Yearly Archives: 2018

When Can an Estate or Trust Distribute IRD to a Charity and Receive an Income Tax Charitable Deduction?—The Answer is not Simple

Nov 15, 2018 Michael YuAdd a Comment

Can an estate or trust with charitable and non-charitable beneficiaries (1) receive income in respect of a decedent (IRD) proceeds, (2) distribute (or set aside) for a charitable purpose the IRD proceeds, and (3) perhaps not be allowed an Internal Revenue (IRC) code section 642(c) income tax charitable deduction? You may know that the answer is “yes.” In their article, Professor F. Ladson Boyle and Jonathan G. Blattmachr not only explain when and why such income tax charitable deduction is available, but also suggest planning techniques to ensure that the deduction is, indeed, available.

To start, here are the authors’ suggested solutions for ensuring that the section 642(c) income tax charitable deduction is available to the estate or trust. First, if possible, designate the charity as the direct beneficiary of the individual retirement account (IRA) or other IRD; do not have the IRD proceeds pass through the decedent’s probate estate or revocable trust. (P. 413.) Second, if the charity cannot be the direct beneficiary of the IRD and if the governing testamentary instrument can be drafted or amended, then ensure that the IRD is “specifically devised to charity as a pre-residuary devise.” (P. 413.) Third, if an estate is in administration, then the personal representative “might distribute the IRD in kind to the charity as a part of the residuary devise due to the charity” (but not to satisfy a specific pecuniary amount). (P. 414.)

Fourth, if none of the foregoing options are viable and the estate will receive the IRD proceeds, then the personal representative “might fully distribute the portion of the estate that is due non-charitable beneficiaries in a tax year before collection of the IRD.” (P. 414.) Effectively, the charity becomes the sole beneficiary of the estate, and the IRD proceeds received will be fully offset by the charitable deduction (P. 414) (because, in the tax year when the IRD proceeds are received and distributed, there effectively are no non-charitable beneficiaries). Fifth, if the decedent had a revocable trust, the personal representative and the trustee of the revocable trust “should consider making a joint election under section 645 to treat the revocable trust as a part of the estate so that the section 642(c) charitable set aside deduction is available, if that is needed or desirable.” (P. 414.)

Those are the authors’ suggested solutions to the problem of a possibly unavailable income tax charitable deduction for distributing IRD to a charitable beneficiary. So, why and when is such income tax charitable deduction available? In order to answer that question, the authors must initially cover several topics, which are briefly summarized here. First, the authors note that, if both estate and income taxes must be paid, then the distribution of IRD to a non-charitable beneficiary may, ultimately, be very small. (Pp. 373-374.) Accordingly, the authors suggest that IRD be paid directly to an individual or charity; the authors note that, however, if an IRA is ultimately payable to an estate, the Service has allowed (in private letter rulings) estates to “assign IRAs and other retirement benefits to charities” (Pp. 374-375.) I wonder if seeking a private letter ruling might be a sixth suggested solution? The authors also conclude, after an extensive discussion, that “a charity’s residuary interest in an estate or trust is not a separate share within the meaning of section 663(c).” (P. 397.)

The authors then narrow the income tax charitable deduction issue to “whether a direction in a decedent’s will that a charity’s interest in the residue of an estate or trust should be satisfied out of any IRD will be given a tax effect under the Code and Regulations.” (P. 397.) The answer lies in determining whether the direction to allocate IRD assets (or their proceeds) to charity has “economic effect independent of income tax consequences,” which is from Treas. Reg. section 1.642(c)-3(b)(2). (Pp. 397-398.) Determining whether a direction has such “economic effect” is, however, no simple task.

The authors first summarize the charitable ordering rules (P. 399) and then the general rules for allocating deductions against different classes of income (Pp. 400-401); both sets of rules apply because the allocation of the charitable deduction “occurs before the allocation of other allowable deductions.” (P. 400.) An example in the Regulations shows one governing instrument’s provision that has “economic effect independent of income tax consequences” because, under the facts of that example, “the amount to be paid to the charitable organization each year is dependent upon the amount of ordinary income the trust earns within that taxable year.” (P. 402, citing the Treasury Regulation example.)

