Law Over Borders Comparative Legal Guide 2025

INTRODUCTION

The United States imposes taxes and has legislatures and courts at the national, state and local levels. While there are a large number of taxes to consider, the taxes with which this chapter is predominantly concerned are income taxes (which are paid by individuals, estates, trusts, business and other entities, etc. at the federal, state and local levels) and transfer taxes (i.e., estate, gift and generation-skipping transfer (GST) taxes, which are paid by individuals, trusts and estates at the federal and state levels). Rates of taxation can vary dramatically (as will be illustrated in the separate sections below), depending upon whether one lives in (or is an estate, trust or entity located in) a state or city that imposes the relevant taxes. The laws of estates, trusts and property are largely (though not exclusively) imposed at the state level. The federal legislature is in session and passes new laws every year. Some state legislatures are in session every year, and others meet episodically. Private client litigations can be heard, depending upon the facts and circumstances, in either federal or state-level courts. All lawyers in the United States are permitted to appear in court, though generally only those lawyers who specialize in litigation do.

1. TAX AND WEALTH PLANNING

1.1. National legislative and regulatory developments

During 2024, the ongoing recovery from COVID-19, the war in Ukraine, global inflation, the Tax Cuts and Jobs Act (TCJA), the uncertainty about the Build Back Better Act (BBBA), the Corporate Transparency Act (CTA), and the Inflation Reduction Act (IRA) dominated the planning landscape.

In our 2021 through 2024 Year-End Estate Planning Advisories, there was a lot of uncertainty about whether the BBBA would be enacted and, if so, whether it would bring about a change in the estate, gift and GST tax exemptions. At the end of the day, while a form of the BBBA passed the House (which form did not include a change to the aforementioned exemption amounts), the BBBA ended up being dead on arrival in the Senate.

The TCJA made significant changes to individual and corporate income taxes, restructured international tax rules, provided a deduction for pass-through income and eliminated many itemized deductions. Most significantly for estate planning purposes, the TCJA temporarily doubled the estate, gift and GST tax exemptions. Absent legislative action by Congress, many of the changes imposed under the TCJA — including the increased exemptions — will sunset after December 31, 2025, with the laws currently scheduled to revert back to those that existed prior to the TCJA. Given the uncertain political landscape, practitioners continue to view this temporary increase in exemption amounts as an unprecedented opportunity for valuable estate planning. But with the inauguration of Donald Trump as President scheduled for January 20, 2025, the probability is now much greater that the increased exemptions will not sunset (though of course they may be modified).

While the permanency of the TCJA's provisions still remains uncertain, the current environment provides a great deal of opportunity for new planning. As the existing tax landscape is still in effect as of the date of submitting this chapter, and looks unlikely to change in favor of higher taxes, particularly in light of the results of the 2024 national elections (resulting in Republican control of the White House and of both Houses), the following are some key income and transfer tax exemption and rate changes under the TCJA, including inflation adjusted amounts for 2022 and 2023.

Federal estate, GST and gift tax rates

For 2025, the federal estate, gift and GST applicable exclusion amounts are USD 13.99 million. The maximum rate for federal estate, gift and GST taxes is 40%. Absent any change by Congress, the maximum rate for federal estate, gift and GST taxes will remain at 40%.

Annual gift tax exemption

Each year individuals are entitled to make gifts using the "Annual Exclusion Amount" without incurring gift tax or using any of their lifetime applicable exclusion amount against estate and gift tax. The Annual Exclusion Amount is USD 19,000 per donee in 2025. Thus, this year, a married couple together can gift USD 38,000 to each donee without gift tax consequences. The limitation on tax-free annual gifts made to non-citizen spouses will increase to USD 190,000 in 2025.

Federal income tax rates

• The TCJA provides for seven individual income tax brackets, with a maximum rate of 37%. The 37% tax rate will affect single taxpayers whose income exceeds USD 518,400 (indexed for inflation, and USD 626,350 in 2025) and married taxpayers filing jointly whose income exceeds USD 622,050 (indexed for inflation and USD 751,600 in 2025). Estates and trusts will reach the maximum rate with taxable income of more than USD 12,950 (indexed for inflation, and USD 15,650 in 2025).
• A 0% capital gains rate applies for single taxpayers with income up to USD 40,000 (indexed for inflation, and USD 47,025 for 2025) or married taxpayers filing jointly with income up to USD 80,000 (indexed for inflation, and USD 94,050 in 2025). A 15% capital gains rate applies for income above this threshold up to USD 441,450 for single taxpayers (indexed for inflation, and USD 518,900 in 2025) and USD 496,600 for married taxpayers filing jointly (indexed for inflation, and USD 583,750 in 2025). The 20% capital gains rate applies above these thresholds.
• The standard deduction was increased to USD 12,000 for single taxpayers (indexed for inflation, and USD 15,000 for 2025) and USD 24,000 for married taxpayers filing jointly (indexed for inflation, and USD 30,000 in 2025).
• The threshold for the imposition of the 3.8% Medicare surtax on investment income and 0.9% Medicare surtax on earned income is USD 200,000 for single taxpayers, USD 250,000 for married taxpayers filing jointly and USD 12,500 for trusts and estates (adjusted for inflation).

Tax Cuts and Jobs Act

The TCJA, which was signed into law on December 22, 2017 and most of which became effective on January 1, 2018, has proven to have many implications for domestic corporate and individual income tax, as well as federal gift, estate and GST tax, fiduciary income tax and international tax. Since the TCJA's enactment, various technical corrections have been issued, as has the Internal Revenue Service's (IRS) guidance on certain aspects of the new tax regime. In light of the TCJA and recent IRS guidance, it is important to review existing estate plans, consider future planning to take advantage of the increased exemption amounts, and maintain flexibility to allow for future strategic planning. Because of the continued importance of the TCJA's new tax laws, the most significant changes and recent guidance are summarized below.

Gift, estate and GST exemptions, rates and stepped-up basis. The TCJA retained the federal estate, gift and GST tax rates at a top rate of 40%, as well as the marked-to-market income tax basis for assets includible in a decedent's taxable estate at death.

While the federal gift, estate and GST taxes were not repealed by the TCJA, fewer taxpayers will be subject to these transfer taxes due to the TCJA's increase of the related exemption amounts. Under the TCJA, the base federal gift, estate and GST tax exemptions doubled from USD 5 million per person to USD 10 million per person, indexed for inflation. As noted above, the relevant exemption amount for 2025 is USD 13.99 million per person, resulting in a married couple's ability to pass nearly USD 28 million worth of assets free of federal estate, gift and GST taxes. These amounts have increased each year until the end of 2025, with inflation adjustments to be determined by the chained Consumer Price Index (CPI) (which will lead to smaller increases in the relevant exemption amounts in future years than would have resulted from the previously used traditional CPI). Without further legislative action, the increased exemption amounts will sunset, and the prior exemption amounts (indexed for inflation, using the chained CPI figure) will be restored, beginning in 2026. Most people are predicting that, under a Trump administration, the prior exemption amounts will not be restored, but time will tell.

