ALI-ABA Course of Study Estate Planning for the Family Business Owner. July 11-13, 2007 San Francisco, California

Transcription

1 1041 ALI-ABA Course of Study Estate Planning for the Family Business Owner Cosponsored by the ABA Section of Real Property, Probate and Trust Law and the ABA Section of Taxation July 11-13, 2007 San Francisco, California Postmortem Planning Considerations: A Review of Income, Gift, and Estate Tax Planning Issues By Steve R. Akers Bessemer Trust Company Dallas, Texas Copyright 2007 by Bessemer Trust Company, N.A. All rights reserved.

2 1042 TABLE OF CONTENTS Administering the Estate of the Family Business Owner Postmortem Planning Considerations: A Review of Income, Gift, and Estate Tax Planning Issues Steve R. Akers Bessemer Trust 300 Crescent Court, Suite 800 Dallas, TX (214) akers@bessemer.com Page I. INTRODUCTION... 1 II. INCOME TAX PLANNING... 1 A. Decedent's Final Return File Decedent's Final Income Tax Return Consider Filing Joint Return Determine How to Report Series E Bond Interest Treatment of Deductions on Final Return Partnership and S Corporation Income Net Operating Losses, Charitable Deduction and Capital Loss Carryovers Installment Sale in Year of Death Treatment of Final Paycheck Dependency Exemptions Executor s Liability for Decedent s Unpaid Income (as well as Gift or Estate) Taxes Inspection Right over Intestate Decedent s Final Income Tax Return Place for Filing Final Form B. Planning Considerations for Estate's Fiduciary Income Tax Return, Form Consider Fiscal Year Administrative Expense Deductions Effect of Two Percent Floor Under 67 on Miscellaneous Itemized Deductions Take Advantage of Double Deduction Items Plan on Paying Substantial Administration Expenses in Last Year to Pass Deductions to Beneficiaries Pay Estate Income Tax Liabilities Election Under 645 to Treat Revocable Trust as Part of Grantor s Estate Consider Utilization of Depreciation and Depletion Deductions (By Estates or Trusts) and Establishment of Depreciation or Depletion Reserve (By Trusts Only) Material Participation by Estate or Trust for Purposes of Passive Activity Losses Reporting of Qualified Dividends and Capital Gains Subject to 5-15% Tax C. Funding and Distribution Planning General Rules Regarding Income Tax Effects of Distributions a. General Rules b. Exceptions: Specific Bequest Exception and Separate Share Rule c. Income in Respect of a Decedent d. Distribution of Appreciated Property in Satisfaction of Pecuniary Bequest e. Distribution of IRD to Satisfy Pecuniary Bequest Accelerates Recognition of IRD f. Distribution of IRA In Satisfaction of Pecuniary Bequest g. Deemed Holding Period of Inherited Property h. Beneficiaries Must Report Inconsistencies with Fiduciary Return i. Undistributed Property When Beneficiary Dies i

3 1043 j. Uncertainty of Beneficiaries k. Distributions Made by Mistake Should Not Carry Out DNI Consider Making Distributions to Shift Income and Defer Tax Payment Consider Timing of Distribution to Avoid Inequities Trust Distributions for the First 65 Days May Be Treated as if Made in Prior Year Election to Treat Estimated Payments by Estate or Trust as if Made by Beneficiary Carefully Document Distributions to Charity That Are Made From Income So That Charitable Income Tax Deduction Will Be Allowed Consider Election to Treat Distributions to Charity as if Made in Prior Year Consider "Trapping" Distributions to Trust Do Not Distribute IRD in Satisfaction of Pecuniary Bequest Distribute Right to IRD to Marital Deduction Share Consider Distributing Right to IRD to Charitable Bequest Consider Planning Considerations in Distribution of Installment Note Consider Whether to Recognize Gain on Distributions in Kind Consider Whether Making In-Kind Distribution Will be Treated as a Taxable Transaction Income Allocation in Funding Bequests Payment of Interest on Pecuniary Bequests Income Tax Planning for Payment of Widow's or Family Allowance; Spouse s Elective Share Consider Throwback Rule and Multiple Trust Rule Consider Allocating General Administration Expenses Against Specific Classes of Income Summary of Techniques for Consideration in Light of Compressed Income Tax Brackets for Estates and Trusts Basis Issues Equitable Recoupment D. Executor's Commissions Consider Tax Effects of Payment of Executor's Commissions Comply with Requirements for Valid Waiver of Commissions III. GIFT TAX PLANNING A. Filing Requirement B. Consider Splitting Gifts With Surviving Spouse Gift-Splitting of Decedent s Gifts Gift-Splitting of Decedent s Spouse s Gifts Debt Deduction for Gift Tax IV. ESTATE TAX PLANNING A. Alternate Valuation Date General Rule Mechanical Requirements for Making Alternate Valuation Election Make Alternate Valuation Election if it Produces Lower Estate Tax Consider Making Sufficient Disclaimers to Cause a Small Amount of Tax to be Payable Consider Effects of Sales and Distributions on Alternate Values B. Special Use Valuation General Effect of Special Use Valuation Qualification Requirements Special Use Value Consider Whether to Make Special Use Valuation Election Carefully Consider Estate Tax Apportionment if Special Use Valuation Election is Made Minority Interest Discount With Special Use Valuation Planning Considerations to Leverage Benefit of Special Use Valuation C. General Valuation Considerations Penalty Considerations ii