The facts in that Treasury Regulation example are: “A trust instrument provides that 100 percent of the trust’s ordinary income must be distributed currently to an organization described in section 170(c) and that all remaining items of income must be distributed currently to B, a noncharitable beneficiary.” (P. 403.) The authors note that “the amount of cash (or other property) that is distributed to the charity is directly related to the principal that is producing the income” and that a “change in the composition of principal affects the amount the charity is to receive” (P. 404.) Accordingly, the direction in this trust to direct 100 percent of the trust’s ordinary income to a charitable organization has “economic effect independent of income tax consequences.”

But wait!—IRD is usually treated as accounting principal, not accounting income. Consequently, the authors re-examine the charitable ordering rules and the general rules for allocating deductions against different classes of income, this time focusing on accounting principal like IRD. The authors conclude that, to have economic effect, a direction to allocate payment to a charity must have “an impact on the underlying assets that produce the income, and therefore on the entitlement to the income the property generates.” (P. 407.)

But don’t forget!—at issue is the allocating of IRD to a charity, not to a non-charitable beneficiary. The authors draw and analogize from what they have already discussed (among other things, separate share regulations, and distributions of income and of principal) to conclude that “an allocation of IRD to a tax-exempt charity seems to be valid as well under the 2012 charitable ordering Regulations.” (P. 408.) The authors note, however, that their conclusion is “not free of doubt, but is a reasoned analysis of the applicable Regulations.” (P. 412.) They posit that the “economic effect” test may, perhaps, only be determined as an objective question of fact on a case-by-case basis. (P. 412.) Finally, the authors conclude that a personal representative having, under the governing instrument or local law, the discretion to allocate IRD to a charity likely “will be ineffective” (P. 415) for lacking “economic effect.”

The authors have discussed the many legal topics invoked in answering when can an estate or trust distribute IRD to a charity and receive an income tax charitable deduction: the income taxation of trusts and estates, the income taxation of IRD, the separate shares of an estate or trust, a specific gift to a charity vs. a fractional residuary gift to a charity, the “economic effect” test of the Treasury Regulations, the charitable ordering rules, the general rules for allocating deductions against different classes of income, distributions of accounting income vs. accounting principal, distributions to charitable beneficiaries vs. non-charitable beneficiaries, and distributions pursuant to the governing instrument vs. under the personal representative’s discretion—all leading to the final topic of distributions by an estate or trust of accounting principal (as part of a residuary gift) to a charitable beneficiary. The authors concluded that the availability of an income tax charitable deduction for such a distribution is not always certain. When, at the end of the article, the authors proposed their alternative actions to take in order to avoid such a distribution (and tests and rules associated thereto), I was all ears.

Emphasizing the Public Interest in Charitable Gifts

Oct 15, 2018 Sarah WaldeckAdd a Comment

Susan Gary’s Restricted Charitable Gifts: Public Benefit, Public Voice makes the case for legal reforms that reflect the public’s interest in loosening donor control of charitable gifts. Gary writes that her article is aimed at advocating for the adoption of reforms that increase “the consideration of the public benefit standard in charities law,” so I know that she didn’t set out to change the way I teach my Estates course. But that’s exactly what she did, and it’s why I like her article.

In classes on charitable trusts, my big picture questions are about the relationship between donors and charities: when should the law defer to the dead hand and when should it permit charities to modify donor-restricted gifts? Gary’s article has convinced me that the public interest—not donors or charities—should instead assume center stage. Restricted Charitable Gifts: Public Benefit, Public Voice is one of those rare articles that prompts me to re-conceptualize material I’ve taught for many years, particularly the enforcement role of the attorney general.

Gary begins with the familiar observation that while the donor and charity are the immediate parties in any charitable gift, the public is also part of the transaction. For example, whenever a charitable donor receives a tax benefit from a gift, the public has subsidized the donor’s charitable giving. Trust law is also generous with charitable donors, exempting them from the Rule Against Perpetuities and other requirements for private gifts. When a gift is large enough, the public confers prestige on the donor, which can lead to improved social standing, business gains, and a generally enhanced reputation.

