Recent Developments in Estate and Trust Administration 2015 Trust and Estate Planning Series

Transcription

1 ABA BRIEFING PARTICIPANT S GUIDE Recent Developments in Estate and Trust Administration 2015 Trust and Estate Planning Series Thursday, December 3, 2015 Eastern Time 1:00 p.m. 3:00 p.m. Central Time 12:00 p.m. 2:00 p.m. Mountain Time 11:00 a.m. 1:00 p.m. Pacific Time 10:00 a.m. 12:00 p.m.

2 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET DISCLAIMER This Briefing will be recorded with permission and is furnished for informational use only. Neither the speakers, contributors nor ABA is engaged in rendering legal nor other expert professional services, for which outside competent professionals should be sought. All statements and opinions contained herein are the sole opinion of the speakers and subject to change without notice. Receipt of this information constitutes your acceptance of these terms and conditions. COPYRIGHT NOTICE USE OF ACCESS CREDENTIALS 2015 by American Bankers Association. All rights reserved. Each registration entitles one registrant a single connection to the Briefing by Internet and/or telephone from one room where an unlimited number of participants can be present. Providing access credentials to another for their use, using access credentials more than once, or any simultaneous or delayed transmission, broadcast, re-transmission or re-broadcast of this event to additional sites/rooms by any means (including but not limited to the use of telephone conference services or a conference bridge, whether external or owned by the registrant) or recording is a violation of U.S. copyright law and is strictly prohibited. Please call BANKERS if you have any questions about this resource or ABA membership.

3 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET Table of Contents TABLE OF CONTENTS... II SPEAKER & ABA STAFF LISTING... III PROGRAM OUTLINE... IV CONTINUING EDUCATION CREDITS INFORMATION... V CPA SIGN-IN SHEET & CERTIFICATE OF COMPLETION REQUEST... VI CFP SIGN-IN SHEET & CERTIFICATE OF COMPLETION REQUEST... VII INSTRUCTIONS FOR REQUESTING CERTIFICATE OF COMPLETION.. VIII PROGRAM INFORMATION... ENCLOSED PLEASE READ ALL ENCLOSED MATERIAL PRIOR TO BRIEFING. THANK YOU. The Evaluation Survey Questionnaire is available online. Please complete and submit the questionnaire at: Thank you for your feedback. II

4 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET Speaker and ABA Staff Listing Speakers Thomas W. Abendroth Partner Schiff Hardin LLP 233 South Wacker Drive Chicago, IL (312) Charles Skip D. Fox, IV Partner McGuireWoods LLP Court Square Building 310 Fourth Street, NE, Suite 300 Charlottesville, VA (434) ABA Briefing Staff Cari Hearn Senior Manager (202) Linda M. Shepard Senior Manager (202) American Bankers Association 1120 Connecticut Avenue, NW Washington, DC III

5 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET TIMES PROGRAM OUTLINE SESSION AND SPEAKERS 12:45 1:00 p.m. ET Pre-Seminar Countdown 1:00 1:03 p.m. Welcome and Introduction 1Source International 1:03 1:25 p.m. Legislative Proposals and Marital Planning Skip Fox, McGuireWoods, LLP 1:25 1:55 p.m. Gifts Tom Abendroth, Schiff Hardin LLP 1:55 2:05 p.m. Questions and Answers 2:05 2:30 p.m. Estate Inclusion, Valuation, and Charitable Gifts Skip Fox, McGuireWoods LLP 2:30 2:55 p.m. GST, Fiduciary Income and Other Tom Abendroth, Schiff Hardin LLP 2:55 3:00 p.m. Questions and Answers Wrap-up IV

6 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET Continuing Education Credits Information The Institute of Certified Bankers (ICB) is dedicated to promoting the highest standards of performance and ethics within the financial services industry. The ABA Briefing, Recent Developments in Estate and Trust Administration has been reviewed and approved for 2.5 continuing education credits towards the CTFA (TAX) and CISP designations. To claim these continuing education credits, ICB members should visit the Member Services page of the ICB Website at You will need your member ID and password to access your personal information. If you have difficulty accessing the Website and/or do not recall your member ID and password, please contact ICB at or American Bankers Association is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: CPE credit hours (es) will be awarded for attending this group-live Briefing. Participants eligible to receive CPE credits must sign in and out of the group-live Briefing on the CPA Required Sign-in/Sign-out Sheet included in these handout materials. A CPA/CPE Certificate of Completion Request Form also must be completed online. See enclosed instructions. The Certified Financial Planners Board has granted 2.0 credits for this briefing. See enclosed instructions on how to receive your CFP credits. Continuing Legal Education Credits This ABA Briefing is not pre-approved for continuing legal education (CLE) credits. However, it may be possible to work with your state bar to obtain these credits. Many states will approve telephone/ audio programs for CLE credits; some states require proof of attendance and some require application fees. Please contact your state bar for specific requirements and submission instructions. V

7 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET CPA Required Sign-in/Sign-out Sheet CPAs may receive up to 2.0 hours of Continuing Professional Education (CPE) credit for participating in this group-live Briefing. INSTRUCTIONS: 1. Each participating CPA must sign-in when he/she enters the room and sign-out when he/she leaves the room. 2. Name and signature must be legible for validation of attendance purposes as required by NASBA. 3. Unscheduled breaks must be noted in the space provided. 4. Each participating CPA must complete, online a CPA/CPE Certificate of Completion Request Form (instructions found on the next page.) 5. Individuals who do NOT complete both forms and submit them to ABA will not receive their Certificate of Completion. This CPE Sign In/Out Sheet must be scanned and uploaded with the CPE/CPA Request for Certificate of Completion form (instructions found the next page) and submitted in order for the CPA to receive his/her certificate of completion. FULL NAME (PLEASE PRINT LEGIBLY) SIGNATURE TIME IN TIME OUT UNSCHEDULED BREAKS American Bankers Association is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: Please note: CPE credits are ONLY awarded to those who have listened to the live broadcast of this Briefing. VI

8 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET Instructions for Receiving Certificates of Completion CPA / CPE Certificate of Completion Submission of a sign-in/sign-out sheet AND electronic request for a Certificate of Completion are required for the validation process to be completed. NASBA requires ABA to validate your attendance BEFORE you will receive your certificate of completion. 1. COMPLETE a CPA / CPE Certificate of Completion Request Form online at: 2. SCAN and UPLOAD the completed CPA / CPE Required Sign-in/Sign-out Sheet (enclosed) and include it with the Request for CPE / CPA Certificate of Compliance form found in Step SUBMIT completed Request form and Sign-in/out Sheet 4. ABA staff will VALIDATE your attendance upon receipt of the Certificate of Completion Request Form and Sign-in/out Sheet. 5. A personalized certificate of completion will be ed to you within 10 business days once your attendance is validated. 6. QUESTIONS about your certificate of completion? Contact us at briefingcertificates@aba.com General / Participant Certificate of Completion 1. REQUEST a General / Participant Certificate of Completion at: 2. A personalized certificate of attendance will be ed to you within 10 days of your request. 3. QUESTIONS about your certificate of completion? Contact us at briefingcertificates@aba.com VII

9 American Bankers Association Trust and Estate Planning Briefing Series Recent Developments in Estate and Trust Administration Thursday, December 3, :00 3:00 p.m. ET ATTENTION: NEW PROCESS FOR CFPs Certified Financial Planner Sign-In Sheet Program ID #: The Certified Financial Planners (CFP) Board has granted 2.0 credits for this program. The participant MUST MAIL the sign-in sheet AND a copy of the CFP approved Certificate of Completion (Request for Certificate of Completion instructions found below) in order to receive continuing education credits for attending this live program. Please mail both the sign-in sheet and Certificate of Completion to: Michelle M. Wynter, American Bankers Association, 1120 Connecticut Ave., NW, Ste. 600, Washington, DC Please note: CFP credits are ONLY awarded to those who have listened to the live broadcast of this Briefing. Last Name Please Print LEGIBLY First Name Middle Name SSN Last four digits only xxx-xx- CFP Registrant ID SMITH JOHN WILLIAM XXX-XX CFP Certificate of Completion Instructions 1. REQUEST a CFP Certificate of Completion via the online Certificate Request Form at: 2. A personalized certificate of completion will be ed to you within 10 days of your request. 3. MAIL CFP Sign-in Sheet AND a copy of the Certificate of Completion to the address found above 4. QUESTIONS about your CFP Certificate of Completion? Contact us at briefingcertificates@aba.com ABA offers many opportunities for you to earn CFP credits. Please complete the form found at so we can add you to promotions and keep you informed. VIII

10 11/20/2015 Recent Developments in Estate and Trust Administration 2015 Trust and Estate Planning Briefing Series American Bankers Association Briefing/Webinar Thursday, December 3, :00 3:00 p.m. ET aba.com1-800-bankers Disclaimer This briefing is being recorded with permission and is furnished for informational use only. Neither the speakers, contributors nor ABA is engaged in rendering legal nor other expert professional services, for which outside competent professionals should be sought. All statements and opinions contained herein are the sole opinion of the speakers and subject to change without notice. Receipt of this information constitutes your acceptance of these terms and conditions. aba.com1-800-bankers 2 1

11 11/20/2015 Presenters Thomas W. Abendroth, Partner, Schiff Hardin LLP Charles D. Fox IV, Partner, McGuireWoods, LLP aba.com1-800-bankers 3 Agenda Legislative Proposals and Marital Planning Gifts Questions and Answers Estate Inclusion, Valuation, and Charitable Gifts GST, Fiduciary Income and Other Questions and Answers aba.com1-800-bankers 4 2

12 11/20/2015 Legislative Proposals and IRS Guidance Pages 1-3 State of the Union Surprise (January 17, 2015) President targets inherited assets in middle class tax reform Deconstructing the Trust Fund Loophole Revenue by Realization Event Increasing the Rate Middle Class Protection What s Next for payers aba.com1-800-bankers 5 Legislative Proposals and IRS Guidance Pages 4-10 The Administration s Estate Budget Proposals for FY2016 and Related Items (February 2, 2015) New Proposal: Increasing the Capital Gains Rate and Closing the Trust Fund Loophole Continuation of Proposals from Prior Greenbooks Revisitation of Estate Rates and Exemptions Minimum Ten-Year Term for GRATs and Other Changes Other Technical Estate Changes aba.com1-800-bankers 6 3

13 11/20/2015 Legislative Proposals and IRS Guidance Pages Priority Guidance Plan (July 31, 2015) Treasury Department and the IRS release their priority guidance plan Revenue Procedure , IRB 1 (October 21, 2015) IRS provides the 2015 inflation adjusted amounts for tax exemptions, deductions, brackets and other items aba.com1-800-bankers 7 Legislative Proposals and IRS Guidance Pages H.R The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (July 31, 2015); and Notice , IRB. 294 (August 21, 2015) New law on consistency in the reporting of basis IRS Frequently Asked Questions on Estate (June 18, 2015) IRS announces that taxpayers must now request closing letters for federal estate tax returns filed on or after June 1, 2015 aba.com1-800-bankers 8 4

14 11/20/2015 Marital Planning Obergefell v. Hodges, 576 U.S. (2015) U.S. Supreme Court holds same-sex marriage to be a fundamental right T.D. 9725, I.R.B (June 12, 2015) Final portability regulations are issued Letter Ruling (Issued April 29, 2015; released August 7, 2015) Estate granted extension to make portability election Pages aba.com1-800-bankers 9 Marital Planning Page 18 Letter Ruling (Issued April 20, 2015; released August 7, 2015) Estate granted extension of time to make reverse QTIP election with respect to marital trust Letter Ruling (Issued June 1, 2015; released September 11, 2015) Estate granted extension of time to file estate tax return to elect portability when the value of the estate did not exceed the basic exclusion amount minus the decedent s taxable gifts aba.com1-800-bankers 10 5

15 11/20/2015 Gifts Pages Estate of Davidson v. Commissioner, T.C. Docket No ; Estate of Donald Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013) and Estate of Marion Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013); Estate of Jack Williams v. Commissioner ( Court Docket No , petition filed Dec 19, 2013) Developments in sweeping IRS attack on time-honored techniques aba.com1-800-bankers 11 Gifts Pages Letter Rulings (Issued October 10, 2014; released March 6, 2015) Favorable rulings on incomplete non-grantor trusts Cavallaro v. Commissioner, T.C. Memo ; appealed July 6, 2015 Court holds that husband and wife are liable for gift tax following company merger Mikel v. Commissioner, T.C. Memo Court examines effect of trust in terrorem provision and arbitration provision on validity of Crummey powers aba.com1-800-bankers 12 6

16 11/20/2015 Gifts Pages Steinberg v. Commissioner, 145 T.C. No. 7 (September 16, 2015) Value of a gift was decreased by the recipient s assumption of potential estate liability by reason of gross up for gift tax paid under section 2035(b) if the donor dies within 3 years of the gift by applying the willing buyer and willing seller test combined with the IRSs actuarial mortality and interest tables United States v. Marshall, 798 F.3d (5th Cir. August 19, 2015) Heirs are not liable for gift tax and interest beyond value of resulting indirect gift aba.com1-800-bankers 13 Gifts Pages Field Attorney Advice F (May 29, 2015) Statute of limitations does not run with respect to gift tax return filed by donor, because the donor failed to adequately disclose the donor s transfer in two partnerships Estate of Redstone v. Commissioner, 145 T.C. No. 11 (October 26, 2015) Transfer of stock was business transaction and not gift aba.com1-800-bankers 14 7

17 11/20/2015 Questions and Answers If you are participating on the Web: Enter your Question in the Box Below and Press ENTER / SUBMIT. If you are participating by Phone: your Question to: aba@1source-intl.net OR Press *1 on your Telephone Keypad aba.com1-800-bankers 15 Estate Inclusion Pages New York State Department of ation and Finance Advisory Opinion TSB-A-15(1)M (May 29, 2015) Membership interest in a single member LLC, which is disregarded for income tax purposes, is not intangible property for New York State estate tax purposes aba.com1-800-bankers 16 8

18 11/20/2015 Valuation Pages Anticipated valuation discount regulations under Section 2704 Expected new regulations will likely change the rules in the valuation of family limited partnerships and limited liability companies Pulling v. Commissioner, T.C. Memo (July 23, 2015) Court upheld taxpayer s valuation of contiguous parcels of real estate, rejecting the IRS arguments that the properties should be valued as a single unit aba.com1-800-bankers 17 Charitable Gifts Pages Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. January 6, 2015) Charitable income tax deduction for conservation easement denied because mortgage on property was not subordinate to easement Balsam Mountain Investments, LLC v. Commissioner, T.C. Memo Partnership s right to change boundaries of a conservation easement causes conservation easement to fail the definition of a qualified real property interest and the income tax charitable deduction was denied aba.com1-800-bankers 18 9

19 11/20/2015 Charitable Gifts Pages Isaacs v. Commissioner, T.C. Memo Donation of twelve fossil trilobites disallowed as income tax charitable deduction because qualified appraisal requirements not met Bosque Canyon Ranch, L.P. v. Commissioner, T.C. Memo Income tax charitable deduction for conservation easement was denied Estate of Schaefer v. Commissioner, 145 T.C. No. 4 (July 28, 2015) Value of Net Income Only Charitable Remainder Unitrusts with Makeup Provisions would be calculated using the greater of five percent or fixed percentage amount aba.com1-800-bankers 19 Charitable Gifts Pages 36 Minnick v. Commissioner, No (9th Cir. August 12, 2015) Court denies charitable deduction for conservation easement because outstanding mortgage on the underlying property was not subordinated at the time of the donation to the rights of the holder of the easement aba.com1-800-bankers 20 10

20 11/20/2015 Generation-Skipping Transfer Pages Letter Ruling (Issued March 4, 2015; released July 10, 2015) Proposed severance of non-exempt marital share into two trusts containing different types of property, and subsequent disclaimer has no adverse estate and generation-skipping transfer tax consequences Letter Rulings (Issued on December 8, 2014; released July 24, 2015); Letter Rulings (Issued on December 8, 2014; released July 31, 2015) Terms of settlement agreement with respect to a grandfathered GST Trust, including the division of the trust into separate trusts and construction of the phrase by right of representation, will not have any adverse generation-skipping transfer tax consequences aba.com1-800-bankers 21 Generation-Skipping Transfer Pages Letter Rulings (Issued October 16, 2014; released February 27, 2015) and (Issued October 16, 2014; released March ) Plan for two similar GST trusts to make a coordinated sale of farm properties to a beneficiary will not cause either trust to lose GST exempt status Letter Ruling (Issued March 12, 2015; released June 19, 2015) Division of GST-exempt trust into successor trusts will not alter GST-exempt status aba.com1-800-bankers 22 11

21 11/20/2015 Generation-Skipping Transfer Pages Letter Ruling (Issued December 22, 2014; released April 17, 2015) Proposed division and modification of GST-exempt trust will not cause any loss of exempt status Letter Ruling (Issued March 18, 2015; released June 26, 2015) IRS allows Section 9100 relief for allocation of GST exemption for transfers over 16-year period Letter Ruling (Issued April 27, 2015; released August 7, 2015) IRS grants extension of time to opt out of automatic allocation rules aba.com1-800-bankers 23 Generation-Skipping Transfer Pages Letter Ruling (Issued May 22, 2015; released September 4, 2015) Transfer to two grandchildren of the taxpayer were not subject to GST tax because the person who was the parent of the grandchildren and child of the taxpayer was deceased at the time of transfer; accordingly, allocation of GST tax exemption to transfers was void Letter Ruling (Issued June 23, 2015; released September 25, 2015) Section 9100 relief and extension of time granted to allocate GST tax exemption to transfers over many years to a Crummey trust, in which some transfers were deemed allocations, and some transfers were not aba.com1-800-bankers 24 12

22 11/20/2015 Generation-Skipping Transfer Pages Letter Ruling (Issued June 24, 2015; released October 23, 2015) Division and modification of trust will not affect generationskipping transfer tax, provided court approves of modification Letter Ruling (Issued June 19, 2015; released October 30, 2015) Reformation of trust removes reversionary interest, provides for completed gifts, and provides that assets will pass outside of settlor s estate aba.com1-800-bankers 25 Fiduciary Income Pages United States v. Stiles, No (W.D. Pa. December 2, 2014) Court grants government s summary judgment motion to foreclose on lien for payment of income tax liability Belmont v. Commissioner, 144 T.C. No. 6 (2015) Estate is not entitled to income tax deduction under Section 642(c)(2) aba.com1-800-bankers 26 13

23 11/20/2015 Fiduciary Income Pages Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, 12 CVS 8740 (2015) North Carolina court holds statute taxing trust income unconstitutional Residuary Trust A u/w/o Kassner v. Director, Division of ation, 2015 N.J. LEXIS 11, 2015 WL (N.J. Sup. Ct. App. 2015), affirming 27 N.J. 68 (N.J. Ct. 2013) Trust not subject to New Jersey income tax aba.com1-800-bankers 27 Other Items of Interest Pages Specht v. United States, No. 1:13-cv-705 (S.D. Ohio January 6, 2015) Court upholds late filing penalties imposed on estate for late filing of an estate tax return when the individual executor relied on attorney suffering from brain cancer Billhartz v. Commissioner, 2015 U.S. App. LEXIS (7th Cir. 2015) Court did not abuse discretion for refusing to vacate settlement between the Internal Revenue Service and estate United States v. Sadler, 2015 U.S. Dist. LEXIS (E.D. Pa. 2015) Estate liable for income tax debts of decedent aba.com1-800-bankers 28 14

24 11/20/2015 Other Items of Interest Pages West v. Koskinen, No. 1:15-cv (E.D. Va. October 19, 2015) Estate was liable for more than $335,000 in penalties and interest for failing to timely pay estate taxes Changes in State Death es in 2014 and 2015 Connecticut, Maine, and New York change their state death taxes aba.com1-800-bankers 29 Questions and Answers If you are participating on the Web: Enter your Question in the Box Below and Press ENTER / SUBMIT. If you are participating by Phone: your Question to: aba@1source-intl.net OR Press *1 on your Telephone Keypad aba.com1-800-bankers 30 15

25 11/20/ Trust Series Recordings Now Available 2015 ABA Trust and Estate Planning Series Briefing Topics Hot Button Issues for the IRS Ethical Challenges for Trust Professionals Show Me the Money: The Focus of States on Revenues and its Impact on Estate Planning Fiduciary Litigation Roundtable Critical Concepts in Understanding Community Property vs. Common Law A Primer on Decanting Choose Your Weapon: The Advantages & Disadvantages of Corporations The Alphabet Soup of Planning and Trust Acronyms and Service Marks Recent Developments in Estate and Trust Administrations aba.com1-800-bankers Trust and Estate Planning Series Briefing Date Feb 4, 2016 Mar 3, 2016 Apr 7, 2016 May 5, 2016 Jun 2, 2016 Sep 8, 2016 Oct 6, 2016 Nov 3, 2016 Dec 1, 2016 Briefing Topic The New Paradigm in Trusts and Estate Valuation Uniform Fiduciary Access to Digital Assets Act (UFADAA) and Digital Assets Life Insurance in a 21 st Century Estate Plan Fiduciary Litigation Roundtable Charitable Tales from the Crypt Issues with Art and Other Collectibles in the Administration of Trusts and Estates Are You a Fiduciary? Twenty Steps to Avoid Fiduciary Litigation Recent Developments in Estate and Trust Administration Register Today at aba.com1-800-bankers 32 16

26 American Bankers Association Briefing Recent Developments in Estate and Trust Administration Thursday, December 3, :00 p.m. to 3:00 p.m. E.T. Charles D. Fox IV McGuireWoods LLP Court Square Building 310 Fourth Street, NE, Suite 300 Charlottesville, Virginia (434) Thomas W. Abendroth Schiff Hardin LLP 233 S. Wacker Drive, Suite 6600 Chicago, Illinois (312) Copyright 2015 by Schiff Hardin LLP and McGuireWoods LLP All rights reserved

27 CHARLES D. ( SKIP ) FOX IV is a partner in the Charlottesville, Virginia office of the law firm of McGuireWoods LLP and head of its Private Wealth Services Industry Group. Prior to joining McGuireWoods in 2005, Skip practiced for twenty-five years with Schiff Hardin LLP in Chicago. Skip concentrates his practice in estate planning, estate administration, trust law, charitable organizations, and family business succession. He teaches at the American Bankers Association National Trust School and National Graduate Trust School where he has been on the faculty for over twenty-five years. Skip was an Adjunct Professor at Northwestern University School of Law, where he taught from 1983 to 2005, and is currently an Adjunct at the University of Virginia School of Law. He is a frequent lecturer across the country at seminars on trust and estate topics. In addition, he is a co-presenter of the long-running monthly teleconference series on tax and fiduciary law issues sponsored by the American Bankers Association. Skip has contributed articles to numerous publications and is a regular columnist for the ABA Trust Letter on tax matters. He was a member of the editorial board of Trusts & Estates for several years and was Chair of the Editorial Board of Trust & Investments from 2003 until Skip is a member of the CCH Estate Planning Advisory Board. He is co-editor of Making Sense of the 2010 Estate Legislation (CCH 2011) and Estate Planning Strategies after Estate Repeal: Insight and Analysis (CCH 2001). He is also the author of the Estate Planning With Life Insurance volume of the CCH Financial Planning Library, and a co-author of four books, Estate Planning Manual (3 volumes, 2002), Law Guide, Glossary of Fiduciary Terms, and Fiduciary Law and Trust Activities Guides, published by the American Bankers Association. Skip is a Fellow of the American College of Trust and Estate Counsel (for which he is Treasurer) and is listed in Best Lawyers in America. In 2008, Skip was elected to the NAEPC Estate Planning Hall of Fame. He is also Chair Emeritus of the Duke University Estate Planning Council and a member of the Princeton University Planned Giving Advisory Council. Skip has provided advice and counsel to major charitable organizations and serves or has served on the boards of several charities, including Episcopal High School (from which he received its Distinguished Service Award in 2001) and the University of Virginia Law School Foundation. He received his A.B. from Princeton, his M.A. from Yale, and his J.D. from the University of Virginia. Skip is married to Beth, a retired trust officer, and has two sons, Quent and Elm.

