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On-Demand: Annual Trust & Estate Update | Planning in an Evolving Economic Environment

Feb 6, 2023

Join EisnerAmper’s Private Client Services professionals for the annual trust and estate presentation. Learn about significant recent developments in estate planning and the opportunities that lie ahead with new and proposed legislation.


Karen Goldberg:Yes, thank you. Good afternoon everyone. Me and my co-presenter, Scott Testa attended the 57th Annual Heckerling Institute on Estate Planning that was held in Orlando, Florida just last month. Today we're going to address some of the topics that were discussed at the institute.

I'm going to start off with discussing some of the recent developments that we touched on. To start off center stage I'm going to talk about Secure 2.0 that was signed into law on December 29th, 2022. And I'm going to run through some key provisions. Secure 2.0 included an increase in the age at which a plan participate must start taking required minimum distributions. There were some significant changes to the rules regarding catch-up contributions. A reduced penalty for a participant missing an RMD, required minimum distribution. The statute of limitations on the assessment of the excise tax, those rules have changed. And there's another provision regarding rolling over a 529 plan into a Roth IRA. So, let's go through some of these changes in more detail.

The new required beginning date for an individual. An individual must start taking his required minimum distributions at age 73. Currently the rule is that an individual must start taking his minimum required distributions on April 1st following the year in which he attains age 72. This has been changed under the new law to age 73, effective for individuals who attain age 72 after 2022. And the age is further increased to 75 individuals who attain age 74 after 2032. Well, that's a mouthful. On this page there's a chart of when an individual must begin taking his RMDs. Notably, an individual who turned 70 and a half before 2020 must have started taking his RMDs April 1st following the year in which he turned 70 and a half.

Next significant change are catch-up contributions. Currently, an individual 50 or older can make additional pre-tax contributions to their workplace retirement plan such as a 401(k.) In 2023 the amount is $7,500. Beginning in 2025, the catch-up contribution limit is increased for individuals ages 60 to 63. Apparently they can make a contribution that's equal to the greater of $10,000 or 50% more than the regular catch-up amount. They must have a special lobby somewhere in Congress to get this increased amount.

But something that affects everyone over the age of 50 is that starting in 2024 anyone earning more than $145,000 in the prior year must make catch-up contributions to a Roth account in after tax dollars. That's a significant change. Everyone was able to make their additional pre-tax contributions, was able to make their catch-up contributions to their retirement plan pre-tax. Now it's after tax starting in 2024 if you earned more than $145,000 in the prior year. That $145,000 amount is being indexed for inflation.

But there's more to the story. Beginning in 2024, apparently no one can make catch-up contributions due to a drafting glitch that has been all over the media, which I'm sure will be changed imminently. Another Secured 2.0 change is a reduced penalty on a missed required minimum distribution. Under current law, if an individual feels to take his required minimum distribution, an excise tax equal to 50% of the RMD will be imposed. Having said this, I have had clients who have failed to take their RMD on time. And they realize this maybe a year or two later. I filed the 5329 explaining that the failure to take the RMD was an inadvertent omission, filed this with a return and a penalty was never imposed on those taxpayers. In fact, I've never seen it imposed on a taxpayer.

Nevertheless, beginning in 2023, the excise tax is reduced from 50% to 25%. Furthermore, the failure to take the RMD is corrected in a timely manner. Within two years, the penalty is reduced from 25% to 10%. I don't know if this will make the IRS more comfortable imposing a penalty on a failure to take an RMD because it isn't so onerous. Maybe we'll see more of the excise tax being imposed, because it's likely to be 25% or 10% rather than 50%, which can be very onerous.

Another taxpayer-friendly change in Secure 2.0 is the statute of limitations on the assessment of the excise tax on excess IRA contributions in missed RMDs has been changed. Under the prior law the statute of limitations on excess IRA contributions missed RMDs started with the filing of form 5329. Now the statute of limitation starts when the taxpayer files his return for the year in which the error occurred. The statute is three years for missed RMDs and six years for excess IRA contributions.

This is very favorable to taxpayers. Because oftentimes a client misses his RMD didn't know he was supposed to start taking them. There's an error and this can go on for five years. And the potential penalties can be extreme. And since a client missed these, missed the RMDs, they made excess IRA contributions and then didn't know they didn't file a 5329, so the statute wasn't running on this. But maybe they hire a new advisor and he figures it out that there were some errors made. The statute of limitations will have run on their earlier years, so the client's exposure is limited. Typically when I find that there's a discovery of a missed RMD or an excess IRA contribution is after the client has passed away. The client's attorney or new advisor finds out that the client never took his RMDs, contributed too much to an IRA. The client's gone, that 5329 was never filed. The exposure could go back a decade. Now that's limited, three years or six years. Very taxpayer-friendly provision.