While the federal estate tax exemption amount has increased, note that multiple U.S. states impose a state-level estate or inheritance tax. The estate tax exemption amount in some of these states matches, or will match, the increased federal estate tax exemption amount. However, in other states, such as Illinois and New York, the state estate tax exemption amount will not increase with the federal estate tax exemption amount, absent a change in relevant state law. Additionally, states may have their own laws that impact planning in that state.

The federal estate tax exemption that applies to non-resident aliens was not increased under the TCJA. Under current law, the exemption for non-resident aliens remains at USD 60,000 (absent the application of an estate tax treaty).

"Anti-clawback" regulations. While there is uncertainty about whether future legislation will address the sunset, either by extending the new exemption amounts beyond 2025 or changing the exemption amounts further, the IRS has issued guidance on how it will address differences between the exemption amounts at the date of a gift and exemption amounts at the date of a taxpayer's death (often referred to as a "clawback"). In Proposed Regulations REG-106706-18, the IRS clarified that a taxpayer who takes advantage of the current lifetime gift tax exemption will not be penalized, if the exemption amount is lower at the taxpayer's death. If a taxpayer dies on or after January 1, 2026, having used more than the statutory USD 5 million basic exclusion (indexed for inflation) but less than the USD 10 million basic exclusion (indexed for inflation), the taxpayer will be allowed a basic exclusion equal to the amount of the basic exclusion the taxpayer had used. However, any exemption unused during a period of higher basic exclusion amounts will not be allowed as an additional basic exclusion upon death. Additionally, the IRS clarified that if a taxpayer exhausted their basic exclusion amount with pre-2018 gifts and paid gift tax, then made additional gifts or died during a period of high basic exclusion amounts, the higher exclusion will not be reduced by a prior gift on which gift tax was paid.

The IRS issued further proposed regulations in April 2022. In REG-118913-21, the IRS provided an exception to the anti-clawback rule that preserves the benefits of the temporarily higher basic exclusion amount for certain transfers that are includable, or treated as includable, in a decedent's gross estate under Internal Revenue Code (IRC) section 2001(b).

Income taxation of trusts and estates. The TCJA added new IRC section 67(g), which applies to trusts, estates, and individuals, and provides that no miscellaneous itemized deductions (all deductions other than those specifically listed in IRC section 67(b)) are available until the TCJA sunsets after December 31, 2025. While the TCJA doubled the standard deduction for individuals, taxpayers that are trusts and estates are not provided a standard deduction. Under the TCJA, trust investment management fees are no longer deductible. After the enactment of the TCJA, there was uncertainty about the deductibility of fees directly related to the administration of a trust or estate (e.g., fiduciary compensation, legal fees, appraisals, accountings, etc.). Historically, these fees had been deductible under IRC section 67(e) and without regard to whether they were miscellaneous itemized deductions or not. In Notice 2018-61, the Treasury Department ("Treasury") issued guidance on whether new IRC section 67(g) eliminates these deductions. This notice provides that expenses under IRC section 67(e) are not itemized deductions and therefore are not suspended under new IRC section 67(g). Note that only expenses incurred solely because the property is held in an estate or trust will be deductible. While the notice was effective July 13, 2018, estates and non-grantor trusts may rely on its guidance for the entire taxable year beginning after December 31, 2017.

New IRC section 67(g) may also impact a beneficiary's ability to deduct excess deductions or losses of an estate or trust upon termination. Prior to the TCJA, it was common tax planning to carry out unused deductions of a trust or estate to the beneficiary upon termination, so the deductions could be used on the beneficiary's personal income tax return. Under new IRC section 67(g), these deductions are arguably miscellaneous itemized deductions and therefore would no longer be deductible by the beneficiary. Notice 2018-61 notes that the IRS and Treasury recognize that section 67(g) may impact a beneficiary's ability to deduct unused deductions upon the termination of a trust or an estate, and the IRS and Treasury intend to issue regulations in this area and request comments on this issue. In the interim, taxpayers should consult with their advisors about whether it would be prudent to engage in planning to utilize (to the extent permissible) these deductions at the trust or estate level.

Finally, the TCJA made a number of taxpayer-friendly changes to the taxation of electing small business trusts (ESBTs). Non-resident aliens are now permissible potential beneficiaries of ESBTs. Also, the charitable deduction rules for ESBTs are now governed by IRC section 170 instead of IRC section 642(c), which means that several restrictions imposed by IRC section 642(c) (e.g., that the charitable donation be paid out of income and pursuant to the terms of the trust) no longer apply. Additionally, an ESBT's excess charitable deductions can now be carried forward five years, but the percentage limitations and substantiation requirements will now apply.

Income tax. The TCJA also has implications for married couples who are divorcing or contemplating a divorce. The TCJA changed prior law to provide that alimony payments will not be deductible by the payor and will not be deemed to be income to the recipient. The TCJA also repealed IRC section 682, which generally provided that if a taxpayer created a grantor trust for the benefit of their spouse, the trust income would not be taxed as a grantor trust as to the grantor-spouse after divorce to the extent of any fiduciary accounting income the recipient-spouse is entitled to receive. Due to the repeal of section 682, a former spouse's beneficial interest in a trust may cause the trust to be taxed as a grantor trust as to the grantor-spouse even after divorce. These changes to the taxation of alimony and the repeal of IRC section 682 do not sunset after 2025; they apply to any divorce or separation instrument executed after December 31, 2018, or any divorce or separation instrument executed before that date but later modified, if the modification expressly provides that changes made by the TCJA should apply to the modification.

Charitable deduction. The TCJA increases the percentage limitation on cash contributions to public charities from 50% of the donor's contribution base (generally, the donor's adjusted gross income) to 60%. This 60% limitation applies if only cash gifts are made to public charities. The deduction limitations remain the same for donations of other assets, such as stock, real estate, and tangible property.