28 THOMAS W. ABENDROTH is a partner in the Chicago law firm of Schiff Hardin LLP and practice group leader of the firm s Private Clients, Trusts and Estates Group. He concentrates his practice in the fields of estate planning, federal taxation, and business succession planning. Tom is a 1984 graduate of Northwestern University School of Law, and received his undergraduate degree from Ripon College, where he currently serves on the Board of Trustees. He has co-authored a two-volume treatise entitled Illinois Estate Planning, Will Drafting and Estate Administration, and a chapter on sophisticated value-shifting techniques in the book, Estate and Personal Financial Planning. He is co-editor of Estate Planning Strategies After Estate Reform: Insights and Analysis (CCH 2001). Tom has contributed numerous articles to industry publications, and served on the Editorial Advisory Board for ABA Trusts & Investments Magazine. He is a member of Duke University Estate Planning Council. Tom is a frequent speaker on tax and estate planning topics at banks and professional organizations. In addition, he is a co-presenter of a monthly teleconference series on estate planning issues presented by the American Bankers Association. Tom has taught at the American Bankers Association National Graduate Trust School since He is a Fellow of the American College of Trust and Estate Counsel.

29 TABLE OF CONTENTS Page LEGISLATIVE PROPOSALS AND IRS GUIDANCE State of the Union Surprise (January 17, 2015) The Administration s Estate Budget Proposals for Fiscal Year 2016 and Related Items (February 2, 2015) Priority Guidance Plan (July 31, 2015) Revenue Procedure , IRB 1 (October 21, 2015) H.R The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (July 31, 2015); and Notice , I.R.B. 294 (August 21, 2015) IRS Frequently Asked Questions on Estate (June 18, 2015) MARITAL PLANNING Obergefell v. Hodges, 576 U.S. (2015) T.D. 9725, I.R.B (June 12, 2015) Letter Ruling (Issued April 29, 2015; released August 7, 2015) Letter Ruling (Issued April 20, 2015; released August 7, 2015) Letter Ruling (Issued June 1, 2015; released September 11, 2015) GIFTS Estate of Davidson v. Commissioner, T.C. Docket No ; Estate of Donald Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013) and Estate of Marion Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013); Estate of Jack Williams v. Commissioner ( Court Docket No , petition filed Dec. 19, 2013) Letter Rulings (Issued October 10, 2014; released March 6, 2015) Cavallaro v. Commissioner, T.C. Memo ; appealed July 6, Mikel v. Commissioner, T.C. Memo Steinberg v. Commissioner, 145 T.C. No. 7 (September 16, 2015) United States v. Marshall, 798 F.3d (5th Cir. August 19, 2015) Field Attorney Advice F (May 29, 2015) Estate of Redstone v. Commissioner, 145 T.C. No. 11 (October 26, 2015) ESTATE INCLUSION i

30 20. New York State Department of ation and Finance Advisory Opinion TSB-A-15(1)M (May 29, 2015) VALUATION Anticipated valuation discount regulations under Section Pulling v. Commissioner, T.C. Memo (July 23, 2015) CHARITABLE GIFTS Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. January 6, 2015) Balsam Mountain Investments, LLC v. Commissioner, T.C. Memo Isaacs v. Commissioner, T.C. Memo Bosque Canyon Ranch, L.P. v. Commissioner, T.C. Memo Estate of Schaefer v. Commissioner, 145 T.C. No. 4 (July 28, 2015) Minnick v. Commissioner, No (9th Cir. August 12, 2015) GENERATION-SKIPPING TRANSFER TAX Letter Ruling (Issued March 4, 2015; released July 10, 2015) Letter Rulings (Issued on December 8, 2014; released July 24, 2015); Letter Rulings (Issued on December 8, 2014; released July 31, 2015) Letter Rulings (Issued October 16, 2014; released February 27, 2015) and (Issued October 16, 2014; released March 6, 2015) Letter Ruling (Issued March 12, 2015; released June 19, 2015) Letter Ruling (Issued December 22, 2014; released April 17, 2015) Letter Ruling (Issued March 18, 2015; released June 26, 2015) Letter Ruling (Issued April 27, 2015; released August 7, 2015) Letter Ruling (Issued May 22, 2015; released September 4, 2015) Letter Ruling (Issued June 23, 2015; released September 25, 2015) Letter Ruling (Issued June 24, 2015; released October 23, 2015) Letter Ruling (Issued June 19, 2015; released October 30, 2015) FIDUCIARY INCOME TAX ii

31 40. United States v. Stiles, No (W.D. Pa. December 2, 2014) Belmont v. Commissioner, 144 T.C. No. 6 (2015) Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, 12 CVS 8740 (2015) Residuary Trust A u/w/o Kassner v. Director, Division of ation, 2015 N.J. LEXIS 11, 2015 WL (N.J. Sup. Ct. App. 2015), affirming 27 N.J. 68 (N.J. Ct. 2013) OTHER ITEMS OF INTEREST Specht v. United States, No. 1:13-cv-705 (S.D. Ohio January 6, 2015) Billhartz v. Commissioner, 2015 U.S. App. LEXIS (7th Cir. 2015) United States v. Sadler, 2015 U.S. Dist. LEXIS (E.D. Pa. 2015) West v. Koskinen, No. 1:15-cv (E.D. Va. October 19, 2015) Changes in State Death es in 2014 and State Death Chart iii

32 RECENT DEVELOPMENTS 1 LEGISLATIVE PROPOSALS AND IRS GUIDANCE 1. State of the Union Surprise (January 17, 2015) President targets inherited assets in middle class tax reform After the American payer Relief Act of 2012, many in the estate planning community thought that tax law dealing with estates and trusts was settled for some time. President Obama s earlier budget proposals calling for a higher rate and a lower exemption (among other changes) and the Republican support for the repeal of the estate tax were seen by many as pro forma budgetary proposals. But on January 17, 2015, President Obama released his tax relief proposal for middle class families. Included in the plan are expanded child care, education, and retirement tax benefits and other tax credits to support working families. To pay for these provisions, the President proposes to: Eliminate the stepped-up basis rules in the Internal Revenue Code, treating bequests and gifts as realization events subject to capital gains tax; Increase top capital gains and dividend tax rates; and Impose a fee on the liabilities of large U.S. financial firms. This new proposal comes at the start of a new Congress, with both the House and Senate controlled by Republicans unlikely to give such a plan any room on the legislative agenda. These selected individual tax changes signal a rhetorical, if not a substantive shift, for the White House from the common ground of comprehensive business tax reform to the perceived inequality of individual income tax system. Deconstructing the Trust Fund Loophole With some rhetorical license, the White House fact sheet describes Internal Revenue Code section 1014 as the trust fund loophole and goes on to suggest that it may be the largest single loophole in the entire individual income tax code. This Code section provides that the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent be the fair market value of the property at the date of the decedent s death The basis of an appreciated asset is said to be stepped-up at death. The fact sheet describes a situation where a person inherits stock worth $50 million. Working with that example, if at a mother s death she passes that stock to her daughter, the daughter s basis in the stock will be $50 million. Under current law, if the daughter immediately sells the stock no capital gains tax will be paid because the basis was stepped-up at the mother s death. The fact sheet fails to point out that the estate of the mother would pay somewhere between 1 This outline is based upon materials prepared by Ronald D. Aucutt, Keonna Carter, W. Birch Douglass, III, Michele A. W. McKinnon, Charles D. Fox IV, Stephen W. Murphy, and William I. Sanderson of McGuireWoods LLP. Copyright 2015, McGuireWoods LLP. All rights reserved. 1

33 $15.6 million and $20 million in federal estate tax at a 40% rate, depending on the availability of the deceased mother s unified credit against estate tax available. And in any one of 19 states (and the District of Columbia), the mother s estate would owe state estate tax as well. Under President Obama s proposal, the mother s death would not only trigger the payment of estate tax, but it would be a realization event giving rise to possible capital gains tax. Revenue by Realization Event Under current law, capital gain is treated as income and taxed only when property is disposed of or sold. The regulations under IRC section 1001 identify capital gain income (or loss) as the gain or loss from the conversion of property into cash, or from the exchange of property for other property differing materially either in kind or extent. Gifts are not sales, and unless the transfer of stock is in fulfillment of a specific bequest or dollar amount, transfers at death are not realization events. Under current law, no capital gains tax is paid when those transfers occur. In order to raise more revenue and to raise it immediately, the President s proposal must change this rule and treat the transfer of assets by gift or at death as realization events. If the proposal alone eliminated the stepped-up basis regime, no capital gains tax would be due until assets were sold. A stated goal for new regime would be to unlock this capital. To unlock capital, and to raise revenue immediately, the capital gains must be realized at the time of these transfers. And if transfers by gift and at death are realization events, capital gains taxes would be owed on the appreciation the difference between the basis and the fair market value at the time of the transfer, regardless of whether the asset is in fact sold or exchanged. Continuing the example from above highlights the impact of this proposed rule on taxpayers. The transfer at death, from mother to daughter, would be a realization event. In addition to the estate tax paid by the mother s estate, an estimated $11 million in capital gains tax would be due at the time of transfer. The proposal is unclear if the capital gains tax will be paid by estate of the mother (or the transferor, if it had been a gift) or the daughter. But it is clear additional tax will be due. This proposal seems to resemble the current Canadian system of taxing capital gains at the death of each decedent. Canada replaced its estate tax system, in part, by enacting the system of taxing capital gain any time an assets is transferred (by gift, at death, on sale, or upon removal from Canada) in The Administration s proposal may also increase taxpayers exposure to state income tax in those states that tax capital gains based on federal revenue. Increasing the Rate Having restored the tax on earned income to higher rates previously seen under President Clinton, this proposal turns to President Reagan for the historical benchmark for the highest rate on capital gains. In addition to imposing the capital gains tax on these transfers, the President proposes to increase the total top capital gains and dividend tax rate to 28 percent. 2

34 Middle Class Protection The President intends this proposal to target those at the top and provides exemptions that are designed to benefit middle-class taxpayers. The fact sheet implies that transfers between spouses would be exempt from the realization treatment. Like the marital deduction eligible for gifts or transfers at death, this exemption would effectively defer the payment of capital gains tax until the death of second spouse unless the asset is sold in the interim. The fact sheet states that gifts at death of appreciated assets to charity would be exempt from this capital gains tax. Each married couple would be allowed to transfer up to $200,000 of capital gains ($100,000 for an individual taxpayer) free of capital gains tax. The exemption is described as automatically portable between spouses. In addition to the basic exemption (described above), each married couple would have an additional $500,000 exemption for personal residences (or $250,000 for an individual taxpayer). Tangible personal property (other than expensive artwork and similar collectibles ) would be exempt from capital gains tax, freeing families from the burden and expense of creating inventories and appraisals for income tax purposes. on inherited family-owned and operated businesses would not be due unless the business was sold, and closely-held businesses would have the option to defer tax on capital gains over time. What s Next for payers The fact sheet released by the White House falls short of a detailed legislative proposal. More details on how the plan would be implemented are expected when the budget process starts in February. What is clear now, however, is that the proposal will face strong objection in the 114 th Congress. While it is unlikely to be part of any comprehensive tax reform, this proposal will join other proposals from the Obama Administration, including limitations on grantor trusts and a minimum term for GRATs, in the library from which ideas for raising revenue may be drawn in the future. It will also form part of the tax reform debate for both Democrats and Republicans headed into the 2016 election cycle. 3

35 2. The Administration s Estate Budget Proposals for Fiscal Year 2016 and Related Items (February 2, 2015) Obama Administration s Budget Proposal for fiscal year 2016 could affect estate planning On February 2, 2015, the Administration released its General Explanations of the Administration s Fiscal Year 2016 Revenue Proposals, which is often referred to as the Greenbook, to accompany its proposed Fiscal Year 2016 Budget. The 2015 Greenbook clarifies the President s proposal in his 2015 State of the Union Address to close the trust fund loophole by treating the transfer of appreciated property during life or at death as a realization event for capital gains tax purposes. It also continues proposals from past Greenbooks and modifies certain of those prior proposals. New Proposal: Increasing the Capital Gains Rate and Closing the Trust Fund Loophole As discussed in the President s State of the Union Address, the Administration proposes to increase the highest long-term capital gains and qualified dividend tax rate from 20 percent to 24.2 percent. The 3.8 percent net investment income tax would continue to apply as under current law. The maximum total capital gains and dividend tax rate including net investment income tax would consequently rise to 28 percent. The Administration describes the proposal on treating transfers as realization events as follows: Under the proposal, transfers of appreciated property generally would be treated as a sale of the property. The donor or deceased owner of an appreciated asset would realize a capital gain at the time the asset is given or bequeathed to another. The amount of the gain realized would be the excess of the asset s fair market value on the date of the transfer over the donor s basis in that asset. That gain would be taxable income to the donor in the year the transfer was made, and to the decedent either on the final individual return or on a separate capital gains return. The unlimited use of capital losses and carry-forwards would be allowed against ordinary income on the decedent s final income tax return, and the tax imposed on gains deemed realized at death would be deductible on the estate tax return of the decedent s estate (if any). Gifts or bequests to a spouse or to charity would not be subject to the tax. Instead, gifts or bequests to a spouse or to charity would carryover the basis of the donor or decedent. Capital gain would not be realized until the spouse disposes of the asset or dies, and appreciated property donated or bequeathed to charity would be exempt from capital gains tax. The proposal would exempt any gain on all tangible personal property such as household furnishings and personal effects (excluding collectibles). The proposal also would allow a $100,000 per-person exclusion of other capital gains recognized by reason of death that would be indexed for inflation after 2016, and would be portable to the decedent s surviving spouse under the same rules that apply to portability for estate and gift tax purposes (making the exclusion 4

36 effectively $200,000 per couple). The $250,000 per person exclusion under current law for capital gain on a principal residence would apply to all residences, and would also be portable to the decedent s surviving spouse (making the exclusion effectively $500,000 per couple). The exclusion under current law for capital gain on certain small business stock would also apply. In addition, payment of tax on the appreciation of certain small family-owned and family operated businesses would not be due until the business is sold or ceases to be family-owned and operated. The proposal would further allow a 15-year fixed-rate payment plan for the tax on appreciated assets transferred at death, other than liquid assets such as publicly traded financial assets and other than businesses for which the deferral election is made. This proposal would be effective for gifts made and decedents dying on or after January 1, Most commentators believe that this proposal is dead on arrival. Continuation of Proposals from Prior Greenbooks Revisitation of Estate Rates and Exemptions. The Greenbooks for the last six years, all the years of the Obama Administration, have proposed permanently setting the estate, gift, and GST taxes at 2009 levels, in which the top rate was 45 percent and the exemptions (technically exclusion amounts ) were $3.5 million for the estate and GST taxes and $1 million for the gift tax, not indexed for inflation. Even though the rate and exemption for these taxes were permanently set in January 2013 at 40 percent and $5 million indexed since 2011, the current Greenbook renews the call to return to 2009 levels, beginning in It also calls for the portability of the exclusion amount between spouses to be permanently retained. By 2018 there will be a new President and there will have been one more congressional election, and it is hard to guess why 2018 is used. But it certainly does not appear to call for any immediate estate planning action. Modification of the Gift Annual Exclusion. The 2015 Greenbook continues the proposal first made in the 2014 Greenbook to modify the gift tax annual exclusion. The 2015 Greenbook cites Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), and points out that the use of Crummey powers has resulted in significant compliance costs, including the costs of giving notices, keeping records, and making retroactive changes to the donor s gift tax profile if an annual exclusion is disallowed. The Greenbook adds that the cost to the IRS of enforcing the rules is significant too. The Greenbook also acknowledges an IRS concern with the proliferation of Crummey powers, especially in the hands of persons not likely to ever receive a distribution from the trust, and laments the IRS s lack of success in combating such proliferation (citing Estate of Cristofani v. Commissioner, 97 T.C. 74 (1991); Kohlsaat v. Commissioner, T.C. Memo ). The Greenbook offers the following explanation of the proposal: The proposal would eliminate the present interest requirement for gifts that qualify for the gift tax annual exclusion. Instead, the proposal would define a new category of transfers (without regard to the existence of any withdrawal or put 5

37 rights), and would impose an annual limit of $50,000 per donor on the donor s transfers of property within this new category that will qualify for the gift tax annual exclusion. Thus, a donor s transfers in the new category in a single year in excess of a total amount of $50,000 would be taxable, even if the total gifts to each individual donee did not exceed $14,000. The new category would include transfers in trust (other than to a trust described in section 2642(c)(2)), transfers of interests in passthrough entities, transfers of interests subject to a prohibition on sale, and other transfers of property that, without regard to withdrawal, put, or other such rights in the donee, cannot immediately be liquidated by the donee. As to interests in passthrough entities, see the IRS successes in Hackl v. Commissioner, 118 T.C. 279 (2002), aff d, 335 F.3d 664 (7th Cir. 2003) (interests in an LLC engaged in tree farming); Price v. Commissioner, T.C. Memo (interests in a limited partnership holding marketable stock and commercial real estate); Fisher v. United States, 105 AFTR 2d (D. Ind. 2010) (interests in an LLC owning undeveloped land on Lake Michigan). The proposal would be effective for gifts made after the year of enactment. It is estimated to raise revenues by $2.924 billion over 10 years. This is what apparently would be left as excludable gifts: Unlimited gifts directly for tuition or medical expenses under section 2503(e). Gifts up to $14,000 (currently) per donee per year, or $28,000 if split, consisting of: outright gifts and gifts to trusts described in section 2642(c)(2) that is, tax-vested trusts exempt from GST tax. This latter provision would effectively permit 2503(c) trusts to any age (not just 21). Up to $50,000 annually of mad money for anything that is otherwise impermissible or at least suspect. There would not have to be an arguable basis for the annual exclusion under current law. (The Greenbook provides the simple example of transfers in trust. ) Expand Applicability of the Definition of Executor. The 2015 Greenbook also contains the proposal first made in the 2014 Greenbook to expand the definition of executor in Section The Internal Revenue Code currently defines executor as the executor or administrator of the decedent s estate, or, if none, then any person in actual or constructive possession of any property of the decedent. This could include the trustee of a decedent s revocable trust, an IRA or life insurance beneficiary, or a surviving joint tenant of jointly owned property. The current definition does not give the executor the ability to act on behalf of a decedent with regard to a tax liability that arose prior to a decedent s death. Some actions that an executor currently cannot by law take include extending the statute of limitations, claiming a refund, agreeing to a compromise or assessment, or pursuing judicial relief. Problems also arise if there is no appointed executor and multiple persons meet the definition of executor. 6

38 The proposal would make the Internal Revenue Code s definition of executor applicable for all tax purposes including acting on behalf of the decedent with respect to pre-death tax liabilities or obligations. The proposal would also grant regulatory authority to adopt rules to resolve conflicts among multiple executors. Grantor Trusts. A grantor trust is treated as owned by the grantor (creator) of the trust during the grantor s lifetime or some shorter period. As a result, after the grantor makes a gift to an irrevocable grantor trust, with the grantor s descendants, for example, as beneficiaries, the income tax on that trust s income must be paid by the grantor, even though the income belongs to the trust and its beneficiaries. That permits the grantor to make income tax payments that benefit the trust and its beneficiaries without treating those payments as additional gifts. Grantor trust treatment also permits transactions between the trust and the grantor without income tax, including sales without capital gain and payment of interest without creating taxable income. That feature has supported the popular and effective estate planning technique of an installment sale to a grantor trust, in which assets are sold to the trust for a promissory note with lenient terms (especially at today s low interest rates), often with a small down payment. The future appreciation in the value of those assets in excess of the modest interest rate escapes gift and estate tax. The trust can also last for multiple generations and be made exempt from the generation-skipping transfer (GST) tax by allocation of the grantor s GST exemption. That feature of grantor trusts also permits fine-tuning or updating the assets of the trust by the grantor s exchange of assets with the trust, again without capital gain or gift treatment. In the 2012 Greenbook, for the first time, the Administration proposed changes to the estate and gift taxation of grantor trusts treated as owned by the grantor for income tax purposes. As written, those proposals appeared designed to treat all such grantor trusts as fully subject to estate tax when the grantor dies or to gift tax if grantor trust status ceases during the grantor s life. Observers did not believe that such a sweeping change was intended, and we waited for clarification in this year s version of the proposal. This 2015 Greenbook (as did the 2013 and 2014 Greenbooks) narrows the proposal. It will not apply to all grantor trusts. It will subject to estate tax (or gift tax) only the portion of the trust attributable to the property received by the trust from the grantor in an installment sale or similar transaction. The reference to the portion of the trust includes the growth in the value of that property, income earned from that property, and the reinvestment of the proceeds of any sales of that property. The amount subject to gift or estate tax will be reduced by the consideration paid by the trust in the sale, presumably including the face amount of the promissory note in most cases. But, of course, the amount of that consideration is typically a fixed amount, while the assets that are sold are usually expected to increase in value. If enacted as proposed, this change would apply to sales after the date the President signs the law and would effectively eliminate all typical estate tax benefits of such sales and end the use of such sales in the manner to which we have become accustomed. All future appreciation in the assets that are sold would be subject to estate tax no matter how long the grantor lives and whether or not the note is paid off. Attempts to avoid that by terminating grantor trust status during the grantor s life or making distributions from the trust would be subject to gift tax. 7