Secure 2.0 will also, this is a new provision. Permits a direct trustee to trustee rollover from a 529 account to a Roth IRA for the plan beneficiary without any tax or penalty on the distribution, but only under certain circumstances. The 529 plan must have been open for 15 years and the rollover from the 529 cannot exceed the aggregate amount of contributions to the 529 account and the earnings thereon more than five years before the rollover. And the total limitation on lifetime contributions from this 529 account to Roth IRA is $35,000. It's effective for distributions after 2023.

So this again is taxpayer friendly. Because let's say you have a couple, they've been making contributions to 529 accounts for their children. The children went to college, maybe graduate school, they're out. There's money still remaining in the 529 account because too much was contributed. Children didn't need it all. The parents could take the money back but there'd be a 10% penalty. Now they have the option of rolling over those excess funds to a Roth IRA for the 529 beneficiaries. Again, it has to be a 529 account that's been open for more than 15 years.

Astrid Garcia: Polling Question #2.

Karen Goldberg:Great. Most of you are listening, all of the above. Now I'm going to go further talking about retirement plans and penalties. Many of you may be aware of notice 2022-53. This was issued in response to a misinterpretation of the SECURE Act. And I'll address what that misinterpretation was. As you all may know, an individual who inherits a retirement plan must begin taking minimum distributions from that retirement plan the year after the participant's death if the participant died after his required beginning date. Effective for participants who died after 2019, generally a retirement account must be fully distributed no later than the end of the 10th year after it is inherited.

So, what most practitioners and taxpayers thoughts with this new rule, this 10-year rule that came into place with the SECURE Act is that no annual RMDs needed to be taken for the first nine years and everything could be back loaded to the 10th year. But regulations came out in 2022 with respect to the SECURE Act, which said, "Uh-huh, no, required minimum distribution must be taken over the entire 10-year period." But this is 2022. How about the 2021 and 2022 missed RMDs? What does a taxpayer need to do? Is there an excise tax? Well, the IRS came out with this notice 2022 and said there's a waiver of the 50% excise tax on missed 2021 and 2022 RMCs because of this misunderstanding. That's great.

Now the question is, does the person who inherited the plan, does he need to take these missed RMDs for 2021 and 2022? We don't know. There's no penalty, so you'll leave them in. Okay, but we need more guidance from the IRS with respect to this. Now I'm going to move on to some cases that were discussed at Heckerling. The first case is DeMuth v. Commissioner. Tax work case decided in 2022. It has to do with checks that were unpaid at a decedent's death and whether those amounts are includeable in the decedent's estate. So particularly a individual gave his son a durable power of attorney to make annual exclusion gifts on his behalf, and the son who had the power of attorney made annual exclusion gifts by writing checks to donees. And the year of the decedent's death the son wrote checks to multiple recipients before the decedent's death in the amount of the annual exclusion.

But only one of those checks was paid before the decedent's death. They were sent to the recipient but only one was cashed before the decedent's date of death. The decedent's estate didn't include the uncashed checks in his estate, because presumably they were completed gifts. Not unexpected. The IRS issued a notice of deficiency stating that the checks to delivered to the donees, but uncashed should have been includeable in the estate. They weren't completed gifts. Because after all the donor could always stop payment on them.

I think this is sort of well-established law. Nevertheless, the IRS made an error and they realized it after the fact. They conceded that three of the checks were not includeable in the decedent estate because they had been credited by the drawer E-bank. But this is not a reversal of the IRS position that uncashed checks are includeable in the decedent's estate because they are not completed gifts. Absolutely. If an individual writes a check, an annual exclusion check on December 31st and it's not cashed until January of the next year, it's not a completed gift until the following year, until it's actually cashed. It's not when the check is written or given to the recipient.

Now the next series of cases that I'm going to talk about all have to do with valuation. That's always a hotspot with practitioners. We have the Nelson case and it has to do with a defined value clause. Mrs. Nelson created a trust in December, on I think it was December 23rd, 2008. She transferred limited partnership interest to the trust with a family business in it.

The memorandum of gift provided that she was making a gift to the trust of a limited partnership interest having a fair market value of $2,096,000 on the date of the gift as determined by a qualified appraiser within 90 days. So, she created the trust on December 23rd and on December 31st she made this gift, this defined value gift. Two days later in January of the following year, she sold a limited partnership interest in the same and to be using similar language in the memorandum of sale that she was selling a limited partnership interest with a fair market value of $20 million on the date of the sale as determined by a qualified appraiser within 180 days.

