1.0 Law & Legal CLE Credit A/V Approval # Recording Date October 19, 2017 Recording Availability October 12, 2018

Transcription

1 1.0 Law & Legal CLE Credit A/V Approval # Recording Date October 19, 2017 Recording Availability October 12, 2018 Meeting Location Date Time Topic King County Bar Association 1200 Fifth Avenue - Suite 700 Seattle, WA Thursday, October 19, :00 PM to 1:15 PM Tax Considerations in Estate Planning and the Administration of Trusts and Estates AGENDA 12:00 PM Introduction 12:10 PM Presentation: Tax Considerations in Estate Planning and the Administration of Trusts and Estates, by Patrick Carter, Flaccus Law The (Federal) Unified Tax Credit o Estate Tax o Gift Tax o IRS Form 709 The Double Step Up in Basis o Qualified Terminable Interest Property o IRS Form 706 o Washington Estate Tax Return o The 99% Federal and 1% Washington QTIP procedure o Using TEDRA to facilitate the process); 1:15 PM Adjourn SPEAKER BIOGRAPHY Patrick Carter, Flaccus Law - Patrick graduated magna cum laude from Seattle University School of Law, where he was on Law Review and interned with Judge Thomas Zilly in the Western District of Washington. Patrick also holds an M.A. in Counseling Psychology from Bastyr University and an LL.M. in Taxation from the University of Washington. While at UW Patrick participated in the Low Income Taxpayer Clinic, where he was recognized for his work by the Clinical Legal Education Association, a national group. Patrick currently works on estate planning, tax controversies, probate, and trusts and

2 estates. Before law school he worked as a family and mental health therapist. He lives in Seattle with family, including his rambunctious 3 year old son.

3 HOW DO I EARN CREDIT FOR SELF-STUDY OR AUDIO/VISUAL (A/V) COURSES? For pre-recorded A/V (self-study) programs, although the sponsor should apply for accreditation, lawyers need to report the credits earned for taking the course. To add an approved course to your roster, follow the procedures below: Go to the "mywsba" website at Log in. Click on the "Access MCLE" link in the "MCLE Info" box on your home profile page. Click on "Add Activity." Search to find the approved course in our system. (See search suggestions on the screen.) Adding a Recorded Course Select Recorded Course from the Add New Activity screen. This will prompt you to search for the activity in case the activity has already been accredited in the MCLE system. You can search by Activity ID or by specific Activity Details. For the Activity Details search, you can use keywords for the title, sponsor name and date. After entering your search criteria and selecting Search at the bottom of the screen, a list of possible activities will be provided. You can select the correct one by clicking the Activity ID. This will take you to the specific activity. Entered the date(s) on which you began and ending viewing this recorded activity. Then claim the correct credits for which you attended this activity in the Credits Claimed fields and click the Submit button at the bottom of the page. You will receive a confirmation message at the top of your screen stating, The activity has been added to your roster.

4 TAX CONSIDERATIONS ESTATE PLANNING AND THE ADMINISTRATION OF TRUSTS & ESTATES

5 THE UNIFIED TAX CREDIT FEDERAL ESTATE AND GIFT TAX EXEMPTIONS

6 THE UNIFIED CREDIT Represents a lifetime exemption from transfer taxes. The credit is first used to offset gift taxes. Any remainder used to offset estate taxes For year 2017, this results in a exemption equivalent of $5,490,000. Exemption equivalent is amount of wealth that can be transferred free of transfer taxes Governed by: 26 U.S.C (Gift Credit) & 2510 (Estate Credit)

7 FEDERAL GIFT TAX

8 GIFT TAX 26 U.S.C Imposition of Gift Tax 26 U.S.C Rate of Tax and Liability Gift taxes are paid by the donor 26 U.S.C Taxable Gifts -(b) $10K (adjusted for inflation [$14K in 2017]) annual exclusion to any person gifted by the donor

