THE AMERICAN LAW INSTITUTE Continuing Legal Education. Estate Planning for the Family Business Owner

Transcription

1 917 THE AMERICAN LAW INSTITUTE Continuing Legal Education Estate Planning for the Family Business Owner Cosponsored by the ABA Section of Real Property, Trust and Estate Law and the ABA Section of Taxation July 8-10, 2015 San Francisco, California Post Mortem Planning - It's Not Too Late to Plan: A Review of Income, Gift and Estate Tax Planning Issues and Strategies By Steve R. Akers Bessemer Trust Dallas, Texas (This outline is excerpted from a considerably longer outline. Send an to the author if you would like to receive the longer outline.)

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3 919 TABLE OF CONTENTS POST MORTEM PLANNING IT S NOT TOO LATE TO PLAN: A REVIEW OF INCOME, GIFT AND ESTATE TAX PLANNING ISSUES Steve R. Akers I. INTRODUCTION... 1 II. INCOME TAX PLANNING... 1 A. Decedent's Final Return Partnership and S Corporation Income Net Operating Losses, Charitable Deduction and Capital Loss Carryovers Executor s Liability for Decedent s Unpaid Income (as well as Gift or Estate) Taxes.. 2 B. Planning Considerations for Estate's Fiduciary Income Tax Return, Form Consider Fiscal Year Administrative Expense Deductions; Consider Whether to Deduct Administration Expenses on Income Tax or Estate Tax Return; Hubert Regulations Effect of Two Percent Floor on Miscellaneous Itemized Deductions Election Under 645 to Treat Revocable Trust as Part of Grantor s Estate Income in Respect of a Decedent Deduction New Higher Income Tax Brackets Under ATRA % Tax on Net Investment Income C. Funding and Distribution Planning General Rules Regarding Income Tax Effects of Distributions Consider Planning Considerations in Distribution of Installment Note Consider Whether Making In-Kind Distribution Will be Treated as a Taxable Transaction Basis Issues Equitable Recoupment D. Executor's Commissions Consider Tax Effects of Payment of Executor's Commissions Comply with Requirements for Valid Waiver of Commissions III. GIFT TAX PLANNING IV. ESTATE TAX PLANNING A. Alternate Valuation Date i

4 General Rule Mechanics for Making Election; Protective Elections Make Alternate Valuation Election if it Produces Lower Estate Tax Consider Making Sufficient Disclaimers to Cause a Small Amount of Tax to be Payable Consider Effects of Sales and Distributions on Alternate Values B. Special Use Valuation General Effect of Special Use Valuation Qualification Requirements Special Use Value Minority Interest Discount With Special Use Valuation C. General Valuation Considerations Penalty Considerations Make Appropriate Valuation Adjustments No Necessity of Aggregating With QTIP Assets for Valuation Purposes Effect of Post-Transfer Events D. Administration Expense and Debt Deductions Allocating Between Income Tax Return and Estate Tax Return; Hubert Regulations Deductibility of Post-Death Interest Expenses Valuation of Disputed Claims Against Estate Case Law Valuation of Disputed Claims Against Estate Regulations Valuation of Disputed Claims Against Estate Protective Claim for Refund Procedures Circular Calculation Often Required Because of Deduction for State Death Taxes.. 74 E. Marital Deduction Planning QTIP Planning Considerations Funding Issues; Consider Discounts in Funding Marital Bequests and Credit Shelter Bequests Consider Appropriate Discounts at First Spouse's Death Even if No Estate Taxes are Due Portability Considerations F. Filing of Estate Tax Return and Payment of Estate Tax General Filing and Payment Requirements, Portability Election Extension of Time to Pay Tax Attributable to Closely-Held Business Under Transferee Liability of Beneficiaries Special Automatic Estate Tax Lien V. DISCLAMER PLANNING A. General Requirements ii