Business entities. The TCJA reduced the top corporate income tax rate to 21%. To decrease the discrepancy in the tax rates between C corporations and pass-through entities, the TCJA also addressed taxation of pass-through entities (partnerships, limited liability companies, S corporations or sole proprietorships) that would typically be taxed at the rate of the individual owners. Generally, new section 199A provides a deduction for the individual owner of 20% of the owner's qualified business income (QBI). This deduction has the effect of reducing the effective income tax rate for an owner in the highest tax bracket from 37% to 29.6%. The deduction is subject to numerous limitations and exceptions. Notably, the deduction may be limited for taxpayers over a certain taxable income threshold, USD 163,000 for single taxpayers (indexed for inflation, and USD 182,100 for 2023) and USD 326,000 for married taxpayers filing jointly (indexed for inflation, and USD 364,200 in 2023). For these taxpayers, the deduction may be subject to limitations based on whether the entity is a "specified service trade or business" (an SSTB, which is generally a trade or business involving the performance of services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, or where the principal asset is the reputation or skill of one or more employees), the W-2 wages paid by the business entity, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. The IRS issued Final Regulations on section 199A on January 18, 2019, followed by a slightly corrected version on February 1, 2019. The IRS also issued Rev. Proc. 2019-11 providing guidance on calculating W-2 wages for the purposes of section 199A, and Notice 2019-07 providing a safe harbor for when a rental real estate enterprise will qualify as a business for the purposes of section 199A. The rules surrounding the deduction, as well as the Final Regulations, are very complex, and taxpayers should consult with their tax advisors to determine the implications of the section 199A deduction. Section 199A is effective until December 31, 2025.

Qualified Opportunity Zones. The TCJA provides federal income tax benefits for investing in businesses located in "Qualified Opportunity Zones." Opportunity Zones are designed to spur economic development and job creation in distressed low-income communities in all 50 states, the District of Columbia, and U.S. possessions. By investing eligible capital in a Qualified Opportunity Fund (a corporation or partnership that has at least 90% of its assets invested in Qualified Opportunity Zone property on two measuring dates each year) that has invested in Qualified Opportunity Zone property in any of these communities, and meeting certain other requirements, investors can gain certain tax benefits, including the deferral or exclusion of existing gain or non-recognition of gain. The IRS issued proposed regulations and Rev. Rul. 2018-29 on October 19, 2018, and a second set of proposed regulations on April 17, 2019 which addressed, among other issues, what transactions would trigger recognition of previously deferred gains. The Qualified Opportunity Zone regime is complex and may impact the tax and estate planning of investors. Taxpayers should consult with their tax and estate planning advisors to discuss the potential tax benefits and implications.

Corporate Transparency Act (CTA)

Passed into law in 2021, the CTA set out to create a beneficial ownership registry for certain domestic entities and foreign entities doing business in the United States (i.e., entities that are either created by a filing with a secretary of state in the United States or are required to file a document to do business in a state in the United States). The goal behind the new beneficial ownership registry is to combat tax evasion, money laundering, and other unsavory acts perpetuated through dealings in the United States. Specifically, the CTA requires a Reporting Company (defined below) to file information regarding itself, its Beneficial Owners (defined below), and its Company Applicant (defined below). While enacted on January 1, 2021, practitioners waited for over a year and a half for the Financial Crimes Enforcement Network of the U.S. Department of the Treasury (FinCEN) to publish final regulations regarding the CTA and its reporting requirements. On September 30, 2022, FinCEN issued such final regulations implementing the CTA's beneficial ownership reporting requirements.

Reporting Companies formed before January 1, 2024 must file their initial reports with FinCEN by January 1, 2025, provided that such Reporting Companies shall not be required to submit information regarding their initial Company Applicant. Reporting Companies formed on or after January 1, 2024 must file their initial reports with FinCEN within 30 days of formation. Any changes to a Reporting Company's Beneficial Owners must be reported within 30 days of such change. Failure to comply with the CTA's requirements may result in stern penalties. As of the date of this chapter, however, a Federal appellate court has issued a nationwide injunction on the enforcement of CTA. Given that CTA was passed in 2021 over the veto of then President Trump, one can expect renewed attempts to repeal CTA, which is the only Federal registry of beneficial ownership in the United States. Some states have state-level equivalents of CTA.

Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act)

The SECURE Act was signed into law by President Trump on December 20, 2019 as part of the Consolidated Appropriations Act. Under the prior law, an IRA owner had to begin withdrawing required minimum distributions (RMDs) from a traditional IRA by April 1 of the year following the year the account owner turned 70 and a half. The SECURE Act increased the required minimum distribution age for taking RMDs from traditional IRAs from 70 and a half to 72. This change is effective for distributions required to be made after December 31, 2019, for individuals who attain age 70 and a half after that date.

Additionally, the SECURE Act changed the distributions of retirement accounts after the death of an IRA account owner.

On December 29, 2022, the SECURE Act 2.0 was enacted, and the IRS released final regulations on July 18, 2024. Among other liberalizations are the extension of the age for starting minimum distributions to 73 or 75, depending upon the individual's year of birth.

The Inflation Reduction Act

On August 16, 2022, President Biden signed the IRA into law. In the estate-planning context, the IRA is significant more for what did not end up in the finalized version, rather than what did. For additional context, it is important to first note what was contained in the BBBA, which passed the House in November 2021. The BBBA contained provisions that would have: (i) decreased the estate, gift and GST tax exemptions; (ii) changed the grantor trust rules to significantly limit the wealth transfer technique of selling assets to an intentionally defective grantor trust; and (iii) eliminated valuation discounts for non-operating business property when valuing ownership interests in privately held companies. The BBBA also had provisions increasing the top marginal income tax rate and the top long-term capital gains rate. None of these proposals made it into the IRA. Additionally, another item missing from the IRA is the elimination of the current state and local tax (SALT) limit. The current federal deduction of USD 10,000 for SALT was left in place, but it is important to be reminded that the limit is scheduled to sunset at the end of 2025.

Although estate planners and clients alike are able to breathe a little easier considering what was not in the IRA, it is important to keep in mind that the absence of certain proposals from the IRA does not foreclose the possibility of the next Congress trying to bring provisions similar to the BBBA in future tax-focused legislation. Under a Trump administration, this promises to be a changing landscape.

Treasury Priority Guidance

On October 23, 2024, Treasury released its 2024–2025 Priority Guidance Plan, which contains 231 guidance projects that are priorities for allocating Treasury and IRS resources during the 12-month period from July 1, 2024 through June 30, 2025. Of these 231 projects, a dozen or so were included in the gifts and estates and trusts section, but are of questionable likelihood under a Trump administration.

1.2. Local legislative and regulatory developments

Income tax

The TCJA made significant changes to the federal income tax, including by limiting the SALT deduction to USD 10,000 for jointly filing taxpayers, unmarried taxpayers, and trusts. In response to the cap on the SALT deduction, a number of states implemented workarounds to the SALT deduction limit by allowing residents to "contribute" to state-controlled charitable funds in exchange for SALT credits. Other states began to allow qualifying entities required to file tax returns within the state to make an election to pay a pass-through entity tax (PTET), as opposed to the income tax being passed through to the individuals who own the entity.