39 Because that portion of the trust would be subject to estate tax, the grantor would be unable to allocate GST exemption to it. If legislation along these lines is enacted, we believe that there would still be some estate tax value in installment sales to irrevocable trusts that are not grantor trusts. But those advantages would be significantly reduced, and many donors would prefer the more predictable benefits of a grantor retained annuity trust (GRAT). Some efforts might be made to design workarounds, possibly including expanded use of the technique of turning grantor trust status on or off, but those techniques would likely attract close scrutiny by the Internal Revenue Service. There is some comfort, however, in the Greenbook proposal that the legislation authorize Treasury to create exceptions from the proposed estate tax treatment. Those exceptions could include helpful safe harbors that relax the rules in the case of sales that meet certain standards. But it is most unlikely that we will know those exceptions and standards before the legislation is enacted. And it is hard to tell what the legislative prospects are. Estimated to raise revenue of slightly over a billion dollars over ten years, the proposal will not be irresistible as a weapon against deficits, but its appeal in an every-little-bit-helps environment is impossible to predict. Meanwhile, then, anyone considering an installment sale to a grantor trust should consider completing it, not as a rush project but without avoidable long delay or inattention, which is usually good advice for any estate planning actions like this. Some of those installment sales might be made to trusts that were created and funded in the surge of gift-giving in 2012 when the future of the gift tax exemption was uncertain. Minimum Ten-Year Term for GRATs and Other Changes. A grantor retained annuity trust is economically similar to an installment sale to a grantor trust, in that it protects from estate tax the appreciation in excess of the interest rate used to calculate the amount of the gift when property is transferred to the GRAT and the grantor retains a stream of annual payments for a stated term. Sometimes GRATs are seen as even preferable to installment sales, because GRATs follow a clear and predictable pattern set forth in tax regulations. One disadvantage of a GRAT is that it will be subject to estate tax, but only if the grantor dies during the stated term. For that reason, many GRATs have had relatively short terms, such as two years. This year s proposal modifies the identical proposal made in the 2012, 2013, and 2014 Greenbooks. As in the past proposals, the 2015 Greenbook would require a GRAT to have a minimum term of ten years. A new proposal in the 2015 Greenbook would eliminate the common practice of zeroing-out by designing the annuity to produce a very low gift tax value by requiring the remainder interest to have a minimum value of the greater of 25 percent of the value of the assets contributed to the GRAT or $500,000 (but not more than the value of the assets contributed. It would also prohibit decreases in the annuity during the term and prohibit the grantor from engaging in any tax-free exchange of assets in the trust. Finally, the proposal would prohibit the GRAT from having a term that extended more than ten years beyond the life expectance of the grantor at the time the GRAT was created. As with this proposal in the past, it is hard to estimate its prospects, although a similar proposal was approved by the House of Representatives in three rather partisan votes in 2010 under Democratic control, and this proposal is estimated to raise almost $3.9 billion over ten years. As 8

40 with the proposal regarding installment sales, the lesson is that GRATs under consideration should probably be completed if it is reasonable to do so, again not necessarily in a rush but with reasonable dispatch. Change in GST Rules for Health and Education Exclusion Trusts ( HEETs ). A health and education exclusion trust (or HEET ) is a complex and uncertain technique. It builds on the statutory rule that distributions from a trust that is not exempt from GST tax directly for a beneficiary s school tuition or medical care or insurance are not generation-skipping transfers, no matter what generation the beneficiary is in. By including charities as permissible beneficiaries with somewhat vague interests, the designers of such trusts hope to avoid a GST tax on the taxable termination that would otherwise occur as interests in trusts pass from one generation to another. The 2015 Greenbook repeats the proposal that was new in the 2013 and 2014 Greenbooks and that would limit the exemption of direct payments of tuition and medical expenses from GST tax to such payments made by individuals, not distributions from trusts. In contrast with other proposals, the Greenbook proposes that this change would be effective when the bill proposing it is introduced and would apply both to trusts created after that date and to transfers after that date to pre-existing trusts. Because of the lack of authority or consensus for their design, the use of HEETs is likely not as widespread as the use of installment sales or GRATs. But because of the abrupt effective date provision that is proposed, any contemplated HEETs should be completed promptly. Also, because the proposal appears intended to repeal an exception for all generation-skipping trusts, not just trusts designed as HEETs, it might be thought that the creation and funding of all such trusts should be placed on a rush basis. Many of us do not recommend that because we expect that the reach of this proposal will be recognized as overbroad, and, if it is enacted, it will be in a more limited form. Even if it might be enacted as proposed, we believe that the care needed in designing all the features of a long-term trust, not just provisions for tuition or medical expenses, ordinarily should not be compromised. Other Technical Estate Changes. The Greenbook carries forward other proposals made in past years, including a requirement for consistency between estate tax values and income tax basis, an expiration of GST exemption allocations after 90 years, and an extension of liens when payment of the estate tax on closely held business interests is deferred. Income Proposals. There are again income tax proposals in the 2015 Greenbook that could significantly affect individual taxpayers. For example, so-called stretch IRAs inherited by beneficiaries other than the original owner s spouse would be limited to a term of five years. A controversial proposal would limit the total amount that could be accumulated in a tax-free retirement arrangement to an amount calculated with reference to the maximum annual benefit from defined benefit plans, currently about $3.2 million at age 62. Original owners of Roth IRAs would be required to take distributions from Roth IRAs after attaining age 70 ½ in the same way as owners of traditional IRAs. For individuals in the 33, 35, and 39.6 percent income tax brackets, the effect of certain exclusions and deductions would be limited to the effect they would have had in the 28 percent bracket. And the Buffett Rule would be implemented by a 9

41 new minimum tax, called a Fair Share, ensuring a tax of at least 30 percent of adjusted gross income less a 28 percent credit for charitable contributions. Unlike the technical estate tax proposals, these proposals are likely to move forward, if at all, in the context of a broad and intense debate about tax reform, the distribution of tax burdens, and the appropriate balance between spending and taxation Priority Guidance Plan (July 31, 2015) Treasury Department and the Internal Revenue Service release their priority guidance plan The annual priority guidance plan contains the following 12 items under the heading of Gifts and Estates and Trusts for the years 2015 to 2016: 1. Guidance on qualified contingencies of charitable remainder annuity trusts under Section Final regulations under Section 1014 regarding uniform basis of charitable remainder trusts. Proposed regulations were published on January 17, Guidance on basis of grantor trust assets at death under Section Revenue procedure under Section 2010(c) regarding the validity of a QTIP election on an estate tax return filed only to elect portability. 5. Guidance on the valuation of promissory notes for transfer tax purposes under Sections 2031, 2033, 2512, and Final regulations under Section 2032(a) regarding imposition of restrictions on estate assets during the six month alternate valuation period. Proposed regulations were published on November 18, Guidance under Section 2053 regarding personal guarantees and the application of present value concepts in determining the deductible amount of expenses and claims against the estate. 8. Guidance on the gift tax effect of defined value formula clauses under Sections 2512 and Regulations under Section 2642 regarding available GST exemption and the allocation of GST exemption to a pour-over trust at the end of an ETIP. 10. Final regulations under Section 2642(g) regarding extensions of time to make allocations of the generation-skipping transfer tax exemption. Proposed regulations were published on April 17,

42 11. Regulations under Section 2704 regarding restrictions on the liquidation of an interest in certain corporations and partnerships. Guidance under Section 2801 regarding the tax imposed on U.S. citizens and residents who receive gifts or bequests from certain expatriates. 4. Revenue Procedure , IRB 1 (October 21, 2015) IRS provides the 2015 inflation adjusted amounts for tax exemptions, deductions, brackets, and other items This Revenue Procedure provides the 2015 inflation adjusted item amounts for tax exemptions, deductions, brackets and other tax items. Selected adjusted income and gift and estate tax numbers are: The gift tax annual exclusion remains at $14,000. The estate tax applicable exclusion amount is increased because of the inflation adjustment to $5,450,000. For an estate of a decedent dying in 2015, the aggregate decrease in the value of qualified property for which a special use valuation election is made under Section 2032 cannot exceed $1,110,000. The annual exclusion for gifts to non-citizen spouses is increased to $148,000. Recipients of gifts from certain foreign persons must report these gifts if the aggregate value of the gifts received in 2015 exceeds $15,671. For estates making the Section 6166 election to defer estate tax on closely held businesses and pay the tax in installments, the dollar amount used to determine the 2 percent portion (for purposes of calculating the interest owed) is $1,480,000. The top 39.6% income tax rate hits at the following amounts for the different categories of taxpayers: Married Individuals Filing Jointly $466,950 Heads of Households $441,000 Unmarried Individuals $415,050 Married Individuals Filing Separately $233,475 Estate and Trusts $12,400 The Kiddie exemption increases to $1,

43 5. H.R The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (July 31, 2015); and Notice , I.R.B. 294 (August 21, 2015) New law on consistency in the reporting of basis On July 31, 2015, President Obama signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act of Section 2004 of this act enacted new Code Sections 1014(f) and These provisions require the value of the basis in any property acquired from a decedent to be consistent with the basis as determined for estate tax purposes and that executors of estates (or persons with the responsibility of executor) disclose to the Internal Revenue Service, and to persons acquiring any interest in the decedent s estate, information identifying the value of each interest received. New Section 1014(f) provides that the basis of depreciated property acquired from a decedent shall not exceed the final value determined for estate tax purposes, or, if the final value has not been determined, the value provided in a statement to recipients of a decedent s property. If an estate is required to file an estate tax return, the executor is required to report the information on valuation to each person acquiring any interest in property included in the decedent s gross estate. The statements must be furnished to the beneficiaries no later than 30 days after the due date for the estate tax return, including extensions, or 30 days after the return is filed. If adjustments are made in the valuation or otherwise after the furnishing of the statements to the beneficiaries, the executor or trustee is required to furnish supplemental statements within 30 days of the date of the adjustment. Authority is granted to the Treasury Department to provide details of the implementation of these rules by regulation. The regulations will likely include rules for situations in which no estate tax returns are required or if the surviving joint tenant or other recipient has better information than the executors. Penalties are also provided for violating the accuracy related penalties on underpayments under Section 6662 and for failure to provide information returns and statements as provided in Sections These changes apply to each estate tax return filed after the enactment date of July 31, This would include the estate tax returns of decedents who died before July 31, 2015 for whom the return has not been filed. On August 21, 2015, in Notice , the Internal Revenue Service stated that statements due to the Service and estate beneficiaries on the final property values for returns that are due after July 31, 2015 will not be due until February 29, The delay is to allow the Treasury Department and the Internal Revenue Service time to issue guidance implementing the reporting requirements of the new law. 6. IRS Frequently Asked Questions on Estate (June 18, 2015) IRS announces that taxpayers must now request closing letters for federal estate tax returns filed on or after June 1, 2015 In a change to its Frequently Asked Questions on the Estate, the IRS has announced that for all federal estate tax returns filed on or after June 1, 2015, estate tax closing letters will be issued only upon request by the taxpayer. The taxpayer must wait at least four months after filing the return to request the closing letter, to allow time for processing. If the taxpayer does 12

44 not request a closing letter, the taxpayer will have wait the statutory three year period to learn if the estate tax return will be reviewed. Catherine Hughes, a Treasury Department estate and gift tax attorney-adviser, stated on September 18 that the IRS will soon allow practitioners to ask for a transcript of an estate tax return, with a code that indicates that the IRS has completed its examination of the estate tax return. The IRS has suggested that this code number will be the equivalent of a closing letter from the IRS. MARITAL PLANNING 7. Obergefell v. Hodges, 576 U.S. (2015) U.S. Supreme Court holds same-sex marriage to be a fundamental right The United States Supreme Court issued its opinion in Obergefell v. Hodges, 576 U.S. (2015) on June 26, In a 5-4 decision, the Supreme Court held that the Fourteenth Amendment requires a State to license a marriage between two people of the same sex and to recognize a marriage between two people of the same sex when their marriage was lawfully licensed and performed out of State. The result of this decision is that both the federal government and state governments must recognize the marriages of same-sex couples for all purposes including income taxes and estate taxes. Obergefell is the latest in a series of Supreme Court decisions on same-sex marriages beginning with United States v. Windsor, 570 U.S. (2013), and Hollingsworth, et al. v. Perry, et al., 570 U.S. (2013). In the 5-4 Windsor decision, the Supreme Court held Section 3 of the federal Defense of Marriage Act unconstitutional as a deprivation of the equal liberty of persons protected by the Fifth Amendment to the United States Constitution. That section of the law, which applied to all corners of the federal code, defined marriage as the union of one man and one woman only. For all federal purposes, including the estate tax marital deduction, this applied regardless of status of a relationship at the state level. The Supreme Court held that the federal government s attempts at classification and regulation of marriage as only existing between one man and one woman would not stand. Before Windsor, a same-sex couple living in a jurisdiction that allowed or recognized same-sex marriage was forced to live as married for the purpose of state law but as unmarried for the purpose of federal law. Going forward, the federal government was required to respect all marriages from the states, including marriages of same-sex couples. And a couple living in a jurisdiction that allowed or recognized same-sex marriage would be married for both state and federal law purposes. In Perry, in June 2008, the Supreme Court of California decided that marriages between samesex couples would be recognized and equal to all other marriages performed in the state. Five months later, in a ballot initiative known as Proposition 8, opponents of marriage equality successfully added a new provision to the California Constitution whereby only a marriage between a man and a woman would be valid or recognized in the state. 13

45 A married same-sex couple and a non-married same-sex couple filed an action seeking to compel state officials and their respective county clerks to issue marriage licenses notwithstanding the language of Proposition 8. The plaintiffs claimed that the language added to the California Constitution by Proposition 8 violated their rights guaranteed by the Fourteenth Amendment to the U.S. Constitution and that they should be allowed to marry. The state officials refused to defend Proposition 8, and the district court allowed a group of individual citizens the group that supported Proposition 8 to defend the language added as a result of the ballot initiative. The lower federal courts in California held that Proposition 8 was unconstitutional, and the state officials were ordered not to enforce Proposition 8. The state officials elected not to appeal the matter, but the individual citizens did appeal the decision, to the Ninth Circuit Court of Appeals. The Ninth Circuit was unclear on whether the petitioners the individual citizens who supported Proposition 8 had standing to appeal. The federal appeals court certified the question to the California Supreme Court, which held that the proponents of the ballot initiative had standing under federal law to defend the constitutionality of the ballot initiative. The Ninth Circuit heard the appeal and upheld the lower court on the merits. The United States Supreme Court, however, did not reach the merits of the Perry decision. Rather, a five-judge majority determined that the opponents of marriage equality the individual citizens did not have standing to pursue the case. As a result, the decision of the lower courts stood. Proposition 8 was held to be unconstitutional, and the county clerks in California were authorized to issue marriage licenses to same-sex couples. Windsor and Perry sparked a national discussion about the rights of same-sex couples to marry. In the wake of those decisions, same-sex couples celebrated their eligibility for the many federal benefits available to married couples. At the same time, plaintiffs in many states challenged the validity of state constitutions and statutes that recognized only marriages between a man and a woman. In Obergefell, an Ohio federal district court issued a temporary restraining order and ordered the Ohio registrar of death certificates not to accept a death certificate for John Arthur, a resident of Ohio, that did not record his status as married and did not record James Obergefell as his surviving spouse. Obergefell v. Kasich, 2013 U.S. Dist. LEXIS (S.D. Ohio 2013). The district court issued a permanent restraining order on December 23, 2013 in Obergefell v. Wymyslo, 962 F.Supp.2d 968 (S.D. Ohio 2013) (the director of the Ohio Department of Health was substituted for the governor as the named party). James Obergefell and John Arthur were in a committed relationship for 20 years, and were both Cleveland, Ohio, residents. Ohio specifically prohibited in the state code and state constitution the recognition of marriage of same-sex couples. Arthur suffered from ALS and was expected to die in the near future. Following the Windsor decision, Obergefell and Arthur flew in a medical transport plane to Maryland, whose laws already allowed same-sex couples to marry, and Arthur and Obergefell were wed in a ceremony inside the plane on the tarmac in Baltimore. They then returned to Ohio. The petitioners then sought a preliminary injunction, to prevent the Ohio registrar of death certificates from issuing a death certificate identifying Arthur as anything other than married to Obergefell at the time of his death. The district court found that the petitioners would suffer irreparable harm if Arthur s death certificate did not recognize his marital status 14

46 and, in light of the recent ruling in Windsor and the equal protection rulings from the U.S. Supreme Court, that the petitioners were likely to prevail on the merits of their case. The State of Ohio appealed the decision in Obergefell to the Sixth Circuit. The Sixth Circuit heard Obergefell with other cases dealing with challenges to bans on same-sex marriage in Kentucky, Michigan, and Tennessee. On November 6, 2014, the Sixth Circuit in a 2-1 opinion held that Ohio s ban on same-sex marriages did not violate the U.S. Constitution. DeBoer v. Snyder, 772 F.3d 388 (6th Cir. 2014). The United States Supreme Court granted certiorari on January 16, 2015 and heard oral arguments on April 28, On June 26, 2015, the Supreme Court held that all states are required by the Fourteenth Amendment to grant licenses for same-sex marriages and to recognize same-sex marriages performed in other states. As a result of Obergefell, the federal and state governments are now obligated to respect a marriage that is validly recognized by a state. Thus, there will no longer be any disparity between the treatment of same-sex married couples for federal and state tax purposes as there was before Obergefell. Marital status confers a number of tax advantages, including the following: gift splitting (Sections 2513(a) and 2652(a)(2)); the marital deduction (Sections 2056 and 2523); portability of the estate and gift tax unified credit (Section 2010(c)); per se same generation assignment (Section 2651(c)) and reverse-qtip elections (Section 2652(a)(3)) for GST tax purposes; the availability of disclaimers even if the property passes for the disclaimant s benefit (Section 2518(b)(4)(A)); a personal exemption (Section 151(b)); the nonrecognition of gain on transfers between spouses (Section 1041(a)); expanded eligibility to exclude gain from the sale of a principal residence (Section 121(b)(2)(A)); and the treatment of spouses as one shareholder of an S corporation (Section 1361(c)(1)). Marriage also presents some potential tax disadvantages, such as the following: treatment of a spouse as a member of the family under chapter 14 (Sections 2701(e)(1) and 2704(c)(2)) (which would prevent the use of a GRIT, for example); disallowance of losses (Sections 267(c)(4) and 707(b)); disallowance of a stepped-up basis in certain cases (Section 1014(e)(1)(B)), attribution of stock ownership (Section 318(a)(1)); and 15

47 status as a disqualified person under the private foundation rules (Section 4946(d)). Other tax attributes that attach to marriage can be good or bad, depending on the circumstances. This includes the filing of a joint income tax return itself (Section 6013), which can be a benefit when one spouse has all or most of the income, but can produce a marriage penalty when both have significant income, and married persons in such cases cannot elect the more advantageous filing as single taxpayers. Similarly, married status can make it easier to qualify a trust as a grantor trust (Sections 672(e) and 677(a)(1)), whether that is desirable or undesirable. In addition, same-sex married couples have the same status as opposite-sex married couples under state law, regardless of the state of residence. This status grants various rights and obligations to same-sex spouses under state property law, including the following: in the case of a decedent dying without a will, a surviving spouse has the right to receive a portion of the decedent s estate under state intestacy laws; a surviving spouse has the right to take an elective share of a deceased spouse s estate; based on the rights granted above, a surviving spouse may have standing to challenge a deceased spouse s will; a surviving spouse has the right to take a share of a deceased spouse s estate in the case of an accidental omission from an earlier will, under omitted spouse statutes; same-sex spouses may own property as tenants by the entirety, protecting such property from the creditors of one spouse; the right to a share of marital property in the case of divorce; and the right to a share of certain property in community property states. In the case of same-sex couples who have been lawfully married or who now plan to be lawfully married, regardless of the jurisdiction of residence, estate planners and advisors should review estate planning documents, beneficiary designations, property agreements, and prenuptial and marital agreements to take advantage of any benefits granted by Obergefell, and to avoid any unanticipated consequences upon the death of either spouse, the incapacity of either spouse, or divorce. 8. T.D. 9725, I.R.B (June 12, 2015) Final portability regulations are issued Temporary regulations and identical proposed regulations with respect to portability were released on June 15, Final regulations were released on June 12, 2015, very close to the expiration date of the temporary regulations on June 15, The final regulations provide that an extension of time to elect portability will not be granted under Treas. Reg in any estate that is required to file any estate tax return because 16

48 the value of the gross estate equals or exceeds the applicable exclusion amount. However, an extension of time may be granted under the rules set forth in Treas. Reg to estates with a gross estate value below the applicable exclusion amount and thus not otherwise required to file an estate tax return. As a consequence, the final regulations did not extend the availability of the automatic extension of time for executors of certain estates under the applicable exclusion amount to file an estate tax return to elect portability with respect to decedents dying before January 1, This temporary extension of time was found in Revenue Procedure , I.R.B The Service also determined that only executors may elect portability. Some commentators had requested that the final regulations allow a surviving spouse who is not an executor to file an estate tax return and make the portability election in several different circumstances. With respect to Qualified Domestic Trusts, the final regulations provide that if the surviving spouse becomes a citizen of the United States and is no longer subject to the requirements for a Qualified Domestic Trust, then the decedent s deceased spousal unused exclusion (DSUE) amount is no longer subject to adjustment and will become available to transfers by the surviving spouse as of the date the surviving spouse becomes an United States citizen. The final regulations confirm that the DSUE amount of the last deceased spouse dying after 2010 is available both to the surviving spouse for gift tax purposes and to the surviving spouse s estate for estate tax purposes. Neither remarriage nor divorce will affect that availability. The death of a subsequent spouse will terminate the availability of the DSUE amount from the previous last deceased spouse. The final regulations also preserve the ordering rule providing that when the surviving spouse makes a taxable gift, the DSUE amount of the last deceased spouse (at that time) is applied to the surviving spouse s taxable gifts before the surviving spouse s own basic exclusion amount. The effect of these rules is to permit a surviving spouse, by making gifts, to benefit from the DSUE amounts of more than one predeceased spouse. A related item on the current IRS Priority Guidance Plan is entitled Revenue Procedure Under Section 2010(c) regarding validity of a QTIP election on an estate tax return filed only to elect portability. It is likely that the contemplated revenue procedure will eventually affirm the validity of a QTIP election made on an estate tax return not needed for estate tax purposes, but filed to make the portability election. 9. Letter Ruling (Issued April 29, 2015; released August 7, 2015) Estate granted extension to make portability election The decedent died after 2010, survived by a spouse who was eligible for portability of the decedent s unused exemption to the surviving spouse. The decedent s gross estate was less than the applicable exclusion amount (including lifetime taxable gifts) but did not file a Form 706 to make the portability election. The estate discovered its failure to elect portability after the due date for making the election. The estate requested an extension of time pursuant to Treas. Reg to elect portability. Without giving reasons, the IRS concluded that the requirements of Treas. Reg had been satisfied. This regulation provides that an extension of time will be granted when a taxpayer provides evidence to establish that the taxpayer acted 17

