Each year, the Heckerling Institute on Estate Planning sets the agenda for what trust and estate practitioners will be thinking about and planning for in the year ahead. While many sessions dive deep into theory and technical updates, one of the most popular and practical sessions is the Advanced Tax Planning Question and Answer Panel, where the conversation is driven entirely by questions from conference attendees.
This year’s panel focused squarely on real-world application. The discussion centered on how new and revived rules actually operate in practice, where compliance traps are emerging, and which planning techniques continue to work despite increased complexity and tighter limitations.
The panel featured Carlyn McCaffrey, Turney Berry, and Samuel Donaldson, three of the most respected voices in trust and estate planning. Their answers addressed a wide range of advanced issues, including trust deductions under Section 68, SALT planning strategies, withdrawal rights, basis step-up techniques, portability elections, and conflict-of-laws concerns.
What follows is a practitioner-focused recap of the most common and most impactful questions raised during the session, organized by topic and supplemented with practical planning takeaways.
Mailing Rules and Postmark Compliance
What is the safest way to meet current postmark requirements?
One of the most practical takeaways from the Heckerling Institute involved the mechanics of proving timely filing. Practitioners were cautioned against relying on blue USPS drop boxes, as postmarks are now often applied at centralized processing facilities and may reflect a later date than when the item was actually mailed.
The safest approach is to mail documents directly at a post office counter and request a manual post office stamp. For proof of timely mailing, the recommended method is a certificate of mailing, which currently costs approximately $2.40 and confirms the date the item was accepted by the Postal Service.
For additional documentation, practitioners can add an electronic return receipt for approximately $0.42. Using both the certificate of mailing and the electronic return receipt results in a total cost of about $4.40 for full proof of timely mailing. This combination is now widely viewed as more reliable than traditional certified mail.
Section 68, Trust Deductions, and Final-Year Issues
Does the Section 68 cutback apply to charitable deductions from CLATs and pooled income funds?
Yes. Section 68 contains no exception for charitable deductions under Section 642(c), including those arising from charitable lead annuity trusts or pooled income funds. While this result aligns more comfortably with policy in the CLAT context, it is less intuitive for pooled income funds where the charity ultimately bears the tax burden. Nevertheless, the limitation applies under current law.
How does Section 68 affect excess deductions in a trust’s final year?
Section 68 does not alter the fundamental rule that excess deductions in a trust’s final year pass out to beneficiaries rather than being absorbed at the trust level. The beneficiaries then apply their own Section 68 limitations. This applies whether the beneficiary is an individual or another trust. Although the IRS generally declines to rule on trust-to-trust mechanics, the same analytical framework logically applies.
Why are Sections 651 and 661 deductions treated as itemized deductions?
Section 63(d) defines itemized deductions broadly as all deductions other than those allowed in computing adjusted gross income or those specifically excluded by statute. Because Sections 651 and 661 are neither AGI deductions nor statutory exclusions, they fall into the residual category of itemized deductions and are therefore subject to the Section 68 limitation.
Are ESBTs a viable response to Section 68?
ESBTs can be useful in limited circumstances, particularly in states where ESBT distributions avoid state and local tax at the beneficiary level. The tradeoff is that ESBT income is taxed at the highest federal rate. This strategy may be attractive where beneficiaries are not themselves in top brackets and state tax savings are meaningful. It is not a universal solution and requires careful modeling.
Withdrawal Rights as a Planning Tool
Do HEMS-limited withdrawal rights trigger grantor trust status under Section 678?
The panelists indicated that a withdrawal right limited by health, education, maintenance, and support is likely sufficient to avoid Section 678 ownership. The HEMS standard provides a meaningful limitation that distinguishes these rights from unfettered withdrawal powers.
What happens if a beneficiary is granted a full withdrawal right?
If a trustee has discretion to grant a full withdrawal right and does so, the beneficiary likely becomes the owner of that portion of the trust under Section 678. Practitioners can draft income rights as withdrawal rights while still satisfying spousal income requirements, including those applicable to QTIP trusts.
What are the estate tax and creditor implications?
If a withdrawal right is exercised as expected, the assets withdrawn are no longer held in trust and therefore are not subject to trust-level estate inclusion or creditor exposure. If the right lapses unexercised, estate inclusion and potential gift tax issues may arise, particularly if the lapse exceeds the five-and-five safe harbor. The practical guidance was clear. Withdrawal rights should be granted only when they are expected to be used and should not be repeated unnecessarily.
SALT Planning with Trusts and Pass-Through Entities
Did trusts receive the higher SALT cap?
Yes. Trusts are treated as taxpayers for this purpose and benefit from the increased SALT cap, which is approximately $40,400 in the relevant year.
Can placing a residence in a non-grantor trust increase SALT deductions?
