “sniff out” potential elder abuse and other gaps that could lead to worse problems. The challenge is educating clients as to the importance and value of this work. Some tasks that had been billed on an hourly basis might now be billed on a flat fee or hybrid basis in order to be fair to the practitioner and reflect the value added. When rates or fee structures are changed, a footer could be incorporated on the bill explaining that an increase or other change has been put into effect. Many billing systems easily accommodate the addition of standard footers to some or all bills to facilitate such communication.

Technology Changes Client Vetting

Practitioners should take steps in advance of being retained. Some refer to these preliminary steps as “pre-engagement.” Turning away a bad case or client is important to the security, success and atmosphere of every firm. This is especially important in the estate planning space. Example, if the prospect has significant assets overseas what issues might this suggest with respect to reporting? Has the prospect complied with all the requisite reporting requirements? If the engagement involves the potential creation of Domestic Asset Protection Trusts (DAPTs) could providing assistance place the CPA at risk of being an aider and abettor to the client’s overly aggressive asset protection planning? It may be advisable to perform some due diligence on a prospective client before the prospect becomes an actual client. The internet has made it easy and, other than staff time, cost free. Have staff search the client’s names, and business names, prior to accepting the engagement. If issues are identified, address them before accepting the prospect as a client. If a prospective client searches raise worries, e.g. a physician prospect who has scores of negative complaints that sound substantive, perhaps the firm should consider whether that reputation risk is something it is willing to take on in the context of estate planning that typically will entail transferring assets into entities and irrevocable trusts. If the firm is willing to accept the client, it might choose to discuss these concerns up front as well as steps and costs of addressing them.


Technology is evolving and has and continues to change how CPA firms providing later life/aging and estate planning services should manage this component of their practices.

Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.

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