Gary uses well-known examples to illustrate why the public has an interest in whether and how long donors can place restrictions on charitable gifts. I won’t belabor these examples here, but in each, the public has an obvious interest in the charitable gift: the Barnes Foundation (arguably the greatest private American art collection), the Buck Trust (hundreds of millions of dollars earmarked for “the needy” in affluent Marin County, California), and the Leona M. and Harry B. Helmsley Trust (donor desired multi-billion dollar trust to be used “for the provision of care for dogs”). As Gary explains, in order for any of these gifts to be “charitable” under trust law, they must confer a “public benefit.” (P. 593-94.) The requirement of a public benefit raises questions about whether “the public should have a voice in how charitable assets are used” or if “some limit should be imposed on the donor’s directions, even if the directions comply with a general understanding of charitable purposes.” (P. 594.)

Enter the state attorney general. Donors usually cannot sue to enforce the terms of their charitable gifts. Instead, the attorney general oversees the use of charitable assets. As an elected official, the attorney general is likely to consider the preferences of the electorate when deciding whether to pursue an enforcement action. The examples in the preceding paragraph illustrate that sometimes donor-imposed restrictions conflict with the public interest. This conflict is frequently cited as a reason to give donors standing to enforce the terms of their charitable gifts.

Gary argues persuasively, however, that attention to the electorate may be one of the attorney general’s greatest strengths since “the Attorney General is elected to protect the interests of the public.” (P. 598.) In other words, oversight by the attorney general ensures that the public has a seat at the table. Using the attorney general’s political status as a justification for shifting more enforcement power to donors ignores that every donation has three parties: the donor, the charity, and the public that subsidizes and supports the charitable gift.

Gary recognizes the financial constraints and other structural limitations on the attorney general’s ability to monitor “every charity and every restricted gift.” (P. 598.) This is another oft-cited rationale for proposals that would broader donor standing. My Estates class has fallen into this trap for years: if not the attorney general, then the donor. But reforms that give donors increased enforcement power do little to advance the public’s interest in the charitable gift. Gary surveys proposals that re-allocate control over the terms of charitable gifts, including rules that would relax donor restrictions after a set number of years and expand the application of cy pres. The cumulative effect of Gary’s survey, and her article overall, is to emphasize that legal reforms in charities law must make the public’s voice as loud as that of donors and charities.

A Creditors’ Rights Perspective on Domestic Asset Protection Trusts

Sep 18, 2018 Kent D. SchenkelAdd a Comment

Property rights are contingent. While property owners enjoy exclusive access to property owned, laws governing creditors’ rights moderate owners’ rights under certain conditions. Failure to satisfy a debt can trigger legal processes that may even lead to a complete stripping of ownership rights in favor of the creditor. Viewed this way, the sorting of rights to property is a zero-sum game where a creditor’s gain offsets an owner’s loss.

Trusts can reduce the vulnerability of an owner’s property rights by adding additional complexity to the ownership arrangement. The spendthrift trust is the obvious example. In such an arrangement an owner transfers the ownership bundle in manner that is said to “split” new ownership rights between a trustee and one or more beneficiaries. Afterwards, the beneficiaries enjoy the benefits of ownership, but neither a beneficiary nor most third parties are capable of diminishing beneficial ownership rights in the spendthrift trust arrangement.

Spendthrift trusts are typically explained as devices. Reference is to the law governing trusts. In these explanations informed by trust law, the fact that creditors’ property rights, including those of involuntary creditors, are diminished by spendthrift trusts is incidental to the main event—the legal operation of the trust device itself. Policy justification focuses on the freedom of the original owner to “dispose” of property as he or she pleases. And while beneficiaries gain a beneficial interest that diminishes baseline property rights of creditors, we phrase our explanations in terms of what is missing from the beneficial owner’s bundle of rights. So we point out that, in a spendthrift trust, a beneficiary has no right to grant creditors an up-front inchoate right to beneficially-owned property. And despite that involuntary creditors lose baseline rights to the beneficial owner’s property, we focus on the beneficial owner’s loss of the “involuntary” right to transfer property rights to a creditor. But in fact, spendthrift trusts are no exception to the zero-sum sorting of property rights between owners and creditors. Rights gained by beneficiaries are lost by creditors.