5 921 B. Nine Months Time Limit Requirement C. Planning Flexibilities with Partial Disclaimers Can Disclaim Specific Assets From Trust Formula Disclaimers are Permitted Bequest With Disclaimed Assets Passing to Charity or Spouse; Disclaim Excess Over Specified Amount D. Passing Without Any Direction By Disclaimant; Disclaimer Involving Foundations Disclaimant as Fiduciary Disclaimant Cannot Hold Power of Appointment Disclaimant as Director of Foundation Receiving Disclaimed Assets E. Disclaimer by Trustee of Power to Make Distributions to Beneficiaries Other Than Spouse But May Be Questionable Unless Beneficiary Consents F. Partial Disclaimer After Some Benefits Have Been Accepted; Expectation of Future Benefit as Acceptance General Rule Jointly Owned Assets Expectation of Future Benefit as Acceptance Disclaimer of Qualified Plan Benefit After Receiving Minimum Required Distribution for Year of Participant's Death G. Disclaimers of Joint-Tenancy Property H. Creative Planning Strategy to Allow Beneficiary to Decide Whether to Retain Unfettered Control Over Trust or be Subject to Ascertainable Standard VI. MISCELLANEOUS PLANNING STRATEGIES iii

6 922 POST MORTEM PLANNING IT S NOT TOO LATE TO PLAN: A REVIEW OF INCOME, GIFT AND ESTATE TAX PLANNING ISSUES Steve R. Akers I. INTRODUCTION This outline is intended as a summary some of the hot topics and items of particular current interest. It is not an overall discussion of post mortem planning strategies, but it focuses on selected topics. A more complete (and much lengthier) outline is available from the author (akers@bessemer.com). II. INCOME TAX PLANNING As a precursor to all of the various income tax issues, the fiduciary (the executor, if any, if not, the testamentary trustee, residuary legatees or distributees) should file Form 56 to advise the IRS of the fiduciary relationship. I.R.C. 6903; Treas. Reg & Written notice of the termination of the fiduciary relationship should also be filed (on Form 56) with the same office where the initial Form 56 was filed. Treas. Reg (b). A. Decedent's Final Return. 1. Partnership and S Corporation Income. For partnership tax years ending after 1997, section 706(c)(2)(A) provides that the taxable year of a partnership closes with respect to a partner whose entire partnership interest terminates by reason of death. Accordingly, the final return of a deceased partner includes the flow through items for the short year ending on the date of death. Under the section 706 regulations, the allocation for the short year is made by an interim closing of the partnership s books or, if all of the partners agree, on a pro rata basis based on the number of days in each period. See Reg (c)(2)(ii). (It is generally preferable to elect out of the exact method in order to avoid the expensive accounting costs of preparing a mid-year closing.) Similarly, an S corporation deceased shareholder must include on his or her final return a pro rata share of S corporation income for the corporation s tax year that ends within or with the decedent s tax year. The decedent s final return must include the decedent s pro rata share of the S corporation s income for the period from the beginning of the year to the date of death, on a number of days allocation basis. 1377(a)(1). If all the shareholders agree, the allocation for the short year is made by an interim closing of the books. 1377(a)(2). Partnership or C corporations may earn proportionately more income after the date of death than before. In that case, if the income is allocated on a pro rata per day basis (rather than using an interim closing of the books), more income will be allocated to the deceased partner s or shareholder s final income tax return. The additional income tax can be deducted for estate tax purposes as an estate liability. In addition, allocating more income to the decedent s final return may facilitate using any carryovers that terminate with the decedent s final return. 2. Net Operating Losses, Charitable Deduction and Capital Loss Carryovers. Net operating loss (NOL) carryovers, charitable deduction carryovers and capital loss carryovers from a prior year are deductible only on the decedent s final income tax return. Any unused losses are lost. E.g., ILM (estate s beneficiaries could not use estate s unused capital loss carryover). If an NOL arises from a net business loss appearing on the decedent s final return, the NOL may be carried back to previous years. 1