9 GIFT TAX WHO MUST FILE A RETURN? A donor does not need to file a Gift Tax Return if one of the following five exceptions applies: 1) Transferred amounts do not exceed the annual exclusion; 2) Transfers are payments that qualify for the educational exclusion, payments that qualify for the medical exclusion stated in I.R.C 2503(e), or are transfers to political organizations; 3) The donor transfers assets to his or her spouse that qualify for the gift tax marital deduction; 4) If the donor transfers assets to his or her non-u.s. citizen spouse and the spouse, and the amount does not exceed $136,000; and 5) If the gift qualifies for the Charitable Deduction and either (1) the transfer is a qualified conservation contribution, or (2) the transfer is a transfer of the donor s entire interest in the property and the donor is and has never made a transfer of any interest in the property for less than full FMV to a person or for a use that is not described in I.R.C 2522(a) or (b).

10 GIFT TAX THE ANNUAL EXCLUSION The Annual Exclusion is commonly what people think of when they think of gifting. A gift within the exclusion amount doesn t use the donor s lifetime gift tax exemption. Currently, the annual exclusion is $14,000 & is indexed for inflation. I.R.C 2503(b)(1). Gifts within the exclusion amount do not require filing a gift return. Only gifts of present interests qualify. A gift of a future interests must be reported at its full value.

11 GIFT TAX PRESENT INTEREST A gift is a present interest if the donee has an immediate right to use, possess, or enjoy the property. Treas. Reg Crummey right of withdrawal in a trust provides beneficiaries with an absolute right to withdraw the gift or a certain portion of the gift during a stated time, which qualifies the gift as a present interest. Gifts of future interests do not qualify for the gift tax annual exclusion (e.g. remainders, reversions, or any other interest that commences in use, possession, or enjoyment at some future time). Treas. Reg

12 GIFT TAX SPLIT GIFTS FROM SPOUSES Spouses may consent to split the gifts that each other makes, so that the gifts will be treated as being made half by each spouse if the following conditions are met: 1) Both spouses must be U.S. citizens or residents on the date of the gift. 2) Both spouses must consent that all of the eligible gifts made by either spouse in the calendar year are treated as split by both spouses. 3) The spouses are married at the date of the gift and do not remarry during the remainder of the calendar year. 4) Must File 709 Gift Return to elect split gift treatment.

13 GIFT TAX 529 (EDU. SAVINGS) PLAN GIFTS Gifts to 529 Plans do not qualify for the I.R.C 2503(e) tuition exclusion. To avoid having these contributions being treated as taxable gifts, the contributions need to utilize the donor s annual exclusion. Pursuant to I.R.C 529(c)(2)(B), if the amount of a donor s 529 Plan contribution for a donee exceeds the annual exclusion, then the donor may elect to have the contribution spread ratably over 5 years beginning with the calendar year that the amounts are contributed.

14 GIFT TAX THE MARITAL DEDUCTION The gift tax marital deduction is available if: (1) The spouses were married to each other at the time the gift was made; (2) The donee spouse is a U.S. citizen; and (3) The asset transferred by the donor is NOT a nondeductible terminable interest as defined by I.R.C 2523(b). a) If a donor transfers assets to his or her spouse that would qualify as QTIP property, the donor MUST file a Form 709 to make such election. Treas. Reg (a). There is no relief available for late filing to make the QTIP election.

15 ALL OTHER GIFTS REQUIRE FILING IRS FORM 709

16 GIFT TAX IRS FORM 709

17 GIFT TAX OTHER THAN BECAUSE I M SUPPOSED TO WHY FILE FORM 709? A Gift Tax Return needs to be completed correctly to start the statute of limitations, which limits the ability of the IRS to challenge the value of the reported gift. A Gift Tax Return needs to be completed correctly to avoid wasting the client s applicable credit amount by not taking advantage of the available exclusions.