Crucial to creation of a spendthrift trust is a benefactor who transfers property rights to the trust arrangement. But a newer legal invention, the so-called “self-settled domestic asset protection trust” (DAPT), dispenses with the necessity of the gratuitous third-party transfer. In these devices, the settlor becomes the beneficiary; the trust is “self-settled.” The DAPT is necessarily statutorily enabled, as the common law justification for spendthrift trusts, the freedom of disposition of the original owner, is absent from the facts. The original owner retains, rather than disposes of, his or her beneficial ownership rights. Yet the nomenclature reveals the bias in favor of the trust beneficiary. Trust properties are “assets” and assets are “protected.” Of course, to “protect” an asset is to increase an owner’s rights, and to diminish the rights of creditors. Here, however, it may not be so easy to de-emphasize the zero-sum nature of property rights. A scholar viewing these devices from the creditor’s standpoint may in fact cry “foul.” Professor James J. White, in a provocatively entitled essay appearing in the Uniform Commercial Code Law Journal, concludes that these devices “are fraudulent conveyances plain and simple.” Although White considers his view both “dispassionate” and “slightly skeptical,” he seems particularly concerned about involuntary creditors; his primary examples being “ex-wives and malpractice plaintiffs.”

Professor White first briefly reviews the history of the DAPT, pointing out that while prior to 1997 the device was not available in any U.S. jurisdiction, now seventeen states enable some version of the DAPT. Before enactment of DAPT statutes, Americans wishing to curb creditors’ rights to property they owned by placing that property in trust had to do so through the laws of certain foreign jurisdictions such as the Cook Islands. In 1997, however, the states of Delaware and Alaska enacted statutes enabling domestic self-settled trusts that curbed creditors’ rights to the settlor/beneficiary’s property. Since that time, another fifteen states enacted similar statutes. According to Professor White, while the sponsors of the Delaware and Alaska legislation were entrepreneurs, lawyers, and trust companies who saw a market for these trusts, later “unsuspecting and uninformed” legislators were simply swayed by the argument that their jurisdictions needed similar statutes in order to keep assets and trust business from flowing to other states. White attempts to assure us that with these reasons for the legislation, legislators did not actually face the “reprehensible” reversal of longstanding public policy that self-settled trusts could not foil the rights of creditors and “stiff ex-wives and deprive successful malpractice plaintiffs from satisfaction out of a settlor/defendant’s trust assets.” Perhaps Professor White assumes too much naiveté on behalf of legislators here. It seems at least as likely that many of these legislators were sympathetic to the favored causes of certain constituents and campaign donors.

Regardless of the reasons for enactment in the various states, Professor White is certainly correct when he notes that the promoters of these trusts, post-adoption by the legislature, focus on the DAPT’s ability to protect assets from claims of creditors. Some promoters are very specific, listing divorce and tort actions as occasions where these trusts offer protection. As White sums it up, “the multiple pages of internet listings, some subtle, some strident, and some with false denials make plain that keeping assets out of the hands of creditors, particularly tort plaintiffs and former wives, is a principal purpose of these trusts.” But the value of White’s insights for the trusts and estates bar lies in his discussion of the changes that the statutes made to fraudulent conveyance law, and his consideration of whether those changes mean that property transfers to these trusts fall outside the rather complicated determination of a fraudulent conveyance. DAPT statutes reduce the statute of limitations for filing claims based on a fraudulent conveyance and require the claimant to prove actual intent on the part of the property owner to “hinder, delay or defraud” a creditor.