Okay, neither of these memorandums said, as finally determined for gift tax purposes, which is key. The appraiser subsequently determined that the value of a 1% LP interest was what subsequently determined the value of a one pre-interest. Based on that appraisal, Mrs. Nelson was deemed to gift a 6% LP interest and sell approximately 58% LP interest to the trust.

The IRS subsequently determined that the gift was undervalued. They disagreed with the appraiser. And so there was a gift tax deficiency related to the gift and also a gift tax deficiency related to the sale because of the undervaluation. The taxpayer argued that the initial valuation was correct, and even if it wasn't, Mrs. Nelson had transferred an LP interest with a specific value at a specific dollar amount. She didn't transfer a fixed percentage of the LP. She transferred an LP interest that had a value of X. By sale it was 2,096,000 and by gift it was 20 million. The tax court disagreed and they said the interest transferred were expressed as the interest having a fair market value of a specific dollar amount as determined by a qualified appraiser, not as finally determined for gift tax purposes, as finally determined by a qualified appraiser. That meant that they felt that if they increased the value of the interest, there was a larger gift and the sale amount should have been more. The sales price should have been more.

Fifth Circuit Court of Appeals affirmed. And they noted that the language of the memorandum didn't say what happened if the LP was undervalued by the appraiser. It didn't indicate what happened to the additional shares that were transferred. Furthermore, they discussed Wandry and they referred to the fact that in Wandry there was language as finally determined for federal gift tax purposes. They distinguished this Wandry and said that it was different. So, this case was not a rejection of the defined value clauses, because they acknowledged, they gave a nod to Wandry and distinguished this case from Wandry, again because the memorandum did not say as finally determined federal gift tax purposes.

And there was no reference to what should happen if the valuation was successfully challenged with the additional shares. The IRS also gave a nod to the time limited defined value clause. The fact that the value of the LP interest could be based on a qualified appraisal that happened within 90 days and 100 days after the date of the transfer. So it gave a nod to that, so it sort of blessed that appraisal. But I think that we need to be really careful when we're structuring these defined value clauses that there's language in there. Again, I can't stress this enough, as finally determined for federal gift tax purposes. And if the IRS should come in and challenge the value, successfully challenge the value, we need to include in the document what happens with those additional shares.

Oops, wrong. Onto the Sorenson case, which involved a Wandry Clause. Two brothers create a grant to a trust and gifted non-voting stock in their company having a value of $5 million. As finally determined for gift tax purposes. Finally, the appropriate Wandry clause. Each of them were trying to use the lion's share of the gift tax exclusion. Based upon this appraisal this equated to approximately 30% of each brother's non-voting shares, 9,385 shares. They subsequently each sold an additional 20% of their company's stock to the trust with a value of almost $3 million based on an appraisal. There was no Wandry provision in the sales agreement. The gift tax returns reported the defined value transfers. The IRS issued a notice of deficiency of almost $14,000,000.

The IRS did not respect the Wandry Clause for the following reasons. This company stock ledger showed 9,385 shares transferred to each trust. There was no asterisk in the ledger saying that this could be adjusted. That's what it showed. There was no formula saying that there was a specific amount equivalent to 9,385 shares, but this could change. Distributions were made based on the ownership of 9,385 shares. Again, there was no notice that this was a formula gift and there could be some adjustment. No agreement with the trust that if the value of the gifted shares was adjusted, and in fact less was transferred to the trust because of the Wandry clause, that the trust would return the shares to the taxpayers.

And the third-party buyer of the company, the company was bought seven years later, there was no understanding that maybe the trust didn't own all of those 9,385 shares and there'd be an adjustment if that was the case. And the court also said that these Wandry Clauses were ... This case was distinguishable from Wandry because the specific shares transferred were 9,385. But under the formula it should have been a little bit less, 9,384 and something.

And because the stock was eventually sold, it was sold seven years later, by the way, for a billion dollars. There was no shears that could be adjusted at that time. There were no shares available if the IRA should come in and adjust it because the stock was sold. There was a stipulation that the defined value formula clause didn't apply to each brother's gift. Each brother gifted 9,385 shares. There was a deficiency of $14 million in gift tax, but the company was sold seven years later for a billion dollars. Each trust received 153 million. This was a win for the brothers because of the significant depreciation. Yes, they made a gift of more than they anticipated, but they got that additional upside out of their estate, and into the trust by paying $14 million of gift tax.

Smaldino. This case has been talked about quite a bit. It was a 2021 tax court case. Mr. Smaldino transferred 8% of an interest in his LLC to a trustee-

Karen Goldberg:Okay, sorry. I'll start again. Sorry about that. In 2013 the donor transferred, Mr. Smaldino in particular transferred an 8% interest in his LLC holding rental properties to a trust for his children and grandchildren. And this was his primary business. And he transferred at 40.95% in the LLC to his second wife. His transfer used his remaining gift tax exclusion and when he transferred to his wife was virtually equivalent to her remaining gift tax exclusion.