4 Mechanical Valuation Requirements Make Appropriate Valuation Adjustment No Necessity of Aggregating With QTIP Assets for Valuation Purposes Valuation of S Corporation Stock; Whether to Tax Affect S Corp Earnings in Determining Value Based on Capitalization of Earnings Approach No Discount for Potential Income Taxes on Retirement Account Effect of Post-Transfer Events D. Administration Expense and Debt Deductions Decide Whether to Claim Administrative Expense Deductions for Estate or Income Tax Purpose Deductibility of Post-Death Interest Expenses Allocating Post-Death Interest Expenses Against Estate Income Possibility of Allocating Administrative Expenses (Other Than Post-Death Interest) Against Estate Income Deduction of Administrative Expenses Attributable to QTIP Trust or Other Non-Probate Assets Sales Expenses Deducted Even If Sufficient Non-Probate Assets to Pay Administration Expenses Residence Maintenance Expenses Maintenance Expenses of Ongoing Business Valuation of Disputed Claims Against Estate No Deduction For Income Taxes on Distribution to Estate From IRA to Pay Estate Taxes Gift and Estate Tax Effects of Executor Elections on the Executor Personally E. Marital Deduction Planning QTIP Planning Considerations Funding Issues Consider Rights of Election Against Will to Increase Marital Deduction Planning Considerations for Non-Citizen Surviving Spouse F. Charitable Deduction Planning Consider Deductibility of Charitable Bequests Consider Statutory Reformation of Split-Interest Trust Consider Judicial Proceeding to Compromise the Interest of Non-Charitable Beneficiaries to Obtain Charitable Deduction Consider Disclaimers of Non-Charitable Interests in Non-Deductible Split-Interest Bequests G. Qualified Family-Owned Business Interest Deduction H. Filing of Estate Tax Return and Payment of Estate Tax General Filing and Payment Requirements Extension of Time to Pay Tax Extension of Time to Pay Tax Attributable to Closely-Held Business Under Discharge of Personal Liability of Executor for Estate Tax Transferee Liability of Beneficiaries Special Estate Tax Lien V. DISCLAMER PLANNING A. General Requirements B. Nine Months Time Limit Requirement Date of Taxable Transfer Time Limit Strictly Enforced Under Age Twenty-One Rules Joint Tenancy Property Application of Time Limit to Transfers Preceding Adoption of Gift Tax No Substantial Compliance Approach; Person Dies Before Signing Disclaimer Income Tax Effect of Disclaimers C. Planning Flexibilities with Partial Disclaimers Regulation iii