49 reasonably and in good faith and that granting relief will not prejudice the interests of the government. The taxpayer is deemed to have acted reasonably and in good faith when the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or to advise the taxpayer to make, the election. 10. Letter Ruling (Issued April 20, 2015; released August 7, 2015) Estate granted extension of time to make reverse QTIP election with respect to marital trust At the decedent s death, a percentage of the decedent s assets passed to a marital trust for the benefit of the surviving spouse. The balance of the estate passed to a trust for the benefit of the decedent s daughter. Bank acted as executor and trustee of the trust and relied on an attorney to prepare Form 706. An election was made to treat the marital trust as QTIP property. However, the estate did not make a reverse QTIP election and did not affirmatively allocate the decedent s generation-skipping transfer tax exemption to the marital trust. Subsequent to the filing of the estate tax return, Treas. Reg (c) was issued. This regulation provided a transitional rule that allowed certain trusts subject to a reverse QTIP election to be treated as two separate trusts, so that only a portion of the trust would be treated as subject to the reverse QTIP election, and that portion would be treated as being fully exempt from generation-skipping transfer tax. The deadline for making the election under the transitional rule was June 24, A new bank became trustee of the trust and reviewed the Form 706. During this review, the new trustee discovered that the attorney had failed to make a reverse QTIP election and determined that the attorney had failed to advise the bank regarding the election under the transitional rule. The trustee requested an extension of time to make a reverse QTIP election with respect to the marital trust and to divide the marital trust into two separate trusts so that one trust was fully exempt from generation-skipping transfer tax and the other was not exempt. The reverse QTIP election would apply only to the exempt QTIP trust. The IRS determined that the requirements for granting an extension of time under Treas. Reg had been met. Requests for relief will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith and that granting relief would not prejudice the interests of the government. A taxpayer is deemed to have acted reasonably and in good faith if a taxpayer reasonably relied upon a qualified tax professional and the tax professional failed to make, or to advise the taxpayer to make, the election. 11. Letter Ruling (Issued June 1, 2015; released September 11, 2015) Estate granted extension of time to file estate tax return to elect portability when the value of the estate did not exceed the basic exclusion amount minus the decedent s taxable gifts Under the facts of this private letter ruling, the decedent s spouse, serving as executor, requested an extension of time to elect portability. The executor did not file an estate tax return on the date that such a return would be due, that is, 9 months after the decedent s death. After the executor 18

50 realized that she had failed to file the estate tax return and elect portability, the executor filed an estate tax return and elected portability. The value of the decedent s gross estate was less than the basic exclusion amount in the year of his death, and the decedent had made no taxable gifts during his lifetime. The IRS noted that in the case of an estate whose value exceeds the basic exclusion amount, such that an estate tax return is required, the portability is a statutory election as defined in Treas. Reg (b). But if the executor is not required to file an estate tax return, the Code does not specify a due date for an estate tax return for the purpose of making a portability election; instead, the Regulations specify that the election must be made on a timely filed estate tax return. Accordingly, if an estate tax return is not required for an estate, then the portability is a regulatory election, and relief is available under Treas. Reg (b). The IRS, in its discretion, granted an extension of time to file an estate tax return to elect portability. The letter clarified that if it is later determined that the value of the estate exceeds the basic exclusion amount minus taxable gifts, and if the estate is otherwise required to file an estate tax return, then the Commissioner would be without discretionary authority to grant relief under Treas. Reg (b), and the extension of time would be null and void. GIFTS 12. Estate of Davidson v. Commissioner, T.C. Docket No ; Estate of Donald Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013) and Estate of Marion Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013); Estate of Jack Williams v. Commissioner ( Court Docket No , petition filed Dec. 19, 2013) Developments in sweeping IRS attack on time-honored techniques A number of recent cases highlight particular issues in valuation of assets for purposes of the estate and gift tax. On July 6, 2015, the Internal Revenue Service settled Estate of Davidson v. Commissioner, T.C. Docket No The IRS had alleged $2.8 billion in estate, gift and generation-skipping transfer taxes owed, and the IRS settled for approximately $320 million in additional estate and generation-skipping transfer tax, approximately $186 million in additional gift tax, and approximately $48 million in additional generation-skipping transfer taxes from lifetime transfers. Davidson involved certain transactions by William M. Davidson, the former owner of the Detroit Pistons and the president, chairman, CEO and owner of 78 percent of the common stock of Guardian Industries Corp., one of the world s largest manufacturers of glass, automotive and building products. In December 2008 and January 2009, Davidson engaged in transactions including gifts, substitutions, a five-year grantor retained annuity trust (GRAT) and sales that eventually paid him no consideration at all. These transactions were similar to those challenged by the IRS in Estate of Kite v. Commissioner, T.C. Memo , in which no consideration was paid back to the grantor. At the time that Mr. Davidson made these transactions, he was 86, 19

51 and the evidence suggested that his actuarial life expectancy was about five years. He lived for only 50 days after making the last transfer, and he died on March 13, The consideration for some of Mr. Davidson s sales included five-year balloon unconditional notes at the applicable federal rate, five-year balloon self-canceling installment notes (SCINs) at the Section 7520 rate with an 88 percent principal premium, and five-year balloon SCINs at the Section 7520 rate with a percent interest rate premium. Addressing Mr. Davidson s sales both in Chief Counsel Advice (Feb. 24, 2012) and in its answer in the Court, the IRS argued the notes should be valued, not under Section 7520, but under a willing buyer-willing seller standard that took account of Mr. Davidson s health. Even though four medical consultants, two chosen by the executors and two chosen by the IRS, all agreed on the basis of Mr. Davidson s medical records that he had had at least a 50 percent probability of living at least a year in January 2009, the IRS saw the notes as significantly overvalued because of his health, and the difference as a gift. Combined gift and estate tax deficiencies, with some acknowledged double counting, were about $2.8 billion. The Davidson estate filed its Court petition on June 14, 2013 (Docket No ), and the IRS filed its answer on August 9, Trial was set by the court for April 14, 2014, but the parties jointly moved to continue it. In an Order on December 4, 2013, that motion was granted, jurisdiction was retained by Judge David Gustafson, and the parties were ordered to file joint status reports on September 14, 2014 and every three months thereafter. This settlement was entered by the court on July 6, In this settlement, the gift tax for prior years was increased by $186,626,788; the generation-skipping transfer tax for lifetime transfers was increased by $48,604,482; the total estate tax was increased from $139,411,144 as reported on the estate tax return to $291,902,040; and the generation-skipping transfer tax owed on the estate tax return was reduced by $450,000, from $29,071,193 to $28,621,193, for total estate and generation-skipping transfer tax liability of $320,523,233. It remains to be seen whether this is a victory for the IRS, a victory for the taxpayer, or a draw. There are other cases pending in which the IRS has launched sweeping attacks on time-honored estate and gift tax techniques. In two docketed cases widely discussed in 2014 and 2015, Estate of Donald Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013) and Estate of Marion Woelbing v. Commissioner ( Court Docket No , petition filed Dec. 26, 2013), the Court has been asked to consider a sale by Donald Woelbing, who owned the majority of the voting and nonvoting stock of Carma Laboratories, Inc., of Franklin, Wisconsin, the maker of Carmex skin care products. According to the Court petitions, Mr. Woelbing sold all of his Carma nonvoting stock in 2006 to a grantor trust in exchange for an interest-bearing promissory note in the amount of $59 million, the fair market value of the stock determined by an independent appraiser. The installment sale agreement provided that if the value of a share of stock was determined to be higher or lower than that set forth in the appraisal, whether by the IRS or a court, then the number of shares of stock purchased would automatically adjust so that the fair market value of 20

52 the stock purchased equaled the amount of the note. The trust s financial capability to repay the promissory note without using the stock itself or its proceeds exceeded 10 percent of the face value of the promissory note, including three life insurance policies on Mr. and Mrs. Woelbing s lives that were the subject of a split-dollar insurance arrangement with the company. The policies had an aggregate cash value of about $12.6 million, which could be pledged as collateral for a loan or directly accessed through a policy loan or the surrender of paid-up additions to the policies. At the time of the sale transaction, two sons of the Woelbings executed personal guarantees in the amount of 10 percent of the purchase price. Mr. Woelbing died in 2009, and the IRS challenged the 2006 sale in connection with its audit of his estate tax return. The IRS basically ignored the note, doubled the value of the stock at the time of the gift to $117 million, again increased the value of the stock at the time of Mr. Woelbing s death to $162 million and included that value in his gross estate, and asserted gift and estate tax negligence and substantial underpayment penalties. For gift tax purposes, the notices of deficiency asserted that the entire value of the stock was a gift at the time of the sale, either because Section 2702 applied to ignore the note or because the note in fact had no value anyway. For estate tax purposes, the IRS asserted that Mr. Woelbing retained for his life the possession or enjoyment of the stock or the right to designate the persons who shall possess or enjoy the stock under Section 2036 and the right to alter, amend, revoke or terminate the enjoyment of the stock under Section Thus, besides simple valuation, the Court might be obliged to address the adjustment clause, the possible reliance on the life insurance policies and guarantees to provide equity in the trust to support the purchase, and the applications of Section 2702 to the sale and Sections 2036 and 2038 after the sale. Similarly, in Estate of Jack Williams v. Commissioner ( Court Docket No , petition filed Dec. 19, 2013), the IRS challenged a partnership owning real estate and business and investment assets with a wide variety of arguments, including disregarding the existence of the partnership and treating transfers to the partnership as a testamentary transaction at the decedent s death; undervaluation of the partnership assets; lack of a valid business purpose or economic substance for the partnership; the decedent s retained enjoyment of the partnership assets; restrictions on the right to use or sell the partnership interest ignored under Section 2703(a); liquidation restrictions ignored under Sections 2703, 2704(a) and 2704(b); and any lapse of voting or liquidation rights in the partnership treated as a transfer under Section 2704(a). The IRS and the taxpayer recently settled the case. The everything-but-the-kitchen-sink approach reflected in these late-2013 Court petitions, especially the Woelbing petitions, has chilled transactions that had been commonplace in estate planning, including installment sales to grantor trusts. Recent Administration proposals for legislation to reduce the benefits of sales to grantor trusts, even though they may not gain traction in Congress, serve to reinforce the perception of increased animus toward these transactions. 21

53 13. Letter Rulings (Issued October 10, 2014; released March 6, 2015) Favorable rulings on incomplete non-grantor trusts Each of these rulings involved a favorable ruling with respect to an incomplete non-grantor trust. In each ruling, the grantor created an irrevocable trust for the benefit of himself, his issue, his spouse, and three other individuals. The trust provided that during the grantor s lifetime, the cotrustees must distribute such amounts of net income and principal as directed by a power of appointment committee and/or the grantor himself. The co-trustees, pursuant to direction of the majority of the committee members, with the written consent of the grantor could make distributions under the Grantor s Consent Power. The co-trustees pursuant to the unanimous consent of all the Power of Appointment committee members, other than the grantor, could direct distributions of net income or principal (the Unanimous Consent Power ). The grantor had the sole power in a non-fiduciary capacity to appoint principal to any one or more of the beneficiaries for their health, maintenance, support, and education ( Grantor s Sole Power). Finally, the grantor retained a broad special power of appointment to appoint to any one other than the grantor, the grantor s estate, or the creditors of either ( Grantor s Testamentary Power of Appointment). The IRS concluded that none of the provisions would cause the grantor or any other persons to be treated as the owner of the trust under Sections 673, 674, 676, 677, or 678. It noted, as in prior rulings, that the circumstances of the operation of the trust would determine whether the grantor or any other person would be treated as the owner of any portion of the trust under Section 675 related to administrative control of the trust. The IRS then noted that the retention of the Grantor s Consent Power over the income and principal of the trust caused the transfer to be incomplete for gift tax purposes. The retention of the Grantor s Sole Power over the principal of the trust also caused the transfer to be incomplete for gift tax purposes. In addition, the Grantor s Testamentary Power of Appointment caused the transfer to be incomplete with respect to the remainder in the trust. The committee s Unanimous Consent Power did not cause the transfer to be complete for gift tax purposes. Finally, the powers held by the committee members did not cause any of the members of the committee to have any taxable general powers of appointment. 14. Cavallaro v. Commissioner, T.C. Memo ; appealed July 6, 2015 Court holds that husband and wife are liable for gift tax following company merger On July 6, 2015, in a gift tax case, the taxpayers appealed the adverse decision of the Court in Cavallaro v. Commissioner, T.C. Memo In 1979, Mr. and Mrs. Cavallaro started Knight Tool Company. Knight was a contract manufacturing company that made tools and machine parts. In 1982, Mr. Cavallaro and his eldest son developed an automated liquid dispensing machine they called CAM/ALOT. Subsequently, in 1987, Mr. and Mrs. Cavallaro s three sons incorporated Camelot Systems, Inc., 22

54 which was a business dedicated to the selling of the CAM/ALOT machines made by Knight. The two companies operated out of the same building, shared payroll and accounting services, and collaborated in the further development of the CAM/ALOT product line. Knight funded the operations of both companies and paid the salaries and overhead costs for both. In 1994, Mr. and Mrs. Cavallaro sought estate planning advice from a big four accounting firm and a large law firm. The professionals advised Mr. and Mrs. Cavallaro that the value of CAM/ALOT Technology resided in Camelot (the sons company) and not in Knight and that they should adjust their estate planning. Mr. and Mrs. Cavallaro and their three sons merged Knight and Camelot in 1995 and Camelot was the surviving entity. Part of the reason for the merger was to qualify for Conformite Europeenne, which means European conformity, so that the CAM/ALOT machines could be sold in Europe. In the 1995 merger, Mrs. Cavallaro received 20 shares, Mr. Cavallaro received 18 shares, and 54 shares were distributed to the three sons. In valuing the company, the accounting firm assumed that the premerger Camelot had owned the CAM/ALOT technology. The Court found that Camelot had not owned the CAM/ALOT technology, and as a result, the Court found that the appraiser overstated the relative value of Camelot and understated the relative value of Knight at the time of the merger. In 1996, Camelot was sold for $57 million in cash with a contingent additional amount of up to $43 million in potential deferred payments based on future profits. No further payments were made after the 1996 sale. Three issues were under review by the tax court: 1. Whether the 19 percent interest received by Mr. and Mrs. Cavallaro in Camelot Systems, Inc., in exchange for their shares of Knight Tool Company in a tax free merger, was full and adequate consideration, or whether it was a gift. 2. Whether Mr. and Mrs. Cavallaro were liable for additions to tax under Section 6651(a)(1) for failure to file gift tax returns for 1995, or whether the failure was due to reasonable cause. 3. Whether there were underpayments of gift tax attributable to the gift tax valuation understatement for purposes of the accuracy related penalty, or whether any portions of the underpayment were attributable to reasonable cause. With respect to the valuation issue, the Cavallaros offered two experts regarding the value of the combined entity. One expert valued the entity at between $70 million and $75 million and opined that only $13 million to $15 million of that value was attributable to Knight. A second appraiser valued the combined entity at $72.8 million. The IRS retained its own appraiser. This appraiser assumed that Knight owned the CAM/ALOT technology. He valued the combined entities at approximately $64.5 million and found that 65 percent of that value, or $41.9 million, was Knight s portion. In reaching its decision on the gift tax liability, the Court noted that the 1995 merger transaction was notably lacking in arm s-length character and Camelot may have been a sham company. It also discussed how the law firm in 1995 had tried to document the ownership of the CAM/ALOT technology by the sons but that such documentation was insufficient. The Court did not accept the testimony of the accounting firm. It noted that the IRS had conceded during 23

55 the litigation that the value of the combined entities was not greater than $64.5 million and that the value of the gift made in the merger transaction was not greater than $29.6 million. As a result, the Court concluded that Mr. and Mrs. Cavallaro made gifts totaling $29.6 million in The Court rejected the imposition of penalties for failure to file a gift tax return and accuracy-related penalties. It found that in both instances, Mr. and Mrs. Cavallaro had been advised by an accountant or lawyers and that there was reasonable cause for the failure to file a gift tax return and failure to pay the appropriate amount of tax. It noted that Mr. and Mrs. Cavallaro relied on the judgment and advice of the professional advisors and that the CAM/ALOT technology had been owned by the sons company since 1987 (and thus was not being transferred in 1995). In documenting its finding of reasonable cause to avoid the penalties, the Court went into great detail about Mr. and Mrs. Cavallaro s lack of formal education beyond high school and that they had built the business themselves. In their appeal, the Mr. and Mrs. Cavallaro argued that the IRS had no basis for alleging that Camelot was a sham corporation and that the Court had been wrong with respect to which assets were owned by Knight as compared to Camelot. This is a case in which the IRS took an aggressive position and it will be interesting to see how the First Circuit decides this case. 15. Mikel v. Commissioner, T.C. Memo Court examines effect of trust in terrorem provision and arbitration provision on validity of Crummey powers In 2007, Israel and Erna Mikel, husband and wife, established an irrevocable trust for the benefit of their family and transferred assets to the trust with a value of $3.262 million. The trust had 60 beneficiaries, which included the grantors children, other descendants and their spouses. The trust gave each of the 60 beneficiaries the type of withdrawal right that had been endorsed in Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). Each beneficiary was given the power, within 30 days of notice of any transfer to the trust, to withdraw a portion of the trust up to the amount that could be excluded from gift tax, which was $12,000 in The grantors filed gift tax returns regarding the trust and elected to split gifts. The grantors took the position that the Crummey withdrawal right given to each of the 60 beneficiaries qualified as a present interest under Section 2503(b), such that $720,000 of the transfer from each spouse, or $1.440 million total, qualified for the gift tax annual exclusion. Of the $3.262 million in property transferred to the trust, the grantors reported a total taxable gift of $1.822 million. Following examination, the IRS concluded that the Crummey withdrawal right did not qualify the interest for the gift tax annual exclusion, and the IRS sent the taxpayers notices of deficiency. The taxpayers petitioned the Court for review. The IRS conceded that the trust document granted each beneficiary an unconditional right to withdraw a portion of the trust assets. However, the IRS argued that the right didn t amount to a present interest because it was not legally enforceable in practical terms. 24

56 The IRS cited two particular provisions of the trust that made the Crummey withdrawal right illusory. First, the trust contained a clause that required that any dispute regarding the trust shall be submitted to arbitration before a panel consisting of three persons of the Orthodox Jewish faith, which in Hebrew is called a beth din. The beth din was directed to enforce the provisions of this Declaration and give any party the rights he is entitled to under New York law. Second, the trust contained an in terrorem provision, which provided that if any beneficiary shall directly or indirectly institute, conduct or in any manner whatsoever take part in or aid in any proceeding to oppose the distribution of the Trust Estate, or files any action in a court of law, then the beneficiary would forfeit his interest in the trust. The IRS argued that a Crummey right of withdrawal is legally enforceable only if the beneficiary can go before a state court to enforce that right. Because the beneficiary was restricted to first filing an action with the beth din and because a beneficiary bringing an action in state court would lose any interest in the trust, the IRS concluded that the beneficiary, at least in practical terms, couldn t go before a state court to enforce its rights. The Court concluded that the Crummey withdrawal rights weren t illusory, and it allowed the gift tax annual exclusion. As for the IRS argument that the beneficiary s remedy must be in state court to be properly enforceable, the Court suggested that arbitration could constitute a sufficient mechanism for enforcement. The court concluded, [The IRS] has not explained why this is not enforcement enough. The court noted that if the trustees were to breach their fiduciary duties by refusing to honor a withdrawal demand, the beneficiary could seek justice from a beth din, which is directed to give any party the rights he is entitled to under New York law. Further, the court noted that if a beneficiary were not satisfied with the decision of the beth din, the beneficiary could appeal the decision to New York state court; this would at least give the beneficiary the ability to present his case before a state court, despite the general reluctance of New York courts to disturb an arbitral decision. As for the IRS argument that the in terrorem provision effectively prohibited a suit in court, the court concluded that the in terrorem provision would not be triggered if a beneficiary filed an action in court to enforce a withdrawal right. The IRS had focused on a particular clause of the in terrorem provision, which ostensibly would be triggered if a beneficiary files any action in a court of law. But the court read this phrase to only apply to proceedings to oppose the distribution of the Trust Estate. The court reasoned that to read the clause to apply to the filing of any action in a court of law, without any qualification would mean that a beneficiary would lose an interest in the trust if he filed any court action, even one to recover for mischievous behavior by their neighbor s dog. Ultimately, the court held, [a]ssuming arguendo that the beneficiaries withdrawal rights must be enforceable in State court, the beneficiaries still had a practical remedy in state court, and the court allowed the gift tax annual exclusion. While the court noted generally that it saw no reason why enforcement before an arbitration panel would not be enforcement enough, its holding assumed, without deciding, that the beneficiaries rights must be enforceable in state court. Accordingly, Mikel leaves open the question of whether a beneficiary must have a remedy in state court for a right Crummey or otherwise to be legally enforceable. 25

57 In a follow-up opinion from the Court, Mikel v. Commissioner, T.C. Memo , the court denied the taxpayer s motion for litigation costs. The Court found that while the taxpayers had prevailed in their argument that the withdrawal rights were legally enforceable and not illusory, the position of the United States in the proceeding was substantially justified. 16. Steinberg v. Commissioner, 145 T.C. No. 7 (September 16, 2015) Value of a gift was decreased by the recipient s assumption of potential estate liability by reason of gross up for gift tax paid under section 2035(b) if the donor dies within three years of the gift by applying the willing buyer and willing seller test combined with the IRSs actuarial mortality and interest tables A mother entered into a binding gift agreement (the net gift agreement ) with her daughters. Under the net gift agreement, the mother gave certain property to her daughters, and the daughters agreed to assume and pay any gift tax liability imposed due to the gifts. In addition, the daughters agreed to assume and pay any estate tax liability imposed under Section 2035(b) as a result of the gifts, if the mother passed away within three years of the gifts. The net gift agreement was the result of several months of negotiation, and the mother and the daughters were represented by separate counsel. In determining the fair market value of the property, the mother retained an appraiser, who valued the property based on the assumption of the potential tax liability by the daughters. The mother filed a gift tax return, and the IRS issued a notice of deficiency. The IRS disallowed the discount that the mother had claimed for her daughters assumption of potential estate tax liability, and the IRS increased the value of the gift from $71,598,056 to $75,608,963, for an increase in gift tax liability of $1,804,908. The IRS argued that the daughters assumption of contingent estate tax liability was not additional consideration in money or money s worth, and argued that the value of the gift should not be reduced by such amount. The court had earlier denied summary judgment on this issue, concluding that this question would be determined by material facts that were the subject of a genuine dispute. The court cited prior case law in which courts had found that a willing buyer would require that certain potential tax liabilities, such as built-in capital gains, should be factored into a valuation. The court concluded that the daughters assumption of the potential estate tax liability was a detriment to the daughters, and was a benefit to the donor. The court concluded that it was proper for the appraiser to consider the value of the contingent estate tax liability assumed by the daughters, based on the mother s life expectancy based on actuarial tables promulgated by the Commissioner of Internal Revenue. 17. United States v. Marshall, 798 F.3d (5th Cir. August 19, 2015) Heirs are not liable for gift tax and interest beyond value of resulting indirect gift In 1995, J. Howard Marshall, II sold his stock in Marshall Petroleum, Inc. back to the company for a price that the court later determined was below its fair market value. This resulted in an 26