The day after Mr. Smaldino transferred the LP interest to his wife, she transferred it to a trust for Mr. Smaldino's children from his first marriage, and grandchildren. Interesting, on the LLC agreements, Mrs. Smaldino was never entered in as an owner of the LLC interest for even a day. There's no reference to her in the LLC agreements. The couple never hid the fact that this was thought part of a prearranged plan. They had agreed that between themselves that Mr. Smaldino's real estate business would go to his children and grandchildren. And when she was questioned in court, she testified that, that was their understanding and that she was asked if she could change her mind and she said no, in the interest of fairness, she couldn't. She had, at her husband's request, she had agreed to transfer this LLC interest to a trust for his children and grandchildren.

So the service, rightfully so, contended that the doctrine of substance over form applied and that the donor's, Mrs. Smaldino's transferred to the trust should be regarded as a transfer by Mr. Smaldino. Because the actions were part of a prearranged plan that tax court agreed. They said that the donor never effectively transferred the LLC interest to his wife and thus the trust received its 49% interest from the donor who obviously had to pay gift tax. So this case is really interesting. And because all of us do SLATs for married couples and usually there's one spouse who's wealthier than the other. And the wealthier spouse typically will transfer assets to the less wealthy spouse and she'll set up a SLAT for the wealthy spouse. And there's always been, the question is, okay if he ... I'm saying he, wealthier. We'll take that that this husband was wealthier in this case, transfers it to the wife and she sets up a SLAT for him. How long does she have to wait to do that before this substance over form could be asserted and the gift to this SLAT by the donor's spouse would be a deemed a gift by the husband to SLAT for himself?

And it was deemed to be a gift by the husband to a SLAT for himself, it'd be an incomplete gift and the property would be includeable in his estate. So how long do you have to wait? Well, there's no answer to that. But you don't want the IRS to be able to, sorry, substance over form. So, I tell my clients, make sure it doesn't happen in the same tax year. I say make sure the wealthier spouse, husband in some cases he doesn't transfer the exact amount to the spouse that she's going to be transferring to the SLAT. And maybe he transfers cash to her and then she mixes it up and purchases other assets that she transfers to the trust in the subsequent year. There's no quick answer to this, but we need to be cognizant of the substance over form doctrine that the IRS could assert when we're setting up SLATs for our clients. That's a lesson that I learned from Smaldino.

Another interesting case is Baty v. Commissioner. And it was settled by the IRS. And it was a result of a chief council advice, 201939002. My slide says that the chief counsel advice came out in 2021, but it's actually a 2019 CCA. So, disregard 12302021. As we all know, or we think we know, that when an individual makes a gift, a publicly traded stock, the value of the gift is a mean of the high and the low on the date of the gift. But what if there's an impending merger? Well, I think that when there's an impending merger the stock price should be taking that into consideration.

The CCA 201939002 said that publicly traded stock must be valued for gift tax purposes, taking into consideration an anticipated merger that was expected to increase the value of the stock. And apparently it didn't for some reason. Well, because of the CCA, the taxpayer who was the subject of that CCA took his case to court. The donor was a co-founder of one of the nation's largest assisted living and memory care providers. And the stock was traded on the New York Stock Exchange. Prior to transferring the stock to the GRAT, the company was in acquisition discussions with multiple companies. And just prior to the transfer, it was in exclusive discussions with another company. The donor who is an insider was aware of these discussions, but the public wasn't, so the stock didn't reflect the potential merger discussions. The stock value on the exchange. On January 14th, 2014, the taxpayer contributed the stock to a two-years zeroed out GRAT and valued it based on the mean between the high and the low of the New York Stock Exchange price.

Following the announcement of the merger, the stock increased significantly. And this was on August 1st, 2014. The IRS asserted that the stock value should have considered the merger discussions. Even though they weren't publicly announced at the time of the gift, the IRS issued a notice of deficiency. They didn't adjust the annuity amount, the GRAT annuity amount. They refused to do so. And in the alternative they argued that the GRAT might have failed to qualify because of the poor appraisal that didn't take into consideration the merger. In a settlement the IRS backed down and conceded and in effect the taxpayer won. The value of the stock was the mean between the high and the low of the date of the gift on the New York Stock Exchange. I think that's fair. I mean, this is publicly traded stock. Yeah, the donor knew, but the public at large didn't. Does that mean that someone who wasn't a principal in the company who didn't know about the merger discussions should have taken into consideration the anticipated merger? How would that be, that wouldn't be possible?

