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From the Internal Revenue Service’s (IRS’s) issuance of private letter rulings regarding extensions and trust modifications to a nationwide injunction against the enforcement of the Corporate Transparency Act (CTA) deadlines and newly released Medicaid and Veterans and Survivors Pension figures, we have recently seen significant legal developments.
To ensure that you stay abreast of these changes, we have highlighted some noteworthy developments and analyzed how they may impact your estate planning, elder and special needs law, and business law practices.
Estate Planning
IRS Issues Private Letter Rulings Allowing Extensions of Time and Addressing Impact of Trust Modification
I.R.S. Priv. Ltr. Rul. 2024-46-006 (Nov. 15, 2024); I.R.S. Priv. Ltr. Rul. 2024-46-007 (Nov. 15, 2024); I.R.S. Priv. Ltr. Rul. 2024-47-003 (Nov. 22, 2024); I.R.S. Priv. Ltr. Rul. 2024-48-002 (Nov. 29, 2024); I.R.S. Priv. Ltr. Rul. 2024-48-008 (Nov. 29, 2024)
Requests for Extensions of Time
On November 22, 2024, the IRS issued Private Letter Ruling 2024-47-003, granting a request for an extension of time to opt out of the automatic allocation of the generation-skipping transfer (GST) exemption. The taxpayer involved created and funded one trust for the primary benefit of his daughter and another trust for the primary benefit of his son. Both trusts had GST tax potential. The taxpayer knew that Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return was required for the transfers made to the trusts but did not intend for any portion of his GST tax exemption to be applied to those transfers. However, the firm he hired to prepare his Form 709 failed to elect not to have the GST tax exemption apply under Internal Revenue Code (I.R.C.) § 2632(c)(5). The taxpayer died the following year. One year after the taxpayer’s death, the tax preparation firm discovered the failure to make the election, and the executor of the taxpayer’s estate requested an extension of time to opt out of the automatic allocation of the GST exemption. In its ruling, the IRS determined that the taxpayer had acted reasonably and in good faith in relying on a qualified tax professional who failed to make the election. Therefore, the IRS granted relief to the executor by allowing the executor to make an election within 120 days following the date of the letter.
On November 29, 2024, the IRS issued Private Letter Ruling 2024-48-008, granting a request for an extension of time to elect portability. In this case, the decedent was survived by a spouse. Based on the value of the decedent’s estate, the estate was not required to file a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. Because Form 706 was not filed, no portability election was made to allow the spouse to take the unused portion of the decedent’s applicable exclusion amount. After determining that the decedent’s estate acted reasonably and in good faith and that the extension would not prejudice the interests of the government, the IRS granted the decedent’s estate’s request for an extension of time of 120 days from the date of the letter to make the portability election.
Impact of Trust Modifications
On November 15, 2024, the IRS issued Private Letter Rulings 2024-46-006 and 2024-46-007, confirming that there would be no GST tax consequences associated with proposed trust modifications. The settlor had created trusts for two granddaughters that were to end when the granddaughters reached a stated age. A judicial reformation of the trusts was proposed for the trusts to last for the granddaughters’ lifetimes and grant each granddaughter a testamentary power to appoint the trust assets to her creditors or the creditors of her estate. The IRS determined that the proposed judicial reformation would not result in a shift of any beneficial interest to any beneficiary occupying a generation lower than the persons holding the beneficial interests, and the modified trust would not extend the time for vesting of any beneficial interest beyond the period set forth in the original trust. As a result, the IRS ruled that after the modification of the trusts, the trusts would remain exempt from applying the GST tax, and no distribution from or termination of any interest in the trusts would be subject to the GST tax.
