Should the Latest Federal Budget Proposal Cause Concern?

The short answer is no. While President Biden's latest budget proposal, released on March 9, includes provisions that would affect high-net-worth individuals, the proposed budget and its contents are far from final. The budget must still go through the legislative process, where the prospects for passage in its current state are dim.

Our attorneys regularly monitor wealth-related tax proposals and report on developments of interest. We are also available at any time to discuss planning strategies.

MAKING LEMONADE: PLANNING IDEAS FOR A DOWN MARKET

BY LINDA KOTIS AND LESLIE WOOD BRADENHAM

The stock market suffered dramatic losses in 2022, and the recent bank failures are contributing to investors' woes in 2023. There is a bright side to all this instability, however, for those currently invested in the market. For example, the owner of a traditional Individual Retirement Account (IRA) may want seize this moment to convert the account to a Roth IRA. The account owner pays income tax now in return for future tax-free growth and tax-free withdrawals. Taxes due on converting a lower value IRA will be less than they would have been when the account was worth more.

Another idea is to give stock to a family member to reduce one's taxable estate. A gift of depreciated assets presents an opportunity to leverage the use of the donor's federal gift tax exemption. The gift will be valued at the current low stock price, and when the market later improves, the donee will benefit from the appreciation on the stock without using any more of the donor's gift tax exemption.

An additional area where a down market can be a positive from a wealth transfer perspective is in estate administration for taxable estates. For estate tax purposes, a decedent's gross estate is normally valued as of the date of death. However, an executor can make an election to instead value the estate assets as of the date that is six months after the date of death (or such earlier date on which an estate asset is sold, exchanged, or distributed), if doing so would result in a decrease of both (i) value of the decedent's gross estate and (ii) the transfer taxes payable. The executor cannot pick and choose assets for this election, but if the collective value of the assets of the gross estate drops between date of death and the alternate valuation date, the down market will allow the decedent's heirs to save on transfer taxes. The tradeoff of this election, however, is that the basis the heirs will receive in the estate's assets will be the lower, alternate valuation date value, likely resulting in higher income taxes if and when the heirs later sell the assets received.

Individuals should consult an attorney, accountant, and/or financial advisor about their specific situation before making a Roth conversion, giving gifts to use gift tax exemption, or using alternate valuation for an estate.

TAX RESIDENCY AND VACATION HOMES: MATTER OF OBUS V. NEW YORK STATE TAX APPEALS TRIBUNAL

BY LESLIE WOOD BRADENHAM

New York taxes its residents on their worldwide income, and a person is considered a New York resident for tax purposes if he (i) is domiciled in New York (a "NY domiciliary"), or (ii) maintains a permanent place of abode in New York and spends more than 183 days of the tax year in New York (a "statutory resident"). In Matter of Obus v. New York State Tax Appeals Tribunal, 206 A.D.3d 1511 (N.Y. 2022), the taxpayers were domiciled in New Jersey, but the husband spent more than 183 days at his job in New York City during each of the tax years in question. As such, whether the taxpayers were subject to New York income taxes on just the New York earned income, or on their income from all sources, turned on whether their New York vacation home in the Adirondack Mountains was a "permanent place of abode."

Determining the state or states where an individual will be subject to taxes involves a determination of the individual's "domicile" and "residency." These terms are not synonymous, and while a person can only have one domicile, she can have more than one residence. Indeed, with remote work on the rise, this may often be the case, and the analysis is increasingly complex. Read our previous article, " Home, Sweet Home."

The vacation home was a five-bedroom, three-bathroom home with year-round utilities and climate control, and the taxpayers had "free and continuous access" to the home throughout the year. However, the taxpayers used the vacation home for "at most" three weeks during each tax year. It was located over a "four-hour drive each way" from the husband's job in New York City, and was not used at all for that purpose. The Court also noted that the taxpayers "do not keep personal effects" in the vacation home, but rather bring with them what they need for each visit. Given these factors, the Court concluded that the vacation home was not a "permanent place of abode" and that the taxpayers "fall outside of the purview of the target class of taxpayers who were intended to qualify as statutory residents."

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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.