There was another GRAT valuation ruling. This one was a Chief Counsel Advice advice 202152018 and this was issued on December 30th, 2021, unlike the other one. And in this particular case a donor funded a two-year GRAT, which shows a publicly held, excuse me, privately held company stock. He was the founder of the company and two weeks before he transferred the stock to the GRAT he was in merger discussions.

Transferred the stock to the GRAT. Next three months he received better offers for the stock. Six months later he accept one of those offers. When he transferred the stock to the GRAT, he used a 409A appraisal that valued the stock seven months earlier. He didn't take into consideration pending merger. Six months after he transferred the stock to the GRAT, one of the merger offers was accepted. And as part of that there was a cash tender offer for three times the value used for the GRAT. Three times the value, of the gift tax value used for the GRAT. IRS included that basing the annuity on an undervalued appraisal caused the retained annuity, the retained interest in the GRAT to fail to function exclusively as a qualified interest from inception. Which meant the value of the gift to the GRAT was the full value of the stock. And it was the value, basically at the tender offer value, which was three times the gift tax value used. Thank you. And now next onto my co-presenter, Scott Testa.

Scott Testa:  Hi, Karen. Thank you very much. I'm going to jump right into it. I picked a couple of topics to discuss that were discussed at Heckerling. One is planning for the marital deduction, the other is planning for the middle rich. And there's a common theme throughout both of these, and especially about throughout all estate planning and that it's all about asking the right questions. You got to know what your client's goals are and what the family situation is. Now some of the goals of marital deduction planning is effective use of both spouse's basic exclusion. Effective use of both spouse's GST exemptions, because there's no portability of the GST exemption. And the deferral of the estate tax until the second spouse dies. Keep in mind that the marital deduction does not necessarily reduce wealth transfer taxes, it just defers it. Assets must be transferred to the spouse in a manner that requires inclusion in the spouse's estate. But deferral protects the spouse from tax and any liquidity issues, meaning there's more assets available to the spouse for his or her life.

And some of the advantages of deferral is that it provides wealth to support the spouse. There's a psychological factor, people just don't want to pay a state tax until the second death or deferred as long as possible. The spouse can spend down the state assets, they can make gifts, make annual exclusion gifts, use the medical or educational exclusion. Another advantage is there could be a change in the estate tax. There could be an increase in the exemption or elimination of the estate tax. We haven't seen that yet, but we will see possibly a decrease in the exemption amount. The change in estate tax laws is also a disadvantage. As I said, the exemption may go down or rates may go up. Also, to consider as family planning. For example, how long must older children wait to inherit if you use the marital deduction? Especially if you have a second marriage where it's possible that the children from the first marriage may be in close age to the spouse. How long do they have to wait to enjoy the inheritance?

It also requires flexibility. No one knows what the estate tax will look like on the second spouse's death or review family situations. You don't know what the family situation will be like then either. And control is always a key issue. You have to discuss how much control the client wants to have. In order to qualify for the amount of deduction the property must pass from the decedent, we'll uses D in it slides, to the surviving spouse S and be included in D's gross estate. As to the survivorship requirement, the speakers suggest, watch out for simultaneous death clauses.

If D and S die under circumstances where it's impossible to prove who died first, property of each would pass as though each were the survivor. So if D had 23 million and S had 2 million, D would pay 5.2 million in estate tax, there'd be no marital deduction and S's exclusion would be wasted. So you want to make sure you use optimal marital formula, gifts that shelter these unified credit with the presumption that D is survived by the spouse. Some other requirements. S must be a U.S. citizen spouse, otherwise you're going to require a QDOT, qualified domestic trust. D need not be a U.S. citizen or resident and also D need not be a U.S. citizen or resident for the DSUE either, which I'll touch upon. And the interest must not be a non-deductible terminable interest. In other words, spouse's interest can't terminate or fail either on the laps of time or their occurrence or non occurrence of an event.

Types of amount deduction. Outright, that's definitely the most simple. Just leave everything outright to the spouse. A lot of amount deduction planning relies on portability and use of the deceased spouse's unused exclusion, the DSUE. Some of the risks of outright disposition though is the spouse, you can have a loss of capacity of the spouse. Assets are subject to claims accreditors. There's loss control by D. The assets could be left to a subsequent spouse or otherwise used in a way that wasn't anticipated by D. Or the subsequent spouse could predecease S and there could be loss of the DSUE. Another type is QTIP, qualified terminal interest property, which I'll discuss in more detail.

The general power of appointment trust. This is a trust where all income is payable to S annual for life. S has a general power to appoint to S or S's estates. Note that payments to creditors alone is not enough. There can be no other beneficiaries other than S, and in this case the trustee can have discretionary power to distribute to S, thus less flexibility. With S can have inter-vivos powers to appoint to third parties, which is not allowed in QTIP trust.