On November 29, 2024, the IRS issued Private Letter Ruling 2024-48-002, confirming that proposed trust modifications would not disqualify a trust as a charitable remainder trust. A and B created a fixed percentage charitable remainder unitrust that required the trustees to pay a unitrust amount equal to five percent of the net fair market value of the trust’s assets each year during their lifetimes. The trust provided that upon the death of either A or B, the trustees must pay the unitrust amount to the survivor. B died first, and A currently receives the entire unitrust amount. The trust provides that upon A’s death, the trust will terminate, and the trust property will be distributed to one or more charitable organizations. With A’s consent, the trustees proposed reforming the trust instrument to provide the following:
- The trustees may distribute all or a portion of the trust assets to the charitable organizations that are the trust’s remainder beneficiaries.
- If a charitable organization is not a permissible remainder beneficiary, the distribution to that organization will lapse, and the assets that would have been distributed to it will instead remain in the trust.
- If there is a distribution of only a portion of the trust assets in kind, the adjusted basis of the property distributed must be fairly representative of the adjusted basis of the property available for payment on the date of payment.
- After a distribution to a permissible remainder beneficiary during A’s lifetime, the sum of the unitrust amount plus any deficiency payable will thereafter be calculated based on the remaining net fair market value of the trust assets on the first day of the trust’s succeeding taxable year.
The IRS ruled that the proposed modification would not disqualify the trust as a charitable remainder unitrust.
Takeaways: Although private letter rulings are not binding precedents and cannot be relied upon by other taxpayers or IRS personnel, they are instructive regarding the IRS’s position on an issue. Some of the preceding private letter rulings provide a reminder that, depending on the circumstances of each case, where the IRS determines that the taxpayer acted reasonably and in good faith, extensions of time may be available to file certain elections, such as an election to opt out of GST tax exemption or a portability election. Several of the mentioned private letter rulings address the impact of trust modifications: When contemplating a trust modification, it may be prudent to request a private letter ruling on its potential effect if there is a concern that the modification could have adverse tax or other consequences.
Under ERISA, Life Insurance Proceeds Must Be Paid to Decedent’s Son as Required by Separation Agreement Instead of Girlfriend Who Was the Named Beneficiary
Hartford Life & Accident Ins. Co. v. Valois, No. 23-3286, 2024 WL 4678055 (9th Cir. Nov. 5, 2024)
Haili Kowalski and her ex-husband entered into a legal separation agreement (LSA) that required the ex-husband to maintain a life insurance policy in the amount of $800,000 naming their minor son, E.K., as beneficiary. The ex-husband later started a new job that provided him with a Hartford insurance policy for $493,000. He named his girlfriend, Marilyne Valois, as the policy’s beneficiary.
After Haili’s ex-husband died, both Marilyne and Haili, on behalf of her son, asserted that they were entitled to the proceeds of the Hartford life insurance policy. In an interpleader action, the United States District Court for the Northern District of California granted summary judgment in favor of Haili concerning the life insurance proceeds on the basis that the LSA was a Qualified Domestic Relations Order (QDRO) under the Employee Retirement Income Security Act (ERISA).
On appeal, the Ninth Circuit Court of Appeals affirmed. Under ERISA, benefits must be paid in accordance with the requirements of any QDRO. To qualify as a QDRO (see 29 U.S.C. § 1056(d)(3)), the LSA must clearly specify the plan to which the QDRO applies. Although Marilyne asserted that the LSA was not a QDRO because it did not specifically name the Hartford insurance policy, the court held that only “substantial compliance” with ERISA’s specificity requirements sufficient to avoid “uncertainty concerning the identity of the beneficiary” was necessary. Hartford Life & Accident Insurance Co. v. Valois, No. 23-3286, 2024 WL 4678055, at *1 (9th Cir. Nov. 5, 2024). Because the ex-husband only had one life insurance policy, and the LSA mentioned “a policy of life insurance,” he was required to name his son E.K. as the sole beneficiary of the Hartford policy. Id. As a result, the court ruled that the LSA was a QDRO because it met the ERISA specificity requirement.