This chapter does not provide a detailed, state-by-state analysis of the PTET election or workaround, but rather provides guidance as to the complexity of this now widely accepted strategy. As the PTET appears, for now, to be the sole workaround to the TCJA's SALT deduction cap, it is crucial for each individual taxpayer and entity to discuss the benefits and potential pitfalls of the election with experienced counsel prior to electing to opt in or out of this tax regime.

This chapter also cannot possibly recite the various legislative and regulatory developments in all 50 states. However, the following are some of the more illustrative developments to look out for. Some states have begun enacting legislation to permit:

• Directed Trusts;
• longer or no rules against perpetuities;
• remote notarization;
• simpler probate procedures for smaller estates;
• modifications to trusts;
• protections for use of powers of attorney;
• electronic wills and remote witnessing;
• state-level reporting of beneficial ownership of certain entities;
• transfer on death deeds;
• modernizing rules for income and principal allocations and adjustments; and
• surrogate decision making.

It is important to take local advice depending upon the state involved.

1.3. National case law developments

United States v. Paulson, 131 AFTR 2d 2023-1743 (9th Cir. May 17, 2023) [EP116-125]

Allen Paulson (the "Decedent") died on July 19, 2000, survived by his third wife Madeleine Pickens ("Madeleine"), three sons from a prior marriage, Richard Paulson ("Richard"), James Paulson ("James") and John Michael Paulson, and several grandchildren, including granddaughter Crystal Christensen ("Crystal"). Richard post-deceased his father and was survived by his wife, Vikki Paulson ("Vikki"). The Decedent's gross estate, valued at approximately USD 200,000,000, was mostly held in a revocable trust (the "Trust"). Years after the Decedent's death, following multiple disputes between the Decedent's fiduciaries and beneficiaries, audit inquiries, and failed elections to defer payment of the Decedent's federal estate taxes, roughly USD 10,000,000 of federal estate taxes, plus interest and penalties, remained unpaid. The United States ultimately brought suit against certain of the Decedent's heirs in their capacities as trustees, transferees or beneficiaries (collectively, the "defendants"), alleging that they were personally liable for the Decedent's unpaid estate tax liabilities pursuant to IRC section 6432(a)(2).

While the lower court held that a beneficiary wasn't liable for unpaid estate taxes as a beneficiary of the Trust because they didn't receive life insurance benefits, and other beneficiaries weren't liable for unpaid estate taxes because they weren't in possession of the estate's property at the time of the Decedent's death, the United States Court of Appeals for the Ninth Circuit (the "Court") reversed the lower court's decision and held that persons who hold estate property or receive it on or after the date of death are personally liable for unpaid estate taxes on that property. In so holding, the Court was the first to interpret the provisions and legislative history of said section 6432(a)(2) to determine its meaning. IRC section 6432(a)(2) imposes personal liability for a decedent's estate taxes on transferees and others who receive or have property from an estate. It states, in relevant part: "If the estate tax imposed by chapter 11 is not paid when due, then the spouse, transferee, trustee (except the trustee of an employees' trust which meets the requirements of section 401(a)), surviving tenant, person in possession of the property by reason of the exercise, nonexercised, or release of a power of appointment, or beneficiary, who receives, or has on the date of the decedent's death, property included in the gross estate under sections 2034 to 2042, inclusive, to the extent of the value, at the time of decedent's death, of such property, shall be personally liable for such tax" (26 U.S.C. section 6432(a)(2)).

One question before the Court was whether the limiting phrase "on the date of the decedent's death" modifies only the preceding verb "has" or also the more remote verb "receives." The Court ruled in favor of the United States that the phrase "on the date of decedent's death" does not limit the verb "receives," holding that IRC section 6432(a)(2) "imposes personal liability for unpaid estate taxes on the categories of persons listed in the statute who have or receive estate property, either on the date of the decedent's death or at any time thereafter, subject to the applicable statute of limitations."

In so ruling, the Court followed "the rule of the last antecedent," which provides that a limiting clause should be read to modify only the noun or verb immediately before it. Contrary to the opinion of the single dissenting Circuit Judge, the Court also noted that to accept another interpretation would be contrary to the statutory text and context, even though it would be possible, under the decided interpretation, for the personal liability of an individual to exceed the value of the property received by them if such property had significantly declined in value after receipt. Overall, the Court felt there were sufficient safeguards preventing this remote possibility from materializing, especially considering the government's affirmations that the personally liable transferee is only responsible to the extent of property actually had or received by such individual.

After deciding that IRC section 6432(a)(2) imposes personal liability on those categories of persons listed in the statute who have or receive estate property on or after the date of the decedent's death, the Court was tasked with determining whether the categories of people listed included the defendants. The Court held that Vikki, Crystal and James were successor trustees of the Trust, and therefore liable for unpaid estate taxes in such capacity to the extent of the value of the property included in the Trust at the time of the Decedent's death. The Court also found Crystal and Madeleine liable as beneficiaries of the Trust, finding more broadly, based on contextual case law and analogous statutory usage, that the term "beneficiary" as used in IRC section 6432(a)(2) included a "trust beneficiary." The case was remanded to the district court to calculate the proportion of estate taxes owed by each individual personally liable.

As a practical result of Paulson, a nominated successor trustee may wish to inquire as to the liabilities of an estate or trust before accepting their role. Additionally, executors and trustees should consider withholding distributions until all estate or trust liabilities are satisfied. On the other hand, beneficiaries who receive distributions should learn whether there are any outstanding liabilities of the estate or trust before spending their distributions. In a case where the payment of estate tax was duly deferred, the timeline for observing these precautions may be extended.

Schlapfer v. Comm'r of Internal Revenue, T.C. Memo 2023-65

On May 22, 2023, the Tax Court issued a decision in Schlapfer v. Comm'r, T.C. Memo 2023-65, making its first ruling on what constitutes adequate disclosure of a gift for gift tax purposes under Treas. Reg. 301.6501(c)-1(f)(2). By ultimately applying a "substantial compliance" approach to disclosure, the Tax Court favorably found that the Taxpayer met the requirements for adequate disclosure despite not adhering to a stricter standard.

By way of background, Ronald Schlapfer (the "Taxpayer") had ties to both Switzerland and the United States. In connection with his career, in 1979, the Taxpayer moved to the United States from Switzerland and obtained a non-immigrant visa, declaring his intention not to reside permanently in the United States. At the time, the Taxpayer's mother, aunt, brother and uncle — his only family — remained in Switzerland. Between 1979 and applying for U.S. citizenship on May 18, 2007, the Taxpayer was married, had children, got divorced, and in 1990, was re-married to his current wife ("Mrs. Schlapfer") with whom the Taxpayer had a son in 1992. Also, in 2002, the Taxpayer started his own business, European Marketing Group, Inc. (EMG), a Panamanian corporation that managed investments, holding cash and marketable securities. At the time of EMG's formation, the Taxpayer owned all 100 issued and outstanding shares of common stock of EMG.