There's also, they'll use something called an estate trust that does not require annual payments. Any accumulated income and principle must be paid to the spouse's estate though. This is a deductible terminal interest. Finally, QDOT, which is a trust for non-citizen spouse, but due to time limitations I'm not going to get into that in any detail.

Upon the first spouse's death you have the option to rely on portability by using the marital deduction in one of those ways I just discussed, or not. Instead, you could fund a credit shelter trust or actually leave to non spouses beneficiaries. But some of the pros of portability is that it's simple. You don't need to balance assets. You get a step up basis at second death, which could be very valuable. No trusts are needed, and it also works well for larger estates, even if the exemption goes down. And currently the exemption is 12,920,000 which is scheduled to sunset after 2025, in which case it will be likely cut in half. At D'S death D can fund the credit shelter trust for 12,000,920 or the remaining exemption amount, or rely on portability. Note that there's no claw back. If D dies in 2023 having made no previous gifts, S has 12,920,000 of D's DSUE plus whatever his or her exemption is, even if that later goes down, but the DSUE doesn't change.

Of course, there's some cons of portability which makes this decision whether to elect portability or not, not so easy. The DSUE can be lost if the surviving spouse remarries and survives another spouse. So only applies to the surviving spouse's last post-2010 pre-deceased spouse. There's an estate tax filing requirement. You have to file an estate tax return. Recently the IRS issued a Rev. Proc. 2022-32 which extends the time to file the return to five years, but only if a return is not otherwise required. So on this five year extension, do you wait to see or do you file now? That's one of the questions you have to address. The example is where S, the surviving spouse's estate is below the current exemption, but above the amount if the exemption goes down, say to 7 million after 2025. Do you wait to see if S survives that date to file?

Another issue is, who's paying for the preparation of the estate tax returns? Sometimes there could be a situation where the executor might not want to pay the cost, like a second spouse for example. The other big con of portability is that DSUE is not indexed for inflation. It's fixed amount, it doesn't grow as the assets appreciate. In other words, it's still that same amount upon the spouse's death, second spouse's death. The credit shelter trust on the other hand can grow outside of the surviving spouse's estate. Another big point is that GST exemption is not portable, so it may be beneficial to allocate the decedent's GST exemption to a non-marital trust. Keep in mind also that portability of the DSUE is a federal tax concept. You have to consider state to state taxes. If the estate is subject to state to state taxes, any benefits of the credit shelter planning are lost. If the decedent dies in New York where the estate tax exemption is 6,000,580, it may be advisable to shelter the estate tax exclusion and then elect portability for the rest.

Next on to the QTIP trust. QTIP trust, Qualified Terminal Interest Property. It's an effective way to use the marital deduction and retain control of the assets from the grave, control of the dead hand here, because assets stay in the trust for use of the spouse. But in order to qualify for the amount of deduction as QTIP trust, there's four requirements under internal revenue code 2056(b)(7). The property must pass from the decedent. The spouse must have a qualifying income interest for life. There can be no other beneficiary during the spouse's life, and election must be made. So absent 2056(b)(7), this trust would not qualify for a marital deduction as it would violate the non-deductible terminal interest rule. S's interest terminates at death. I look at it as that QTIP election is you're making a deal with the government. We want the deduction now with the agreement that will include those assets in the spouse's estate upon her death. And regarding the election, the speakers note that because the government had so much trouble with returns that failed to properly make the QTIP election, QTIP treatment is now automatic, unless there's an affirmative election now.

You simply report the trust or other property that qualifies for QTIP treatment accurately on the return, form 706, example M for example, and compute the tax with the deduction reflected. So, you can make a parcel QTIP election. This is usually done by formula, which allows for some post-mortem planning. For example, you could have a trust that's QTIPical and decide up until the due date of the return, including extensions to make the QTIP election or not, and the election will be to rely on portability or not. Then in that case the trust is a credit shelter trust and the election is irrevocable.

Some drafting tips are to use the savings clause, include a statement of intent. You have to consider the effect of a partial election on other portions of the documents. The document should allow for division of the trust and it should also state that the trust cannot be funded with assets that do not qualify. You can also make a reverse QTIP election. This is a way to not avoid the loss of the GST exemption on the first spouse's death. So it allows D, the first spouse to remain as transfer for GST purposes. Keep in mind that you can't make a reverse QTIP election for part of a part of a QTIP. So, no partial reverse QTIP elections. And the trust document should include severance power to allow for full exempt and non-exempt shares. It just makes it easier for administration of the trust.