The court rejected Marilyne’s argument that the LSA, which required the ex-husband to provide an $800,000 life insurance policy for the benefit of his son, was not a QDRO because it required Hartford to provide increased benefits in contravention of ERISA, 29 U.S.C. § 1056(d)(3)(D)(ii). The court determined that the LSA, an agreement solely between Haili and her ex-husband, was not binding on Hartford and thus did not require it to provide more than the $493,000 in life insurance proceeds specified in the Hartford policy.
Takeaways: The Valois case highlights the importance of reviewing and considering clients’ marital agreements to ensure their estate planning documents and retirement account and life insurance policy beneficiary designations align with those agreements. In addition, estate planners should consider consulting an employee benefits attorney when questions arise regarding employee benefits covered by ERISA, a complex law that may preempt some state laws impacting clients’ estate plans. Although a beneficiary designation generally will override any contrary provision in a will or trust, in a benefit plan governed by ERISA, a beneficiary designation contrary to the terms of a QDRO generally will not be honored, as the court held in the Valois case.
Elder Law and Special Needs Law
2025 Medicaid and Veterans Pension Figures Released
Medicaid Spousal Impoverishment Figures. On November 15, 2024, the Centers for Medicare & Medicaid released the following increases, effective January 1, 2025:
- The Community Spouse Resource Allowance (CSRA) will increase to a range of $31,584 to $157,920.
- The home equity limit will increase to a range of $730,000 to $1,097,000.
- The Minimum Monthly Maintenance Needs Allowance (MMMNA) will increase to a range of $2,555 to $3,948, with Alaska’s and Hawaii’s MMMNA rising to $3,192.50 and $2,937.50, respectively.
The CSRA and MMMNA figures are used to determine the amount of income and resources that can be retained by a community spouse when their spouse is applying for or receives Medicaid for long-term care.
Veterans and Survivors Pension Figures. The US Department of Veterans Affairs (VA) released its current pension rates for Veterans, effective December 1, 2024, to November 30, 2025. The Maximum Annual Pension Rate (MAPR) for VA Pension for Veterans with no dependents who qualify for housebound or aid and attendance benefits is $28,300. The net worth limit for eligibility is $159,240. The MAPR for a Veteran with a dependent spouse is $33,548.
The VA also released the current pension rates for survivors, effective December 1, 2024, to November 30, 2025. The MAPR for VA Survivors Pension for surviving spouses with no dependents who qualify for housebound or aid and attendance benefits is $21,696. The net worth limit for eligibility is $159,240. See the VA’s website for additional figures.
The Veterans Pension program provides monthly payments to wartime Veterans who meet certain age or disability requirements and whose income and net worth are within the specified limits. The VA Survivors Pension program provides monthly payments to qualified surviving spouses and unmarried dependent children of certain wartime Veterans whose income and net worth are within the specified limits.
Takeaways: Please note that each state determines its own Medicaid figures, which must remain within the thresholds set by the federal figures. Those state-specific numbers are generally updated annually in Elder Docx before the end of January.
Business Law
Corporate Transparency Act Blocked by Nationwide Injunction
Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-00478, 2024 WL 4953814 (E.D. Tex. Dec. 3, 2024)
On December 3, 2024, the United States District Court for the Eastern District of Texas entered a nationwide preliminary injunction against the enforcement of the CTA. The court determined that the government’s case seeking enforcement of the CTA was unlikely to succeed on the merits because the CTA is not a valid exercise of Congress’s enumerated powers under the Tenth Amendment of the US Constitution: Contrary to the government’s assertion, neither the Commerce Clause nor the Necessary and Proper Clause vest Congress with the power to enact the CTA.
First, the court held that the CTA exceeds Congress’s power to regulate commerce because it does not regulate a preexisting activity but instead compels a new one by requiring companies to file a beneficial ownership information (BOI) report. The court held that the CTA regulates reported companies simply because they are entities registered in a state and compels the disclosure of BOI for law enforcement purposes: “The fact that a company is a company does not knight Congress with some supreme power to regulate them in all aspects especially through the CTA, which does not facially regulate commerce.” Texas Top Cop Shop, Inc. v. Garland, No. 4:24-cv-00478, 2024 WL 4953814, at *25 (E.D. Tex. Dec. 3, 2024). The court determined that upholding the CTA would substantially expand the commerce power beyond “centuries of precedent,” and it declined to do so. Id.