18 GIFT TAX FORM 709 STATUTE OF LIMITATIONS Form 709 generally has a 3 year statute of limitations. IRC 6501(a). A 6-year statute of limitations applies if more than 25% of assets or gifts are omitted from the return and not disclosed. IRC 6501(a)(2). There is NO statute of limitations as to a specific omitted gifts. IRC 6501(c)(9).

19 GIFT TAX - VALUATION If the value of a gift is adequately disclosed on Form 709 in a manner sufficient for the IRS to determine the nature of the gift, the IRS may not challenge the value of the gift after three years have passed since the return was filed. I.R.C 2504(c); I.R.C. 6501(a). Treas. Reg (c)-1(f)(2) states the rules for adequate disclosure. The flowing slide lists the criteria for what must be included on the Federal Gift Tax Return under this regulation.

20 GIFT TAX ADEQUATE DISCLOSURE RULES: (Treas. Reg (c)-1(f)(2)) 1) A description of the transferred property and any consideration received by the transferor; 2) The identity of each transferee and the relationship between the transferor and the transferee; 3) If the gift is made to a Trust, the Gift Tax Return must include the Trust s tax identification number and a brief description of the terms of the Trust or a copy of the Trust Instrument; 4) The Gift Tax Return must include a statement describing any position taken on the return that is contrary to any proposed, temporary, or final Treasury Regulation or Revenue Ruling published at the time of the gift; and 5) Unless the value of the gift is supported by an appraisal meeting the standards of Treas. Reg (c)-1(f)(3), the Gift Tax Return must include a detailed description of the method used to determine the fair market value of the property transferred and the underlying data must be submitted. Additional requirements are contained in Treas. Reg (c)-1(f)(2)(iv).

21 GIFT TAX DOCUMENTING GIFT VALUE: Appraisals should be submitted for items that do not have readily determined values such as interests in closely held corporations, tangible personal property, or real estate. A Form 712 should be submitted for transfers of life insurance policies. For transfers of closely held corporations, the balance sheet, earnings statements, and dividends received for the five years prior to the gift should be attached. Page 9 of the Instructions for Form 709 provide additional information that should be submitted for other specific items.

22 GIFT TAX AUDIT FLAGS FOR FORM 709 Returns disclosing non-gift transactions such as loans and sales to related parties; Returns approaching or exceeding the applicable lifetime unified exclusion amount; Large gifts of family partnership interests. Gifts involving split-dollar life insurance.

23 ESTATE TAX

24 FEDERAL ESTATE TAX 26 U.S.C Imposition & Rate of Tax 26 U.S.C Deduction of State Death Taxes 26 U.S.C Marital Deduction 26 U.S.C. 2010(c)(5)(A) Portability Election

25 26 U.S.C Imposition & Tax Rate (a) IMPOSITION A tax is hereby imposed on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. (b) COMPUTATION OF TAX The tax imposed by this section shall be the amount equal to the excess (if any) of (1) a tentative tax computed under subsection (c) on the sum of (A)the amount of the taxable estate, and (B)the amount of the adjusted taxable gifts, over (2)the aggregate amount of tax which would have been payable under chapter 12 with respect to gifts made by the decedent after December 31, 1976, if the modifications described in subsection (g) had been applicable at the time of such gifts.

26 FEDERAL ESTATE TAX 2017 BRACKET RATES Taxable Estate After $5,490,000 Exemption: Tax Rate $0 $10,000 18% $10,001 $20,000 20% $20,001 $40,000 22% $40,001 $60,000 24% $60,001 $80,000 26% $80,001 $100,000 28% $100,001 $150,000 30% $150,001 $250,000 32% $250,001 $500,000 34% $500,001 $750,000 37% $750,001 $1,000,000 39% $1,000, %

27 26 U.S.C State Death Taxes -(a) ALLOWANCE OF DEDUCTION For purposes of the tax imposed by section 2001, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of any estate, inheritance, legacy, or succession taxes actually paid to any State or the District of Columbia, in respect of any property included in the gross estate (not including any such taxes paid with respect to the estate of a person other than the decedent).