58 increase in the value of the stock of the remaining shareholders. Shortly after the sale, J. Howard died. The IRS and J. Howard s estate entered into a stipulation that determined the value and recipients of the indirect gifts, but J. Howard s estate did not pay the gift tax. The IRS attempted to collect the unpaid gift tax from the donees of the transfers. At the time of the sale, five individuals or entities held MPI Stock, including Eleanor Pierce Stevens (J. Howard s ex-wife who was the beneficiary of a trust funded with MPI stock), E. Pierce Marshall (J. Howard s son), Elaine T. Marshall (E. Pierce s wife), and separate trusts for the benefit of J. Howard s two grandchildren. Stevens was the beneficiary of a grantor retained income trust which paid income to Stevens. As part of her divorce settlement with J. Howard Marshall, Stevens received shares of MPI stock. In 1984, she transferred all of her shares of MPI to a living trust and a few years later, the living trust split those shares into four trusts. Half of the shares were transferred to three charitable remainder annuity trusts and the remaining shares were put into the grantor retained income trust which was to pay income to Stevens for ten years and then pass the assets to E. Pierce who was the remainder beneficiary. When the MPI shares were transferred to the three charitable remainder annuity trusts and the grantor retained income trust, the shares were cancelled and then re-issued in the name of the four trusts. E. Pierce passed away in 2006 and Stevens passed away in The IRS audited J. Howard s gift taxes for 1992 through As a result, after years of back and forth negotiation, the estate and the IRS entered into a stipulation and found that Marshall made substantial indirect gifts to the other shareholders as a result of the 1995 sale of shares of MPI back to the company. The IRS found that the amounts of the gifts were the following: $43,768,091 E. Pierce $35,939,316 Stevens $1,104,165 Elaine Trusts for the two Grandchildren $2,208,830 In 2008, the Court issued decisions finding deficiencies in J. Howard s gift taxes. J. Howard s estate never paid the gift taxes. In 2010, the government brought an action in district court against E. Pierce s Estate, Elaine, the trusts for the two grandchildren and Steven s estate. In 2010, E. Pierce s estate paid the gift taxes owed on the gifts to E. Pierce, Elaine, and the trusts for the two grandchildren. Stevens estate paid nothing toward the gift tax. When Stevens passed away in 2007, her grandson, E. Pierce, Jr., became the executor of her estate and Finley L. Hilliard was trustee of her living trust. Both were aware that Stevens estate and the living trust could be held liable for the unpaid gift tax. Before paying anything toward the unpaid gift tax, E. Pierce, Jr. made distributions of personal property from Stevens estate and also paid rent on Stevens' apartment for one year. Hilliard used funds from the living trust to pay accounting and legal fees for charitable organizations other than the living trust. E. Pierce, Jr. and Hilliard filed a joint income tax return for the living trust and the estate and also permanently set aside $1,119,127 for charitable purposes. 27

59 In a prior opinion, United States v. Marshall, 771 F.3d 854 (November 10, 2014), the court held that the beneficiaries was liable for all accrued interest as a transferee. The August 19, 2015 opinion withdraws that prior opinion. The August 19, 2015 opinion holds that the heirs are not liable for gift tax and interest beyond the value of the resulting indirect gift from the decedent donor on which he did not pay gift tax. The court concluded that a donee s liability for a donor s unpaid gift tax and interest is capped at the amount of the gift, under Section 6342(b), which provides a lien to secure the payment of gift taxes. 18. Field Attorney Advice F (May 29, 2015) Statute of limitations does not run with respect to gift tax return filed by donor, because the donor failed to adequately disclose the donor s transfer in two partnerships Under the facts of this Field Attorney Advice, a donor transferred interest in two partnerships, and then timely filed a gift tax return reporting the transfers. The IRS concluded that the gift tax return failed to adequately disclose the transfers, and failed to adequately describe the method used to determine the fair market value of both partnership interests, under Treas. Reg (c)-1(f)(2). The IRS concluded that the gift tax return listed certain information required by the regulations, including the donee s name and address and the donee s relationship to the donor. The IRS also concluded that the return probably satisfies the provisions of the regulations requiring a description of any consideration received for the transferred property and a statement describing any position that is taken that is contrary to any proposed, temporary, or final regulations or revenue rulings. However, the IRS concluded that the return insufficiently described the transferred property. The return only listed 8 digits of the tax ID number for one partnership; the return omitted the designations LP or LLP from the partnership s titles, thus wrongly implying that the partnerships were traditional partnerships; and the return only states that partnership interests were transferred, without specifying whether they were general or limited partnership interests. In addition, the IRS concluded that the return failed to describe the method used to determine the fair market value of the property, and instead the return only states that the land that was the primary property of a partnership was independently appraised by a certified appraiser, with certain percentage discounts taken. That is, the return summarized the fact of an appraisal and a discount, but did not explain the method used to reach these figures. Accordingly, the IRS concluded that the three-year limitations period on the gift had not begun to run with the filing of the gift tax return. 19. Estate of Redstone v. Commissioner, 145 T.C. No. 11 (October 26, 2015) Transfer of stock was business transaction and not gift In transfers pursuant to a settlement relating to a family business, the IRS argued that the resulting transfers were gifts. The court found that because the transfers represented the 28

60 settlement of a bona fide dispute, was made at arm s length, and was free from any donative intent, it met the three criteria for a transaction to be in the ordinary course of business as per the gift tax regulations. In 1972, family members settled a dispute related to a family business, National Amusements, Inc. ( NAI ). In this settlement, Edward Redstone released his claim to 33/ 1/3 NAI shares, which were placed in trust for Edward s children. In exchange for this release, Edward s father and brother acknowledged Edward s ownership of 66 2/3 NAI shares. Upon Edward s death in 2011, the IRS argued that the transfers were a gift by Edward, and assessed $737,625 in gift tax and penalties. Treas. Reg provides that a transfer of property made in the ordinary course of business is not subject to gift tax, and that such a transfer is one that is bona fide, at arm s length, and free from any donative intent. Such a transfer is deemed to be made for consideration, and not as a gift, even if a party later argues that the assets that he received was inadequate. The court concluded that based on the facts, the transfer was made pursuant to a settlement agreement in the ordinary course of business, and not because of any donative intent on the part of Edward. Accordingly, no gift tax was due. ESTATE INCLUSION 20. New York State Department of ation and Finance Advisory Opinion TSB-A-15(1)M (May 29, 2015) Membership interest in a single member LLC, which is disregarded for income tax purposes, is not intangible property for New York State estate tax purposes In this advisory opinion, a petitioner residing in New York State considered forming a single member limited liability company under Delaware law for the sole purpose of contributing his condominium, which was located in New York State, to the limited liability company and then moving to another state. The petitioner intended to remain as the sole owner of the limited liability company for the remainder of his life and to reside outside of New York State until his death. The petitioner s question assumed that the proposed single member limited liability company would be disregarded for income tax purposes and would not be treated as a corporation under Treas. Reg (c). The New York State estate tax is imposed on the transfer by the estate of a non-resident decedent of real property and tangible property physically located in New York State. As a result, condominiums constitute real property and are generally subject to New York State estate tax. However, where real property, including condominiums, is held by a corporation, partnership, or trust, the interest in such an entity had been held by the courts to be intangible property. See Estate of Havemeyer, 17 N.Y.2d 216 (1966) and In the Matter of Finkelstein, 40 Misc.2d 910 (N.Y. Surr. Ct. Rockland County 1963). The New York Law also defines tangible personal property to exclude various property including shares of stock and cash. Under Section 7701, the default classification of a single member limited liability company is that an entity is disregarded for income tax purposes is not deemed to be an entity separate from its owner. 29

61 Consequently, in situations where a single member limited liability company is disregarded for federal income tax purposes, it will be treated as owned by the individual owner and the activities of the single member limited liability company are treated as the activities of the owner. Therefore, this Advisory Opinion ruled that the interest in the single member limited liability company, which is treated as a disregarded entity, would be treated for New York estate tax purposes as real property held by the petitioner and subject to New York State estate tax. It would not be treated as an intangible asset. However, the Opinion noted that where a single-member LLC makes an election to be treated as a corporation pursuant to Treas. Reg (c), rather than being treated as a disregarded entity, such ownership interest would be considered intangible property for New York State estate tax purpose. VALUATION 21. Anticipated valuation discount regulations under Section 2704 Expected new regulations will likely change the rules in the valuation of family limited partnerships and limited liability companies According to various sources, proposed regulations under Section 2704(b)(4) to restrict or eliminate valuation discounts are reported to be close to publication. These possible proposed regulations would look at the restrictions to be disregarded in the valuation of interests in partnerships and corporations and seek to eliminate or greatly restrict the availability of valuation discounts. Pursuant to statutory authority conferred in 1990 and a guidance project pending since 2003, the IRS apparently drafted the proposed regulations by 2009 but then stepped back and sought additional legislative cover. In 2013, the attempt to eliminate valuation discounts by legislation was abandoned, but the regulation project has gone forward. Chapter 14 was added to the Internal Revenue Code in Under Section 2074(b), certain restrictions, called applicable restrictions, are disregarded for purposes of the estate, gift, and generation-skipping transfer tax in valuing interest in corporations or partnerships transferred to family members. Section 2074(b)(4) provides: (4) Other Restrictions. The Secretary [of the Treasury] may by regulations provide that other restrictions shall be disregarded in determining the value of the transfer of any interest in a corporation or partnership to a member of the transferor s family if such restriction has the effect of reducing the value of the transferred interest for purposes of this subtitle but does not ultimately reduce the value of such interest to the transferee. We do not know what the proposed regulations might contain, but they are likely to reduce or eliminate the effectiveness of valuation discounts for family or limited partnerships and limited liability companies for many clients and customers in their estate planning. One of the most interesting questions is the effective date of the new rules. There are two possible effective dates. The first is the date that the regulations are proposed. The second is the 30

62 date on which they are finalized. A more significant factor is what event is measured against the effective date. If the event is the creation of a restriction, as in Section 2704 itself, then postenactment transfers from an entity already created and funded would not be subject to the new rules. But if the critical event is the transfer of a restricted interest, then having the entity in place before the effective date is not enough. The necessary transfers, presumably to younger generations or trusts for their benefit, would have to have been completed prior to the effective date. The reaction to the proposed regulations is likely to be intense, as many will try to criticize, challenge, or circumvent the new rules. Final resolution, if it is possible at all, may require several years. For some, the new rules may provide some certainty with respect to valuation discounts as opposed to the uncertainty of the Internal Revenue Service questioning and litigating both the availability of valuation discounts and the amount of valuation discounts. No matter what happens, these new proposed regulations under Section 2704 will have an impact on the planning that is done for clients as well as on the administration of trusts and estates that hold limited partnership and limited liability company interests. 22. Pulling v. Commissioner, T.C. Memo (July 23, 2015) Court upheld taxpayer s valuation of contiguous parcels of real estate, rejecting the IRS arguments that the properties should be valued as a single unit The sole issue of contention between the IRS and the decedent s estate was the valuation of three parcels of real estate. These parcels were held by certain corporate entities, which in turn were owned in whole or in part by the decedent. Upon the decedent s death, the IRS determined a deficiency of estate tax in the amount of $1,155,065. The IRS argued that the three parcels should be valued as a single unit. The court looked to state law to determine the extent of the estate s property interests in the real estate, and the extent to which it was proper to treat the properties as a single unit. The court agreed that assembling the properties into one unit would yield the greatest value, but the court concluded that assembling the properties was not reasonably likely, because of the facts and circumstances of the entities which held the properties. The court upheld the estate s valuation of the parcels, which had value the parcels as separate parcels and thus at a lower total value than had the parcels been treated as one single parcel. CHARITABLE GIFTS 23. Mitchell v. Commissioner, 775 F.3d 1243 (10th Cir. January 6, 2015) Charitable income tax deduction for conservation easement denied because mortgage on property was not subordinate to easement In 1998, Charles and Ramona Mitchell purchased a 105 acre ranch in Colorado from Clyde Sheek. Charles Mitchell subsequently purchased a contiguous parcel with an additional 351 acres from Clyde Sheek in The parties agreed that after an initial down payment, Charles Mitchell would pay the balance for the second parcel in annual installments. In 2002, the 31

63 Mitchells formed a family limited liability limited partnership called CL Mitchell Properties, LLLP and transferred the ranch land subject to Clyde Sheek s deed of trust to the partnership. In 2003, CL Mitchell Properties, LLLP placed a conservation easement over 180 acres of unimproved ranch land which the partnership owned. In 2004, Mr. and Mrs. Mitchell claimed an income tax charitable deduction of $504,000 for the conservation easement. In 2010, the IRS disallowed the income tax charitable deduction because the property was subject to Mr. Sheek s unsubordinated mortgage at the time of the donation. As a result, the conservation purpose was not protected in perpetuity as required by the Internal Revenue Code. The Court denied the Mitchell s claimed income tax charitable deduction concluding that the Internal Revenue Code and its implementation regulations strictly required that Sheek s mortgage be subordinated on the date of the donation in order to meet the requirement that an easement be granted in perpetuity. Only in 2005, almost two years after the donation, did Sheek agreed to subordinate his interest in the ranch land to the easement. On appeal, the Tenth Circuit upheld the decision of the Court. Mr. Mitchell died in 2006 and Mrs. Mitchell, the surviving taxpayer, first argued that the mortgage provision and the regulations contained no explicit time frame for compliance. Mrs. Mitchell also claimed that the regulations entitled her to the deduction despite any failure to comply strictly with the mortgage subordination provision since the risk of forfeiture was low. Mrs. Mitchell had also claimed that the mortgage subordination provision in the Treasury Regulations was arbitrary and capricious. The Tenth Circuit did not consider this argument because it was raised for the first time on appeal. The IRS argued that the mortgage subordination provision was a bright line requirement which required any existing mortgage to be subordinated to the rights of the charitable organization as of the date of the donation irrespective of the risk of foreclosure or any alternate safeguards. Mrs. Mitchell claimed that she was entitled to the income tax charitable deduction despite the failure to subordinate at the time of the conveyance because the deed contained sufficient safeguards to protect the conservation purpose and perpetuity and that the remote future event provision acted as an exception to the mortgage subordination provision for giving remote and harmless errors. The Tenth Circuit, in interpreting Treas. Reg A-14(g), found that the mortgage subordination provision did not allow subordination at any time and that the IRS was entitled to demand strict compliance for the mortgage subordination provision irrespective of the likelihood of foreclosure. The court noted that the remote future event provision and the regulation provides that a deduction will not be disallowed merely because the interest that passes to donee organization may be defeated by the happening of some future event if on the date of the gift it appears that the possibility that such act or event will occur is so remote as to be negligible. The court noted that this did not include the unexceptional risk of foreclosure. It noted that it was reasonable for the IRS to adopt an easily applied subordination requirement over a case by case fact specific inquiry into the financial strength or credit history of each taxpayer. Consequently the denial of the income tax charitable deduction was upheld. 32

64 24. Balsam Mountain Investments, LLC v. Commissioner, T.C. Memo Partnership s right to change boundaries of a conservation easement causes conservation easement to fail the definition of a qualified real property interest and the income tax charitable deduction was denied Balsam Mountain Investments, LLC granted a perpetual conservation easement to North American Land Trust. The conservation area was defined in the easement as a specific 22-acre parcel of land in Jackson County, North Carolina. Under the easement agreement, Balsam retained the right to make boundary changes to the conservation area. The calculated area of land within the conservation area after any alteration could not be reduced from the original calculated area of land. The land added to the conservation easement had to be contiguous with the current conservation area. No adjustments could be made after the fifth anniversary of the date of the conservation easement. The aggregate land removed from the conservation area as a result of all boundary line alterations could not exceed five percent of the original area within the conservation area. The IRS contended that the easement was not a qualified real property interest of the type described in Section 170(h)(2)(C) and therefore the gift did not meet the requirements of a qualified conservation contribution. The Court agreed with the IRS, holding that a conservation easement is not a qualified real property interest if the easement agreement permits the grantor to change what property is subject to the easement. Balsam tried to distinguish this case from Belk v. Commissioner, 140 T.C. No. 1 (2013). Balsam noted that the easement agreement in Belk allowed the donor to substitute other land for all the land initially subject to easement. Here the easement allowed substitution for only five percent of the land initially subject to the easement. The court declined to agree with Balsam, noting that while the easement was different from the one in Belk, the difference did not matter. 25. Isaacs v. Commissioner, T.C. Memo Donation of twelve fossil trilobites disallowed as income tax charitable deduction because qualified appraisal requirements not met In 2006, Dr. James Isaacs donated four fossil trilobites to the California Academy of Sciences. In 2007 Dr. Isaacs donated an additional eight fossil trilobites to the California Academy of Sciences. Dr. Isaacs filed Forms 8283, Non-Cash Charitable Contributions, with his 2006 and 2007 federal income tax returns. On each form, an individual signed on behalf of the California Academy of Sciences to acknowledge that the California Academy of Sciences was a qualified organization and had received Dr. Isaacs donations in the relevant tax year. Dr. Isaacs included letters from the senior collections manager for geology at the California Academy of Sciences acknowledging the donations with his 2006 and 2007 returns. Both of Dr. Isaacs Forms 8283 bore the signature Jeffrey R. Marshall in the declaration of appraiser. Dr. Isaacs also called Jeffrey R. Marshall as a witness at trial, and the court accepted Mr. Marshall as an expert in the valuation of fossils. Mr. Marshall identified his signature on Dr. Isaacs 2006 Form 8283 as his 33

65 own but did not recall signing it. Likewise he identified his signature on Dr. Isaacs 2007 Form 8283 but could not recall signing the form. Mr. Marshall similarly identified his signature on two letters dated December 31, 2006 and 2007 that purported to be appraisals for the fossils donated by Dr. Isaacs to the California Academy of Sciences in 2006 and However, Mr. Marshall did not write or even recognize the letters, and, as Dr. Isaacs offered no testimony from any other expert as to the letters author, the court did not admit them into evidence. Dr. Isaacs did not offer any other reported appraisals of the donated fossils. For 2006, Dr. Isaacs claimed an $85,894 deduction on the basis of a $136,500 non-cash contribution and an $11,719 carryover from a prior year. For 2007, he claimed a $52,361 deduction on the basis of a $109,800 non-cash contribution and a $62,575 carryover from a prior year. For 2008, he claimed a $14,548 deduction on the basis of cash contributions totaling $500 and a $120,309 carryover from a prior year. The court found that Dr. Isaacs failed to obtain qualified appraisals of the donated fossils as required by Section 170(f)(11)(c). The court noted that Mr. Marshall denied that he had written the reported appraisals and, as a result, they were not admitted into evidence. In addition, Dr. Isaacs failed to satisfy the recordkeeping requirement. He introduced no evidence other than the Forms 8283 with respect to the valuation of the fossils. This violated the regulations to Section 170 which mandate that as a pre-requisite to a deduction of a non-cash charitable contribution, the taxpayer must maintain records containing information on the approximate date and manner of the acquisition of the fossils and the cost or other basis or the method by which their purported fair market value is determined. Finally, Dr. Isaacs failed to obtain a satisfactory contemporaneous written acknowledgment as required for a contribution exceeding $250. Although Dr. Isaacs received letters from the California Academy of Sciences acknowledging the contribution, they did not state whether the California Academy of Sciences had provided any goods or services in exchange. Consequently the letters could not suffice as contemporaneous written acknowledgement. The court also imposed accuracy related penalties. 26. Bosque Canyon Ranch, L.P. v. Commissioner, T.C. Memo Income tax charitable deduction for conservation easement was denied Bosque Canyon Ranch, L.P. ( BCR I ), a Texas limited partnership, was formed in 2003 and owned the Bosque Canyon Ranch, which consisted of 3,744 acres. In 2005, BCR I granted a conservation easement to the North American Land Trust. BCR I sold partnership interests to outsiders which gave each holder a home site. The home site parcel owners and North American Land Trust could, by mutual agreement, modify the conservation easement provided that the modification could not have a material adverse effect on any of the conservation purposes. The 2005 easement was valued at $8,400,000. BC Ranch II, L.P. ( BCR II ) was formed in December 2005 as a Texas limited partnership. On December 20, 2005, BRC I deeded approximately 1,866 acres of the Bosque Canyon Ranch to BCR II. BCR II granted the North American Land Trust a conservation easement in 2007 relating to 1,732 acres of Bosque Canyon Ranch. The material terms of the 2007 deed were substantially the same as those in BCR I s 2005 deed. 34

66 To obtain an income tax charitable deduction for the contribution of a conservation easement, the contribution must meet the requirements of a qualified conservation contribution. In general, a qualified conservation contribution is a contribution of a qualified real property interest to a charity for conservation purposes. The 2005 and 2007 deeds permitted modifications to the boundaries between the home site parcels and the property subject to the easements. The IRS contented that the deeds violated the requirement for a conservation easement that the conservation easement be in perpetuity. The court found that the conservation easements did not constitute a qualified real property interest and therefore the income tax charitable deduction should be denied. In addition, the court held BCR I and BCR II liable for gross valuation misstatement penalties under Section 6662(a). 27. Estate of Schaefer v. Commissioner, 145 T.C. No. 4 (July 28, 2015) Value of Net Income Only Charitable Remainder Unitrusts with Makeup Provisions would be calculated using the greater of five percent or fixed percentage amount Arthur Schaefer owned a 100% interest in Schaefer Investments, LLC, which he formed on February 21, The 100% interest consisted of 990 non-voting units and 10 voting units. Schaefer Investments, LLC owned 92.34% of AES Family Limited Partnership and a money market checking account. Also on February 21, 2006, the same date he created Schaefer Investments, LLC, Schaefer created two charitable remainder unitrusts (CRUTs). Schaefer transferred a 49.5% non-voting interest in Schaefer Investments, LLC into each of the two CRUTs. Schaefer was the income beneficiary of both CRUTs. Upon his death, one of his sons became the income beneficiary of the first CRUT and the second son became the income beneficiary of the second CRUT. The CRUTs were net income only trusts with makeup provisions that provided for payments of the lesser of the net trust accounting income or 11% of the net fair market value of the assets revalued annually for the first CRUT, and 10% of the net fair market value of the assets revalued annually for the second CRUT. Schaefer died in The estate did not claim a charitable contribution deduction for any portion of the trusts. Instead, the estate reduced the amounts reported on Schedule G by the amounts it deemed to be charitable contributions. The estate claimed that it was entitled to a charitable contribution deduction for the values of the charitable remainder interests of the two CRUTs. For the estate to be eligible for the deduction, the value of each remainder interest had to be at least 10% of the net fair market value of the property contributed to the trust at the time of the contribution. The estate and the IRS disagreed about the appropriate distribution amount to use in calculating the values of the remainder interests in the CRUTs. The court held that where the trust payout is the lesser of the trust income or fixed percentage, the parties must use an annual distribution amount equal to the greater of the fixed percentage stated in the trust instrument or 5% to determine whether the estate is eligible for the charitable contribution deduction. The estate had argued that in valuing the remainder interests, the distributions were calculated by using the Section 7520 rate to determine the trusts expected income, so long as the Section 7520 rate is above 5% of the net fair market value of the assets. The IRS had argued that the remainder interest is valued using a distribution rate equal to the fixed percentage in the trust instrument. 35