Second, the court ruled that the Necessary and Proper Clause, which grants Congress the authority to enact statutes rationally related to implementing a constitutionally enumerated power, did not authorize the CTA. Although the government asserted that the CTA was necessary and proper in service of Congress’s power to regulate commerce, regulate foreign affairs, and impose and collect taxes, the court disagreed. The court determined that the CTA’s mandatory disclosure requirements were not justified as necessary and proper to regulate commerce since there was no preexisting activity as required by the commerce clause. In addition, the CTA is not connected to Congress’s constitutional authority over foreign affairs. Rather, it regulates the anonymous existence and conduct of companies created or registered to do business under state law, which is an exclusively domestic issue. Finally, the court determined that the CTA does not impose a tax or generate revenue and thus is not within Congress’s power to tax, nor is it necessary and proper to implement its power to impose and collect taxes.
The court determined that because the enforcement of the CTA would violate the constitutional rights of the plaintiffs—a private individual and five business entities—and cause them to incur compliance costs, they would suffer irreparable harm in the absence of preliminary relief. In addition, the court ruled that a nationwide injunction was appropriate because the CTA and its regulations apply to millions of existing reporting companies, and it was necessary to provide meaningful relief.
Takeaways: In contrast to National Small Bus. United v. Yellen, No. 5:22-cv-1448-LCB, 2024 WL 899372 (N.D. Ala. Mar. 1, 2024), which enjoined the enforcement of the CTA only against the named plaintiffs, Texas Top Cop Shop provides nationwide relief from the CTA’s BOI reporting requirements for businesses falling within the CTA’s definition of a reporting company. The CTA took effect January 1, 2024. Businesses formed after January 1, 2024, but before January 1, 2025, were required to report their BOI within 90 days after formation or registration. However, many of the 32.6 million existing reporting companies existed before 2024, and they now have at least a temporary reprieve from compliance with the January 1, 2025, reporting deadline. WealthCounsel members may visit the Corporate Transparency Act webpage on the member website for additional information and updates.
Texas Federal Court Vacates 2024 DOL Final Rule Increasing Minimum Salary Threshold for White Collar Overtime Exemptions
Texas v. Dept. of Labor, No. 4:24-CV-499-SDJ, No. 4:24-CV-468-SDJ, 2024 WL 4806268 (E.D. Tex. Nov. 15, 2024)
The Fair Labor Standards Act (FLSA) (29 U.S.C. §§ 201–219) requires covered employers to pay their employees federal minimum wage and overtime pay unless the employees fall within one of several exemptions, including the exemption for executive, administrative, and professional (EAP) employees. The FSLA does not include a minimum salary level or language regarding compensation level for an employee to fall within the EAP exemption but merely states that the minimum wage and overtime pay requirements do not apply to “any employee employed in a bona fide executive, administrative, or professional capacity,” as those terms are “defined and delimited” by agency regulations (29 U.S.C. § 213(a)(1)). Since the FLSA’s enactment, the US Department of Labor’s (DOL’s) regulations have included a minimum salary level for EAP employees, and courts upheld the DOL’s authority to impose the prior salary level test for employees to qualify for the exemption.
In April 2024, the DOL issued a final rule making changes to the minimum salary level that were to occur in three stages: (1) starting July 1, 2024, the 2024 final rule raised the minimum salary from $684 per week to $844 per week; (2) starting July 1, 2025, the minimum salary would increase from $844 to $1,128 per week; (3) starting July 1, 2027, a mechanism designed to automatically increase the salary level every three years based on contemporary earnings data without public notice and comment would take effect.
In June 2024, the state of Texas obtained a preliminary injunction against the enforcement of the 2024 final rule. The June 2024 preliminary injunction was granted only for Texas; the 2024 final rule took effect July 1, 2024, for all other employers.