On July 7, 2006, the Taxpayer applied for a LifeBridge Universal Variable Life Policy (the "Policy"). His stated purpose for taking out the Policy was to create and fund a policy that the Taxpayer's mother, aunt and uncle (his brother died in 1994) could use to support the Taxpayer's nephews. The Taxpayer was the initial owner of the Policy, mother, aunt and uncle were named as the insured, and the Taxpayer and Mrs. Schlapfer were designated as primary beneficiaries. On September 22, 2006, the Policy was issued. By November 8, 2006, the Taxpayer had transferred USD 50,000 in cash and his 100 shares of EMG to an account in order to fund the premium payments on the Policy. On January 24, 2007, the Policy was assigned to the Taxpayer's mother as owner, and by May 31, 2007, the Policy had been irrevocably assigned to the Taxpayer's mother, aunt and uncle as joint owners.

As part of the Offshore Voluntary Disclosure Program (OVDP), meant to give U.S. taxpayers with offshore assets an opportunity to comply with U.S. tax reporting and payment obligations, in 2012, the Taxpayer filed a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return for the year 2006, along with several supporting documents. One such document was a protective filing for the gift of 100 shares of EMG, described as a controlled foreign corporation, having a value of USD 6,056,686. The protective claim stated that the gift was not subject to gift tax because, at the time the gift was made, the Taxpayer did not intend to reside permanently in the United States. The Taxpayer inaccurately reported the gift as a gift of EMG shares and not a gift of the Policy because he thought the Policy was an example of an entity that the OVDP instructions required be disregarded upon filing. He also stated that the EMG shares were assigned to his mother, even though the ultimate assignment was to the Taxpayer's mother, aunt and uncle as joint owners. In June 2014, the IRS responded to the Taxpayer's OVDP submission with a request for additional documentation and information, to which the Taxpayer responded without delay in July 2014.

In January 2016, the IRS opened an examination of the Taxpayer's 2006 Form 709. Ultimately, after discussions and the IRS's assertion that the gift was actually a gift of the Policy in 2007 (and not the EMG shares in 2006), the IRS issued a notice of deficiency claiming the Taxpayer was liable for USD 4,429,949 of gift tax and USD 4,319,200 worth of additions to tax. Both the IRS and the Taxpayer filed summary judgment motions with the Tax Court, with the Taxpayer, on the other hand, asserting that the three-year limitations period applicable to the gift had run, given the Taxpayer's adequate disclosure of the gift on his 2006 Form 709. Accordingly, the question before the Tax Court was whether the gift in question, as reported on the Taxpayer's 2006 Form 709, satisfied the rules of adequate disclosure such that the statute of limitations had expired before the IRS claimed a deficiency.

IRC section 6501(c)(9) provides that the Commissioner may assess a gift tax at any time if a gift is not shown on a return, unless the gift is "disclosed in such return, or in a statement attached to the return, in a manner adequate to apprise the Secretary of the nature of such item." Prior case law provides that disclosure is considered adequate if it is "sufficiently detailed to alert the Commissioner and his agents as to the nature of the transaction so that the decision as to whether to select the return for audit may be a reasonably informed one" (Thiessen v. Commissioner, 146 T.C. 100, 114 (2014), quoting Estate of Fry v. Commissioner, 88 T.C. 1020, 1023 (1987)). Treasury Regulation 301.6501(c)-1(f)(2) provides that transfers reported on a gift tax return will be considered adequately disclosed if the return provides the following information: (i) a description of the transferred property and consideration received therefor; (ii) the identity of and relationship between each transferee and the transferor; (iii) if transferred in trust, the trust employer identification number (EIN) and description of its terms, or, in lieu of such a description, a copy of the trust instrument; (iv) a description of the method used to determine the fair market value of the transferred property; and (v) a statement describing any position contrary to any proposed, temporary or final Treasury regulations or revenue rulings.

The provisions of IRC section 6501(c)(9) and analogous IRC provisions provide support that information relating to a gift disclosed on documents other than the gift tax return, (for example, the supporting documents submitted through the OVDP), is properly considered when analyzing whether the gift was adequately disclosed. Additionally, in Treasury Decision 8845, the IRS provided that its express rejection of a "substantial compliance" approach did not mean "that the absence of any particular item or items would necessarily preclude satisfaction of the regulatory requirements, depending on the nature of the item omitted and the overall adequacy of the information provided."

With this as background, the Court held that the Taxpayer substantially complied with the requirements of Treas. Reg. 301.6501(c)-1(f)(2) such that the IRS was adequately apprised of the nature of the gift. With respect to requirement (i), even if the Taxpayer failed to describe the gift correctly, stating the gift was of the EMG shares and not the Policy itself, he provided sufficient information regarding the underlying asset, (i.e., the EMG shares), the value of which primarily comprised the value of the Policy. Regarding the Taxpayer's identification of the transferees and his relationship with them, the fact that he inaccurately stated only his mother as a transferee was held immaterial since the other transferees were also family members, and there would be no change to understanding the nature of the gift had his aunt and uncle been identified from the start. Finally, the financial reports of EMG that were provided with the Taxpayer's submission to the OVDP were sufficient to allow the Court to determine the fair market value of the EMG shares. Thus, the Court held that the Taxpayer met the requirements for adequate disclosure, and, accordingly, the three-year statute of limitations, including extensions, had expired prior to the IRS's issuance of the notice of deficiency.

Anenberg v. Commissioner, 162 T.C. No. 9 (May 20, 2024)

Alvin Anenberg (the "Decedent") died in 2008 and was survived by his wife Sally Anenberg ("Sally") and two sons from a prior marriage. At his death, pursuant to his estate plan, assets (including shares of the Decedent's business) were distributed to a QTIP marital trust (the "Marital Trust") for Sally. The Marital Trust required that trust income be distributed to Sally, at least annually, and it authorized the Trustee to distribute principal to Sally for her support. Upon Sally's death, the assets of the Marital Trust were to be distributed to the Decedent's sons.

In October 2011, the Trustee of the Marital Trust petitioned a state court to terminate the Marital Trust and distribute all of the assets outright to Sally. Sally and the remainder beneficiaries consented to the petition. The court approved, and all of the assets of the Marital Trust were distributed to Sally. A few months later, Sally gifted and sold the assets (including shares of the Decedent's business) to trusts for the Decedent's children and grandchildren. Sally filed a timely 2012 gift tax return reporting the gifts to the trusts and reporting the sales as non-gift transactions.