28 26 U.S.C Marital Deduction -(a) ALLOWANCE OF MARITAL DEDUCTION For purposes of the tax imposed by section 2001, the value of the taxable estate shall, except as limited by subsection (b), be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate. -(b)(7) ELECTION WITH RESPECT TO LIFE ESTATE FOR SURVIVING SPOUSE (A) In general In the case of qualified terminable interest property (i) for purposes of subsection (a), such property shall be treated as passing to the surviving spouse, and (ii) for purposes of paragraph (1)(A), no part of such property shall be treated as passing to any person other than the surviving spouse.

29 WASHINGTON STATE ESTATE TAX RCW et. seq. Estate and Transfer Tax Act RCW Definitions RCW Estate Tax Imposed, Amount of Tax RCW Marital Deduction, Qualified Domestic Trust

30 RCW Estate Tax Imposed Estate tax imposed Amount of tax. (1) A tax in an amount computed as provided in this section is imposed on every transfer of property located in Washington. For the purposes of this section, any intangible property owned by a resident is located in Washington. (2)(a) Except as provided in (b) of this subsection, the amount of tax is the amount provided in the following table:

31 WASHINGTON ESTATE TAX 2017 BRACKET RATES If Washington taxable estate is at least But less than After $2,129,000 Exemption: The amount of tax equals: Initial tax amount Plus tax rate % $0 $1,000,000 $ % $0 Of Washington taxable estate value greater than $1,000,000 $2,000,000 $100, % $1,000,000 $2,000,000 $3,000,000 $240, % $2,000,000 $3,000,000 $4,000,000 $390, % $3,000,000 $4,000,000 $6,000,000 $550, % $4,000,000 $6,000,000 $7,000,000 $910, % $6,000,000 $7,000,000 $9,000,000 $1,100, % $7,000,000 $9,000,000 $1,490, % $9,000,000

32 RCW Marital Deduction Marital deduction, qualified domestic trust Election State registered domestic partner entitled to deduction Other deductions taken for income tax purposes disallowed. (1)(a) If the federal taxable estate on the federal return is determined by making an election under section 2056 or 2056A of the internal revenue code, or if no federal return is required to be filed, the department may provide by rule for a separate election on the Washington return, consistent with section 2056 or 2056A of the internal revenue code and (b) of this subsection, for the purpose of determining the amount of tax due under this chapter. The election is binding on the estate and the beneficiaries, consistent with the internal revenue code and (b) of this subsection. All other elections or valuations on the Washington return must be made in a manner consistent with the federal return, if a federal return is required, and such rules as the department may provide. (3) Notwithstanding any department rule, if a taxpayer makes an election consistent with section 2056 of the internal revenue code as permitted under this section, the taxpayer's Washington taxable estate, and the surviving spouse's Washington taxable estate, must be adjusted as follows: (a) For the taxpayer that made the election, any amount deducted by reason of section 2056(b)(7) of the internal revenue code is added to, and the value of property for which a Washington election under this section was made is deducted from, the Washington taxable estate. (b) For the estate of the surviving spouse, the amount included in the estate's gross estate pursuant to section 2044 (a) and (b)(1)(a) of the internal revenue code is deducted from, and the value of any property for which an election under this section was previously made is added to, the Washington taxable estate.

33 DOUBLE STEP-UP IN BASIS LEVERAGING THE FEDERAL TAX CODE & REVISED CODE OF WASHINGTON TAX FREE COMBINED ESTATES OF $2.129 MILLION - $4.258 MILLION WITH FULL BASIS UPON SECOND DEATH

34 QUALIFIED TERMINABLE INTEREST PROPERTY Special classification of property Historically this has been a very compelling means to provide income to the surviving spouse, while still directing the principal of a decedent s estate to his chosen beneficiaries. Regularly used by individuals with children from a previous marriage who want to ensure their surviving spouses are provided for during life, and their issue are the ultimate takers of their property.

