By Sahri D. Zeger, Sarah Gaymon, Deborah Frishman, Jacqueline Fraller, & Lawrence Lipoff

The 60th annual Heckerling Estate Planning Conference in Orlando, Florida concluded another successful week on Jan. 15. Below are selected insights from CohnReznick’s Trusts and Estates team.

2/37th limitation on income tax deductions in OBBB 

By Deborah Frishman

Speakers at Heckerling underscored a notable issue arising from the One Big Beautiful Bill Act (OBBB). OBBB imposes a 2/37th limitation on itemized deductions, which may unintentionally restrict a trust’s ability to deduct income distribution – creating the possibility of partial double taxation for beneficiaries.

OBBB does not include the income distribution deduction among the expressly excluded deductions from the limitation. Panelists suggested this was likely an oversight and expect technical corrections to address it. Without clarification, a beneficiary could be taxed on 100% of distributable net income while the trust’s corresponding deduction has a 2/37th limitation.

Panelists also explored possible interim strategies. One option is granting beneficiaries limited withdrawal rights over trust income instead of requiring mandatory distributions. For example, providing a surviving spouse with withdrawal power over all accounting income could cause the trust to be treated as a grantor trust, avoiding the cap. However, it is important to note that this is a complex, temporary workaround pending formal guidance.

Making sure a portability election is valid

By Jacqueline Fraller

The Recent Developments session of Heckerling included an interesting discussion on the Tax Court decision in the Estate of Billy S. Rowland. The Tax Court held that Billy’s estate could not claim the deceased spousal unused exclusion (DSUE) from the estate of his predeceased spouse (Fay) because Fay’s estate failed to make a valid portability election.

The executor of Fay’s estate did not comply with the reporting requirements of filing an estate tax return for portability where there are beneficiaries in addition to her spouse and charities. The executor filed a Federal Estate Tax return utilizing the simplified reporting method for portability. However, the simplified method is not available where there are transfers from the estate to beneficiaries other than the spouse and charities.  

The invalid portability election resulted in a loss of the DSUE amount claimed on Billy’s estate of approximately $3.7 million.

There are key takeaways from this decision. Tax return preparers should use this case as an example to clients who are reluctant to incur professional fees for the tax return preparation and valuations. Also, tax return preparers need to keep in mind that there are instances where full valuations are necessary even if the estate return is filed for portability and falls below the filing threshold. Best practices should be taken to avoid jeopardizing portability of the DSUE.

Income tax insurance for divorcing spouses

By Sahri D. Zeger

The most interesting topic I heard during Heckerling was not in any of the conference rooms. It was during an outside conversation. Imagine this scenario:

Spouses finalize their property settlement agreement in 2025 which, among other things, releases each other from all prior potential claims. In 2026, their jointly filed income tax return is audited and a tax position related to one spouse’s investment is denied, resulting in joint liability for the additional tax, interest, and penalties assessed in 2027. What can an ex-spouse do about an unforeseen event like this? Tax insurance may be a good answer.

The underwriting company may be willing to insure against potential tax liability for an open tax year, but only after a thorough review of the filed return and risk assessment. The goal is less about the insurance coverage and more about the thorough review by a third party offering to assume risk. The underwriting process will bring to the surface any potential exposures, which the negotiating spouses can then build into the property settlement agreement.

Multiple jurisdiction wills and probate: Key considerations

By Sarah Gaymon

Living in an increasingly mobile world, it is common for individuals to acquire assets located in multiple countries. For individuals owning assets in multiple jurisdictions, estate planning requires additional considerations to make sure that assets transfer as intended to loved ones upon death. Countries may have vastly differing succession laws, particularly between common law systems, which generally permit testamentary freedom, and civil law or religious law systems, which may impose forced heirship or other mandatory distribution rules. As a result, careful consideration must be given to whether a single will or multiple country specific wills are appropriate.

In some cases, a will that is valid and effective in one country may be limited, unenforceable, or even disregarded with respect to assets located elsewhere. Planning may be further complicated by the fact that not all countries recognize trusts, so trusts created in one country may have completely different treatment and ownership in another.

Probate procedures also vary widely across countries. In some jurisdictions, probate may be relatively straightforward, while in others it can be time-consuming, public, and procedurally complex. Assets located abroad may require separate local probate proceedings in addition to the primary probate conducted in the decedent’s home country.

Individuals owning property in multiple countries require comprehensive, multi-jurisdictional planning to help ensure coordination among estate planning documents and to reduce administrative burden, delays, and costs, while improving certainty and efficiency in cross-border estate administration.

Second stage estate planning

By Lawrence Lipoff

Among the informational and sometimes fascinating sessions at The Heckerling Institute, the panel discussion with Jonathan Blattmachr, Diana Zeydel, and Todd Angkatavanich titled Splitting, Splicing and Stacking Strategies to Trust Structures was my favorite. The speakers focused on second stage estate planning, after the initial asset transfer plan has been initiated and often completed.  

As an example, a taxpayer may initiate one or a series of Grantor Retained Annuity Trusts (GRATs) for assets that have the possibility of explosive value growth, usually over a two-year period, followed by a continuing trust that would be a grantor trust as to the taxpayer. Still, for Generation-Skipping Transfer (GST) Tax technicalities, a GRAT is not an efficient structure to benefit future “Skip Person” generations. Hence, GRAT’s continuing trust’s beneficiaries are often children of the settlor.

As such, assuming the GRAT was economically successful – i.e., the investment during the two-year term exceeded in value growth the IRS monthly mandated based upon date the GRAT was established – an investment opportunity exists. An estate planner may consider suggesting the GRAT’s continuing trust and a dynastic trust may co-invest within a partnership or limited liability company with the continuing trust receiving a preferred rate of return and the dynastic trust receiving a common participation to the extent the investment’s return exceeds the preference rate. In such a situation, any excess growth can move from one generation down to many generations within an asset-protected vehicle.