As far as timing, time for making the QTIP election or the reversed QTIP election is on the last estate tax return that is filed including exemptions, including extensions. If you don't file a return timely, then the deadline is the first estate tax return that is filed after the due date. Remedies for missed election, the IRS allows an extension of time to cure administrative defects. You could just file a replacement original or amended return within six months listing the property and claiming the deduction. You could take 9100 relief, a relief filing a private letter ruling. As far as making a late reverse QTIP action there's a Rev. Proc. on that 2004-47, which is a simplified alternate method to be used in place of a formal process. So you can do it without the user fee on the private letter ruling.

Another way to wait and see and remain flexible is through the use of disclaimer planning. It's just an alternative way to do an outright plan since it allows for postmortem planning. So D makes an unlimited amount of deduction request and if S claims the appropriate amount, it then flows into a credit shelter trust. The problems with disclaimers that it must be made within nine months after death. And then you may find that S may be unwilling to give up control, she may have second thoughts. The surviving spouse may not have capacity to disclaim. And then you have to consider the impact on disclaimer as well on as to the rights of the beneficiaries. And two other things. S cannot have already accepted the property and the document must specify the disposition of disclaimed interest. In other words, S can't be the one to direct disposition. It's as if S predeceased D, so it's got to be written into the terms of the document.

Astrid Garcia: Polling Question #3.

Scott Testa: Yeah, Jeff Beck died during the week of Heckerling. He's probably one of the greatest guitar players of all time and one of my personal favorites. I didn't see anything on the Grammys last night, but he does have eight wins with 15 nominations.

Astrid Garcia:  That's great. All right, I will be closing polling question number three, please make sure you submitted your answer. And Scott, let me jump into question number four just because of timing. And I will-

Scott Testa: Yeah, Jeff was a member of the Yardbirds and as a solo artist.

Scott Testa: So C is correct.

Astrid Garcia:  Polling Question #4.

Scott Testa:Yes. So Truth and Beck-Ola are two my favorite albums of all time. So I suggest you check them out, especially for our younger listeners here. The original lead singer was Rod Stewart and the bass player was Ron Wood, who later went on to join the Rolling Stones. But the question is, what group did they both join immediately following the Jeff Beck group?

Astrid Garcia: And I'll just give it a few more seconds to get in the answers. Okay, I will be closing this polling question now and we'll put it back on your last slide.

Scott Testa:  Yeah, so it was The Faces they joined. They were formally the Small Faces. But they joined the faces. I'd get more into this, but we're running out of time. So planning for the middle rich was another key topic that was discussed at Heckerling. One of the things that you need to know about planning for the middle rich. It's important that the entire family is comfortable with the plan. You have to know the family situation, the ownership of the assets and the type of entity. These are all important to proper estate planning. Who's the middle rich? I would say the rich are 12 to 13 million. Middle rich are generally those that have basically twice the exemption amount. Planning with the middle rich, like the marital planning, it's stick with the tried and true basics. Avoid advanced esoteric planning. They got to be comfortable giving away the assets.

So, one of the things you have to realize is, who do you represent? Is it the senior family members, the younger generation? Start with non-tax aspects and then step one and a half middle rich, they note that they will make gifts if they're not giving up control or income. And the speakers discuss using what they call the test trust. It's the gift, a small amount in trust for a beneficiary, which the beneficiary has influence. But we know we like our acronyms like SLATs and other cool names of trust. So I figured let's call this the Testa Trust. Let's see if it catches on. I'm going to try and trademark that, but let's see if this catches on at all. And the purpose of the Testa Trust is to educate the client and the family on use of the trust and get them comfortable with making gifts. You can use an existing trust, you can use a new trust, and once you fund the grantor trust, you can then facilitate swaps.

You can swap out assets to get a higher base step up basis. You could do sales to defective grantor trust, or you can do joint purchases. In other words, if you are starting an investment or getting in an investment, let the trust be the one that purchases the new assets with the grantor. The middle rich have to be comfortable with giving ... They don't want to give up control. They don't want to give up investment control or distribution control. Investment control is easy to do. You can use voting and non-voting shares. Distribution control is a little harder to do. The grantor can inspire the fiduciary but not control them. You got to be aware of too much control under 2036(a)(2). If too much interest is retained it could be pulled into their estate. And then you need to pry this control out of the client's hands at least three years before death. You can consider a power of appointment, doesn't have the same fiduciary standards as a trustee.

