Proposed Tax and Estate Reform Measures Targeting HEETs, Carried Interest, Conservation Easements, and Non‑Spouse IRA Distributions

of direct payments for tuition and medical expenses are subject to GST but for this special exclusion. Also, although HEETs have been written about in planning publications, it is unclear how often they are actually implemented: donors who use their GST exemption for multi-generational trusts often feel that they've done “enough” for those lower generations, and may lack the charitable intent necessary for the HEET to work. In addition, given life’s uncertainties, trust creators may be reluctant to limit trust distributions to tuition and medical expenses only. Tax “carried” (profits) interests as ordinary income. In exchange for their services on behalf of hedge funds and private equity funds, managers of these entities are often compensated with what are called “carried interests,” or profits from the entity. Because these profits interests are structured as partnership interests, they pass through long-term capital gain to the partners/managers, and are therefore taxed at preferential rates. The proposal would not recharacterize the treatment of a partner’s investment in the entity, but would tax as ordinary income what is viewed as compensation for the partner’s investment management services for the partnership. Thus, a partner’s share of income in an “investment services partnership interest” (ISPI), regardless of how the income is characterized at the partnership level, would be taxed as ordinary income, and would also be subject to self-employment tax. An ISPI is an interest in future profits of an “investment partnership”; an investment partnership is one in which substantially all of the entity’s assets are investment-type assets, such as certain securities, real estate, interests in partnerships, commodities, cash or cash equivalents, or derivative contracts related to those assets. Tighten up conservation easements. Donors of conservation easements typically get a charitable deduction for the permanent restrictions they put on property that will be used exclusively for conservation purposes. Recent court decisions have upheld large deductions for easements preserving recreational amenities, including golf courses, surrounded by upscale homes. These contributions have raised concerns that the deductions claimed are excessive and seem to promote private interests rather than bona fide conservation activities. The proposal would prohibit a deduction for a conservation easement on a golf course. A second proposal would address historic preservation easements, and would disallow a deduction for restricting the “upward development” of an historic building, since such development is typically already restricted under local ordinances. In addition, conservation easements on buildings listed in the National Register would need to comply with the same (more stringent) rules applicable to buildings in a registered historic district. Limit protracted payout for non-spouse beneficiaries of IRAs and retirement plans. Under current law, a non-spouse beneficiary of an IRA or a retirement plan (such as a 401(k)) must begin taking “required minimum distributions” (RMDs) from the account the year after the account owner’s death, but can spread those distributions out over her life expectancy. Thus, if widowed Mom names Child as beneficiary of her IRA, for example, and Child is 40 when Mom dies, Child’s RMDs can last over 40 years, assuming those are the only distributions Child takes from the account. The proposal would change this rule, and in general would require that non-spouse beneficiaries withdraw the balance of the retirement account within five years after the owner’s death. (Certain exceptions would apply for “eligible” beneficiaries, such as those who are disabled, chronically ill or a child under the age of majority.) The reason for the proposed change is that retirement accounts were intended to benefit owners and their spouses, and not heirs such as children and grandchildren. Comments. It is not surprising to see this proposal, as last year, something similar was in a highway bill, but was then pulled. Given the need for revenue, limiting the generous protracted payouts currently permitted for non-spouse beneficiaries seems like low-hanging fruit. If enacted, the proposal would potentially make it less attractive for owners of substantial traditional IRAs to convert that IRA into a Roth Tax Topics 04/29/13 4 HOUSE_OVERSIGHT_022364