67 The court found each approach to be arguably flawed. There was no basis for the estate s approach in the statute. The IRS s approach potentially undervalued the remainder interests that would pass to the charitable beneficiary because it assumed the maximum distribution by using the fixed percentage, even though that amount can be distributed only if the trust produces sufficient income. The court found that the text of Section 664 was ambiguous. The IRS guidance in Revenue Ruling , C.B. 349 provides that notwithstanding a net income makeup provision, the computation of the charitable deduction is determined on the basis that the regular unitrust amount would be distributed in each year of the trust. The court also reviewed the legislative history of the statute. The court noted that the legislative history and the administrative guidance point to only one conclusion, that the value of the remainder interest of a net income charitable remainder unitrust with makeup provisions must be calculated using the greater of 5% or the fixed percentage stated in the trust instrument. As a result, the estate had to use an annual distribution amount of 11% or 10% of the net fair market value of the respective CRUTs. The parties had previously stipulated that the estate would not be entitled to a charitable contribution deduction if the remainder interests were valued using this method. 28. Minnick v. Commissioner, No (9th Cir. August 12, 2015) Court denies charitable deduction for conservation easement because outstanding mortgage on the underlying property was not subordinated at the time of the donation to the rights of the holder of the easement In 2006, the donors donated a conservation easement on certain property. The land was still subject to a mortgage, despite certain warranties in the easement to the contrary. An appraiser valued the conservation easement at $941,000, and the donors claimed a charitable deduction on their income tax returns. Following review by the IRS, the IRS denied the deduction for the conservation easement, because the mortgagee did not subordinate its rights in the property to the rights of the qualified organization to enforce the conservation purposes of the easement. The court concluded that to qualify for the income tax deduction and to comply with the compliance with the in perpetuity requirement of 26 U.S.C. 170(h)(5)(A), and the more specific subordination requirements of Treas. Reg A 14(g)(2). Because the mortgagee had not subordinated its rights, the conservation easement was subject to extinguishment by a prior mortgage holder, and accordingly the deduction was denied. GENERATION-SKIPPING TRANSFER TAX 29. Letter Ruling (Issued March 4, 2015; released July 10, 2015) Proposed severance of non-exempt marital share into two trusts containing different types of property, and subsequent disclaimer has no adverse estate and generationskipping transfer tax consequences Upon the decedent s death, the decedent s assets passed to a QTIP trust for the benefit of the surviving spouse. The trustee divided the QTIP trust into two shares, one fully exempt from generation-skipping transfer tax and the other fully non-exempt. The trustee proposed to sever the non-exempt QTIP share into two trusts. Trust A would contain cash and Trust B would 36

68 contain the remaining non-exempt property. Following the division of the non-exempt share into Trust A and Trust B, the spouse planned to renounce his entire interest in Trust A by making a non-qualified disclaimer. The Service first ruled that the division of the non-exempt share into Trust A and Trust B would have no effect on the qualification of both the exempt and the nonexempt shares for the federal estate tax marital deduction and the status of Trust A and Trust B as QTIP trusts. The subsequent distribution and termination of Trust A after the surviving spouse s disclaimer would not cause Trust B or the GST-exempt share to lose their status as QTIP trusts. The Service next ruled that after the spouse renounced his entire interest in Trust A, the spouse would be deemed to have made a gift of his qualifying income interest under Section 2511 and a gift of all the other property of Trust A under Section In addition, since the surviving spouse s interest in Trust A would be separate and distinct from his interest in Trust B, the spouse would not be deemed to have made a gift of any property in Trust B or the exempt share. The Service next ruled that Section 2702 would not apply to division of the non-exempt share into Trust A and Trust B and the subsequent renunciation by the spouse of his income interest in Trust A. Consequently, the value of spouse s income interest in Trust B and in the GST-exempt share would not be valued at zero. The Service finally ruled that after the spouse s renunciation of his entire interest in the property and Trust A, none of the property in Trust A would be subject to inclusion in the spouse s gross estate at the spouse s subsequent death under Section Letter Rulings (Issued on December 8, 2014; released July 24, 2015); Letter Rulings (Issued on December 8, 2014; released July 31, 2015) Terms of settlement agreement with respect to a grandfathered GST Trust, including the division of the trust into separate trusts and construction of the phrase by right of representation, will not have any adverse generation-skipping transfer tax consequences Each of these letter rulings deals with the same fact situation. The testator died prior to September 25, He was survived by two children (Child A and Child B). A third child predeceased the testator and was survived by her child (Grandchild C). The testator s will establish an irrevocable trust for the benefit of his descendants that was grandfathered for generation-skipping transfer tax purposes. The net income was to be paid in equal shares to the two surviving children and the grandchild. If any of them was not living on an income payment date, the trustees were to pay his or her share of the income by right of representation to the deceased beneficiary s then-living issue. Upon the death of the survivor of the Child A, Child B, and Grandchild C, the principal of the trust was to be distributed to the testator s then-living issue by right of representation. Child A passed away, survived by two children (Grandchild A-1 and Grandchild A-2). Child B is living, and Grandchild C is living. The trust is to terminate when the survivor of Child B and Grandchild C has died. 37

69 Disagreements arose between the corporate trustee and Child B as to the investment of the assets and the allocation of receipts between income and principal. Child B filed a petition to divide the trust and administer the divided trust as separate trusts. The stated reason for the division was that the division would facilitate the investment, management and administrative decisions regarding Child B s share. Other beneficiaries opposed Child B s petition, but as a result of extensive settlement negotiations, the trustees and beneficiaries agreed that the trust would be terminated and its assets divided into two trusts. Trust A, equal in value to one-third of the value of the trust, would be held as a separate trust for of Child B and his descendants. Trust B, equal in value to two-thirds of the value of the trust, would be held as separate trusts for Grandchild C and her descendants and Child A s descendants. The parties also agreed that the term by right of representation would be construed to require the distribution of trust assets among the descendants of the testator with the first division made at the child level, even if that generation had no living descendants. The Service first ruled that because the settlement resolved the bona fide issue of the construction of the words by right of representation and was the product of arm s-length negotiations, it would not shift the beneficial interest in the trust to lower generation beneficiaries, and it would not extend the time for vesting of any beneficial interest in the trust, therefore the implementation of the terms of the settlement agreement, including the division of the trust, would not cause any distributions to be subject to GST tax. This fell within the provisions of Treas. Reg (b)(4)(i) with respect to when a modification, judicial construction, settlement agreement, or trustee s action with respect to an exempt trust will cause the trust to lose its exempt status. The proposed division would not cause any person to make a gift to any beneficiary of any of the trust. The terms of the settlement agreement would also not cause the assets to be included in the gross estate of a beneficiary who died prior to the termination of the trust. Each trust would be treated as a separate trust for federal tax purposes. Finally, because a division of the trust into Trust A and Trust B would not result in any shift of a beneficial interest in the assets of the trust, there would be no realization of gain or loss to the trust and consequently no adverse income tax consequences. 31. Letter Rulings (Issued October 16, 2014; released February 27, 2015) and (Issued October 16, 2014; released March 6, 2015) Plan for two similar GST trusts to make a coordinated sale of farm properties to a beneficiary will not cause either trust to lose GST exempt status Each of these letter rulings involves the plan for two similar GST exempt trusts to make a coordinated sale of farm properties to a beneficiary. Each trust was created and became irrevocable before September 25, 1985 and therefore was grandfathered from GST Each of the two trusts together owned a farm. The trustees of both trusts decided that it was in the best interest of each trust to sell the property in a coordinated sale. The property was currently zoned for agriculture and residential use and for public land use. The farm had been on the market for several years. The proposed purchaser was a limited partnership owned by a lineal descendant of the grantors who was also a beneficiary of one of the two trusts and a contingent beneficiary of the other trust. The sale would be approved by a court. 38

70 Generally, under Treas. Reg (b)(4)(i)(D)(1), a modification of a trust will not cause a grandfathered trust to lose its GST exemption if the modification does not shift a beneficial interest to a beneficiary in a lower generation and does not extend the period for the vesting of the interests in the trust beyond the period provided for in the original trust. The following rulings were requested: 1. The execution and carrying out of the terms of the agreement of sale would not cause either trust to lose its GST exempt status. 2. Entering into the agreement of sale and carrying out the terms would not cause any beneficiary of either trust to make or be deemed to have made a taxable gift to any other beneficiary. 3. The sales transaction would not cause any beneficiary to be required to have adverse estate tax consequences with respect to assets owned by Trust 1 or Trust 3 as long as the assets remained in the trust. The IRS found that the execution and carrying out the terms of the sales agreement and the sale of the farm were administrative in nature and would not shift a beneficial interest in either trust to any beneficiary in a lower generation. In addition, the execution of the sales agreement and the sale of the farm would not extend the time for the vesting of any beneficial interest in either trust beyond the period originally provided in the trust documents. The IRS also found that as long as a court approved the sale as one that was fair, and reasonable with arm s length terms, there would be no taxable gifts to any beneficiary or to the purchaser. In addition, because the trustees of the two trusts proposed to sell the farm, there would be no transfers by the beneficiaries of assets to either the trusts or any other trust and therefore none of Sections 2036, 2037 or 2038 would apply. Therefore there would be no adverse estate tax consequences with respect to the property in the trust, unless property in the trust was distributed to the beneficiaries at some point. 32. Letter Ruling (Issued March 12, 2015; released June 19, 2015) Division of GST-exempt trust into successor trusts will not alter GST-exempt status The settlor established a trust under which the trustee could make discretionary distributions of income to the settlor s daughter for support, comfort, maintenance and medical care. The original trust became irrevocable after September 25, The trust had an inclusion ratio of zero. Any net income not paid to daughter could be distributed in the trustee s discretion to daughter s issue. The trustee could also make discretionary distributions of principal to the daughter for her support or maintenance or to meet any emergency to the extent that income was insufficient. The trustee could also distribute principal to the daughter s children for each child s support, maintenance, education or medical care. Any distribution of principal to a child of the daughter was to be treated as an advancement. Upon the death of the daughter, the trust was distributed per stirpes to then-living descendants of the daughter. 39

71 The trustee, pursuant to the provisions of state law, proposed to divide the assets of the trust into two separate trusts to benefit each of the daughter s two children and that child s descendants. As long as there was any living descendants within a particular family line, distributions of income and principal would be limited to the daughter and the descendants of that particular family line. The daughter s distributions of income and principal must come equally from both successor trusts. In all other respects, the successor trusts would be identical to the original trust. The IRS first ruled that the division of the original trust into the two successor trusts would not alter the inclusion ratio and that each successor trust would have the same inclusion ratio as the original trust. This is because the proposed modifications and division would not result in significantly changing any beneficial interest in the trust and it would not extend the time for vesting any beneficial interest beyond the period provided for under the trust. The IRS also ruled that there would be no adverse gift tax, estate tax, or income tax consequences to the proposed division of the original trust. 33. Letter Ruling (Issued December 22, 2014; released April 17, 2015) Proposed division and modification of GST-exempt trust will not cause any loss of exempt status The settlor created an irrevocable trust prior to September 25, Under the irrevocable trust the settlor created and funded five trusts, one such trust for each of his children. Each share was administered as a separate trust. The provisions of each trust provided for discretionary distributions of income and principal to the child, the child s spouse, and the child s children, grandchildren and their spouses. The trust would continue until the death of the survivor of the child and the child s spouse, at which time the trust would be distributed to the child s thenliving issue, per stirpes, otherwise the settlor s then-living issue, per stirpes. Child A has four living children. Due to differences in the objectives and needs relating to Child A s four children, the corporate trustee sought to divide the Child A trust into four separate trusts, one for each of the four grandchildren. Each grandchild s trust was to be administered for the benefit of Child A, Child A s spouse, the respective grandchild, and the spouse and children of that grandchild. Upon the death of the survivor of Child A and Child A s spouse, the trust would terminate, and the remaining assets would be distributed to the respective grandchild, otherwise to the grandchild s then-living issue, per stirpes, otherwise to Child A s then-living issue, per stirpes, otherwise to the settlor s then-living issue, per stirpes. The Service held that the division and modification of Child A s trust would not have any adverse generation-skipping transfer tax consequences. It noted that the division would not result in a shift of any beneficial interest in the Child A trust to a beneficiary who occupied a generation lower than the persons holding the beneficial interest prior to the division and it would not extend the period for vesting of the beneficial interest. The Service also held that there would be no adverse income tax, gift tax or estate tax consequences to the proposed modification and division. 40

72 34. Letter Ruling (Issued March 18, 2015; released June 26, 2015) IRS allows Section 9100 relief for allocation of GST exemption for transfers over 16- year period Decedent created a separate trust for each of his two daughters. Although each trust would likely be subject to generation-skipping transfer tax, each trust was not considered a GST trust within the meaning of Section 2632 and consequently, the automatic allocation rules of Section 2632 did not apply to either trust. Decedent made transfers to each trust in Years 1 through 10. On each gift tax return filed, Decedent and Wife treated the gifts as having been split under Section During Years 1 through 10, the preparers of the returns failed to allocate or advise Decedent and Wife to allocate GST exemption to the gifts. In Years 11 through 16, Decedent and Wife each separately transferred the annual exclusion amount to the two trusts. Decedent and Wife did not file a Form 709 and no GST exemption was allocated to any of the transfers. As in previous years in which gift tax returns were filed, Decedent s and Wife s tax advisers failed to recognize the need to allocate GST exemption and failed to make the recommendation to Decedent and Wife. Decedent s estate and Wife requested an extension of time under Section 9100 to allocate exemption to the respective transfers made to the two trusts over the 16-year period. Under Treas. Reg , an extension of time will be granted when a taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith and that granting relief will not prejudice the interests of the government. The regulation provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or to advise the taxpayer to make, the election. The Service concluded that the requirements of Treas. Reg had been satisfied and granted an extension of 120 days for Decedent s estate and Wife to allocate the respective GST exemptions to the transfers made over the 16-year period. 35. Letter Ruling (Issued April 27, 2015; released August 7, 2015) IRS grants extension of time to opt out of automatic allocation rules The Grantor established four separate identical inter vivos irrevocable trusts for the benefit of the grantor s siblings. The terms of the trusts provided the trustee would pay any or all of the income and principal to the siblings. The trusts would terminate upon the earlier of the death of the beneficiary or when the beneficiary reached age 65. Upon termination, the remaining property would be paid to the beneficiary, if living, otherwise the beneficiary s living issue, otherwise to the issue of the grantor s mother s living issue other than the grantor. These trusts were GST Trusts under Section 2632 and GST exemption would be automatically allocated to the trusts unless the decedent opted out. The accountant prepared the gift tax return and failed to disclose the gifts to the trusts. Consequently, the accountant did not opt out of the automatic allocation of GST Exemption rules with respect to the gifts to those trusts. Subsequently, the accountant realized that the trusts had not been included on the gift tax return. The grantor met with an attorney to discuss further 41

73 estate planning. Following the meeting, the attorney spoke with the accountant who informed the attorney that he would prepare an amended Form 709 to report the gifts to the trusts. The grantor requested an extension of time to opt out of the automatic allocation rules for the gifts to the trusts when the trusts were formed. The IRS determined that the requirements of Treas. Reg for the granting of an extension of time had been satisfied. Treas. Reg provides that requests for relief will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith and that the grant of relief would not prejudice the interests of the government. The taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a tax professional and the tax professional failed to make, or to advise the taxpayer to make, the election. 36. Letter Ruling (Issued May 22, 2015; released September 4, 2015) Transfers to two grandchildren of the taxpayer were not subject to GST tax because the person who was the parent of the grandchildren and child of the taxpayer was deceased at the time of the transfers; accordingly, allocation of GST tax exemption to transfers was void Under the facts of this private letter ruling, the taxpayer and his spouse made outright gifts to the deceased child s children two grandchildren. The grandchildren s parent, a child of the taxpayer and his spouse, had died before the gifts. The taxpayer and his spouse split the gifts to the grandchildren, and on their gift tax returns, the taxpayer and his spouse allocated GST tax exemption to the transfers. Following the taxpayer s death, the executor of the taxpayer s estate requested a ruling that the allocation of GST exemption to the gifts were null and void, because there was no GST tax potential with respect to those transfers. Under Treas. Reg (b)(4)(i), an allocation of GST tax exemption becomes irrevocable after the due date of the return. However, the Regulations further provide that an allocation of GST tax exemption to a trust is void if the allocation is made with respect to a trust that has no GST potential with respect to the transferor making the allocation, at the time of the allocation. In making this determination, a trust has GST potential even if the possibility of a generation skip is so remote as to be negligible. In this case, the transfers were made outright, and not in trust. Because the grandchildren s parent was deceased at the time of the transfers, the transfer was not a generation-skipping transfer, and the allocation of GST tax exemption was void. 42

74 37. Letter Ruling (Issued June 23, 2015; released September 25, 2015) Section 9100 relief and extension of time granted to allocate GST tax exemption to transfers over many years to a Crummey trust, in which some transfers were deemed allocations, and some transfers were not The taxpayers established an irrevocable trust for the benefit of a beneficiary and the beneficiary s descendants. The beneficiary was granted a withdrawal right, which was noncumulative and lapsed if not exercised. The withdrawal right was not limited under Section 2514(e), that is, the gift did not lapse to the extent of the greater of $5,000 or 5 percent of the trust assets. In certain years, the amount transferred to the trust was in excess of the limits under Section 2514(e). The taxpayers made transfers to the trust in years 1 through 14. Following the death of the taxpayers and the beneficiary, it was discovered that the taxpayers and the beneficiary had failed to allocate GST exemption to the trust. The executor of the estates of the taxpayers requested relief under Treas. Reg and an extension of time to allocate each taxpayer s available GST tax exemption to the transfers to the trust, effective as of the date of each transfer. The IRS ruled that the taxpayers were the transferors for GST tax purposes of one-half each of the transfers made to the trust in years 1 through 14. Further, the beneficiary was the transferor for GST tax purposes to the extent that a transfer in a given year exceeded the limits in Section 2514(e). Thus, the trust had three separate transferors for purposes of GST tax. Beginning in 2001, transfers to the trust were subject to the automatic exemption rules of Section Accordingly, for transfers by the taxpayers made in 2001 and following, GST tax was automatically allocated to those transfers. As for transfers made before 2001, the executors were granted relief under Treas. Reg to allocate GST tax exemption to the transfers, as of the value on the date of such transfer. 38. Letter Ruling (Issued June 24, 2015; released October 23, 2015) Division and modification of trust will not affect generation-skipping transfer tax, provided court approves of modification Under the facts of this letter ruling, a testamentary trust was established under the will of the testator. The primary beneficiary of the trust was the testator s son, and the son s descendants were also beneficiaries of the trust. The testator died before September 25, 1985, and thus the trust was grandfathered from application of the generation-skipping transfer tax. The son currently has 4 living children. Under the terms of the trust, the trustee may distribute income and principal to the son and his descendants in the trustee s absolute discretion. The trustee also has discretion to distribute undistributed income to a charitable foundation. The trust states the testator s intent that the trustee distribute such income to the charitable foundation, so long as such a distribution does not interfere with the security of the testator s descendants. At the son s death, the remaining 43

75 income and principal of the trust is to be distributed to the son s then living descendants, per stirpes, with each share held in a separate trust for the benefit of such descendant. The trust is subject to the common-law Rule Against Perpetuities that is, the trust is to terminate one day before the date that is 21 years after the date of death of the last to survive of the testator s descendants who were living at the testator s death. At the termination date, the remaining assets of each trust are to be distributed to the foundation. During the administration of the trust, the needs and investment goals of the grandchildren have been different. The trustee wished to divide the trust into separate trusts, one for each grandchild, with the dispositive terms otherwise identical to the current trust, with each trust to exist for the benefit of the son and a particular grandchild, and with each trust having the same termination date as the original trust. The trustee plans to submit a petition to the court for this modification. State law allows such a modification upon petition of a trustee or beneficiary, if because of circumstances not known to or anticipated by the settlor, the order will further the purposes of the trust, or modification of administrative, nondispositive terms of the trust is necessary or appropriate to prevent waste or avoid impairment of the trust s administration. The IRS ruled that, so long as the court approved of the modification, the modification would not cause the trusts to be subject to GST tax. In addition, the IRS ruled that because the beneficiaries will have substantially the same beneficial interests, rights, and expectancies after the proposed division of the trust, such a modification would not trigger gift tax. 39. Letter Ruling (Issued June 19, 2015; released October 30, 2015) Reformation of trust removes reversionary interest, provides for completed gifts, and provides that assets will pass outside of settlor s estate In this ruling, a husband and wife created a trust for the benefit of their two children. The terms of the trust provide that it is irrevocable. The trust provides for certain distributions to the grantors children for their well-being, with an emphasis on the children s education, health, and personal development. The trust provides that if all of the grantors children are deceased, the assets revert back to the grantors. The grantors were the trustees of the trust, but the grantors never made any distributions to the beneficiaries. The grantors filed a gift tax return for contributions to the trust, but they later became concerned that the assets to the trust would not be treated as completed gifts, and the assets of the trust could be included in the grantors estates for estate tax purposes. In state court proceedings, the grantors and the drafting attorney submitted evidence that the grantors intended that transfers to the trust be completed gifts for gift tax purposes, and that the assets of the trust be outside of the grantors estates for estate tax purposes, and that the potential inclusion of the assets in the grantors estates was caused by scrivener s errors. The trust was reformed to correct these scrivener s errors, to provide that distributions to the beneficiaries are 44

76 subject to an ascertainable standard, and to provide that in the case of a deceased child, the assets would pass to the child s estate rather than to the grantors. The grantors resigned as trustees. Citing Commissioner v. Estate of Bosch, 387 U.S. 456 (1967), the IRS noted that when the issue involves the determination of property interests for federal tax purposes, the determination is based on state law based on the highest court of the state, giving proper regard to the lower court s determination. The IRS reviewed the reformations to correct these scrivener s errors, and determined that these reformations were consistent with state law as applied by the highest court of the state. Accordingly, the modifications to the trust would be retroactive to the creation of the trust for federal tax purposes, such that the original transfers to the trust would be completed gifts for gift tax purposes, and the assets would pass outside of the estate of the grantors for estate tax purposes. FIDUCIARY INCOME TAX 40. United States v. Stiles, No (W.D. Pa. December 2, 2014) Court grants government s summary judgment motion to foreclose on lien for payment of income tax liability Julia Stiles died in Her son, David Stiles, was appointed executor of her estate. The income tax return for the estate was not filed until June The IRS then assessed taxes, interest and penalties against the estate in the amount of $2,093,091. The estate also owed $12,936 to the Register of Wills and $110,635 to the Delaware Division of Revenue. The Estate s primary assets consisted of real estate in Wilmington, Delaware and an investment account that, at the time of Julia Stiles death was worth $2,303,547. The real property in Delaware was sold in August 2002 for $379,000 and the proceeds were distributed shortly after the sale. Between 2002 and 2005, David Stiles distributed approximately $775,000 from the estate to himself and $425,000 to each of his two sisters. In the beginning of April 2008, the estate s investment account was worth $1,787,660. In April 2008, Stiles distributed $110,635 to the Delaware Division of Revenue. The IRS stated that as of March 31, 2014, the estate owed the IRS $71,762. In addition, interest had been assessed as well as penalties for failure to timely pay the tax, for failure to make required estimated tax payments, and accuracy related penalty. In 2010, the U.S. filed a federal tax lien against Stiles and his wife on property in Washington County, Pennsylvania with respect to the income tax liabilities for 2007 and The government then filed for summary judgment with respect to the enforcement of its lien. The court noted that Stiles, who had representation, failed to file a responsive statement of material facts. As a result, Stiles acquiesced to the record presented by the government. To survive summary judgment, Stiles had the duty to demonstrate the existence of a genuine issue for trial or submit an affidavit requesting additional time for discovery. The government argued that Stiles and his sister were personally liable for depleting the estate before providing for the payment of the taxes owed by the estate. The government alleged that the estate held assets worth approximately $2.7 million at the time of Julia Stiles death. The government also noted that after David Stiles sold the Delaware real estate property and made distributions from the investment account, the estate s liabilities exceeded its assets. Stiles 45