In December 2020, the IRS issued a Notice of Deficiency, asserting that Sally's estate owed over USD 9 million in gift tax as a result of the termination of the Marital Trust and the subsequent sales of the company shares under IRC section 2519. Generally, IRC section 2519 provides that the disposition of a qualifying income interest in a QTIP Marital Trust is treated as a transfer of all the remainder interests in the property. Sally's estate argued that neither the termination of the Marital Trust nor the subsequent sales constituted a gift because Sally received full consideration for the property she was deemed to transfer. Under IRC section 2501(a)(1), gift tax is imposed on the transfer of property by gift — a transfer which is made without receiving full and adequate consideration.

The Tax Court agreed with the estate and unanimously rejected both positions of the IRS. The court began its analysis by reviewing the policy behind QTIP marital trusts, which is to defer taxation on QTIP trust assets until the death of the surviving spouse. It found that, at the time of the termination of the Marital Trust, even if a transfer occurred for purposes of IRC section 2519, no gift resulted when the assets were distributed to Sally because she received full ownership of the assets in return. These assets would be subject to estate tax upon Sally's death. Accordingly, imposing a current gift tax on the value of the remainder interest under IRC section 2519 would result in double taxation. The court also found that no deemed transfer under IRC section 2519 occurred when Sally sold the company shares following the termination of the Marital Trust. Once the Marital Trust was terminated, the qualifying income interest for life terminated and there could be no disposition of something that did not exist. Notably, the court did not address whether the Decedent's sons made a gift by consenting to the termination and distribution of the Marital Trust assets to Sally.

McDougall v. Commissioner, 163 T.C. No. 5 (September 17, 2024)

Clotilde McDougall (the "Decedent") died in 2011 and was survived by her husband Bruce McDougall ("Bruce") and their two children, Linda and Peter. At her death, pursuant to her estate plan, assets were distributed to a QTIP marital trust (the "Marital Trust") for Bruce. The Marital Trust required that trust income be distributed to Bruce, at least annually, and it authorized the Trustee to distribute principal to Bruce for his health, education, maintenance, and support. Upon Bruce's death, the assets of the Marital Trust were to be distributed to the Decedent's children.

In October 2016, Bruce and the children entered into a non-judicial settlement agreement (the "Agreement") to terminate the Marital Trust and to distribute all of the assets outright to Bruce. On the same day, Bruce sold the assets he received from the Marital Trust to a trust for his children (the "Children's Trust") in exchange for a promissory note. Bruce, Linda and Peter each filed their own timely gift tax returns disclosing the transactions as non-gift transactions.

The IRS issued a Notice of Deficiency to Bruce asserting that the termination of the Marital Trust and subsequent sale of the Marital Trust assets to the Children's Trust were subject to gift tax under IRC section 2519. Generally, IRC section 2519 provides that the disposition of a qualifying income interest in a QTIP marital trust is treated as a transfer of all the remainder interests in the property. In addition, the IRS issued a Notice of Deficiency to Peter and Linda asserting that the agreement resulted in gifts of their remainder interests in the Marital Trust to Bruce under IRC section 2511. IRC section 2511 provides that the gift tax shall apply to any gratuitous transfer whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

With respect to Bruce, the Tax Court rejected the IRS's position. It applied its holding in Anenberg and found that Bruce did not make a gift upon the termination of the Marital Trust because he received full consideration for the property he was deemed to transfer. Accordingly, Bruce was put in the same position he would have been in had the property been distributed outright to him at the Decedent's death rather than to the Marital Trust. In addition, the Tax Court rejected the IRS's argument that the subsequent sale of the Marital Trust assets for promissory notes triggered IRC section 2519. As described in Anenberg, once the Marital Trust was terminated, the qualifying income interest for life terminated so there could be no disposition of something that did not exist.

With respect to Linda and Peter, the Tax Court agreed with the IRS and found that a gift was made to Bruce under the Agreement. The court explained that, before Linda and Peter entered into the Agreement, they held valuable property rights (i.e., the remainder interests in the Marital Trust). After they consented to the Agreement, Linda and Peter gave up those rights by agreeing that all the Marital Trust assets would be distributed to Bruce for which they received nothing in return. By giving up something for nothing, the Tax Court agreed that Linda and Peter engaged in gratuitous transfers subject to gift tax under IRC sections 2501 and 2511.

Connelly v. United States 144 S. Ct. 1406 (2024)

In Connelly, the United States Supreme Court addressed whether the value of life insurance proceeds used by a corporation to redeem a deceased shareholder's shares should be included in the decedent's estate for federal estate tax purposes.

Two brothers, Michael and Thomas Connelly, owned a closely held family roofing and siding business, Crown C Supply, Inc ("Crown"). The brothers had a stock purchase agreement governing the disposition of company stock on the first of their deaths, giving the surviving brother the right to purchase the deceased brother's shares. If the surviving brother chose not to exercise that right, Crown was required to redeem the shares. Crown had purchased USD 3.5 million in life insurance on each brother to fund such a redemption.

After Michael's death, Crown redeemed the shares from Michael's estate for USD 3 million, using the life insurance proceeds. Thomas, as the executor of Michael's estate, reported the value of Michael's shares as USD 3 million on the federal estate tax return. The IRS audited the return and determined that the USD 3 million value of the life insurance proceeds used for the redemption should be included in the valuation of Michael's shares in Crown. The IRS thus adjusted upward the total value of Crown to USD 6.86 million, resulting in Michael's 77.18% interest being valued at approximately USD 5.3 million. Based on this higher valuation, the IRS assessed an additional estate tax of USD 889,914. Michael's estate paid the additional estate tax under protest and filed for a refund.

At the District Court level, relying on Blount v. Commissioner, Michael's estate argued that the life insurance proceeds used for the redemption should not be considered part of the corporation's value. In Blount, the Eleventh Circuit had allowed insurance proceeds to be excluded if they were offset by a redemption obligation. The District Court rejected this argument and granted summary judgment for the government, holding that the life insurance proceeds should be included in the valuation of the estate. The court ruled that the redemption obligation did not reduce the fair market value of Crown, as the redemption itself did not diminish the economic value of the corporation or the shares.

The estate appealed to the Eighth Circuit, which upheld the District Court's ruling. The Eighth Circuit agreed that the life insurance proceeds should be included in the calculation of the corporation's fair market value for estate tax purposes. The Eight Circuit emphasized that, under established tax law, life insurance proceeds payable to a corporation are considered an asset that increases the company's value. The court did not view the redemption obligation as a liability that would reduce this value because a fair market value redemption would leave the remaining shareholders' proportional ownership unchanged in economic terms. The Eighth Circuit's decision reaffirmed that life insurance proceeds cannot be excluded when calculating the value of an estate's shares.