A non-grantor trust that owns a residence and income-producing assets can apply its own SALT cap to real estate taxes. However, practitioners must consider that trusts reach the highest tax brackets quickly and are subject to Section 68.
Section 121 exclusion and residences held in trust
While trusts can be effective owners of residential real estate, non-grantor trusts generally cannot satisfy the two-out-of-five-year occupancy requirement needed to claim the Section 121 exclusion. As a result, placing a principal residence into a non-grantor trust often forfeits the $250,000 exclusion that would otherwise be available to an individual owner. For this reason, the panel noted that this strategy is typically more attractive for vacation homes, where the exclusion would not apply in any event.
How should PTE taxes be handled for investment partnerships?
Even where a partnership has no line-one trade or business income, PTE taxes are commonly reported as other deductions on Schedule K-1. IRS guidance issued in 2020 effectively validated the SALT workaround, and no significant authority has disallowed the deduction on the basis that the partnership lacks business income.
Estate Planning Updates
Portability elections under Rev. Proc. 2022-32
When no estate tax return is otherwise required, Rev. Proc. 2022-32 provides automatic relief to elect portability within five years of death. No extension request is necessary. The Form 706 should clearly state that it is filed pursuant to the revenue procedure to ensure the election is recognized.
Discount Planning After Moore: Reassessing Old Assumptions
The panel also addressed the implications of the Moore case and its impact on traditional valuation discount planning. The discussion highlighted that discount strategies which were once highly effective for reducing estate tax exposure may now create unintended downsides for many clients.
As noted during the session, when discounted values are reported on an estate tax return, the corresponding step-up in basis is also limited. While discount planning can reduce estate tax, it may simultaneously reduce income tax benefits by limiting the basis adjustment at death.
This issue is particularly relevant for clients whose transfer tax exposure has diminished over time due to increased exemption amounts. For those clients, the estate tax savings achieved through discount planning may no longer justify the loss of a full basis step-up. The panel emphasized the importance of revisiting older planning structures and transactions to determine whether discount provisions continue to serve a meaningful purpose or whether they should be modified or unwound in light of current tax realities.
TRUMP Accounts Versus UTMA Accounts
TRUMP accounts offer tax-free growth but impose contribution limits, age restrictions, and penalties for early distributions. UTMA accounts lack these tax advantages but offer greater flexibility and fewer restrictions. The much-discussed government seed contribution operates more like a tax credit mechanism than a direct cash deposit, and details remain subject to refinement.
Cancellation of Debt Income and Discounted Notes
The panel addressed a common estate administration question involving a loan from a parent to a child where the note is valued at less than face value on the parent’s estate tax return. Practitioners asked whether the child recognizes cancellation of debt income when the note is later extinguished.
The panel’s answer was clear. No income is recognized. When the estate transfers the note back to the child, the transaction is treated as a gift, not a cancellation of indebtedness for income tax purposes. As a result, the child does not recognize taxable income from being relieved of the obligation to repay the note.
Divorce, Decanting, and Public Policy
Why did decanting fail in CS v. RH?
The court focused on the husband’s effective control over trust assets rather than formal trust law distinctions. Although the wife was not a beneficiary, the decanting strategy and retained control caused the court to treat the trust interests as marital property for equitable distribution purposes.
Does changing trust situs to a DAPT-friendly state solve the problem?
No. Divorce courts apply their own domestic relations law. Moving trust situs to a state like Nevada or South Dakota does not prevent a court from evaluating control and economic benefit under its own marital property framework.
Can spouses contract around this risk?
In some states, including New York, spouses may enter into enforceable agreements defining property rights before or during marriage. These agreements must be fair and reasonable when made and not unconscionable at enforcement. Adequate disclosure and separate counsel are critical when trust interests are involved.
Reimbursing Grantors for Income Taxes
Adding a reimbursement clause after a trust is established can create gift tax issues. More viable approaches include moving situs to a state with statutory reimbursement rights or using an existing swap power to extract value economically. For large, unplanned taxable events, clean reimbursement options are limited, underscoring the importance of advance planning.
About EstateMin
EstateMin is a legal technology platform built specifically for trust, estate, and probate practitioners. We help firms reduce administrative workload through intelligent automation, AI-powered workflows, and a secure client portal designed for estate administration and planning matters. By streamlining document collection, task management, and client communication, EstateMin enables attorneys to spend less time on process and more time on high-value advisory work. We work closely with trust and estate professionals across the United States and internationally and regularly support and speak at CLE-accredited programs and industry events focused on the future of estate planning practice. Get in touch to learn more here.
Book a demo with EstateMin here
This article is provided for general informational and educational purposes only and reflects the author’s views and interpretations of publicly discussed topics. It does not constitute legal, tax, or professional advice, nor does it create an attorney-client relationship. Readers should not act or refrain from acting based on this content without seeking advice from qualified professional advisers regarding their specific circumstances.