White admits that since the case law is scarce or nonexistent, the effect of these legislative changes in actual cases is unknown. However, he suggests that current law as to determining actual intent “will be relatively easy to meet in view of the skepticism that many courts will have and because the advertising and sales information reveal a pervasive intent to hamper creditors.” On the other hand, he concedes that shortening the statutes of limitations for bringing such claims could be a “powerful restriction” on them. White takes the reader through an analysis of the steps for proving actual intent to hinder, delay or defraud future creditors, including involuntary creditors, which likely make up the bulk of those potential creditors with which the typical DAPT settlor/beneficiary is concerned. Although White reviews some case law helpful in this analysis, given the general paucity of cases much of White’s musings here are speculative. In an interesting observation on this subject, White notes that commentators do not even agree on the definition of “future creditor,” with some asserting that courts “are unwilling to void transfers whose purpose and effect is to shelter assets from creditors that were unknown at the time of the transfer” while others do not so conclude.

White also explores the question of which jurisdiction’s laws will apply in these cases. In federal bankruptcy cases, he points out that a ten-year statute of limitations may apply to fraudulent transfers regardless of state law. Further, since only seventeen states enacted DAPT legislation, many out-of-state settlor/beneficiaries must rely on a choice of law term in the trust instrument in order to take advantage of a DAPT. In such cases the public policy exception in the state where the settlor/beneficiary resides may negate the choice of law provision. White cites a federal bankruptcy case from a court sitting in Washington in observing that “it was no surprise that the court inferred a public policy against self-settled trusts from a Washington statute that prohibits self-settled trusts.” White also very briefly confronts the arguments that the DAPT is no different from a limited liability company (LLC), a homestead exemption, and other statutory diminishments of creditors’ rights. A more thorough comparison with these devices would give additional context.

In his concise essay, Professor White’s creditors’ rights perspective alerts us to potential legal and public policy uncertainties created by the DAPT. Regardless of whether the reader agrees with White that the DAPT is a form of fraudulent conveyance, his essay is a reminder of what I describe above as the zero-sum aspect of property rights. Strengthening the property rights of beneficial owners decreases the rights of creditors. Whether a particular increase and decrease is desirable invokes important questions of law and policy. In considering the DAPT from the standpoint of fraudulent conveyance law, Professor James J. White offers trusts and estates specialists a fresh perspective.

The Temporal Dimension of Fiduciary Duty

Aug 3, 2018 Alexander Boni-Saenz2 comments

What is the time frame of fiduciary duties? In other words, what time horizon should fiduciaries have in mind as they execute their responsibilities? This is an underexamined aspect of fiduciary law, and Professor Susan Gary’s piece, Best Interests in the Long-Term: Fiduciary Duties and ESG Integration, provides a thought-provoking entry point using the lens of socially responsible investing (SRI). Gary argues that if prudent investing evolves to encompass a longer-term understanding of value creation, then consideration of environmental, social, and governance (ESG) factors may become not only possible, but legally required. If this occurs, we may witness a tectonic shift in investor behavior similar to that produced by enshrining modern portfolio theory (MPT) in fiduciary law.

Gary starts by reviewing the different terminologies and strategies of SRI. The goal is to differentiate ESG integration—Gary’s primary object of analysis—from other types of SRI. ESG integration is a holistic investment strategy that considers traditional financial factors alongside material ESG factors, with materiality defined as the likelihood that the ESG factor has some relationship with financial outcomes. Environmental factors might include a company’s energy efficiency policies, while social factors can run the gamut from human rights to labor conditions to community relations. Governance factors, in turn, involve such issues as board diversity, executive compensation, and transparency policies. Gary contrasts ESG integration with early forms of SRI that employed negative screening mechanisms to exclude certain socially undesirable companies or classes of assets from an investment portfolio. She also distinguishes it from a more modern form of SRI called impact investing, which typically involves a sacrifice of economic return in exchange for a measurable social impact.

With those definitions in place, Gary turns to investment theory. MPT currently dominates this space, with its focus on maximizing returns by diversifying the portfolio to manage risk. Early theoretical work examining the relationship between MPT and SRI concluded that SRI was undesirable for two reasons. First, it hinders attempts at diversification by removing certain classes of assets from portfolios for non-financial reasons. Second, the screening required by SRI theoretically increases administrative costs as compared to non-SRI alternatives. Gary contends that the first objection conflates SRI with negative screens, when certain types of SRI like ESG integration do not employ such screens. As for the second objection, she believes that it carries less weight today as SRI information has become more readily available. She devotes one section of the paper to detailing the numerous governmental and non-governmental entities that now require or collect ESG information.