77 admitted through testimony that he knew about the estate s federal tax liability and that estate taxes and yearly fiduciary income taxes would have to be paid. Stiles tried to argue that he relied upon counsel in making the distributions to himself and the sisters. The court noted that relying on the poor advice from attorneys is not a defense. The court noted that a tax lien upon all the Stiles property arose when he neglected or refused to pay the assessed taxes. The government asked that its lien upon property in Washington County be foreclosed upon and that the real property be sold to pay the outstanding liabilities which the court granted. 41. Belmont v. Commissioner, 144 T.C. No. 6 (2015) Estate is not entitled to income tax deduction under Section 642(c)(2) Decedent s will directed that the residue of her estate, which included income in respect to the decedent, be left to charity. The estate took a charitable contribution deduction under Section 642(c)(2) on its federal income tax return claiming that it had permanently set aside an amount of its gross income for charity. At the time of her death, Decedent owned a condominium in which her brother resided. During the protract administration of the estate, the brother took a variety of legal actions and asserted a life tenancy interest in the condominium. The brother was subsequently awarded a life tenancy in the condominium. Because of the cost of litigation over the condominium, the estate lacked sufficient funds to pay the amount previously deducted as a charitable contribution. The court found that under Section 642(c)(2), any part of the gross income of an estate which pursuant to the terms of the governing instrument is permanently set aside during the taxable year for charitable purposes shall be allowed as an income tax deduction to the estate on the fiduciary income tax return. Treas. Reg (c)-2(d) provides that no amount will be considered permanently set aside for charity unless under the terms of the governing instrument and the circumstances of a particular case, the possibility that the amount set aside will not be devoted to such purpose or use is so remote as to be negligible. The possibility that the costs involved in a dispute over the condominium would cause the estate to invade the amount set aside for charity was not so remote as to be negligible as required under the regulations. As a result, the estate did not permanently set aside the charitable contribution amount as required under Section 642(c)(2) and, therefore, was not entitled to the income tax charitable deduction. 42. Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue, 12 CVS 8740 (2015) North Carolina court holds statute taxing trust income unconstitutional On April 23, 2015, Judge Gregory P. McGuire of the Business Court division of the Superior Court of Wake County, North Carolina, issued a decision in the matter of the Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue (12 CVS 8740), holding application of North Carolina General Statute (N.C.G.S.) Section unconstitutional as applied to the income taxation of the Kimberly Rice Kaestner 1992 Family Trust (the Trust ). The decision was issued on motion for summary judgment. The facts of the case were not in 46

78 dispute and were determinative in the court s conclusion that N.C.G.S. Section (the Statute ) violates both the due process and commerce clauses of the U.S. Constitution when applied to the Trust, as taxpayer. The facts were undisputed by the taxpayer and the Department of Revenue. A New York resident created the Trust for the benefit of his descendants and appointed a New York resident as initial trustee. In 1997, a beneficiary of the Trust, Kimberly Rice Kaestner, moved to North Carolina and established residency. The parties conceded that the Trust had no connection or activity in North Carolina: All records of the Trust were maintained in New York. The custodian of the investments of the Trust was located in Boston, Massachusetts. The tax returns for the Trust were prepared in New York. The trustee did not travel to North Carolina. The trustee did not make any distributions to the beneficiary. Pursuant to the terms of the Trust, the beneficiary cannot compel the trustee to make a distribution from the Trust. The trustee filed North Carolina state fiduciary income tax returns and paid state income taxes on the undistributed taxable income of the Trust based on the provisions of the Statute, which states that tax is imposed on the taxable income of a trust that is for the benefit of a resident of North Carolina. Subsequently, the Trust filed claims for refund of the tax paid for the years 2005 through 2008 on the basis that the Statute violates the Due Process Clause and Commerce Clause of the U.S. Constitution. Judge McGuire s opinion applies the requirements of both the Due Process Clause and Commerce Clause of the U.S. Constitution to the facts of the case. In essence, to withstand scrutiny, there must be nexus and voluntary connectivity between the taxing state (North Carolina) and the taxpayer (the Trust). Throughout the opinion, Judge McGuire stresses that the relevant entity in the analysis is the Trust, who is the taxpayer, and reviews the activities of the Trust (through the trustee) in determining whether there are sufficient contacts between the Trust and the taxing state, North Carolina, stating that [the Trust s] contacts with North Carolina are relevant here, but not those of its beneficiaries. See Order, page 11, paragraph 27. The court reviewed, specifically, the lack of activities by the trustee to the taxing state, North Carolina. Citing the U.S. Supreme Court case of Quill Corporation v. North Dakota, 504 U.S. 298 (1992), the court emphasized that the taxpayer must purposefully avail itself of the benefits of an economic market in the forum state. Both the Due Process Clause and Commerce Clause require a relationship between the tax imposed and the benefits provided by the state. The Trust is controlled by the trustee, not the beneficiary; therefore, the analysis of the connection between North Carolina, as the taxing authority, and the taxpayer, the Trust, is based on the activities of the trustee. 47

79 In this case, the court found the trustee had no connections with North Carolina, and did not purposefully or voluntarily avail the Trust of the benefits of the state of North Carolina. Noting that the actual control of the Trust remained with the trustee, the court stated that the infrequent contact as reflected in the record, contact driven by the beneficiary and not [the Trust], cannot, as a matter of law, constitute sufficient contact of [the Trust] with the State such that all of [the Trust s] undistributed income is subject to taxation in North Carolina. See Order, page 12, paragraph 30. Accordingly, the lack of any physical presence or voluntary activity of the Trust, as the taxpayer, in North Carolina was determinative in the court s holding that the Statute, when applied to the Trust, is unconstitutional. While a significant decision, it is certain to be appealed by the Department of Revenue. Further, while the Trust sought a determination that the Statute is unconstitutional on its face, as well as when applied to the Trust, as taxpayer, the court s opinion ruled only that the Statute is unconstitutional as applied to the Trust, as taxpayer. Trustees in situations in which the only nexus to North Carolina is the residency of a beneficiary should file protective claims for refund, as the court s opinion states that the beneficiary s residence in North Carolina, standing alone, is not a sufficient contact by [a trust] with this State to support the imposition of the tax at issue. However, given the specific and unique facts of the case and heavy reliance on such facts in reaching its decision, the application of the opinion to any situation should be analyzed to determine if a claim for refund is appropriate. Typically, activities of a trustee will cross state lines and into the jurisdiction where the beneficiaries reside, in which circumstances the factual differences may yield a different conclusion regarding the constitutionality of the Statute. 43. Residuary Trust A u/w/o Kassner v. Director, Division of ation, 2015 N.J. LEXIS 11, 2015 WL (N.J. Sup. Ct. App. 2015), affirming 27 N.J. 68 (N.J. Ct. 2013) Trust not subject to New Jersey income tax Trust A was created by the will of a New Jersey resident who died in New Jersey law defines a resident trust for income tax purposes to include a trust, or a portion of a trust, consisting of property transferred by the will of a decedent who at his death was domiciled in this state. This case dealt with income received in During that tax year, the sole trustee resided in New York and administered the trust outside of New Jersey. The trustee filed a return and paid New Jersey tax on Subchapter S corporation income attributable to activity in New Jersey. However, the trustee did not file a return and pay New Jersey tax on interest income and S corporation income allocated to activities outside New Jersey. The New Jersey Division of ation contended that the trustee was taxable on all undistributed income because the trust held assets in New Jersey. The New Jersey Court granted the taxpayer s motion for summary judgment. It rejected the Division of ation s arguments that the trust should be subject to taxation because the return showed the tax preparer s New Jersey address rather than the trustee s New York address. The court also rejected the director s assertion that the lack of a presence in New Jersey could be overcome by the United States Supreme Court s ruling in Quill Corporation vs. North Dakota, 504 U.S. 298 (1992). It noted that Quill involved a plaintiff actively conducting a mail order business that targeted residents of North Dakota, while the trust at issue in this case carried out 48

80 business directly as a passive owner of stock. It also distinguished Quill in that Quill involved the imposition of use tax, and the present case involved the imposition of income tax. The New Jersey Court held that Trust A cannot be deemed to own assets in New Jersey merely because it was a shareholder in S corporations that own New Jersey assets. The Appellant Division affirmed the New Jersey Court. It did so using the New Jersey square corners doctrine that requires the government to deal fairly with its citizens and engage in equitable practices. It noted that the Division of ation s official guidance gave taxpayers unequivocal advice that undistributed trust income would not be taxable if the trustee was not a New Jersey resident and the trust had no New Jersey assets. In fact, the argument that a trust was subject to taxation of its retained income if it had any New Jersey income was only announced in The court noted that it was fundamentally unfair for the Division of ation to announce in its official publication that under a certain set of facts a trust s income will not be taxed, and then retroactively apply a different standard years later. OTHER ITEMS OF INTEREST 44. Specht v. United States, No. 1:13-cv-705 (S.D. Ohio January 6, 2015) Court upholds late filing penalties imposed on estate for late filing of an estate tax return when the individual executor relied on attorney suffering from brain cancer This action arose as a result of the IRS s motion for summary judgment. Virginia Escher passed away in 2008 with an estate worth $12,506,462. Her cousin, Janice Specht, was appointed executor. Specht, then 73, was a high school educated homemaker who had never served previously as an executor, owned no stock, and had never been in an attorney s office. Ms. Specht selected Ms. Escher s attorney, Mary Bachsman, to assist her. Ms. Bachsman had over 50 years of experience in estate planning, but was privately battling brain cancer. According to the court, Ms. Bachsman deceived Ms. Specht as to the status of an extension regarding the filing of the estate tax return and the payment of tax. That deception eventually led to malpractice claims and the voluntary relinquishment of Ms. Bachsman s law license. Subsequently Ms. Bachsman was declared incompetent and was subject to a guardianship over her pension and estate. The estate filed the federal estate tax return and paid the federal estate on January 26, 2011 almost sixteen months after the September 30, 2009 due date. The estate argued that reasonable cause existed for failure to timely file and pay estate taxes because its failure was due to the reliance on the attorney who was entrusted to handle the estate. The IRS maintained that courts have recognized the non-delegable nature of the duty to make timely filings of tax returns and have held that reliance on counsel is insufficient to constitute reasonable cause for the failure to file a return or pay a tax. The IRS imposed penalties and interest of $1,198, The estate did not contest that it failed to timely file or pay the estate tax. The only issue was whether the failures were due to reasonable cause and not due to willful neglect. Under Section 6651(a), the penalties for failure to file a return or failure to pay will not be owed if the taxpayer can establish that the failure is due to reasonable cause and not due to willful neglect. 49

81 In granting the IRS s motion for summary judgment, the district court relied on United States v. Boyle, 469 U.S. 241 (1985). The district court first noted that the Supreme Court in Boyle recognized the distinction between a taxpayer that relied on the erroneous advice of counsel concerning a question of law and a taxpayer who retained an attorney to attend to an unambiguous precisely defined duty to file a return by a certain time. A taxpayer may reasonably rely on advice received from an attorney on a matter of tax law. However, one does not have to be a tax expert to know that tax returns have fixed filing dates and that taxes must be paid when they are due. Although Ms. Specht lacked the sophistication of single handedly completing and filing the estate tax return, no evidence was produced to suggest that she lacked the sophistication to understand the importance of the estate tax return filing deadline or to ensure that the deadline was met. In addition, the court felt that the late filing and payment resulted from willful neglect. Ms. Specht was aware that the federal tax returned needed to be filed and paid within nine months after Ms. Escher s death, that the tax liability was approximately $6 million, and that the estate would need to sell UPS stock owned by Ms. Escher that it held to cover the tax liability. She also understood that the deadline was important and that missing the deadline would result in consequences. She also received numerous notices from the probate court that the estate was missing deadlines and that Ms. Bachsman had failed to file a first accounting. In addition, there were letters from another family that had hired Ms. Bachsman informing Ms. Specht that Ms. Bachsman was incompetent and two letters from the Ohio Department of ation informing Ms. Specht that the state estate tax return was delinquent. The court noted that while it was difficult to hold that Ms. Specht was ultimately responsible for Ms. Bachsman s malpractice, that binding precedent required that results. It also noted that in light of Ms. Bachsman s malpractice, the State of Ohio refunded the late filing and payment penalties for Ohio state estate taxes without the estate filing a refund suit. It was unfortunate that the United States did not follow the State of Ohio s lead. 45. Billhartz v. Commissioner, 2015 U.S. App. LEXIS (7th Cir. 2015) Court did not abuse discretion for refusing to vacate settlement between the Internal Revenue Service and estate Warren Billhartz had four children from his first marriage, which had ended in divorce. Under the marital settlement agreement, Billhartz agreed to leave an amount equal to one-half of his estate to his four children. Billhartz subsequently remarried and remained married until his death in At his death, virtually all of his assets were either held in a trust or in joint tenancy with his second wife. The trust named his second wife and one of his four children as co-trustees. Under the terms of the trust, the trustee was to set aside an amount sufficient to purchase an annuity that would pay his first wife an annuity of $3,000 monthly. From the remaining funds, 6% was left to each of his three daughters and 16% was left to his son. Although the marital settlement agreement provided that the four children were to receive 50% of Billhartz s estate (an undefined term), divided evenly, they cumulatively ended up with less 50

82 than 34% of Billhartz s assets divided unevenly. The children executed an agreement (the Waiver Agreement ) in which they accepted the lesser share set out for them in the trust and waived all potential claims that they might have been able to assert. The payments to the children totaled approximately $20 million. Each daughter received about $3.5 million and the son received $9.5 million. On the federal estate tax return, the estate claimed a deduction of approximately $14 million for the amounts passing to the children (equal to $3.5 million dollars per child even though the son received more). The estate claimed the deduction as a claim against the estate under Section According to the estate, the amounts paid to the children were paid in settlement of a debt owed to them by Billhartz pursuant to his contractual obligations of the marital settlement agreement. The IRS disallowed the full $14 million deduction. After discussion and negotiation, the estate and the IRS settled before going to trial in the Court. Under the settlement, the IRS agreed to concede 52.5% of the original $14 million deduction. The Court was notified of the settlement and the trial was removed from the docket. The court ordered the parties to submit a decision document reflecting the terms of the settlement by July 24, On June 12, 2012, the daughters filed lawsuits in state court against the estate contending that the Waiver Agreement had been procured by fraud. In addition, the son, after resigning as co-trustee, filed a similar lawsuit. As a result of the state court lawsuits, the estate asked the tax court for an extension of time to submit the decision document. The court granted a 90-day extension period. On October 1, 2012, the estate moved to restore the case to general docket arguing that it should be entitled to deductions under Section 2053 for the additional payment arising from the state court litigation, and therefore the settlement amount would have to be recalculated in the event of additional payments. The IRS moved for entry of a decision consistent with the terms of the settlement agreement. While the motions were pending in the Court, the estate settled with the children in their state court lawsuits and the estate agreed to pay each of the daughters an additional $1.45 million. On June 14, 2013, the Court denied the estate s motion to restore the case to the general docket and granted the IRS s motion for entry of a decision. The estate requested the Seventh Circuit to review the decision of the Court. The Seventh Circuit held that the Court did not abuse its discretion by refusing to set aside the settlement. The Seventh Circuit rejected the two arguments that the estate made to set aside the settlement. The first was the doctrine of mutual mistake. The estate argued that the parties belief that the estate s debt to the children had been finally determined by the Waiver Agreement was a basic factual assumption underlying the settlement with the IRS. The Seventh Circuit noted that it had difficulty seeing how the finality of the estate s payments to the children could have been a basic factual assumption when the $14 million amount that the estate wished to deduct differed from the $20 million amount that the estate agreed to pay the children in the Waiver Agreement. In addition, the rules governing rescission for either mutual or singular mistakes are inappropriate when a party s erroneous prediction or judgment about future events is involved. The estate s second argument was that the IRS made a misrepresentation during settlement negotiations by knowingly omitting a material fact, specifically that the children might initiate a new lawsuit against the estate. The Seventh Circuit noted that the estate was in a much better position than the IRS to anticipate the children s litigation. This meant that the IRS s admission 51

83 likely would not have changed the estate s views regarding the likelihood of a lawsuit. As a result, the decision of the Court was upheld. 46. United States v. Sadler, 2015 U.S. Dist. LEXIS (E.D. Pa. 2015) Estate liable for income tax debts of decedent Robert L. Sadler died in In 2013, the Internal Revenue Service sued Sadler s estate to recover an outstanding tax liability of $42, at the time the complaint was filed. Sadler had deficiencies in income taxes going back to The IRS also determined that Sadler had understated his tax liability for 2001 and 2002 by taking deductions for expenses allegedly incurred complying with the American with Disabilities Act and for other transactions that lacked economic substance. The parties filed motions for summary judgment. The IRS sought to reduce to judgment the entire amount that it alleged was owed. The defendant in its motion for summary judgment did not dispute the underlying tax liability but alleged that it should be abated for technical reasons relating to the application of overpayments from the 2001 and 2002 taxes to taxes in The court granted summary judgment to the IRS. It noted that the IRS properly applied claimed overpayments in 2001 and 2002 as credits towards outstanding tax liability from 1994 and was now entitled to recover the entire amount of tax assessed in 2001 and 2002 from the estate. 47. West v. Koskinen, No. 1:15-cv (E.D. Va. October 19, 2015) Estate was liable for more than $335,000 in penalties and interest for failing to timely pay estate taxes The IRS assessed $317, in interest and penalties against an estate for failure to timely pay estate taxes. The executors sought a refund, on the grounds that they reasonably relied on erroneous advice of counsel regarding the timing of filing of the estate tax return and payment of estate taxes. At issue was an from the decedent s attorney, in response to questions from the executors regarding legal steps required for the estate in the short term. The attorney wrote in pertinent part, [the executors would] need to pay final bills, and possibly file a Federal Estate tax return, [the decedent s] final 1040, and a trust income tax return, and that [t]his all takes as short as a few months or (if an estate tax return is required) as long as [two] years. The next day, one of the executors responded that he was sure there will be tax due and that he assume[d] that the accountant who had handled the decedent s taxes would prepare the estate tax return. During a later meeting with the attorney, estate taxes were not discussed. After the deadline for the estate tax return had passed, the attorney was asked to begin work on the estate tax return, and the attorney assumed that the accountant had filed for an extension. The attorney filed the estate tax return and submitted tax of $1,258,019. The IRS responded that because the estate tax return was filed late, penalties and interest were due in the amount of $335, The court summarized that the IRS can assess a tax penalty unless such failure is due to reasonable cause. The court summarized that this reasonable cause requires at least the exercise of ordinary business care and prudence, and an inability to file by the deadline or to pay 52

84 the tax. The court concluded that [n]o reasonable person exercising ordinary business care and prudence would rely on the for [the] purpose [of estate tax filing or payment deadlines, and thus the taxpayers had failed to satisfy this requirement. The court thus upheld the penalties and interest. 48. Changes in State Death es in 2014 and 2015 Connecticut, Maine, and New York change their state death taxes Maine on June 30, 2015, increased its exemption to the federal exemption beginning in Connecticut on July 10, 2015, capped the amount of Connecticut estate and gift tax at $20 million for both residents and nonresidents effective for decedents dying on or after January 1, New York on April 1, 2015, clarified the new rate schedule that was enacted in 2014 so that it applies to all decedents dying after April 1, 2015 and modified its three year gift add-back provision so that it would not apply to individuals dying after December 31, State Death Chart Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Alabama None is tied to federal state death tax credit. AL ST Alaska None is tied to federal state death tax credit. AK ST Arizona None was tied to federal state death tax credit. AZ ST ; (2), (12). On May 8, 2006, Governor Napolitano signed SB 1170 which permanently repealed Arizona s state estate tax. Arkansas None is tied to federal state death tax credit. AR ST ; ; , as amended March, California None is tied to federal state death tax credit. CA REV & TAX 13302; Colorado None is tied to federal state 53 Legislation Affecting State Death 2016 State Death Threshold

85 Connecticut Delaware Type of Separate Estate Pick up Only Effect of EGTRRA on Pick-up and Size of Gross Estate death tax credit. CO ST ; As part of the two year budget which became law on September 8, 2009, the exemption for the separate estate and gift taxes was increased to $3.5 million, effective January 1, 2010, the tax rates were reduced to a spread of 7.2% to 12%, and effective for decedents dying on or after January 1, 2010, the Connecticut tax is due six months after the date of death. CT ST In May 2011, the threshold was lowered to $2 million retroactive to January 1, For decedents dying after June 30, Legislation Affecting State Death On July 10, 2015, the Connecticut Governor signed Senate Bill 1502 which implemented the biannual budget. The budget bill included a $20 million dollar cap on the amount of Connecticut estate and gift tax for both residents and nonresidents. This cap will be effective for decedents dying on or after January 1, It is estimated that the tax cap will affect taxable estates greater than $170.5 million. The Connecticut exemption remains at $2 million. On March 28, 2013, the Governor 2016 State Death Threshold $2,000,000 $5,450,000 (indexed for inflation) 54

86 District of Columbia Type of Pick-up Only Effect of EGTRRA on Pick-up and Size of Gross Estate The federal deduction for state death taxes is not taken into account in calculating the state tax. DE ST TI (c)(2). frozen at federal state death tax credit in effect on January 1, In 2003, tax imposed only on estates exceeding EGTRRA applicable exclusion amount. Thereafter, tax imposed on estates exceeding $1 million. DC CODE ; ; approved by Mayor on June 20, 2003; effective retroactively to death occurring on and after January 1, No separate state QTIP election. Florida None is tied to federal state death tax credit. FL ST ; FL CONST. Art. VII, Sec. 5 Legislation Affecting State Death signed HB 51 to eliminate the four year sunset provision that originally applied to the tax as enacted in June On June 24, 2015, the D.C. Council approved changes to the D.C. Estate. The changes include possible increases in the D.C. estate tax threshold to $2 million in 2016 and to the federal threshold of $5 million indexed for inflation in 2018 or later. Both increases are subject to the District meeting or exceeding certain revenue targets which may or may not happen State Death Threshold $1,000,000 55

87 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Georgia None is tied to federal state death tax credit. GA ST Hawaii Modified Pick-up was tied to federal state death tax credit. HI ST 236D-3; 236D- 2; 236D-B The Hawaii Legislature on April 30, 2010 overrode the Governor s veto of HB 2866 to impose a Hawaii estate tax on residents and also on the Hawaii assets of a non-resident or a non US citizen. Idaho None is tied to federal state death tax credit. ID ST ; ; (as amended Mar. 2002). Illinois Modified Pick-up Only On January 13, 2011, Governor Quinn signed Public Act which increased Illinois individual and corporate income tax rates. Included in the Act was the reinstatement of Illinois estate tax as of January 1, 2011 with a $2 million exemption. Senate Bill 397 passed both the Illinois House and Senate as part of the tax package for Sears and CME on December 13, It increased the Legislation Affecting State Death On May 2, 2012, the Hawaii legislature passed HB2328 which conforms the Hawaii estate tax exemption to the federal estate tax exemption for decedents dying after January 25, State Death Threshold $5,450,000 (indexed for inflation for deaths occurring after January 25, 2012) $4,000,000 56