The United States Supreme Court granted certiorari and unanimously affirmed the lower courts' rulings. The Court rejected the reasoning from Blount and held that a corporation's contractual obligation to redeem shares using life insurance proceeds is not a liability that reduces the corporation's value for federal estate tax purposes. The Court's analysis hinged on the principle that a redemption at fair market value does not affect any shareholder's economic interest and so does not diminish the corporation's value.

The Court also found that including the proceeds as part of the corporation's fair market value is consistent with standard valuation principles and statutory estate tax requirements. The ruling emphasized that the key question in estate tax valuation is the value of the decedent's property at the time of death — not how the corporation's value might change post-redemption.

Connelly has significant implications, particularly for closely held family businesses that use life insurance to fund stock redemptions.

Connelly establishes that life insurance proceeds payable to a corporation must be included when calculating the fair market value of the corporation for federal estate tax purposes, even if those proceeds are earmarked for redeeming a decedent's shares.

Connelly will also influence how family-owned businesses structure buy–sell agreements and plan for business succession. When a corporation is obligated to redeem a deceased owner's shares, the life insurance proceeds used to fund that redemption will now increase the value of the corporation, thereby increasing the taxable value of the estate. Business owners may need to reconsider using redemption agreements as part of their succession plans, as this approach now carries the risk of increasing the estate tax burden.

Estate planners may need to explore alternative planning options, such as cross-purchase agreements, in which the surviving shareholders directly purchase the shares of a deceased owner using life insurance proceeds. In this structure, the life insurance proceeds are paid directly to the purchasing shareholders — rather than to the corporation — thereby avoiding the increase in the corporation's value. That said, cross-purchase agreements introduce other complexities, such as requiring each shareholder to obtain life insurance on the other owners.

Connelly reinforces the importance of proper valuation techniques in estate tax planning. Executors and estate planners must carefully assess the fair market value of closely held corporations, accounting for all assets (including life insurance proceeds) and structuring agreements in a way that minimizes estate tax liability.

In sum, Connelly reaffirms the IRS's position on the inclusion of life insurance proceeds in estate valuations and underscores the need for careful estate planning to minimize tax liabilities for closely held businesses. Estate planners should evaluate existing agreements and explore strategies that align with the Court's ruling to avoid unexpected tax consequences.

Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024)

In Loper Bright, the United States Supreme Court fundamentally altered the landscape of administrative law by overruling Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., a key precedent that had shaped judicial review of agency interpretations of federal statutes for four decades. "Chevron deference" required courts to defer to reasonable agency interpretations of ambiguous statutes. Under such deference, agencies enjoyed significant discretion in interpreting statutory language — arguably expanding the scope of their regulatory authority and shifting the balance of power in favor of executive agencies over the judiciary.

Loper Bright stems from the National Marine Fisheries Service's (NMFS) interpretation of the Magnuson-Stevens Fishery Conservation and Management Act (MSA), from which the agency implemented a rule requiring fishing companies to pay for at-sea monitors — an "industry-funded program."

A group of family-owned fishing companies challenged the rule, arguing that the MSA did not authorize the NMFS to impose these costs. Applying Chevron deference, the lower courts found the NMFS's interpretation of the MSA to be reasonable, and so upheld the agency's rule.

But in a landmark decision (the Supreme Court consolidated Loper Bright with Relentless Inc. v. Department of Commerce, a related case from the First Circuit), the Supreme Court overruled Chevron after concluding that Chevron deference was incompatible with the constitutional role of the judiciary and the APA's mandate that courts decide "all relevant questions of law." Instead, the Court held that courts must exercise independent judgment in interpreting ambiguous statutes without deferring to agency interpretations.

The Court closely examined the APA, which governs judicial review of agency action, noting that section 706 of the APA mandates that "the reviewing court shall decide all relevant questions of law." The Court reasoned that giving agencies such deference effectively forced courts to relinquish their statutory duty under the APA to decide legal questions. The Court also noted that Congress passed the APA in 1946 as a direct response to limit the growing administrative state, and the APA's clear language suggested that Congress intended for courts to retain their traditional role of interpreting statutes — an intent that Chevron deference undermined.

The Court's opinion emphasized constitutional concerns about Chevron, drawing heavily from foundational separation of powers precedents. Because Article III empowers the judiciary with the authority to resolve legal disputes, and because Chevron blurred this separation of powers principle by allowing executive branch agencies to interpret the law, the Court concluded that Chevron undermined the judiciary's core responsibility to interpret statutes and serve as a check on the executive branch power.

Despite Chevron's 40-year run, the Court rejected arguments that it should uphold Chevron on the basis of stare decisis. The Court described Chevron as unworkable and confusing in its application, cited several exceptions and qualifications that had been imposed on Chevron in its progeny, and noted that Chevron had become a tangled doctrine leading to inconsistent rulings — all factors undermining a decision to uphold precedent based on stare decisis.

Even so, the Court acknowledged the continued relevance of Skidmore deference, under which courts may give weight to agency interpretations based on their persuasiveness. Such Skidmore deference, however, is fundamentally different from Chevron deference in that Skidmore deference does not demand judicial deference, but permits courts to consider the agency's expertise, consistency, and reasoning without surrendering the court's ultimate judgment.

The Court's opinion fundamentally reshapes administrative law and will have far-reaching implications, not only for federal agencies and the "administrative state," but also for areas of tax law and estate planning, where agency interpretations of ambiguous statutory provisions play a critical role. The overruling of Chevron fundamentally redefines the relationship between courts and federal agencies, curtailing the agencies' authority to interpret statutory ambiguities without judicial oversight and placing the power of statutory interpretation firmly with the judiciary.

The implications could be sweeping. For tax practitioners, courts will no longer defer to the IRS's interpretation of tax regulations. Courts will instead conduct their own independent analysis, which could lead to increased challenges to key areas of tax law.

This increased scrutiny may also complicate tax compliance, as taxpayers and tax practitioners would need to rely less on IRS interpretations and more on judicial precedent — which may be inconsistent across circuits. The burden on courts may also increase from the resurrection of challenges to portions of the tax code that were once thought to be settled based on deference to the IRS's interpretation of its regulations.

Similarly, ambiguities in gift, estate, and GST tax statutes may now be subject to judicial interpretation, rather than agency determinations, and this shift could introduce uncertainty into estate planning strategies that rely on regulatory guidance. And estate planners may need to reconsider certain tax-saving techniques that were previously upheld under deference to IRS regulations.

