Recent Tax Court Case Has Important Lessons On How To Do Estate Planning Right!

Recent Tax Case, Smallino V. Internal Revenue Service Commissioner, TC Note. 2021-127, November 10, 2021, there are many important lessons to be learned in implementing proper real estate planning. This lesson is especially important for those rushing to make plans for 2020 and 2021 for fear of dramatic changes in tax laws.

Even if these strict changes aren’t made (there’s a bit of legislation that the House of Representatives just passed), you should be wary of Smallino when you’re planning your tuition. I’ve already. If you have completed your 2020 or 2021 plans, take a look at this tutorial and make sure all the ducks are ok. After all, if you didn’t do something right, it’s definitely worth getting rid of your tax laws afterwards rather than waiting for the IRS auditor to find your fault.

The serious mistakes in the Smaldino case cannot be retrospectively corrected, but failure to come up with such a plan could benefit from part of the post-cleaning work. This article looks at the Smallino case, what the taxpayer went wrong in this case, and how to plan better. It also explains what you can do with some of these errors, if possible, to fix them afterwards. This makes this case study a good case for explaining the pros, cons, and downsides of the property planning process. This is a bit of a long story, but we hope it will be of more use to you.

That’s the story
LLC: Mr Smaldino owns and manages a number of rental properties. He placed 10 of his lease with the Family Limited Liability Company (LLC) he owned through a revocable trust. Owning a rental property with an LLC is a smart way to minimize personal liability. For example, if a tenant sues you, he or she should only have access to your LLC property, not your home or other personal property.

Depending on the value of the property and how much you own, you may be able to serve multiple people by keeping each property in a separate LLC to prevent dominoes. So when a lawsuit is filed against one property, the other property must be left intact. This is similar to the legal equivalent of a watertight door between underwater spaces. This has nothing to do with the history of Smaldinos, but it is a good suggestion of a plan to consider. Second, Smaldino taxpayers keep LLC profits in a revocable trust. This is usually a good plan to protect your assets against a will and the risk of future disability.

Dynasty Trust: Mr Smaldino has transferred approximately 8% of the shares of Class B LLC members to an irrevocable trust (Dynasty Trust) intended to benefit his children and grandchildren. This is a fairly common real estate plan. Many taxpayers are so worried that the tax exemption will be limited that their heirs donate an irrevocable trust to take advantage of the tax exemption.

The latest House proposal does not reduce tax exemptions at all, establishing a dynastic trust and giving gifts could be good moves, but a slightly different plan might be better for you. Possible. Since Mr. Smaldino is married for the second time, it is possible that his wife is not considered an heir. If, as a beneficiary, you have a solid marriage with a trust that includes your spouse, this could be a smart move for you as he or she will retain access to the trust assets after the donation. So make sure the type of trust you are using and the beneficiary is appropriate for your situation.

If you’re single or married but want to access the trust you’ve created, there’s more you can do. You can add a loan clause to the trust so that someone can lend you money from the trust. This allows the configurator who created the trust to access the trust credits if necessary. This can be important when you don’t have a husband, when your husband dies, or when the two are divorced.

Another way to add more access is to designate a beneficiary, grant the right to reinstate you as a beneficiary, or direct a trustee to provide you with a trustworthy asset. Contains authorization (called special order rights). This last technique is suitable if you live in one of the 19 states that allow something called a disbanding trust, or if you want to build trust in one of these steps.

A gift to my wife (probably!): Mr. Smaldino gave his wife about 41% of his LLC membership. The next day he “intentionally” donated the same profit to the dynasty’s trust. If the court defines the taxpayer’s actions as “intentional”, that’s not a good sign. Suffice it to say that the court was not impressed with the validity of Mr Smaldino’s gift to his wife and his alleged gift to the dynasty that Mr Smaldino later created. That’s the crux of the problem.

In conclusion, the court described the alleged gifts Mr. Smaldino gave to his wife as if Mr. Smaldino himself gave the gifts directly to the Dynasty Trust and then to the Dynasty Trust. This passes the expected transfer from Ms. Smaldino. As a result, the tax imposed is quite high. As shown below, Ms. Smaldino likely kept the winnings for a day, transferring the exact same winnings he received to the Dynasty Foundation, as well as the many steps their families and advisors had to take to support them. They accepted the deal, but the court did not.