88 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate exemption to $3.5 million for 2012 and $4 million for 2013 and beyond. Governor Quinn signed the legislation on December 16, Legislation Affecting State Death 2016 State Death Threshold Illinois permits a separate state QTIP election, effective September 8, ILCS 405/2(b- 1). Indiana None Pick-up tax is tied to federal state death tax credit. IN ST ; On May 11, 2013, Governor Pence signed HB 1001 which repealed Indiana s inheritance tax retroactively to January 1, This replaced Indiana s prior law enacted in 2012 which phased out Indiana s inheritance tax over nine years beginning in 2013 and ending on December 31, 2021 and increased the inheritance tax exemption amounts retroactive to January 1,

89 Iowa Type of Inheritance Effect of EGTRRA on Pick-up and Size of Gross Estate Pick-up tax is tied to federal state death tax credit. IA ST 451.2; Effective July 1, 2010, Iowa specifically reenacted its pick-up estate tax for decedents dying after December 31, Iowa Senate File 2380, reenacting IA ST Legislation Affecting State Death 2016 State Death Threshold Iowa has a separate inheritance tax on transfers to remote relatives and third parties. Kansas None For decedents dying on or after January 1, 2007 and through December 31, 2009, Kansas had enacted a separate stand alone estate tax. KS ST 79-15, 203 Kentucky Inheritance Pick-up tax is tied to federal state death tax credit. KY ST Kentucky has not decoupled but has a separate inheritance tax and recognizes by administrative pronouncement a separate state QTIP election. Louisiana None Pick-up tax is tied to federal state death tax credit. LA R.S. 47:2431; 47:2432; 47:2434. Maine Pick-up Only For decedents dying after December 31, 2002, pick- $5,450,000 (indexed for 58

90 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate up tax was frozen at pre- EGTRRA federal state death tax credit, and imposed on estates exceeding applicable exclusion amount in effect on December 31, 2000 (including scheduled increases under pre-egtrra law) (L.D. 1319; March 27, 2003). Legislation Affecting State Death 2016 State Death Threshold inflation) On June 20, 2011, Maine's governor signed Public Law Chapter 380 into law, which will increase the Maine estate tax exemption to $2 million in 2013 and beyond. The rates were also changed, effective January 1, 2013, to 0% for Maine estates up to $2 million, 8% for Maine estates between $2 million and $5 million, 10 % between $ 5 million and $8 million and 12% for the excess over $8 million. On June 30, 2015, the Maine legislature overrode the Governor s veto of LD 1019, the budget bill for fiscal years 2016 and As part of the new law, the Maine Exemption is tagged to the federal exemption for decedents dying on or after January 1,

91 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Legislation Affecting State Death 2016 State Death Threshold The tax rates will be: 8% on the first $3 million above the Maine Exemption; 10% on the next $3 million above the Maine Exemption; and!2% on all amounts above $6 million above the Maine Exemption. The new legislation did not include portability as part of the Maine Estate. Maryland Pick-up Inheritance For estates of decedents dying after December 31, 2002, Sec deduction is ignored in computing Maine tax and a separate state QTIP election is permitted. M.R.S. Title 36, Sec Maine also subjects real or tangible property located in Maine that is transferred to a trust, limited liability company or other pass-through entity to tax in a non resident s estate. M.R.S. Title 36, Sec On May 15, 2014, Governor O Malley signed HB 739 which $2,000,000 60

92 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate repealed and reenacted MD TAX GENERAL 7-305, 7-309(a), and 7-309(b) to do the following: Legislation Affecting State Death 2016 State Death Threshold 1. Increases the threshold for the Maryland estate tax to $1.5 million in 2015, $2 million in 2016, $3 million in 2017, and $4 million in For 2019 and beyond, the Maryland threshold will equal the federal applicable exclusion amount. 2. Continues to limit the amount of the federal credit used to calculate the Maryland estate tax to 16% of the amount by which the decedent s taxable estate exceeds the Maryland threshold unless the Section 2011 federal state death tax credit is then in effect. 3. Continues to ignore the federal 61

93 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate deduction for state death taxes under Sec in computing Maryland estate tax, thus eliminating a circular computation. Legislation Affecting State Death 2016 State Death Threshold 4. Permits a state QTIP election. Massachusetts Pick-up Only For decedents dying in 2002, pick-up tax is tied to federal state death tax credit. MA ST 65C 2A. $1,000,000 For decedents dying on or after January 1, 2003, pick-up tax is frozen at federal state death tax credit in effect on December 31, MA ST 65C 2A(a), as amended July imposed on estates exceeding applicable exclusion amount in effect on December 31, 2000 (including scheduled increases under pre-egtrra law), even if that amount is below EGTRRA applicable exclusion amount. See, payer Advisory Bulletin (Dec. 2002), DOR Directive 03-02, 62

94 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Mass. Guide to Estate es (2003) and TIR published by Mass. Dept. of Rev. Legislation Affecting State Death 2016 State Death Threshold Massachusetts Department of Revenue has issued directive, pursuant to which separate Massachusetts QTIP election can be made when applying state s new estate tax based upon pre-egtrra federal state death tax credit. Michigan None is tied to federal state death tax credit. MI ST ; Minnesota Pick-up Only frozen at federal state death tax credit in effect on December 31, 2000, clarifying statute passed May imposed on estates exceeding federal applicable exclusion amount in effect on December 31, 2000 (including scheduled increases under pre- EGTRRA law), even if that amount is below EGTRRA applicable exclusion amount. MN ST ; ; instructions for MS Estate Return; MN Revenue Notice On March 21, 2014, the Minnesota Governor signed HF 1777 which retroactively repealed Minnesota s gift tax (which was enacted in 2013). With respect to the estate tax, the new law increases the exemption to $1,200,000 for 2014 and thereafter in annual $1,400,000 63

95 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Separate state QTIP election permitted. Legislation Affecting State Death $200,000 increments until it reaches $2,000,000 in It also modifies the computation of the estate tax so that the first dollars are taxed at a 9% rate which increases to 16% State Death Threshold The new law permits a separate state QTIP election. The provision enacted in 2013 to impose an estate tax on non-residents who own an interest in a pass-through entity which in turn owned real or personal property in Minnesota has been amended to exclude certain publicly traded entities. It still applies to entities taxed as partnerships or S Corporations 64

96 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Legislation Affecting State Death that own closely held businesses, farms, and cabins State Death Threshold Mississippi None is tied to federal state death tax credit. MS ST Missouri None is tied to federal state death tax credit. MO ST ; Montana None is tied to federal state death tax credit. MT ST ; Nebraska County Inheritance Nebraska through 2006 imposed a pick-up tax at the state level. Counties impose and collect a separate inheritance tax. NEB REV ST (1). Nevada None is tied to federal state death tax credit. NV ST Title A.025; 375A.100. New Hampshire New Jersey None Pick-up Inheritance is tied to federal state death tax credit. NH ST 87:1; 87:7. For decedents dying after December 31, 2002, pickup tax frozen at federal state death tax credit in effect on December 31, NJ ST 54:38-1 $675,000 Pick-up tax imposed on estates exceeding federal 65

97 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate applicable exclusion amount in effect December 31, 2001 ($675,000), not including scheduled increases under pre-egtrra law, even though that amount is below the lowest EGTRRA applicable exclusion amount. Legislation Affecting State Death 2016 State Death Threshold The executor has the option of paying the above pick-up tax or a similar tax prescribed by the NJ Dir. Of Div. of n. NJ ST 54:38-1; approved on July 1, In Oberhand v. Director, Div. of, 193 N.J. 558 (2008), the retroactive application of New Jersey's decoupled estate tax to the estate of a decedent dying prior to the enactment of the tax was declared "manifestly unjust", where the will included marital formula provisions. In Estate of Stevenson v. Director, (N.J ) the NJ Court held that in calculating the New Jersey estate tax where a marital disposition was burdened with estate tax, creating an interrelated computation, the marital 66

98 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate deduction must be reduced not only by the actual NJ estate tax, but also by the hypothetical federal estate tax that would have been payable if the decedent had died in Legislation Affecting State Death 2016 State Death Threshold New Jersey allows a separate state QTIP election when a federal estate tax return is not filed and is not required to be filed. The New Jersey Administrative Code also requires that if the federal and state QTIP election is made, they must be consistent. NJAC 18:26-3A.8(d) New Mexico None is tied to federal state death tax credit. NM ST 7-7-2; New York Pick-up Only frozen at federal state death tax credit in effect on July 22, NY TAX 951. Governor signed S in 2004 which applies New York Estate on a pro rata basis to nonresident decedents with property subject to New York Estate. On March 16, 2010, the New York Office of The Executive Budget of which was signed by Governor Cuomo on March 31, 2014 made substantial changes to New York s estate tax. The New York $3,125,000 (as of April 1, 2015 and through March 31, 2016) $4,187,500 (April 1, 2016 through March 31, 2017) 67

99 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Policy Analysis, payer Guidance Division issued a notice permitting a separate state QTIP election when no federal estate tax return is required to be filed such as in 2010 when there is no estate tax or when the value of the gross estate is too low to require the filing of a federal return. See TSB-M-10(1)M. Legislation Affecting State Death estate tax exemption which was $1,000,000 through March 31, 2014 has been increased as follows: April 1, 2014 to March 31, $2,062, State Death Threshold Advisory Opinion (TSB- A-08(1)M (October 24, 2008) provides that an interest in an S Corporation owned by a non-resident and containing a condominium in New York is an intangible asset as long as the S Corporation has a real business purpose. If the S Corporation has no business purpose, it appears that New York would look through the S Corporation and subject the condominium to New York estate tax in the estate of the non-resident. There would likely be no business purpose if the sole reason for forming the S Corporation was to own assets. April 1, 2015 to March 31, $3,125,000 April 1, 2016 to March 31, $4,187,500 April 1, 2017 to December 31, $5,250,000 As of January 1, 2019, the New York estate tax exemption amount will be the same as the federal estate tax applicable exclusion amount. The maximum 68

100 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Legislation Affecting State Death rate of tax will continue to be 16% State Death Threshold able gifts within three years of death between April 1, 2014 and December 31, 2018 will be added back to a decedent s estate for purposes of calculating the New York tax. The New York estate tax will be a cliff tax. If the value of the estate is more than 105% of the then current exemption, the exemption will not be available. On April 1, 2015, as part of Executive Budget, New York enacted changes to the New York Estate. New York first clarified that 69

101 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Legislation Affecting State Death the new rate schedule enacted in 2014 applies to all decedents dying after 2016 State Death Threshold April 1, Previously, the rate schedule only applied through March 31, New York then modified the three year gift add-back provision to make it clear that the gift add-back does not apply to any individuals dying on or after January 1, Previously, the gift add-back provision did not apply to gifts made on or after January 1, New York continues to not permit portability for New York estates and no QTIP election is allowed. 70

102 North Carolina Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Legislation Affecting State Death None On July 23, 2013, the Governor signed HB 998 which repealed the North Carolina estate tax retroactively to January 1, North Dakota None is tied to federal state death tax credit. ND ST Ohio None Governor Taft signed the budget bill, 2005 HB 66, repealing the Ohio estate (sponge) tax prospectively and granting credit for it retroactively. This was effective June 30, 2005 and killed the sponge tax State Death Threshold On June 30, 2011, Governor Kasich signed HB 153, the biannual budget bill, which contained a repeal of the Ohio state estate tax effective January 1, Oklahoma None is tied to federal state death tax credit. OK ST Title Oregon Separate Estate The separate estate tax was phased out as of January 1, On June 28, 2011, Oregon s governor signed HB 2541 which replaces $1,000,000 71

103 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Oregon s pick-up tax with a stand-alone estate tax effective January 1, The new tax has a $1 million threshold with rates increasing from ten percent to sixteen percent between $1 million and $9.5 million. Legislation Affecting State Death 2016 State Death Threshold Pennsylvania Inheritance Determination of the estate for Oregon estate tax purposes is based upon the federal taxable estate with adjustments. is tied to the federal state death tax credit to the extent that the available federal state death tax credit exceeds the state inheritance tax. PA ST T. 72 P.S amended December 23, Pennsylvania had decoupled its pick-up tax in 2002, but has now recoupled retroactively. The recoupling does not affect the Pennsylvania inheritance tax which is independent of the federal state death tax credit. Rhode Island Pick-up Only Pennsylvania recognizes a state QTIP election. frozen at federal state death tax credit in effect on January 1, 2001, with certain adjustments (see below). RI ST On June 19, 2014, the Rhode Island Governor approved $1,500,000 72

104 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate 1.1. Rhode Island recognized a separate state QTIP election in the State s Division Ruling Request No Rhode Island's Governor signed into law HB 5983 on June 30, 2009, effective for deaths occurring on or after January 1, 2010, an increase in the amount exempt from Rhode Island estate tax from $675,000, to $850,000, with annual adjustments beginning for deaths occurring on or after January 1, 2011 based on "the percentage of increase in the Consumer Price Index for all Urban Consumers (CPI-U)... rounded up to the nearest five dollar ($5.00) increment." RI ST Legislation Affecting State Death changes to the Rhode Island Estate by increasing the exemption to $1,500,000 indexed for inflation in 2015 and eliminating the cliff tax State Death Threshold South Carolina None is tied to federal state death tax credit. SC ST ; and , amended in South Dakota None is tied to federal state death tax credit. SD ST 10-40A-3; 10-40A-1 (as amended Feb. 2002). Tennessee None Pick-up tax is tied to On May 2, 73

105 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate federal state death tax credit. TN ST ; Tennessee has not decoupled, but has a separate inheritance tax and recognizes by administrative pronouncement a separate state QTIP election. Legislation Affecting State Death 2012, the Tennessee legislature passed HB 3760/SB 3762 which phases out the Tennessee Inheritance as of January 1, The Tennessee Inheritance Exemption is increased to $1.25 million in 2013, $2 million in 2014, and $5 million in State Death Threshold Texas None is tied to federal state death tax credit. TX TAX ; ; Utah None is tied to federal state death tax credit. UT ST ; On May 2, 2012, the Tennessee legislature also passed HB 2840/SB2777 which repealed the Tennessee state gift tax retroactive to January 1,

106 Vermont Type of Modified Pick-up Effect of EGTRRA on Pick-up and Size of Gross Estate In 2010, Vermont increased the estate tax exemption threshold from $2,000,000 to $2,750,000 for decedents dying January 1, As of January 1, 2012 the exclusion is scheduled to equal the federal estate tax applicable exclusion, so long as the FET exclusion is not less than $2,000,000 and not more than $3,500,000. VT ST T a. Legislation Affecting State Death 2016 State Death Threshold $2,750,000 Previously the estate tax was frozen at federal state death tax credit in effect on January 1, VT ST T (8), 7442a, 7475, amended on June 21, No separate state QTIP election permitted. Virginia None is tied to federal state death tax credit. VA ST ; The Virginia tax was temporarily repealed effective July 1, Previously, the tax was frozen at federal state death tax credit in effect on January 1, was imposed only on estates exceeding EGTRRA federal applicable exclusion 75

107 Washington Type of Separate Estate Effect of EGTRRA on Pick-up and Size of Gross Estate amount. VA ST ; On February 3, 2005, the Washington State Supreme Court unanimously held that Washington s state death tax was unconstitutional. The tax was tied to the current federal state death tax credit, thus reducing the tax for the years and eliminating it for the years Hemphill v. State Department of Revenue 2005 WL (Wash. 2005). In response to Hemphill, the Washington State Senate on April 19 and the Washington House on April 22, 2005, by narrow majorities, passed a standalone state estate tax with rates ranging from 10% to 19%, a $1.5 million exemption in 2005 and $2 million thereafter, and a deduction for farms for which a Sec. 2032A election could have been taken (regardless of whether the election is made). The Governor signed the legislation. WA ST ; Legislation Affecting State Death On June 14, 2013, Governor Inslee signed HB 2075 which closed an exemption for marital trusts retroactively immediately prior to when the Department of Revenue was about to start issuing refund checks, created a deduction for up to $2.5 million for certain family owned businesses and indexes the $2 million Washington state death tax threshold for inflation State Death Threshold $2,054,000 Washington voters defeated a referendum to 76

108 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate repeal the Washington estate tax in the November 2006 elections. Legislation Affecting State Death 2016 State Death Threshold Washington permits a separate state QTIP election. WA ST West Virginia None is tied to federal state death tax credit. WV Wisconsin None is tied to federal state death tax credit. WI ST 72.01(11m). For deaths occurring after September 30, 2002, and before January 1, 2008, tax was frozen at federal state death tax credit in effect on December 31, 2000 and was imposed on estates exceeding federal applicable exclusion amount in effect on December 31, 2000 ($675,000), not including scheduled increases under pre-egtrra law, even though that amount is below the lowest EGTRRA applicable exclusion amount. Thereafter, tax imposed only on estates exceeding EGTRRA federal applicable exclusion amount. WI ST 72.01; 72.02, amended in 2001; WI Dept. of Revenue website. 77

109 Type of Effect of EGTRRA on Pick-up and Size of Gross Estate Legislation Affecting State Death 2016 State Death Threshold On April 15, 2004, the Wisconsin governor signed 2003 Wis. Act 258, which provided that Wisconsin will not impose an estate tax with respect to the intangible personal property of a non-resident decedent that has a taxable situs in Wisconsin even if the non-resident s state of domicile does not impose a death tax. Previously, Wisconsin would impose an estate tax with respect to the intangible personal property of a non-resident decedent that had a taxable situs in Wisconsin if the state of domicile of the non-resident had no state death tax. Wyoming None is tied to federal state death tax credit. WY ST ; _1 78

110 2016 ABA Trust and Estate Planning Briefing Series The American Bankers Association announces the 2016 Trust and Estate Planning Briefing Series. Our featured speakers, Charles D. Fox IV, partner, McGuireWoods LLP and Thomas W. Abendroth, partner, Schiff Hardin LLP are nationally-recognized trust and estate attorneys and tenured teachers from the ABA Trust Schools. They will provide you and your staff with critical information on estate planning and trust administration topics. This series provides you with an excellent business development opportunity; invite outside counsel to attend these informative programs at your location. Make the most of this high-impact content! Save 20% when you spend $2000 or more on 2016 Trust Series Briefings, CDs or recordings. Use the promo code TRUST2016. Charles D. Fox IV Thomas W. Abendroth February 4, 2016 March 3, 2016 The New Paradigm in Trusts and Estates Valuation Uniform Fiduciary Access to Digital Assets Act (UFADAA) and Digital Assets This briefing will discuss the new regulations and implications on estate planning. Topics to be discussed include: The current uniform law proposals, and planning options under current law will be reviewed during this program. Uncertain Current Federal and State Legislative Environment Different Approaches of Tech Industries and Estate, Trust, and Financial Planning Professionals Uniform Fiduciary Access to Digital Assets Act Personal Expectations Afterlife and Choices Act Provisions in Wills, Trusts, and Powers of Attorney to Deal with Digital Assets 2.5 CISP, 2.5 CRSP, 2.5 CTFA (TAX) Legal and Economic Basis for Valuation Discounts Past IRS Attempts to Regulate Discounts Section 2704 Rules and Application to Family LPs and LLCs New Valuation Regulations Planning Under the New Regulations Register today and/or purchase the recordings! aba.com/trustbriefings BANKERS 2.5 CTFA (FID)

111 2016 ABA Trust and Estate Planning Briefing Series April 7, 2016 Life Insurance in a 21st Century Estate Plan 2.5 CRSP, 2.5 CTFA (Fin. Plan.) This briefing will help listeners understand the role of life insurance in current estate plans. Topics will include: Reasons for having Life Insurance Types of Life Insurance and Specially Designed Who Can Be Insured Private Placement Life Insurance Estate Planning with Life Insurance Premium Financing May 5, 2016 Fiduciary Litigation Roundtable 2.5 CISP, 2.5 CRSP, 2.5 CTFA (FID) A panel of attorneys will discuss current trends in fiduciary litigation and how to minimize a trustee s exposure. Topics will include: Current fiduciary litigation cases Diversification and Other Investment Disputes Keeping Beneficiaries Informed Decanting Closely-Held Assets in Trust June 2, 2016 Charitable Tales from the Crypt 2.5 CISP, 2.5 CTFA (TAX) Frequent misuse of the charitable deduction, and the most recent errors made in charitable planning will be discussed during this briefing. Topics will include: Qualifying for the Estate Charitable Deduction Qualifying for the Income Charitable Deduction Avoiding the Imposition of Capital Gains on a Charitable Foundation Problems with Private Foundations Challenges with Charitable Remainder Trusts September 8, 2016 Issues with Art and Other Collectibles in the Administration of Trusts and Estates 2.5 CTFA (INV) Best practices in dealing with these unique assets and protecting their value in the trust and estate administration context will be discussed. Topics will include: Confusing Legal Environment of Local, State, Federal and International Rules Verifying Authenticity and Good Title Limitations on Sales of Art such as Endangered Species Restrictions and Cultural Heritage Limitations Rights of Artists Ways to Sell Art Securing Art Special Considerations with Collectibles such as Guns October 6, 2016 Are You a Fiduciary? 2.5 CISP, 2.5 CRSP, 2.5 CSOP, 2.5 CTFA (FID) This session will discuss some of the major issues surrounding the fiduciary role in wealth management. Topics will include: Fiduciary Role in Trusts Non-Trustee Fiduciary Roles in Trusts Fiduciary Roles under ERISA and New DOL Proposed Rules Fiduciary Roles for Investment Advisers Outside of ERISA November 3, 2016 Twenty Steps to Avoid Fiduciary Litigation 2.5 CISP, 2.5 CRSP, 2.5 CSOP, 2.5 CTFA (ETH) Best practices for minimizing claims will be discussed. Topics will include: Duty of Loyalty Steps to Take in Opening Relationships Steps to Take when Taking Over Another Trust Department Communications with Beneficiaries Fees Accountings Seeking Court Approval December 1, 2016 Recent Developments in Estate and Trust Administration 2.5 CISP, 2.5 CTFA (TAX) A review of recent legislation, regulatory developments, cases, and public and private rulings in the estate, gift, generation-skipping tax, fiduciary income tax, and charitable giving areas will be provided. Some of the subjects to be discussed include: Marital Deduction Planning Portability Possible changes in the Estate Laws Valuation Issues Gifts The Availability of Discounts Charitable Planning Post Mortem Planning The Generation-Skipping Asset Protection Insurance Fiduciary Income American Bankers Association is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: learningmarket.org. In order to provide listeners with timely information, the presenters reserve the right to alter the content or emphasis of the programs. Register today and/or purchase the recordings! aba.com/trustbriefings BANKERS