Loper Bright marks a significant shift in administrative law, particularly affecting the balance of power between agencies and the judiciary. By overruling Chevron, the Court has reasserted the role of the judiciary in statutory interpretation, which is likely to have profound impacts across many areas of law. Agencies will now face greater challenges in defending their interpretations of ambiguous statutes, and courts will do more to determine the meaning of federal laws, leading to greater scrutiny of regulatory actions in complex and ambiguous legal regimes.

1.4. Local case law developments

Similarly to local legislative developments, it is beyond the scope of this chapter to cover case law developments in all 50 states. But bear in mind that every year, there are local, state-level cases bearing on the validity and interpretation of wills and trusts, marital rights, property rights, beneficiary rights, duties of fiduciaries, taxation, etc.

1.5. Practice trends

As can be seen from the preceding and following sections of this chapter, estate planning has become so complicated that it is increasingly being done not just by planners alone, but in conjunction with those who have deep experience in estate and trust administration and in estate and trust litigation.

1.6. Pandemic-related developments

Most pandemic-related relief, including, in particular, tolling of statutes of limitations and tax relief, has sunset. In some cases, however, state-level measures permitting remote execution, witnessing and notarization have become permanent.

2. ESTATE AND TRUST ADMINISTRATION

2.1. National legislative and regulatory developments

Estate and trust administration in the United States is generally not handled at the national level.

2.2. Local legislative and regulatory developments

This chapter also cannot possibly recite the various legislative and regulatory developments in estate and trust administration in all 50 states. However, similar to developments affecting tax and wealth planning, the following are some of the more illustrative developments to look out for. Some states have begun enacting legislation to permit:

• Directed Trusts;
• longer or no rules against perpetuities;
• remote notarization;
• simpler probate procedures for smaller estates;
• modifications to trusts;
• protections for use of powers of attorney;
• electronic wills and remote witnessing;
• state-level reporting of beneficial ownership of certain entities;
• transfer on death deeds;
• modernizing rules for income and principal allocations and adjustments; and
• surrogate decision making.

It is important to take local advice depending upon the state involved.

2.3. National case law developments

Estate and trust administration in the United States is generally not handled at the national level.

2.4. Local case law developments

Similarly to local legislative developments, it is beyond the scope of this chapter to cover case law developments affecting estate and trust administration in all 50 states. But bear in mind that every year, there are local, state-level cases bearing on the validity and interpretation of wills and trusts, marital rights, property rights, beneficiary rights, duties of fiduciaries, taxation, etc.

2.5. Practice trends

As can be seen from the preceding and following sections of this chapter, estate and trust administration has become so complicated that it is increasingly being done not just by administrators alone, but in conjunction with those who have deep experience in estate planning and in estate and trust litigation.

2.6. Pandemic-related developments

Refer to the local legislative developments of this chapter (see above, Section 1.2) for new laws on remote witnessing and remote notarization, all of which were prompted by the pandemic.

3. ESTATE AND TRUST LITIGATION AND CONTROVERSY

3.1. National legislative and regulatory developments

Because estate and trust administration in the United States is generally not handled at the national level, litigation tends not to be at the national level.

3.2. Local legislative and regulatory developments

There have been no local legislative and regulatory developments of note on the litigation front. But it is worth noting that, as increasingly revocable trusts are used as substitutes for wills, most states lack statutes regulating trust, as opposed to will, contests.

3.3. National case law developments

Because estate and trust administration in the United States is generally not handled at the national level, litigation tends not to be at the national level.

3.4. Local case law developments

This chapter also cannot possibly recite the various case law developments affecting estate and trust litigation and controversy in all 50 states. However, it is worth noting that as increasingly revocable trusts are used as substitutes for wills, most states lack statutes regulating trust, as opposed to will, contests.

3.5. Practice trends

As can be seen from the preceding and following sections of this chapter, estate and trust litigation has become so complicated that it is increasingly being done not just by fiduciary litigators alone, but in conjunction with those who have deep experience in estate and tax planning and in estate and trust administration.

3.6. Pandemic-related developments

The federal and 50 states court systems addressed the pandemic in radically different ways. Some closed, and some never closed. Some functioned, remotely, some continue to function remotely, some were always in person, and some have resumed being in person. Almost all remain severely backlogged as a result of the pandemic.

4. FREQUENTLY ASKED QUESTIONS

4.1 What is the substantial presence test for the purposes of avoiding worldwide U.S. income taxation?

Individuals satisfy the substantial presence test if they are present in the U.S. for a period of 183 days or more in any given year. If the individual is not physically present in the U.S. for 183 days or more in any given year, but is present in a given year for at least 31 days and the individual's presence in that year and the two preceding years equals a weighted aggregate of 183 days or more, then the individual is also deemed a resident for that year and is subject to U.S. income tax for such year. An individual will be subject to U.S. income tax on the first day of the year in which the individual meets the 183 days test.

For the purposes of this calculation: (1) each day in the first preceding year counts as only ⅓ of a day and each day in the second preceding year counts as only ⅙ of a day; and (2) partial days in the U.S., such as travel days, count as full days.

By way of example, the following calculation will apply to an individual who has spent 10 days in the U.S. during Year 1, 40 days during Year 2, and 25 days during Year 3:

Thus, the individual can return to the U.S. in Year 3 and remain for up to 142 days without becoming a U.S. resident for income tax purposes. If the individual returns to the U.S. in Year 3 and stays for more than 142 days, the individual's residency starting date will be the first day during Year 3 in which the individual entered the U.S. As a general rule of thumb, provided one does not spend more than 122 days in the U.S. in any given year, one will not meet the substantial presence test.

4.2 How long do I have to give up my green card without expatriation exposure?

Individuals who terminate their long-term permanent residency status (a green card held for at least eight of the 15 tax years preceding expatriation) after June 17, 2008, and who are "covered expatriates", are treated like citizens who give up their citizenship and are subject to a mark-to-market exit tax on their worldwide property, and certain gifts and bequests that they make after expatriating will also be subject to taxes.

It is therefore of crucial importance for green-card holders who are considering giving up their green card to do so effectively before holding the green card for eight years in order to avoid being subject to the onerous expatriation rules, discussed below.

For purposes of determining the eight-year period, any portion of a tax year is considered a full year. By way of example, if an individual obtained a green card on December 1, 2016, and relinquishes the green card on January 1, 2023, the individual will have held the green card for a portion of eight tax years and will therefore be considered a long-term resident. It should be noted that there may or may not be re-immigration consequences to surrendering one's green card after eight years.

Notably, residence in the U.S. under any other immigration status, such as a work visa, does not count towards establishing one's long-term resident status for purposes of the expatriation rules.

Moreover, in order to no longer be considered a domiciliary of the U.S., it is not enough to relinquish one's green card. One must also establish a domicile elsewhere.

Originally published by The Global Legal Post, April 29, 2025.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.