The United States District Court for the Eastern District of Texas then consolidated Texas’s case with the cases of a coalition of business organizations. After an extensive analysis of the history of the FSLA, EAP exemption, and prior DOL rules, the court determined that the FSLA required a duties-based test applicable to employees who perform executive, administrative, or professional capacity duties. The court ruled that the DOL had exceeded its authority in implementing the 2024 final rule because its salary thresholds “‘effectively eliminate’ consideration of whether an employee performs ‘bona fide executive, administrative, or professional capacity’ duties in favor of what amounts to a salary-only test.” Texas v. Dept. of Labor, No. 4:24-CV-499-SDJ, No. 4:24-CV-468-SDJ, 2024 WL 4806268, at * 17 (E.D. Tex. Nov. 15, 2024) (citations omitted). Because the DOL had exceeded its statutory jurisdiction, the court granted a summary judgment in favor of the state of Texas and the business organizations and vacated the 2024 final rule.
Takeaways: Notably, the court recognized that under the US Supreme Court’s recent decision in Loper Bright Enterprise v. Raimondo, 144 S. Ct. 2244 (2024), the role of a reviewing court under the Administrative Procedure Act is to independently interpret the relevant statute to determine whether an agency acted within its statutory authority in creating rules to implement the statute. The court’s November 15, 2024, ruling hinged on the express language of the FLSA, which exempts EAP employees from its minimum wage and overtime requirements based on their duties. Although previous iterations of the minimum salary standard implemented in prior versions of the DOL rules had been approved by the Fifth Circuit Court of Appeals, the maximum percentage of employees previously excluded from the EAP exemption under earlier DOL rules was 10 percent. The court contrasted this percentage with the 30 to 50 percent of EAP employees, representing millions of employees, who would be nonexempt under the minimum salary levels established in the 2024 final rule, ultimately resulting in billions of dollars in employer costs and payroll increases. As a result, the court determined that the salary requirements set forth in the final rule went well beyond the DOL’s authority to define and delimit the FLSA’s EAP exemption. Therefore, the increase in the minimum salary that occurred on July 1, 2024, has been nullified, and the scheduled July 1, 2025, increase and subsequent increases will not take effect. Because of the change in presidential administrations, it is unclear if the DOL will appeal the court’s decision to the Fifth Circuit Court of Appeals.
IRS Provides Limited Additional Relief in Implementation of Form 1099-K Reporting Requirement for Third-Party Settlement Organizations
I.R.S. Notice 2024-85 (Nov. 26, 2024)
The American Rescue Plan Act of 2021 lowered the Form 1099-K (Payment Card and Third Party Network Transactions) reporting threshold from aggregate payments of $20,000 and 200 transactions to $600 in aggregate payments with no minimum number of transactions. As a result, third-party settlement organizations (TPSOs) such as PayPal, CashApp, Venmo, and LawPay, used by many small businesses and individuals to sell goods and services, will eventually be required to report payments exceeding $600 to the IRS. Small businesses and individuals who use those applications for transactions exceeding $600 will receive Form 1099-K and must report the income listed on it on their income tax return. This reporting requirement will inform the IRS about millions of previously unreported transactions.
The initial effective date was January 1, 2022. However, in Notice 2023-10 and Notice 2023-74, respectively, the IRS announced that 2022 and 2023 would be transition periods and continue to be subject to the $20,000 and 200 transaction thresholds. On November 26, 2024, the IRS issued Notice 2024-85, which provides additional—although more limited—relief:
- For 2024, TPSOs must report transactions when the total payments exceed $5,000.
- For 2025, the reporting requirement applies when the total payments exceed $2,500.
- For 2026 and after, the reporting requirement applies to total payments exceeding $600.
Takeaways: Form 1099-K is an informational tax form and may include amounts that are not taxable, such as payments from family members or friends that are reimbursements or gifts. As a result, individuals and businesses should keep accurate records of personal and business transactions or consider using separate accounts.