5 Separate Interests Cannot Disclaim for Certain Number of Years Severable Property Power of Appointment is Treated as a Separate Interest Can Disclaim Specific Assets From Trust Disclaimer of Specific Pecuniary Amount Allowed Formula Disclaimers are Permitted Partial Disclaimers With Executor Having Authority to "Pick and Choose D. Passing Without Any Direction By Disclaimant Splintering of Interests in Will Disclaimant as Fiduciary Disclaimant Cannot Hold Power of Appointment Disclaimant as Director of Foundation Receiving Disclaimed Assets E. Disclaim to Avoid Inclusion in Beneficiary's Estate F. Disclaim to Avoid Creditor's Claims G. Disclaimer Opportunities Involving Surviving Spouse Disclaim Outright Disposition Into QTIP Trust Consider Partial Disclaimer to QTIP Trust Disclaimers to Allow QTIP Treatment; Disclaimers on Behalf of Minors Disclaimer by Trustee of Power to Make Distributions to Beneficiaries Other Than Spouse But May Be Questionable Unless Beneficiary Consents Disclaimer of All Interests Under Will, so Property Passes by Intestacy to Spouse Disclaimer of Insurance on Surviving Spouse s Life Disclaimer of Property Passing by Intestacy to Persons Other Than Spouse Disclaimer of Qualified Plan Benefits Having QTIP Trust as Beneficiary, so Benefits Pass Outright to Spouse to Get Benefit of Rollover IRA Disclaimer Before End of Period To Determine Designated Beneficiary H. Partial Disclaimer After Some Benefits Have Been Accepted; Expectation of Future Benefit as Acceptance General Rule Community Property Other Jointly Owned Assets Expectation of Future Benefit as Acceptance Disclaimer of Qualified Plan Benefit After Receiving Minimum Required Distribution for Year of Participant s Death I. Disclaimers of Joint-Tenancy Property Overview Bank Accounts, Brokerage Accounts, or Other Similar Interests Joint Tenancies of Other Property J. Disclaimers for Generation Skipping Transfer Tax Purposes Disclaim to Utilize First Spouse's Million Dollar Exemption Amount Disclaim to Create Direct Skips Disclaim Right to be Reimbursed for Estate Taxes from QTIP Trust Disclaimer by Children to Utilize Decedent s Exemption Amount Disclaim to Limit Generation-Skipping Transfer to Exemption Amount K. Effects Upon Disclaimer of Non-Ascertainable Standard For Distribution Power Held By Disclaimant Disclaimer to Avoid Having General Power of Appointment Requirement that any Retained Power to Direct Enjoyment of Disclaimed Interest be Limited by an Ascertainable Standard L. Be Careful with Tax Apportionment Issues with Respect to Disclaimed Assets M. Construction of Disclaimer N. Disclaimers of Pre-1932 Interests VI. GENERATION-SKIPPING TRANSFER TAX - BRIEF SUMMARY OF PLANNING OPPORTUNITIES iv

6 1046 A. Disclaimer Planning Opportunities B. Effects Upon Disclaimer of Non-Ascertainable Standard For Distribution Power Held By Disclaimant Disclaimer to Avoid Having General Power of Appointment Disclaim to Utilize GST Exemption Amount By Creating Direct Skips C. GST Exemption Allocation General Rules Consider Allocating GST Exemption to Lifetime Transfers That May Result in Generation-Skipping Transfers Consider Allocating GST Exemption to Testamentary Transfers Likely to Result in Generation-Skipping Transfers Consider Retroactive Allocation of GST Exemption If Children-Beneficiaries Predecease Grandchildren-Beneficiaries and Original Transferor D. Funding Considerations General Rule-Use Estate Tax Values Exception for Allocating GST Exemption to Pecuniary Lead Gifts Residual Transfers After Payment of Pecuniary Amount E. Reverse QTIP Considerations Make Reverse QTIP Election Split QTIP Trust into Separate Trusts for Making Reverse QTIP Election Consider Predeceased Ancestor Exception in Determining Whether to Make the Reverse QTIP Election VII. ALLOCATING ADMINISTRATION EXPENSES AGAINST INCOME OR UNDER REGULATIONS, TREATMENT OF ESTATE MANAGEMENT EXPENSES A. Hubert-Supreme Court Decision Facts Summary of Supreme Court Decision B. Final Regulations Overview Estate Management Expenses Estate Transmission Expenses Reduction of Marital or Charitable Deduction for Estate Management Expenses Attributable to Property Passing to Beneficiaries Other Than Spouse or Charity Special Rule Where Estate Management Expenses Are Deducted on the Estate Tax Return Effective Date of Regulation Planning Considerations Under Final Regulations C. Retain Flexibility to Utilize Estate Tax Deduction Under Section 642(g) v