35 FEDERAL QTIP ELECTION Federal QTIP Election: 26 U.S.C. 2056(b)(7) provides that certain terminable interest property that ordinarily would not qualify for the marital deduction can qualify, provided that a proper election is made on the estate tax return. Federal Reverse QTIP Election: 26 U.S.C. 2652(a)(3) provides the possibility to allow the decedent s estate to treat the decedent as the transferor for generation skipping tax purposes. Allows for decedent s GST tax exemption to be allocated to the QTIP trust/property. If unused, GST exemption evaporates after executor files decedent s 706.F

36 FEDERAL QTIP ELECTION - MECHANICS Form 706, Schedule M, Section A (page 20 in Rev form 706) You make the QTIP election simply by listing the qualified terminable interest property on Part A of Schedule M and inserting its value. You are presumed to have made the QTIP election if you list the property and insert its value on Schedule M. If you make this election, the surviving spouse's gross estate will include the value of the qualified terminable interest property.

37 WASHINGTON QTIP ELECTION WAC Valuation of property subject to estate tax, and how to calculate the tax. subparagraph (2)(c)(iii) Washington qualified terminable interest property (QTIP) election. (iii) Washington qualified terminable interest property (QTIP) election. (A) A personal representative may choose to make a larger or smaller percentage or fractional QTIP election on the Washington return than taken on the federal return in order to reduce Washington estate liability while making full use of the federal unified credit. (B) Section 2056 (b)(7) of the Internal Revenue Code states that a QTIP election is irrevocable once made. For the taxpayer that makes this election, any amount deducted by reason of section 2056 (b)(7) of the Internal Revenue Code is added to, and the value of the property for which a Washington election is made is deducted from, the Washington taxable estate. For the estate of the surviving spouse, the amount included in the estate's gross estate pursuant to section 2044 (a) and (b)(1)(a) of the Internal Revenue Code is deducted from, and the value of any property for which an election under this section was previously made is added to, the Washington taxable estate. A QTIP election made on the Washington return is irrevocable, and a surviving spouse who is the lifetime beneficiary of property for which a Washington QTIP election was made must include the value of the remaining property in his or her gross estate for Washington estate tax purposes. If the value of property for which a federal QTIP election was made is different, this value is not includible in the surviving spouse's gross estate for Washington estate tax purposes; instead, the value of property for which a Washington QTIP election was made is includible. (C) The Washington QTIP election must adequately identify the assets, by schedule and item number, included as part of the election, either on the return or, if those assets have not been determined when the estate tax return is filed, on a statement to that effect, prepared when the assets are definitively identified. Identification of the assets is necessary when reviewing the surviving spouse's return, if a return is required to be filed. This statement may be filed with the department at that time or when the surviving spouse's estate tax return is filed.

38 WASHINGTON QTIP ELECTION - MECHANICS Washington State Estate Tax Return, Schedule M, Section A You make the QTIP election simply by listing the qualified terminable interest property on Part A of Schedule M. By listing some amount of value on Schedule M, Section A, of the deceased spouse s tax return, the surviving spouse s estate becomes subject to RCW , which results in the future deduction of the federal QTIP property from surviving spouse s Washington estate. If less than the entire value of the trust (or other property) that the executor has included in the gross estate is entered as a deduction on Schedule M, the executor shall be considered to have made an election on as to a fraction of the trust (or other property). Numerator = amount of trust (or other property) deducted on Schedule M Denominator = total value of the trust (or other property)

39 Mixed Federal & Washington Elections 99% FEDERAL QTIP ELECTION Moves the value of 99% of the property to the surviving spouse s federal taxable estate. Along with a portability election on Form 706, there should be very little concern that any increase in the federal QTIP portion of the trust will result in any federal estate taxes. Upon death of surviving spouse, Achieves step up in federal tax basis on 99% of the trust value elected for QTIP treatment on Federal Form % WASHINGTON QTIP ELECTION Uses the totality of the decedent spouse s Washington State exemption. Preserves decedent spouse s exemption so that it is not wasted. Upon death of surviving spouse, only 1% of the trust value included in his or her Washington taxable estate.

