Gifting in 2021 is a case of ‘Use it or lose it’

By Jessica N. Cory

This article appeared as a Guest Column in The Oklahoman on April 27, 2021.

The federal government currently imposes a 40% tax on most lifetime gifts and transfers at death, with a few exceptions.

For example, taxpayers can make “annual exclusion gifts,” or transfers of $15,000 per person per year, to as many people as the transferring taxpayer desires, without incurring any gift tax or even having to file a gift tax return.

Phillips Murrah attorney Jessica Cory

Jessica N. Cory represents businesses and individuals in a wide range of transactional matters, with an emphasis on tax planning.

Taxpayers also can make tax-free gratuitous payments for certain educational and medical expenses and can make tax-free (and tax-advantaged) transfers to charitable organizations.

In addition, taxpayers are also permitted to gift up to a set “unified credit amount” free of the gift or estate tax, whether the transfers are made during life or at death.

Under the Tax Cuts and Jobs Act of 2017 (the “TCJA”), the unified credit amount was temporarily doubled, greatly increasing the ability for individuals to engage in strategic planning and reduce their future taxable estates. For example, the unified credit amount is $11.7 million in 2021 (or $23.4 million for a married couple), up from $5.49 million in 2017. However, given the possibility of tax changes in 2021, it may be time to finalize some planning and lock-in at the current unified credit amount.

For many individuals, taking advantage of the current higher unified credit amount involves a tricky balance, navigating between transferring as much wealth as possible out of the individual’s taxable estate, while at the same time maintaining sufficient income and financial security.

One solution for this type of situation is a Spousal Lifetime Access Trust (or “SLAT”). With this type of trust, an individual establishes an irrevocable trust for the benefit of his or her spouse, and funds it with a completed gift, removing those assets from the individual’s estate and taking advantage of the current $11.7 million unified credit amount. The SLAT can be set up to allow the trustee to make income and principal distributions from the trust to the beneficiary-spouse during the spouse’s lifetime, providing the couple with a future income stream even after the gift is complete.

Because a SLAT offers the ability to make a gift now, using up some of the historically high unified credit amount while preserving access to income and principal, it is a valuable estate planning tool, especially in 2021.

However, SLATs are not without some potential pitfalls.

For example, if two spouses each want to set up a SLAT for the other, the trusts must be carefully drafted to avoid something known as the “reciprocal trust doctrine,” which the IRS can use to essentially unwind the couple’s planning and pull the trust assets back into their estates.

In addition, because a SLAT involves a completed gift to the beneficiary-spouse, the donor-spouse must give up all control over the property placed into trust, including in the event of a subsequent divorce or the death of the beneficiary-spouse. Accordingly, it is important to carefully weigh a number of considerations before funding a SLAT, including other gifting strategies that can effectively leverage the unified credit amount.

Minimizing future estate tax is only one component of a successful estate plan.  However, given the current legislative environment, it is a particularly important piece this year.

Under the tax plan that President Biden campaigned on, the unified credit amount would be reduced significantly, potentially back to 2009 levels, or $3 million. Accordingly, it makes sense to use up the unified credit now, before potentially losing it later this year or in 2022.

For more information on how the information in this article may impact your business, please call 405.552.2472 or email Jessica N. Cory.

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Income tax challenges for medical marijuana businesses in Oklahoma

Jessica Cory web

Jessica N. Cory represents businesses and individuals in a wide range of transactional matters, with an emphasis on tax planning.

In this article, Oklahoma City Attorney Jessica N. Cory explores the conflict between federal and state law as it pertains to Oklahoma medical marijuana businesses.

What is the primary federal tax issue for Oklahoma medical marijuana businesses?

Jessica Cory, attorney with Phillips Murrah law firm answers: The primary tax issue for Oklahoma medical marijuana businesses stems from the conflicting treatment of the marijuana industry under federal and state law. Although the approval of State Question 788 last summer legalized the use, growth and sale of medical marijuana for state purposes, marijuana remains an illegal drug under the federal Controlled Substances Act. Special tax provisions apply to penalize anything deemed illegal drug trafficking under federal law, including licensed medical marijuana businesses.

What are the specific federal tax burdens a medical marijuana business will face?

Internal Revenue Code Section 280E represents the biggest tax challenge for medical marijuana businesses. Generally, the Internal Revenue Code allows a taxpayer to take a deduction for all “ordinary and necessary” business expenses paid or incurred during the taxable year. Congress has created an exception to this rule in certain instances, however.

One such exception is Code Section 280E, which prohibits a taxpayer engaged in the business of “trafficking in controlled substances” from taking a deduction for ordinary business expenses. Because the federal Controlled Substances Act defines marijuana as a Schedule I drug, Code Section 280E severely limits the types of deductions available to a medical marijuana business.

Although Code Section 280E prevents a marijuana business from taking normal business deductions, it does not bar a business from offsetting its gross receipts with its cost of goods sold (“COGS”). This means a business can at least reduce its potential taxable income by its direct costs of production. However, the Internal Revenue Code has issued guidance strictly limiting the types of costs a taxpayer engaging in a marijuana business can allocate to COGS, to prevent an end-run around Code Section 280E.

Case law supports this narrower interpretation of COGS for the marijuana industry, including prohibiting resellers of marijuana from including any indirect costs — costs other than the price paid for inventory plus any transportation or other necessary acquisition costs — in COGS.

Is there anything marijuana business owners can do to minimize their federal tax burden?

Yes, a tax professional can help marijuana businesses develop strategies for minimizing the impact of Code Section 280E. For example, a tax adviser can help a business differentiate between COGS and business deductions to take full advantage of the COGS offset allowed under federal law. In addition, a tax professional may be able to help a company structure its business to separate out its different activities to avoid having Code Section 280E apply too broadly. It is also essential for marijuana businesses to keep careful records, particularly if the business also engages in additional activities unrelated to growing, processing or selling marijuana.

Has there been any effort in Congress to fix the disparity in treatment under federal and state law?

Members of Congress have repeatedly introduced legislation to exempt marijuana businesses lawfully operating under state law from the parameters of Section 280E. For example, the Strengthening the Tenth Amendment through Entrusting States (“STATES”) Act, which would amend the Controlled Substances Act to protect people operating within the bounds of state cannabis laws, was recently reintroduced. Unfortunately, despite bipartisan support and the backing of several 2020 presidential candidates, the odds are not in favor of passage at this time.

Jessica Cory is an attorney with Phillips Murrah law firm.