As SRI has matured, researchers have produced more data to help resolve this debate. Unfortunately, the empirical studies on the costs of SRI are not entirely conclusive. However, Gary highlights several studies finding that SRI has no effect or a positive effect on returns. She uses these findings to explore the financial case for ESG integration, which is tied to a critique of short-termism in current financial thinking. Specifically, some theorists posit that MPT has led to a focus on short-term risk and return as opposed to longer-term systemic risk because the former is theoretically manageable by investors while the latter is not. Thus, financial markets have become too focused on quarterly evaluations of companies as well as maximization of short-term profit. In contrast, ESG factors are by their nature more systemic and long-term. They hedge against longer-term concerns such as access to fresh water or the stability and credibility of financial markets. This helps explain why studies showing positive results from ESG integration tend to have longer time horizons.

This is all a prelude to the legal analysis in the article, which concerns how SRI interfaces with fiduciary duties. The fiduciary duty of care requires that fiduciaries manage assets with reasonable care, skill, and caution. Gary observes that this standard is malleable and has in the recent past been subject to reinterpretation with the legal adoption of the principles of MPT. She argues that a similar evolution is underway as we learn more about ESG integration, which appears to pose no threat to financial returns and may in fact enhance them. An even more radical change in mindset may be in the offing as well, with a shift from a short-term to a long-term understanding of value creation. This potential temporal shift is the most intriguing element of the piece, and it surfaces more explicitly in Gary’s consideration of the fiduciary duty of impartiality. This duty requires fiduciaries to consider adequately the interests of differently-situated beneficiaries, and it is heavily implicated when fiduciaries manage assets for beneficiaries across generations. In this case, it may be necessary to contemplate ESG factors in order to respect the interests of future sets of beneficiaries. In other words, reflexive short-termism might be prohibited. This fiduciary duty seems to the most fertile ground for Gary’s arguments.

I was curious to what degree Gary predicates her case for ESG integration on long-term financial thinking, given that longer-term studies provide her strongest evidence. To the extent that she does, it may be necessary to lay out a normative case for long-termism, which raises its own set of thorny questions. Why should we evaluate financial returns on a quarterly, yearly, or longer basis? Are there not scenarios in which a shorter time horizon might make sense? Some beneficiaries may have short-term needs, and others might not live long enough to see a longer time horizon. If different temporal scopes for fiduciary duty are desirable based on the circumstances, how should we set the default rule for the prudent investor? However one thinks fiduciary duties should be structured, Gary has made a forceful case that ESG factors can no longer be ignored. Her piece compels us to reckon with fundamental questions about the temporal scope of fiduciary duty and the relevant time frame for investor behavior. These are not small questions, and Gary provides a valuable analysis that will jumpstart a dialogue on these important issues.

Is Marriage a Proxy for Wealth?

Jul 4, 2018 Phyllis C. TaiteAdd a Comment

Discussions about wealth accumulation and economic equality invariably lead to discussions about income and wealth inequalities. Professor Erez Aloni‘s article, The Marital Wealth Gap, takes the discourse to a new level by adding the connection between marriage and wealth inequality. Specifically, Professor Aloni indicates how the family structure impacts wealth by comparing the accumulation of wealth among married households in the top ten percent to all households in the bottom ninety percent. He coins this differential “the marital wealth gap.” Further, the article exposes various policies that reinforce wealth inequalities that serve as the foundation for the marital wealth gap. Finally he discusses the cause and harms caused by the gap and possible solutions for narrowing the gap.

In his analysis, Professor Aloni explores whether the success of married couples is the cause of the wealth advantage and he analyzes the various legal mechanisms that reinforce the wealth privilege that married households enjoy. In other words, he posits that law and policy facilitate measures to maximize wealth holdings for married households. Professor Aloni proposes the state should decouple wealth benefits from marriage by dismantling the architecture that supports preferences based on marriage.