40 USING TEDRA TO CURE INCOMPLETE PLANNING POST-MORTEM ESTATE PLANNING WITH TEDRA TO CREATE A QTIP ELIGIBLE TRUST WHEN ONLY A CREDIT SHELTER TRUST WAS CONTEMPLATED

41 WASHINGTON TEDRA (RCW 11.96A) RCW 11.96A General power of courts Intent Plenary power of the court. (1) It is the intent of the legislature that the courts shall have full and ample power and authority under this title to administer and settle: (a) All matters concerning the estates and assets of incapacitated, missing, and deceased persons, including matters involving nonprobate assets and powers of attorney, in accordance with this title; and (b) All trusts and trust matters. RCW 11.96A Definitions. (2) "Matter" includes any issue, question, or dispute involving: (f) The amendment, reformation, or conformation of a will or a trust instrument to comply with statutes and regulations of the United States internal revenue service in order to achieve qualification for deductions, elections, and other tax requirements

42 USING TEDRA TO REFORM A TESTAMENTARY TRUST SO THAT IT MAY BE QTIP ELIGIBLE Remember ALL interested parties must sign off on the agreement. RCW 11.96A.220 It may also be useful to file the agreement in court after it has been executed. RCW 11.96A.230 The focus of the agreement should be achieving available tax benefits: i.e. The sole purpose for amendment is to ensure that the testamentary trust will qualify for Qualified Terminable Interest Property (QTIP) election status should the Personal Representative of the estate desire to make use of the tax advantages available through QTIP election. Amend also to remove any language that may limit the PR in making variable elections for state and federal purposes, should such language have been included in the decedent s Will.

43 TEDRA AGREEMENT ESSENTIAL LANGUAGE TO MAKE TRUST QTIP ELIGIBLE My spouse shall be the sole beneficiary of the QTIP Trust. He/she shall receive all of the income from this trust for life. *required under Section 2056(b)(B)(ii) of the IRC The Trustee shall pay the trust income to my spouse at least annually *required under Section 2056(b)(7)(B)(ii)(I) of the IRC The Trustee shall not distribute trust assets to anyone other than my spouse, while living. *required under Treasury Regulation Section (b)-7(h), Example 4. If the Personal Representative chooses to elect a portion less than the entirety of the QTIP Trust for QTIP treatment, as provided in Section 10.3 below, the specific portion must be expressed as a fraction or percentage of the QTIP trust, or may be defined by means of a formula. *required under Treasury Regulation Section (b)-7(b)(2)(i), -7(h).

44 OTHER POTENTIAL QTIP ELIGIBILITY LANGUAGE, DEPENDING ON CIRCUMSTANCES If a residence is placed into the QTIP Trust, and it is not used as an income producing asset for the trust, my spouse shall have an exclusive and unrestricted right to use the residence for the duration of his/her life. *required under Treasury Regulation Section (b)-7(h). While the Trustee has the power to retain non-income-producing property in the QTIP Trust, my spouse may require conversion of the asset into income-producing property at any time. *required under Treasury Regulation Section (b)-7(d)(2). My Husband/wife shall have an annual power of withdrawal over the property contained within the QTIP Trust, where the withdrawal right is limited to a non-cumulative right to withdraw the greater of $5,000 or five percent of the trust estate, as provided under Sections 2514(e) and 2041(b)(2) of the Internal Revenue Code. This right of withdrawal should not cause the QTIP Trust to be classified as a Section 2056(b)(5) general power of appointment marital deduction trust. If, for any reason, this power would cause the QTIP Trust to be classified as a Section 2056(b)(5) general power of appointment marital deduction trust, then my Husband/wife shall not have such power.

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