The speakers also talked about upstream planning for basis adjustments by giving senior generation a general power appointment over trust assets. You can use something called the circumscribed general power. This is when you want to obtain a step-up in basis. You give someone the power over assets, but only assets where the value exceeds basis. And it's capped at the remaining exemption amount. In other words, to make sure you include these assets in their state, to get a step-up basis. Middle rich have to be comfortable in not giving up income. They'll only make gifts if they're not giving up income. One way to do that is make sure you give away non-income producing property like life insurance or raw land, but they still require premium payments or taxes and upkeep. So these might be additional expenses or gift. And then when cash is needed, you just swap the assets out of the trust and take the cash out. If you do a sale to the grantor trust, it can provide cash flow in the form of interest and principal payments.

You can also include the spouse as a beneficiary, especially for those that, for couples reluctant to part with assets, you should consider the spousal lifetime access trust, which is a common planning move in estate planning. It's common because it works well. This is when one spouse transfers the property or the remaining exemption mount, including children and future generations. While the grantor is alive the other spouse has access. And you can capture the current exemption amount while not compromising the spouse and vicariously the grantor. You got to watch out for reciprocal trusts and these trusts are grantor trusts so any grantor trust implications apply. And it does use the grantor's GST exemption.

There are some issues with the SLATs and I see we're up at the one-hour mark. Some of the key questions are, who do you represent, and when you're dealing with both spouses, is there conflict of interest? Advise a divorce risk, watch out for step transactions. As Karen mentioned, don't be a Smaldino. I would suggest if you do transfer to the spouse, you got to wait some time, wait till the next year, issue a K1 to the spouse, even if it's for a short period of time. Distribute the cash to the spouse. For middle rich clients, one SLAT may be used for purpose of the use it or lose it exemption. In other words, for couples with 20 to 30 million or even 40 million, they're not going to give away 25 million, which is twice the exemption amount.

So, we've been doing one SLAT, but note that this may mean the non-grantor spouse has more assets than the grantor spouse. So again, they got to be comfortable with the planning. Once you set up the trust, start gifting and exclusion gifts, remaining exemption gifts. Keep in mind, the middle rich ones, certainty they don't want to pay gift tax. That's where the fractional gift, the defined value clause may come in. Again, don't be a Nelson. You got to make sure you word the value properly. And then once the exemption is used, you consider GRATs. They don't require a gift. They're less risky that you can do a zero gift, plus there's the annuity back to the grantor.

And then we already did the polling questions. I was going to get some quick nuggets from Heckerling. One of the issues that comes up, if you don't file a 706, how do you allocate GST exemption? Well, it's automatic, but the answer is, if you're not comfortable with the automatic allocation, you can file a 706 and make an allocation on Schedule R. Do you have to report charity on gift tax returns? Yes. I mean, it's right in the instructions. A lot of preparers don't do this. The risk is that there's a six-year statute limitation if there's a 25% omission of gifts. In other words, if you do like zero gifts like GRATs and you have any gifts to charity, you're emitting 25% of your gifts. So you could do a lump sum charitable gift.

Is there a 709 filing requirement for exercise or swap powers? No. But again, the adequate disclosure rules, if non-gift completed transaction should start the statute of limitations. We get this all the time. Do I really need an appraisal to report a gift of a closely held interest? No, but the regulations are unclear on what you need if you don't attach an appraisal. And again, time is limited, so we can't get into any details on that. And then we get the, is my three-month old appraisal good, or is my 409 evaluation okay? No, the Regs are clear on what the appraisal requirements are. And one of them is that the appraisal must contain the date of the transfer and the date and purpose of the appraisal. So three month old appraisal won't have that. And a 409 a evaluation is not for gift tax purpose, so it doesn't meet the purpose.

If we talk about having the client sign a disclaimer, if they refuse saying they understand the risk. And then any question that starts with, but can't we just, the answer is no. I mean, you can't rely on audit risk as part of your planning and as part of your return preparation.

Do we need to attach an adequate disclosure statement to the 709? No, but you should comply with the adequate disclosure requirements. The trustee of a revocable trustee can't sign 709 to split gifts. It must be the executor or appointed administrator. This one I didn't know that. When you amend a gift tax return there's a Rev. Proc. that tells you to put this language on top of the 709. Now, contrast this with the instructions with just say to write amended on top of page one and attach copies of page one, two, and three or the original 709.

Also, if you do a sale to a spouse's defective grant or trust, there's no gain recognition, but you still must pick up the interest income on a joint return. The IRS is reluctant to give 9,100 leave to elect in to GST exemption. If you previously elect that out your recourses, do a late allocation. The difference is that 9,100 relief relates back to the original day of the gift. And something else to discuss is that beneficiaries don't have income when they're using a residence in the trust somewhere buried in code section 643(i) related to foreign trust. The answer can be found. But again, now these are just some of the things I tried to tack on to the end that we discussed in either the question and answer session or some of the other materials throughout the week. And I think we're five minutes over time, so I want to send it back to Astrid.

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