Wealth accumulation and preservation is an important indicator of economic health because wealth includes assets, in addition to income, and is transferable. Income is not as good an indicator because tax rates have the power to manipulate economic resources. For instance, capital gains income is not taxable until there is a realization event and because of preferential rates, this property is taxed at a lower rate than wages. Professor Aloni points out that the intersection of wealth and family law also impacts the gender wealth gap because divorce negatively impacts women who tend to be the primary caretakers in the marital household. Overall, he argues marital status and family structure are highly correlated to wealth ownership.

In this article, Professor Aloni shows how data support his theory that married families own the most wealth and that  married individuals never own the least. Interestingly, he also provides data indicating that married couples own significantly more wealth than their cohabiting counterparts. Further, the research shows the top ten percent of the wealthiest households are married in greater proportions than any other group and they are most likely to be homeowners.

In focusing on causes of the marital wealth gap, Professor Aloni explores different possibilities. For example, married couples typically practice labor specialization and cut expenditures, therefore the marital framework tends to encourage fiscally responsible behavior. Further, married families tend to get support from extended family while divorce divides the economic structure whereby the same resources used for one household are divided between two households. Still, he concedes that marriage may be only one factor rather than the single cause of the wealth gap.

Next, Professor Aloni discusses how law and policy impact and contribute to the wealth gap through tax preferences and incentives. The tax code provides specific benefits to married couples, unavailable to other couples, as long as they are married and file a joint income tax return. For example, the capital gains tax exclusion for sale of a principal residence permits a married couple to exclude up to $500,000 as long as one of them has ownership and they both occupy the home for the requisite time period. A cohabiting couple does not enjoy this preferential treatment. Similarly, unemployed spouses may contribute to an Individual Retirement Account even though they have no earned income. Again, cohabitants do not qualify for this benefit.

Other tax benefits available to married couples, through the transfer tax system, are the unlimited marital deduction, double exclusion amounts, and portability provisions. Working in concert, these laws allow an unlimited amount of wealth to be transferred to a spouse, a double exclusion by using the surviving spouse’s exclusion amount, or portability of any remaining exclusion from the decedent spouse. Either way, marital status provides a path to estate and gift tax double exclusion amounts and transfers of enormous amounts of wealth.

Finally, Professor Aloni discusses the fact that wealthy individuals tend to congregate and socialize with potential mates from similar educational and socioeconomic backgrounds. He refers to this arrangement as positive assortative mating based on parental wealth. One of the most interesting aspects of this article is the connection demonstrated between cultural policies and societal norms that affect meeting pools and impact mate selection. For instance, he argues that factors such as school segregation, exclusionary neighborhoods, and the rising cost of higher education restrict access to physical spaces making it difficult for people from different socioeconomic backgrounds to meet. As a result, wealthy families consolidate wealth by marriage and further contribute to wealth concentration through intergenerational transfers thereby exacerbating wealth inequality.

In order to effect structural change, Professor Aloni explores options such as limiting income and transfer tax preferences and exclusions to married couples who are economically interdependent, or eliminating the marital deduction and switching to an individual-based tax system. For example, he suggests, couples with prenuptial agreements should be restricted from income splitting. Additionally, unmarried couples who are economically interdependent should have the benefit of portability and estate tax exclusions. Furthermore, elimination of the marital deduction and switching to an individual-based filing system would treat all relationships equally.

Overall, Professor Aloni argues for marriage neutrality, that marital status should not be the determining factor in receiving tax and wealth-based preferences. This approach advances a recognition of transformative family definitions and promotes nontraditional marriage by not favoring marital status in laws and policies. This is an interesting article based in intersections between estates, trusts, tax, and family law. I particularly like the correlation between marital status and the contribution to wealth inequality as well as the analysis of the wealth concentration via marriage of two socioeconomically privileged families. I recommend this article to all scholars and professors who teach tax policy and social justice-based courses.